On Jul 9, 2013, Zacks Investment Research upgraded Kirkland's Inc. (KIRK) to a Zacks Rank #1 (Strong Buy) following an upbeat outlook for the second quarter of fiscal 2013.
Why the Upgrade?
In the second–quarter of fiscal 2013, Kirkland's expects earnings per share to be between 75 cents and 85 cents. This is higher than the previous guidance range of 70 cents to 85 cents.
Kirkland raised its guidance following decent first quarter fiscal 2013 results (announced on May 28, 2013) which were way ahead of management's guidance as well as the Zacks Consensus Estimate on the back of strong online sales during the quarter
Following the loss incurred in the second and third quarter of fiscal 2012, the surge in earnings in the last two quarters came as a relief to the investors of this Nashville, TN-based home décor retailer.
Moreover, management is optimistic about increased traffic and better same-store sales during the second quarter of fiscal 2013 due to increased consumer confidence due to rebound in the homebuilding sector, together with a drop in gasoline prices.
Estimates were mostly revised upwards following the encouraging first-quarter results and the upbeat outlook for the second quarter. For fiscal 2013 the estimate moved up 6.4% to 83 cents over the last 60 days. The Zacks Consensus Estimate for fiscal 2014 increased 4.4% to 97 cents over the same period.
Other Stocks to Consider:
Others players in the same industry which look attractive at the current levels include Fortune Brands Inc. (FBHS) and Restoration Hardware (RH) and Flower Foods Inc. (FLO), all carrying a Zacks Rank #1 (Strong Buy).
Thursday, August 29, 2013
Monday, August 26, 2013
Will a New Acquisition Send Johnson & Johnson Prices Higher?
Listerine, Johnson's Baby Lotion, Tylenol, ARN-509—all of these are Johnson & Johnson (NYSE:JNJ) products, but you probably wouldn't keep the last one in your medicine cabinet at home. ARN-509 isn't actually a physical product at all, but rather a treatment for prostate cancer. Johnson & Johnson acquired the rights and assets to ARN-509 through the purchase of its parent company, Aragon Pharmaceuticals, on Monday. The acquisition sent Johnson & Johnson shares higher on Monday and Tuesday, but at around $86 a share, is J&J a buy right now? Let's use our CHEAT SHEET investing framework to decide whether Johnson & Johnson is a OUTPERFORM, WAIT AND SEE, or STAY AWAY.
Catalysts
Johnson & Johnson announced an 8.5 percent increase in sales in the first quarter of this year. Its pharmaceutical division was the primary contributor to this growth. The biggest seller in this division was the anti-inflammatory drug, Remicade, which sold $1.6 billion, up 5.2 percent from last year's sales. The fastest growing product in J&J's pharmaceutical line was the prostate cancer treatment Zytiga—its sales increased 72 percent over the past year and netted $344 million for the healthcare giant.
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Johnson and Johnson's recent acquisition of Aragon for almost $1 billion ($650 million plus $350 million if certain objectives are met) made financial headlines on Monday and boosted the share price 0.85 percent. The real purpose of the acquisition was to extract the ARN-509 division and its assets, while the rest of Aragon would be spun off into a new company independent of Johnson & Johnson. A billion dollars is a lot for a small pharmaceutical company, much less a single product, but J&J has a strong track record of picking acquisitions with strong future cash flows, despite the expensive initial cost.
Fundamentals Are Mixed
When performing a comparative analysis using several key metrics, it appears that, at a price of around $86 a share, Johnson & Johnson is relatively expensive compared to its major competitors and the industry as a whole. J&J's price to earnings ratio has been hovering around an all-time high over the past several months and is significantly higher than one of its chief competitors, Pfizer (NYSE:PFE), as well as the average P/E of the major drug manufacturing industry.
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Johnson & Johnson is currently paying a dividend of 3.1 percent, in line with its competitors and the industry average. It announced that it would increase its dividend payments by a rather attractive 8.2 percent over the coming year. Johnson & Johnson's stable free cash flow margin and strong dividend payback ratio of almost 65 percent suggest that J&J can continue to increase its dividend each year.
| JNJ | PFE | Industry | |
| Trailing P/E | 23.38 | 13.98 | 14.20 |
| Growth Est. (year) | 6.1% | 0.9% | 23.6% |
| Dividend Yield | 3.1% | 3.3% | 3.6% |
| ROE | 15.78% | 12.68% | 19.9% |
Technicals Are Strong
Johnson & Johnson is currently trading at around $86, slightly above its 50-day moving average of $85.77 and well above its 200-day moving average. The stock's positive momentum has been unquestionably strong since the beginning of the calendar year, as you can see in the graph below. After the stock peaked at a price of $89.99 on May 22, there was a slight retracement (a short-term downward correction followed by a return to the previous upward trend), and it seems that the stock has regained its footing as of late.
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Conclusion
Healthcare giants like Johnson & Johnson have performed extraordinarily well this year. Johnson & Johnson has a beta of 0.38, meaning that it will be less volatile than the market. This might bring peace of mind to some investors who have grown tired of the recent volatility in the markets. With its attractive dividend rate, historically strong free cash flow margins, and a low beta, Johnson & Johnson could be a good addition to a core retirement portfolio.
Sunday, August 25, 2013
Hot Stocks To Watch For 2014
Sometimes it's tempting to just say ��kay, valuation doesn't matter�� throw caution to the wind, and go into a growth story like J.B. Hunt (Nasdaq:JBHT). After all, with seemingly every quarter this company demonstrates why it's one of the leaders in the still-growing intermodal space. While the stock did lag the S&P 500 over the last quarter, it continues to enjoy rich multiples and ample support on the sell-side. Even though I really do like this company and wish I had bought the stock four years ago, I still can't resolve the valuation in light of the probable returns and cash flow that this business will produce.
A Minor Miss Won't Matter
Typically, expensive growth stocks suffer when the companies miss estimates and particularly when the misses start stacking up consecutively. Even though this is the second straight miss at J.B. Hunt and the third in four quarters, I don't expect any major revisions or weakness in the stock ��the misses haven't been that bad, the long-term bull thesis is still intact, and there's a solid reserve of investor goodwill in place.
SEE: The Value Investor's Handbook
Revenue rose more than 9% this quarter, which missed the average Wall Street guess, but not by much (less than 2%). The intermodal business (more than 60% of revenue) saw 12% growth this quarter on 12% load growth. The DCS business saw 13% growth as reported (or 16% ex-fuel charges), and the truck brokerage business (ICS) saw 20% overall revenue growth as strong load growth (up 29%) offset ongoing price weakness. Last and certainly least, revenue from the trucking business continues to erode rapidly (down 20%) as the company further reduces its fleet size.
Like revenue, profits were very slightly softer than expected, but not to such a degree as to be a real worry. Operating income rose 7% and the operating margin fell 20bp from the year-ago level, but the margin improved a full point sequentially as the company works through some contract start-up costs in the DCS business. Intermodal profits were up nicely (segment income up 19%), while trucking continues to decline (down two-thirds from last year).
Hot Stocks To Watch For 2014: Tsakos Energy Navigation Ltd(TNP)
Tsakos Energy Navigation Limited, together with its subsidiaries, provides seaborne crude oil and petroleum product transportation services worldwide. The company offers marine transportation services for national and independent oil companies and refiners under long, medium, and short-term charters. As of August 16, 2011, its fleet consisted of 50 vessels comprising 59 tankers, including 2 dynamic positioning 2 (DP2) shuttle tankers under construction, and 1 liquefied natural gas carrier. The company was formerly known as MIF Limited and changed its name to Tsakos Energy Navigation Limited in July 2001. Tsakos Energy Navigation Limited was founded in 1993 and is based in Athens, Greece.
Advisors' Opinion:- [By Lowell]
Tsakos Energy Navigation Limited is a provider of international seaborne crude oil and petroleum product transportation services. Its EPS forecast for the current year is 0.54 and next year is 0.99. According to consensus estimates, its topline is expected to grow 4.48% current year and 12.48% next year. It is trading at a forward P/E of 10.95. Out of eight analysts covering the company, two are positive and have buy recommendations, one has a sell recommendation and five have hold ratings.
Hot Stocks To Watch For 2014: AutoZone Inc.(AZO)
AutoZone, Inc. retails and distributes automotive replacement parts and accessories. The company?s stores offer various products for cars, sport utility vehicles, vans, and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories, and non-automotive products. Its automotive hard parts product line includes A/C compressors, batteries and accessories, belts and hoses, carburetors, chassis, clutches, CV axles, engines, fuel pumps, fuses, ignition, lighting, mufflers, starters and alternators, water pumps, radiators, and thermostats. The company?s maintenance items include antifreeze and windshield washer fluid; brake drums, rotors, shoes, and pads; chemicals, including brake and power; steering fluid, oil, and fuel additives; oil and transmission fluids; oil, air, fuel, and transmission filters; oxygen sensors; paint and accessories; refrigerant and accessories; shock absorbers and struts; spark plugs and wires; and windshield wiper s. Its discretionary product line comprises air fresheners, cell phone accessories, drinks and snacks, floor mats and seat covers, mirrors, performance products, protectants and cleaners, sealants and adhesives, steering wheel covers, stereos and radios, tools, and wash and wax products. The company also offers commercial sales program that provides the delivery of parts and other products to local, regional, and national repair garages, dealers, service stations, and public sector accounts. In addition, it sells the ALLDATA brand automotive diagnostic and repair software through the Website, alldata.com; and automotive hard parts, maintenance items, accessories, and non-automotive products through the Website, autozone.com. As of May 7, 2011, the company operated 4,467 stores in the United States and Puerto Rico, and 261 stores in Mexico. AutoZone, Inc. was founded in 1979 and is based in Memphis, Tennessee.
Advisors' Opinion:- [By Geoff Gannon] >Dun and Bradstreet (DNB) are examples. All have great track records for business and stock price growth long term so this appears to be a strategic decision to finance through debt rather than equity. My question is at what point can an investor judge that this practice is no longer creating value but adding risk to the investment? There can obviously be too much leverage. However when money is cheap to borrow and ROIC is high this seems like a great way to create value for shareholders, to just borrow at 3% and buy stock with an ROIC over 20%, but how much is too much?
Thank you,
Jeff
It��l take me a while to answer. And I�� afraid my answer may really go off on some tangents here.
So, I want to make a few key points right away:
路 Negative equity itself is meaningless (could be good or bad).
路 Operating liabilities and financial liabilities should be analyzed separately.
路 You will often have to restate the value of assets from book value if you want the balance sheet to reflect reality.
路 In special cases ��like with pensions ��you may have to restate liabilities as well.
路 Liquidating safety and operating safety are two different things.
路 Compare net financial obligations to EBITDA.
路 Compare net financial obligations to free cash flow ��think of borrowed money as the price of time (a good business can always wait a few years and do the same things without any debt, ask yourself which you�� rather they do ��borrow money or spend time).
路 Look at EV/EBITDA ��not just the P/E ratio.
Finally, remember you can always learn from someone who invests in debt.
Stock investors can learn a lot from people who analyze debt. Here is a good blog to give you a taste of what I mean.
Reading about investing in debt ��and especially about companies in bankruptcies ��can give you a new perspective on situations like these.
I just wrote an article about how free cash flow isn�� everything. W! ell neither are earnings. And neither is book value.
If you look at the stocks in my portfolio, you��l find I must value free cash flow very highly because as a group they tend to:
路 Always have positive free cash flow
路 Have unusually high ratios of free cash flow to reported earnings
路 Buy back shares
路 Pay dividends
路 And still have excess cash
Dun & Bradstreet sure doesn�� meet the last criterion (it has a lot more debt than cash). But it checks the other boxes. This is something both my ��ide moat��investments and my ��et-nets��have in common. Free cash flow.
And yet, I wrote a whole article about how free cash flow isn�� everything.
That�� because it�� really looking at the space between the three key statements:
路 Balance sheet
路 Income statement
路 Cash flow statement
Where you do your most important work.
Investing isn�� about the balance sheet or the income statement or the cash flow statement. It�� about how the balance sheet, income statement and cash flow statement interact through time.
Never be myopically focused on one financial statement or myopically focused on one time period.
Each statement reveals just one aspect of the same object: a business. And it does it for just one time period (in fact, the balance sheet does it for just one moment in time).
As an investor, you need to be able to see all aspects of the business in motion.
Because we are seeing just one aspect of a business when we see something like negative equity ��that fact alone means almost nothing.
It would be like if we were analyzing football players and we knew somebody weighed 300 pounds. Is that good or bad?
For a quarterback?
Bad.
On the line?
If he�� good enough in other ways ��he could weigh even more and nobody would mind.
If we were drafting a football player we�� want to know the combination of age, size, weight, agilit! y, skill,! personality, etc. Just knowing weight isn�� going to help without having more context of how that one aspect relates to the whole player.
Same thing with a business. Same thing with an investment.
So negative shareholder�� equity alone doesn�� matter. In fact, like you said, it can be something you find with stocks that perform perfectly fine over time.
Now, about Dun & Bradstreet...
I wish I had bought more Dun & Bradstreet (DNB). On the morning of the big drop, I only had 6% of my portfolio in cash and ready to buy. I�� doing a bit of selling of something else ��over in Japan ��right now. It�� a cheap stock. And will probably perform wonderfully for whoever buys it from me. But the risk of catastrophic loss rose since I first bought the stock. The risk/reward may still be good. But the reliability is not as high. That�� usually my cue to go. So I would be selling that Japanese stock anyway. Even if DNB hadn�� dropped.
But I do hope it sells a little faster ��now that I have someplace to put the cash.
I hate having only 6% of my portfolio in a position. I have a pretty strong dislike ��almost a rule against ��any position less than 10% in my portfolio. I have found I do not make good decisions when I have to juggle 10 or more opportunities in my head at once.
That shows you how much I like DNB. For most stocks, I would wait until I knew I had enough cash to put more than 10% into the stock. For DNB, I immediately used all the cash I had available. Even before I worried about how I could get more. If the price of DNB gets away from me ��and I get stuck with just a 6% position ��I will be disappointed. But I won�� sell the position. I��l hold it. Probably for a long time. You don�� get many opportunities to buy a business with the super wide moat and essentially non-existent tangible investment requirements of something like DNB very often.
There are some companies where ��if I feel the business is still as I ! remember ! it, economically ��I will buy the stock whenever it gets to an acceptable owner earnings yield. There is not much more to it than that. ��cceptable��in my book is better than my next best alternative or 10% a year ��whichever is higher. If nothing seems priced to return about 10% a year, I hold cash.
I don�� believe in market timing. But I don�� believe in taking a risk where I think if everything goes perfectly the upside is still going to be in the single digits.
Well, after the big drop ��I thought DNB was just about exactly priced to deliver 10% a year. I don�� mean that I know what the stock will do. But I think the normal economic earnings of the business ��after they pay interest and all that ��that could be passed on to owners will be about 10 cents a year for every $1 I paid for the stock last week.
Plenty of other stocks are priced in a similar way. But they are not reliable in the same way I think DNB is. Trading at a P/E of 10 is not the same thing as being priced like a 10% perpetual bond.
In most cases, it is very different. In DNB�� case I don�� think that�� true.
That was the rationale for the purchase.
Now, on to your concern. The share buybacks. And the negative equity.
So, negative equity alone has no meaning. It�� a non-issue.
I buy stocks all the time ��most stocks I buy in fact ��that have positive tangible equity in excess of my purchase price (that is, they trade below tangible book value). But I also buy stocks with negative book value. I owned IMS Health before it was bought out. They had the same practice as DNB. They borrowed and bought back stock. Year after year.
Different people have different ways of measuring how much debt is too much debt. This is a separate issue from whether the debt is being used productively.
Obviously, if you have to borrow at 9% and you can only earn 6% on what you borrow ��that�� not a recipe for success. So, in that case, even if you are! borrowin! g a ��afe��amount of debt ��you may still be doing wrong for shareholders.
But, here we are talking about companies that tend to use borrowed money to buy back shares ��not buy equipment, develop land, dig for gold, etc. So the calculation should be a bit easier.
If the company is able to grow at least as fast as inflation and the stock trades at a price to owner earnings of say 10 ��and you think it�� worth every penny ��then obviously borrowing at anything less than 10% a year should theoretically be fine if all of the money borrowed is used to buy back stock.
Generally, I�� want to make sure that a company that is buying back stock while simultaneously owing money is always borrowing at ��hopefully, longer fixed rates ��that are lower than the return I�� expect on the stock if the company stopped growing today and never started growing again.
That would be my test. If a company can pass that test ��it can go ahead and borrow and buy back stock. As long as the level of debt is also safe. We��l deal with that issue in a minute.
So, if I think DNB stock could return close to 10% a year even if it was a truly no-growth company from this moment forward ��then it�� okay that they borrow money at a much lower rate.
How much lower?
In their 10-K, DNB says that in November 2010, they borrowed $300 million at 2.9%. The $300 million is due in November 2015. So they borrowed for five years at under 3%. Buying back stock will return more than 3%. That was true even when the stock was a lot more expensive.
They also have an $800 million credit facility. They owed $260 million on that facility at the end of last year. They currently pay 1.6% a year in interest on that $260 million.
Again, 1.6% a year is much lower than the return DNB�� shareholders can expect from share buybacks.
So, borrowing money and buying back stock is okay from a return on investment perspective.
What about a safety perspective? Is! the amou! nt of debt DNB is carrying safe? Can they handle it?
Here, we don�� care that they are buying back stock. And as strange as it sounds ��we don�� care that they have negative equity.
I know I write about net-nets all the time. I�� the guy who writes GuruFocus��Ben Graham: Net-Net Newsletter. By definition, a net-net trades below book value. So you�� think I�� be a big believer in the importance of book value.
I�� not. Book value alone means nothing. It can hint at something big though.
Tangible book value is a useful screening tool. So is EV/EBITDA. Neither measure is perfect. They are more useful when you are soaring over the entire market trying to spot bargains. They are less useful when you are trying to analyze specific companies. If an entire country�� stock market has a low price-to-tangible book ratio or low EV/EBITDA this is very important info to know. In fact, it�� decisive. You can buy indexes on that knowledge alone. But you probably shouldn�� buy specific companies on that knowledge alone.
Ultimately, things like:
路 Liquidation Value
路 Market Value
路 Replacement Value
路 And Owner Earnings
Matter more. These things trump:
路 Book Value
路 EV/EBITDA
But you��e got to calculate them yourself. You��e got to move beyond being a record keeper ��an accountant ��and become an appraiser.
We��e talked about this kind of thing before. DreamWorks Animation (DWA) carries a library of animated movies on its books. For about $13.5 million a movie.
You can find all this for yourself by reading the company�� balance sheet and the notes to its financial statements in its 10-K. I can�� stress this enough. You always have to read the notes. In many ways, the notes are the 10-K.
If you could separate DreamWorks��employees, property, technology, management and production pipeline from the movies they��e already made ��and their rights in those franchises ��would ! you be wi! lling to pay more than $14 million a movie for that intellectual property stub?
Some (old movies, and a couple flops) are carried at zero. A couple new ones are carried for a lot. All of them together are carried for about $310 million.
Would you pay $310 million for the movies DreamWorks has already released plus the rights to keep making movies in those franchises?
If so, then that balance sheet item is probably worth even more than $310 million. And DreamWorks��book value ��as intangible and full of intellectual property as it may be ��is actually understated.
If not, then that balance sheet item is worth less than $310 million. And DreamWorks��book value is overstated.
This is because the way DreamWorks treats their other inventory ��the stuff that hasn�� been released yet ��is pretty similar to how the accounting works at other companies in other industries (they make it and as they do ��they carry it on their books at their cost). Once a movie is released, this gets trickier though. Because DreamWorks starts amortizing the movie at what may or may not be an economically accurate way of recording long-term revenue generating potential and residual value.
And so you have an asset that might not be carried on the books at what it could be sold for. And yet it might be quite possible to sell that asset.
You have a similar situation with land. Sometimes companies accumulate land over the years at prices that do not reflect what that land could be sold for. Generally Accepted Accounting Principles (GAAP) does not allow companies to mark up the value of this land over time. This is particularly important to note when changes in the business make the land less integral to the business than it once was. In other words, some companies end up with valuable land they could sell without radically changing how they run their business day-to-day.
And then you have the very tricky concepts of receivables and inventory. They are good in liqui! dation �! �yes. You can borrow against them ��yes.
But, generally, they are not a very good asset to own because they are utterly integral to the business and they need to be constantly replenished ��essentially they become an obligation. You�� rather have less working capital than more working capital if you could.
So some assets on the balance sheet matter a lot more than other assets. And their book value may not reflect their market value.
The assets that matter most are usually:
路 Cash
路 Investments
路 Land
路 Intellectual Property
路 Tax Savings
路 Legal Claims
If you have these things, you can support less debt. If you don�� have these things, you can�� support debt ��except to the extent you are generating cash flow from your business.
Cash flow from the business is always best. But if you��e focused on a static snapshot of a business ��like a balance sheet ��it helps to restate the cash, investments, land, intellectual property, etc., to reflect what they could be sold for.
Things that can be sold can sometimes be borrowed against. And selling things can help save shareholders when there is debt and no cash flow to pay for it.
But that is not a good situation. Cash flow protection is much better than asset protection.
Strong, reliable free cash flow is usually a surer sign of a company�� safety than anything you��l find on the balance sheet.
But why those specific assets?
Why not include inventory, receivables, etc.? Why talk about land ��and stuff you can sue over?
These assets matter most because they are in some sense separable from the operating business itself. You convert these assets into other things. There are different ways of doing it. Not all of those things can be sold. But if you want to exit a certain line of business ��you can usually keep those things.
They become corporate assets more than business assets.
Inventory and receivables are d! ifferent.! They are important. But they are most important as an acid test of cheapness and overcapitalization.
A net-net is almost always cheap and overcapitalized.
That�� why you screen for them. But, like I��e said before, don�� fixate on a net-net�� assets. Just use those assets to prove the company is cheap. Then pivot and start analyzing the operating business ��its profitability, reliability, future prospects, etc.
When it comes to an operating business ��don�� think of assets as assets. Assets in a continuing business are not necessarily good. Liabilities in a continuing business are not necessarily bad.
In liquidation, assets are good. And in liquidation, liabilities are bad.
But we��e not talking about liquidation.
Liquidation should not be your first line of defense.
So, when deciding whether a company like Dun & Bradstreet, DirecTV, AutoZone, etc. is carrying a safe amount of debt ��whether the balance sheet shown at book value�� verdict of negative net worth is economically accurate ��you want to break the company down into:
路 Cash
路 Investments
路 Land
路 Intellectual Property
路 Tax Savings
路 Legal Claims
路 Owner Earnings
While the right measure to use is owner earnings, I�� going to talk about these stocks you mentioned in terms of EBITDA. It�� a number we can all agree on. Yes. It is too generous. If people use EBITDA like it means EPS ��they are trying to fool you. But EBITDA is not evil. It is a tool. As useful for analysts as for promoters.
We��l try to use it responsibly here.
EBITDA saves us from debating the exact amount of maintenance cap-ex, working capital changes, etc. that would be needed to support a no-growth DNB, DTV, AZN, etc.
How much is EBITDA worth?
If you had to capitalize EBITDA like it was the rent on an apartment building to figure out the value of that apartment building ��what number would you use?
It�� unlikely ! U.S. comp! anies generate much more than 33 cents of EBITDA for every dollar of book value they have. I don�� have data on this. It may be a smidgeon higher at the moment. But that�� only because we live in odd times. Right now, returns on equity ��however you measure them ��are really high in the U.S.
So, a normal number would be even lower. And remember, U.S. stocks trade way above book value ��so even if a company is generating 33 cents of EBITDA on its book value ��investors only be getting more like 15 cents of EBITDA on every dollar of their cost in the stock.
That number may sound wonderfully high ��but 15 cents is less than you think after you pay for physical depreciation (a real expense) and taxes (another real expense). Even without interest payments of any kind, you can easily go from 15 cents of EBITDA to about 7 cents of net income.
What I just described isn�� far from the current reality in the U.S.
Okay. So I think it�� fair to say that at a normal company you would need at least $3 of book value to generate $1 of EBITDA. Maybe more. But not less.
Here�� where I want to talk about asset-earnings equivalence.
I��e mentioned before that assets generate earnings. And then earnings are used to buy (or build) assets. And then those assets create more earnings.
And so you have this cycle of investment. You have a stock of assets. You have a flow of earnings. You turn the flow into the stock. And you turn the stock into the flow.
Well, the truth is that when you have a flow of earnings on the income statement ��and yes, the cash flow statement ��but no assets (or very few assets) on the balance sheet, this doesn�� mean you have a negative economic net worth.
It means something different.
It usually means you have a special asset. An asset that is worth its flow. Not an asset that can be easily appraised perhaps. And certainly not an asset that can be easily compared to other assets.
This is not like! owning a! single family home on a street with 20 others.
This is like owning a highway rest stop. There is nothing else for 30 miles. Maybe you can build a restaurant here as cheaply as a restaurant anywhere. But the cash flows are going to be different. And so the market value of that rest stop location will be different regardless of what your original cost was ��this is if and only if folks can�� put up a thousand other restaurants all around yours.
Well, Dun & Bradstreet is like that highway rest stop. DirecTV is like that. And Autozone is like that. To some extent. They all own special assets. Assets that are not separable from the operating business.
The business is the valuable asset. And it�� valuable in ways the balance sheet may not reflect.
Well, what if we just approximately applied this idea to $1 of EBITDA is similar to $3 of equity?
It�� a strange concept. But let�� see where it takes us.
DNB had EBITDA in 2011 of $506 million.
How much did it take to produce that $506 million in EBITDA?
The truth is that it took nothing. If you look at what I normally consider the core invested assets of an operating business:
路 Receivables
路 Inventory
路 Property, plant, and equipment
And you net them against what I consider to be the core liabilities of an operating business:
路 Accounts payable
路 Accrued expenses
路 Deferred revenue
You don�� get a positive number. You get a negative number.
What does this mean?
If you liquidated Dun & Bradstreet�� business ��it would cost you money. There�� a reason that revenue is deferred ��you��e been pay, your customers haven�� been served ��they won�� appreciate a sudden shut down. If you try to flip a switch and shut it down ��you would not be able to take more cash out of it.
In fact, since you��e been paid for services you haven�� provided ��you�� actually have to put more money into DNB to shut it down. I! f you don! �� provide the service ��they��l want their money back.
This is the opposite of a net-net. If you shut a net-net down ��no one would need to inject more money into the company to liquidate it. Instead, it could be shut down and a surplus from the sale of inventory and the running off or sale of receivables could be paid out to owners.
It�� important to note that being in a strong, safe liquidating position does not necessarily mean you are in a strong, safe operating position.
Most net-nets have a higher risk of bankruptcy than Dun & Bradstreet. (Understatement of the century.) But all net-nets have a lower risk of failing to survive a forced liquidation than Dun & Bradstreet.
Does that matter?
Does it really matter to you how a stock like Dun & Bradstreet would fair in a liquidation?
I don�� think it does. In fact, if Dun & Bradstreet ended up in bankruptcy ��what would happen to the operating business would be a much bigger concern than say the $118 million or so they have in cash. Yes ��cash, receivables, etc., matter. But if you have a business producing $500 million in EBITDA, people want to preserve that asset. And a business that produces cash flow really is an asset. In fact, the operating business would be the key asset if a company like:
路 Dun & Bradstreet
路 DirecTV
路 Or AutoZone
Couldn�� pay its creditors on time.
Let�� look back at that very theoretical mention of EBITDA I made. I said that an American public company with $1 of EBITDA might also have $3 of equity.
Now, equity is not the same as assets. Companies use leverage. But imagine for a moment what this would mean if a company with $500 of EBITDA followed the same sort of pattern as other companies.
Well, it would have at least $1.5 billion in net assets.
As I pointed out, Dun & Bradstreet ��the core operations of the company, what we��l call the business rather than the corporation ��really doesn�� have any net! assets. ! Its assets are less than its liabilities.
So we��e got at least a $1.5 billion hole here.
In my book, that�� economic goodwill. Not accounting goodwill.
It�� the investment shareholders need to normally put into the business. And ��in this case ��it�� simply not there. The stock of invested assets is missing. But the cash flow is there. And the cash flow is what has value.
Now, if you take out all the assets and liabilities related to operations from DNB�� balance sheet you��e basically left with
Financial Assets
路 Cash: $118 million
Financial Liabilities
路 Debt: $843 million
路 Pensions: $595 million
Let�� net them out. You get net financial liabilities of $1.32 billion.
So we��e got an asset ��this operating business with (what I think is conservatively calculated) economic goodwill of $1.5 billion ��and we��e got this $1.32 billion liability.
Is that different from buying a house for investment purposes and borrowing 88% of its appraised value?
I don�� think so. I think ��if you need to look at it from an asset/liability perspective ��that�� the right way to look at it.
Yes. It�� borrowing a lot of money. But it�� borrowing against the appraised value of the business ��really what the market would pay for DNB�� cash flows. Not the book value of DNB�� business.
DNB has an operating business that would normally need $1.5 billion in net assets to support it. And it borrowed $1.32 billion.
This has very little to do with what the business is worth to a stockholder.
For that, you�� need to start talking about what EV/EBITDA is at DNB.
But you didn�� ask whether DNB was a good investment. You asked whether it was safe.
The real answer to whether companies like DNB, DTV and AZO are safe has to do with the kinds of measures people who look at debt worry about.
It usually involves EBITDA. Which I know is a dirty word amo! ng some v! alue investors ��and Charlie Munger in particular. But it isn�� easy to compare companies with different businesses and different financial structures.
For one thing, DNB ��and some of these other companies ��are already unusual from an operating perspective. And even EBITDA does not ��olve��this problem.
Over the last 10 years, DNB has turned 68 cents of every dollar of EBITDA into free cash flow. This is rather remarkable when we consider that corporate taxes in the U.S. are 35%. Interest rates ��while low ��are still higher than zero. And DNB grew nominal sales by 3.5% a year over the last 10 years.
EBITDA should be reduced by:
路 Interest
路 Taxes
路 Additions to property
路 And additions to working capital
We�� expect that to cause free cash flow to come in closer to half of EBITDA than two-thirds in the kind of circumstances I described.
It didn�� at DNB because:
路 Working capital is negative
路 Capital spending needs are minimal
These aren�� financial aspects. They��e operational aspects of the business. In fact, they are core and usually quite difficult to change aspects of the business.
I usually find that working capital needs and capital spending needs are part of the DNA of a business. They are there from birth. They are ��in broad strokes ��something that�� very hard to change. You can improve discipline. But you can�� turn a railroad into an ad agency. Their property requirements are what they are. And they��e always been that way.
An exceptionally cash-generative business is often an exceptionally cash generative business for reasons that have nothing to do with the current management team or their policies.
So even EBITDA doesn�� help us separate a company that converts one dollar of EBITDA into 50 cents of free cash flow over a decade from a company that converts one dollar of EBITDA into 68 cents of EBITDA over a decade.
So, no measure is perf! ect. When! in doubt, creditors and shareholders would both prefer to see free cash flow come in higher. Free cash flow is the best protection.
But we��l look at EBITDA because that is a customarily used measure ��and it allows us to compare different companies without having me constantly talking about why free cash flow is high here but low here. EBITDA just causes fewer problems than either a net income or free cash flow based discussion would.
So, I mentioned that financial liabilities at DNB ��basically debt and pensions ��are $1.3 billion. And EBITDA is $500 million.
That means debt ��we��l lump pensions in with debt here ��is 2.6 times EBITDA. Can you live with that?
Is debt of 2.6 times EBITDA okay?
That�� the question to ask. Not whether it�� okay to have negative equity. Negative equity itself is not a risk. Poor interest coverage is.
You can also measure the ability to repay debt by looking at free cash flow. For free cash flow ��because of working capital swings ��never use a one year number. Take a three-year average. In DNB�� case that three-year average is $325 million.
So, if DNB continued to produce free cash flow at the same rate ��and used every penny of free cash flow to pay down its debt and fund its pension liabilities ��it would take the company exactly four years to scrub its balance sheet spotless.
This is probably closer to the kind of number Warren Buffett would use. He�� probably say: ��he company can pay everything off in four years.��br>
There is an additional problem with DNB. The pension plan. I said pensions were about $600 million. But that�� only the unfunded portion. The actual obligation is $1.7 billion. This is then reduced by the value of pension plan assets.
The calculation of the unfunded portion that appears on the balance sheet depends on assumptions DNB makes. Some of which are too aggressive:
路 Expected Long-Term Return on Plan Assets: 8.25%
They are c! utting it! to 7.75% going forward. That is still too high.
The plan�� target allocation is:
路 55% stocks
路 43% bonds
路 2% real estate
We��l call that:
路 55% stocks
路 45% bonds
Which is awfully close to 50/50 between stocks and bonds. So the math is pretty easy.
What would I say the expected return on a 50/50 stock and bond portfolio should be?
6.25%.
I think 50/50 stock and bond pension plans that are assuming more than 6.25% a year are assuming too much. And that obviously means they are understating their liabilities.
Of course, some people disagree with me. And some of them are a lot smarter than me. Berkshire Hathaway assumes a 7% a year return on their pension plans. At year end, stocks were 60% of Berkshire�� pension assets.
I think assumptions more aggressive than about:
路 8% for stocks
路 4% for bonds
Are too aggressive.
Berkshire may be right to use 7% for their pension plan return assumptions.
But, if it was up to me, I�� use 6%. Of course, nobody uses 6%.
The average expected return on pension assets is 7.8% at the 100 largest U.S. public companies. So, DNB is right in line with them with its 7.75% expectation.
But Dun & Bradstreet�� funded status is worse than most big U.S. companies. On average, companies have funded between 75% and 80% of their pension obligations.
Here is a comparison of expect return and actual returns for the 100 public companies with the largest defined benefit plans:Expected Actual 2000 9.4% 4.5% 2001 9.3% (6.4%) 2002 9.2% (8.7%) 2003 8.5% 19.2% 2004 8.4% 12.4% 2005 8.3% 11.2% 2006 8.3% 12.9% 2007 9..9% 2008 8.1% (18.7%) 2009 8.1% 13.9% 2010 8.0% 12.8% 2011 7.8% 5.9%
As you can see, expectations make no sense. They are very sticky. They didn�� increase at all when there was a huge drop in stock prices. And they were at their highest in 2000 ��when no combination of assets was going to earn you 9.4% a year.
Unfortunately, the asset allocation of these funds is really bad too. They had 60% on average in stocks in 2006 ��when the market was clearly overvalued ��but just 38% today when stocks are by far the best investment available to them.
At least on this measure, DNB does better. They have 52% of their plan assets in stocks.
So I would expect them to earn about 6% a year on their pension investments.
They expect 7.75% a year. That 1.75% a year gap is equivalent to $22 million a year in earnings they expect to have ��that I think they won��.
It shaves about 7% a year off their earnings. In other words, when DNBS says it earned $6 a share ��my ears hear it earned $5.60 a share.
It cuts into my valuation of the company. But it doesn�� make me think there is the potential for financial peril because of the pension plan.
Ultimately, we are talking about a plan with $1.7 billion in obligations that has almost $1.3 billion in assets at a company with $300 million a year in free cash flow that could be devoted to closing that gap if they need to.
Finally, Dun & Bradstreet�� 6.3%-a-year compensation increase assumption is something I highlighted when I read the 10-K. Berkshire assumes 3.7%. I don�� have any data on this. But I can�� remember seeing many public companies who assume a greater than 6% compensation increase.
Finally, let�� look at the companies you talked about ��Dun & Bradstreet, DirecTV and AutoZone ��from a perspective that! incorpora! tes their debt into their prices.
I�� using Bloomberg numbers here.EV/EBITDA Dun & Bradstreet 7.8 DirecTV 6.2 AutoZone 10.3
If you��e not used to looking at EV/EBITDA ��one thing that might help you is to assume that a truly unleveraged company would have a P/E ratio that was double its EV/EBITDA ratio. This is not exactly right. It can vary a lot by industry. But it may help you think about the numbers.
So, Dun & Bradstreet might sell for about 15 to 16 times earnings if it used no debt. For reasons I explained earlier ��Dun & Bradstreet tends to convert EBITDA into free cash flow much better than most companies ��a 7.8 times EV/EBITDA ratio at DNB would probably be equivalent to a P/E of about 11.5.
In other words, if you��e not worried the debt poses a risk of bankruptcy ��you can imagine 7.8 times EBITDA with debt is really the same price as 11.5 times EBITDA with no debt.
I think that�� the best way to think about Dun & Bradstreet�� negative equity and whether the debt they have and the share buybacks they��e done make sense.
The questions to ask are:
1. Is the earnings yield of the stock they are buying back higher than the interest rate of the money they are borrowing?
2. Do you need to adjust any financial obligations ��like an unfunded pension liability ��to determine the true extent of what the company owes?
3. Are net financial obligations (debt and pensions minus cash) a low enough multiple of their EBITDA?
4. How many years of free cash flow would it take to completely pay off all their financial liabilities?
5. Is the price of the entire company ��in terms of EV/EBITDA, not just P/E ��still low enough to justify your investment?
6. And most importantly: How reliable is the company�� EBITDA, free cash flow, etc?
This last questi! on is som! ething I didn�� spend any time on in this article. But it�� the reason I bought DNB.
If I thought the company:
路 Did not have a wide moat
路 Did have a high risk of technological obsolescence
路 And didn�� have the pricing power (and places to cut costs) to keep margins up
I would definitely feel differently about DNB as a stock. And I might even feel differently about it in terms of its ability to carry debt.
So the long-term reliability of the business should be a critical part of your analysis of any company with negative equity.
But the fact that a company has negative equity is really not a big deal. The right company can have negative equity and still be worth buying.
The ��ight company��tends to be a wide moat business with almost no need for tangible investment in day-to-day operations.
In other words:
路 Negative working capital
路 Minimal property, plant, and equipment
路 A wide moat
Those are - [By Paul]
Timothy W Briggs, who is a Senior Vice President at AutoZone Inc. (NYSE:AZO), sold 12,830 shares on Sep 26 at $324.83 per share for a total value of $4,167,574. About the company: AutoZone, Inc. is a specialty retailer of automotive replacement parts and accessories. The Company offers an extensive product line for cars, sport utility vehicles, vans and light trucks, including new and remanufactured automotive hard parts, maintenance items, accessories and non-automotive products. Autozone operates in United States and Puerto Rico, and Mexico.
Hot Tech Companies To Watch For 2014: Gold Port Resources Ltd. (GPO.V)
Gold Port Resources Ltd., an exploration stage junior mining company, engages in the identification, acquisition, and exploration of mineral properties primarily in Guyana, South America. It principally explores for gold and copper ores. The company owns interests in the Groete Creek Gold and Akaiwong projects located in Guyana. Gold Port Resources Ltd. was incorporated in 1995 and is headquartered in Vancouver, Canada.
Hot Stocks To Watch For 2014: R.G. Barry Corporation(DFZ)
R.G. Barry Corporation, together with its subsidiaries, engages in designing, sourcing, marketing, and distributing consumer products in the retail accessories category primarily in North America. It operates in two segments, Footwear and Accessories. The Footwear segment offers footwear products comprising primarily slippers, sandals, hybrid and fashion footwear, slipper socks, and hosiery under the Dearfoams, Angel Treads, DF by Dearfoams, Utopia by Dearfoams, and Terrasoles names. This segment also markets Levi?s branded slippers and sandals. The Accessories segment provides foot and shoe care products, such as cushioned insoles, handbags, tote bags, and travel products for women under the Foot Petals, Fab Feet, Glamour Toez, Heavenly Heelz, Killer Kushionz, baggallini, and Le Bagg names. The company markets its products through accessory sections of department stores, chain stores, warehouse clubs, specialty stores, independent stores, television shopping networks, e- tailing/Internet based retailers, discount stores, and mass merchandising channels of distribution. R.G. Barry Corporation was founded in 1947 and is headquartered in Pickerington, Ohio.
Hot Stocks To Watch For 2014: Yhi International Limited (Y08.SI)
YHI International Limited, an investment holding company, engages in the import, export, and distribution of automotive and industrial products. The company offers automotive products, including tires, alloy wheels, and automotive batteries; and industrial commercial products, such as industrial batteries and golf buggies. It also designs, develops, manufactures, markets, and distributes alloy wheels and alloy wheel moulds, as well as offers tires under the Neuton brand name; and industrial and automotive batteries under the Neuton Power brand name. In addition, the company engages in the retail of tires, alloy wheels, industrial batteries, and related goods. YHI International Limited operates primarily in Singapore, Malaysia, China, Hong Kong, Taiwan, Australia, and New Zealand. The company was founded in 1948 and is headquartered in Singapore. YHI International Limited is a subsidiary of YHI Holdings Pte Ltd.
Saturday, August 24, 2013
PIMCO’s El-Erian: Forget Politicians—It’s the Fed That Matters
PIMCO CEO Mohamed El-Erian said Monday that although the G-8 Summit would bring powerful world leaders this week to Northern Ireland, all eyes in market and economic circles would be on the Federal Reserve’s meeting Tuesday and Wednesday because central banks are better these days at setting policy than politicians.
The Fed and other Western central banks have been at the forefront of efforts to revive economic growth, create jobs and maintain financial stability, according to El-Erian, who serves as PIMCO’s co-chief investment officer alongside Bill Gross.
“Lacking the support of other policymaking entities, they have courageously taken on important policy objectives with imperfect and highly experimental tools,” El-Erian wrote. “As such, there is genuine uncertainty today about the future evolution of the cost-benefit equation, and what this means both for the willingness of central bankers to stay the course and for their current and future effectiveness.”
Nervousness About Rising Interest Rates
El-Erian’s comments come as interest rates have recently started to rise—even though inflation is in check and the U.S. unemployment rate stubbornly remains above 7%. Yet the benchmark 10-year U.S. Treasury note rose to as high as 2.29% last week (its highest level since April 2012), and mortgage rates look to be rising toward the 4% mark.
Why? Because investors are nervous, and they keep waiting for central banks such as the Fed to turn off the easy-money spigot. As a result, investors are reducing their exposure to bonds and sending rates higher, which has the effect of pushing bond prices down.
“The ongoing bond sell-off has offered investors few places to hide,” wrote Anthony Valeri, fixed-income market strategist for LPL Financial, in a fixed income call note on June 11. “Most bond sectors have suffered price declines, in some cases worse than Treasuries, in what has been a general rebuke of bonds in response to uncertainty about the timing of Fed tapering.”
Buzzword du Jour: ‘Tapering’
That word—“tapering”—has become the buzzword du jour as market players now watch for any sign that the Fed is shutting down its quantitative easing (QE) program, which has supported historically low interest rates in response to the financial crisis of 2008.
For example, Michael Hanson, senior U.S. economist for Bank of America-Merrill Lynch, wrote on Monday that he expects the Federal Open Market Committee (FOMC) at this week’s meeting “to leave the door open to tapering” before the end of 2013.
“The markets could interpret a neutral-sounding directive as a tacit endorsement of the repricing of Fed policy,” Hanson added. “Our base case remains that persistently low inflation and slower growth in Q2 and Q3 will delay any cut in the Fed's monthly QE3 purchase pace until 2014.”
Similarly, El-Erian believes that market watchers will look on Wednesday for three specific issues: whether the FOMC still intends to taper the exceptional support it provides markets and the economy; how concerned officials are about the cost and risks of their policy experimentation; and whether the negative global side effects are registering inside the Fed’s policy deliberating committee.
“I suspect that the Fed will attempt to walk back on its tapering narrative, recognize but downplay the collateral damage and unintended consequences of its experimental policy stance, and convey little about negative global externalities,” he predicted.
Top 10 Dividend Stocks To Own For 2014
At the same time, El-Erian suspects that the Fed will (in a dignified manner) beg the world’s politicians to act decisively on basic policy issues such as jobs and economic growth—and he also suspects that it won’t meet with much luck due to political constraints.
“Whether in the official statement or in the remarks that follow, officials will again call for support from other policymaking entities,” he wrote. “And the great irony will be that this call will follow a disappointing communique from the G-8…. Until this basic imbalance is corrected, global growth and employment will fall short of what is both required and possible; and markets will lack the sustained underpinnings of strong fundamentals.”
---
Read PIMCO’s Gross: Fed in a Corner, Will ‘Taper’ by Year’s End at AdvisorOne.
Friday, August 23, 2013
JCP: Starbucks CEO Schultz Blasts Ackman for ‘Disgusting’ Actions
It’s been a busy day for J.C. Penney (JCP), and this afternoon, another party climbed into the fray: Starbuck‘s (SBUX) CEO Howard Schultz spoke with Maria Bartiromo on CNBC‘s “Closing Bell,” offering a defense for interim CEO Mike Ullman and a scathing attack on activist shareholder Bill Ackman, who today called for the chairman, Tom Engibous, to step down.
Said Schultz, “I have never seen in 20 years as a CEO or a board member, any board member leaking an email to the press, not sharing it with the board, not sharing it with the CEO,” referring to Ackman’s two press releases in the last 24 hours.
The irony is Bill Ackman has the blood on his hands for being the architect and recruiter of [former CEO] Ron Johnson, and of the strategy. Mike Ullman came back to try and save that company. He is the kind of leader that will rebuild the trust with employees, and if given time, turn things around. There’s no better person to run J.C. Penney. And what’s so wrong is that Bill Ackman has been destroying the company. If I was sitting on that board, I would be asking for Bill Ackman’s removal. Bill Ackman has fractured the trust within that board. Watching what went on today, I find it disgusting.
J.C. Penney shares ended the day down 79 cents, or almost 6%, at $12.87.
Monday, August 19, 2013
Best Undervalued Stocks To Buy Right Now
Ray Dalio�� $120 billion Bridgewater Associates in 2010 and 2011 was ranked the world�� largest and best-performing hedge fund, with a 23 percent return in 2011 when the average fund lost 5 percent. Dalio fosters a unique culture of transparency and pursuit of excellence at Bridgewater based on his self-penned ��rinciples.��They employ a global macro strategy to invest. In Dalio�� words in an October 2011 Charlie Rose interview, ��e assess what the world economy is like and what ��how asset classes will change and we are managing money for pension funds and endowments like you described; the Pennsylvania teachers, those types of pension funds. We��e trying to keep them safe.��
Dalio�� portfolio contains 261 stocks, and 32 percent of it is now in emerging markets ETFs. His biggest purchases during the fourth quarter were Vanguard Emerging Markets ETF (VWO), iMCSI Emerging Markets Index Fund (EEM), BMC Software (BMC), Watson Pharmaceuticals (WPI) and Berkshire Hathaway Inc. B Shares (BRK.B).
Vanguard Emerging Markets ETF (VWO) and iMCSI Emerging Markets Index Fund (EEM)
Dalio increased his holding in the Vanguard Emerging Markets ETF by 2,233,700 shares that he paid about $39.50 each for in the fourth quarter of 2011. The purchase brought his total holding to 29,957,622 shares. He opened this position in the fourth quarter of 2009.
This ETF contains 906 stocks, whose biggest 10 holdings comprise 19.1% of total assets, located in emerging markets such as China (17.7 percent), Brazil (15.8 percent), Korea (14.6 percent) and Taiwan (11.9 percent). In the last year it lost 18.68 percent, and is up 19.48 percent over the last three years. It has the highest level of potential risk and potential reward Vanguard offers. The median market cap of companies in the fund is $17 billion, and the median P/E is 11.5 and P/B is 1.8.
Dalio also increased his position in the iMSCI Emerging Markets Index Fund (EEM) by 1,427,100 shares in the fourth quarter at an avera! ge price of $39 per share, bringing his total holding to 21,203,400 shares. Dalio opened this position in the first quarter of 2010.
This emerging markets fund contains 840 stocks, weighted 17.2% in China, 15.4% in Brazil, 14.6% in South Korea and 10.7% in Taiwan. It also went down 18.87% last year, and is up 17.35% over the last three years. The median P/E is 15.85 and P/B is 2.91, and media market cap is $3.79 billion.
The fund was down largely due to the worsening sovereign debt crisis in Europe and inconclusive federal dect ceiling talks in the U.S. The index fell by 9 percent in August, its worst performance since October 2008. Emerging market performance was also impacted by a decline in the U.S. dollar, which depreciated 6 percent versus the Chinese yuan for the year, largely due to historically low U.S. interest rates and fiscal deficit concerns.
The emerging markets investments tie into Dalio�� view of the macro environment. He said in October 2011 that he believes the world has become a dichotomy of debtor-developed nations and creditor-emerging nations. Emerging nations like China, he says, are competitive and beginning to have big surpluses (which they��e lending to the developed world).
BMC Software (BMC)
Dalio increased his stake in BMC software Inc. by 736,755 shares in the fourth quarter at about $36 per share, bringing his total holding to 822,460 shares. He opened the position in the third quarter of 2011 with 85,705 shares at $43.85, though he had traded the stock numerous times before. That quarter, the stock had a 30% downturn.
BMC Software makes software that helps IT organizations manage their business services and applications across distributed, mainframe, virtual and the increasingly popular cloud environments. It has the industry�� broadest choice of IT management solutions, that help clients cut costs, reduce risk and achieve their objectives.
BMC has been partnering with firms to increase its effectiveness in cloud-! based ser! vices and software-as-a-service in recent years. In December it announced it would support Cisco Network Services Manager across its cloud management product line. It also has a strategic alliance with Cisco for more than 25 cloud customers and works with them often when they unveil new products.
The same quarter, BMC also announced its second-generation service solutions that will help IT professionals avoid many of the risks associates with implementing a cloud and enhance the rewards through workshops, architecture and roadmaps.
"Our strategy for success and market leadership is proven, as evidenced by large enterprises standardizing on BMC's universal management platform, the strong demand for our cloud management and Software-as-a-Service solutions, the ongoing expansion of our strategic alliances and the number of multi-product wins across both our businesses," said Bob Beauchamp, BMC's chairman and chief executive officer, in the company�� third-quarter earnings release.
Financially, BMC has a history of strong earnings, revenue and cash flow growth. Revenue has increased each of the last 10 years to a record $2 billion in fiscal 2011, and cash flow reached $743 in 2011, compared to $613 in 2010. Earnings have also steadily increased over the last 10 years, reaching a record $456 million in fiscal 2011. Operating margins reached their highest level of the decade in the quarter ended Sept. 30, 2011, at 30.9% and its net margin was at 20.6%, lower than 22.2% in 2010, but higher than the previous years of the decade. The record earnings and stock price drop pushed BMC�� P/E to historically low levels in 2011, though higher than competitors Microsoft (MSFT) and IBM (IBM):
In its third quarter, BMC bought back 6.3 million shares for $225 million, and has $1 billion remaining in its current share repurchase program. In the last year it returned $800 million to shareholders, which is more than 100 percent of its cash flow.
Since Dalio bought the stock ! it has go! ne up approximately 8.8%.
Watson Pharmaceuticals Inc. (WPI)
Watson Pharmaceuticals stock has been on a decidedly upward trajectory in the last five years, increasing 108 percent. It became slightly cheaper in 2011, however. Dalio has been trading the stock for years but most recently he bought 314,360 shares at about $65 per share in the fourth quarter of 2011 after the stock had ventured off of its 52-week high of $73.35 it climbed to in the middle of the year.
Watson has a long-term record of profitability and growth, with an 11.9% 10-year revenue per share growth rate and 14.2% 10-year free cash flow per share growth rate.
Though the stock price declined in late 2011, the company in November reported double-digit net revenue and earnings growth. The company also announced that month an exclusive agreement with Pfizer Inc. (PFE) to launch a generic version of Lipitor, the world�� best-selling drug in the history of pharmaceuticals. It also received approval from the FDA to start producing a generic version of the birth control drug Yaz that month, a drug with sales of $173 million in the 12 months ending Sept. 30, 2011.
In February, Watson announced a full-year 2011 net revenue increase of 29 percent and EPS increase of 39 percent, due in large part to the successful launch of a total of 189 generic products globally for the year. Currently it is using its strong cash position to invest in growth markets, Canada and European operations.
In spite of the good news and increasing its full-year revenue forecast by $100 million to about $5.4 billion, the stock is up just 0.05 percent year to date.
Dalio�� next largest purchase was Berkshire Hathaway Inc. (BRK.B), and three new buys: BCE Inc. (BCE), The Goldman Sachs Group Inc. (GS), and Peabody Energy Corp. (BTU).
Dalio staking over 32 percent of his fund in emerging markets is tantamount to a forecast that emerging markets will outperform from the macro guru. His other top purchases have c! lear grow! th prospects. To see more of what Dalio bought, visit his portfolio. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Ray Dalio.
Dalio�� portfolio contains 261 stocks, and 32 percent of it is now in emerging markets ETFs. His biggest purchases during the fourth quarter were Vanguard Emerging Markets ETF (VWO), iMCSI Emerging Markets Index Fund (EEM), BMC Software (BMC), Watson Pharmaceuticals (WPI) and Berkshire Hathaway Inc. B Shares (BRK.B).
Vanguard Emerging Markets ETF (VWO) and iMCSI Emerging Markets Index Fund (EEM)
Dalio increased his holding in the Vanguard Emerging Markets ETF by 2,233,700 shares that he paid about $39.50 each for in the fourth quarter of 2011. The purchase brought his total holding to 29,957,622 shares. He opened this position in the fourth quarter of 2009.
This ETF contains 906 stocks, whose biggest 10 holdings comprise 19.1% of total assets, located in emerging markets such as China (17.7 percent), Brazil (15.8 percent), Korea (14.6 percent) and Taiwan (11.9 percent). In the last year it lost 18.68 percent, and is up 19.48 percent over the last three years. It has the highest level of potential risk and potential reward Vanguard offers. The median market cap of companies in the fund is $17 billion, and the median P/E is 11.5 and P/B is 1.8.
Dalio also increased his position in the iMSCI Emerging Markets Index Fund (EEM) by 1,427,100 shares in the fourth quarter at an avera! ge price of $39 per share, bringing his total holding to 21,203,400 shares. Dalio opened this position in the first quarter of 2010.
This emerging markets fund contains 840 stocks, weighted 17.2% in China, 15.4% in Brazil, 14.6% in South Korea and 10.7% in Taiwan. It also went down 18.87% last year, and is up 17.35% over the last three years. The median P/E is 15.85 and P/B is 2.91, and media market cap is $3.79 billion.
The fund was down largely due to the worsening sovereign debt crisis in Europe and inconclusive federal dect ceiling talks in the U.S. The index fell by 9 percent in August, its worst performance since October 2008. Emerging market performance was also impacted by a decline in the U.S. dollar, which depreciated 6 percent versus the Chinese yuan for the year, largely due to historically low U.S. interest rates and fiscal deficit concerns.
The emerging markets investments tie into Dalio�� view of the macro environment. He said in October 2011 that he believes the world has become a dichotomy of debtor-developed nations and creditor-emerging nations. Emerging nations like China, he says, are competitive and beginning to have big surpluses (which they��e lending to the developed world).
BMC Software (BMC)
Dalio increased his stake in BMC software Inc. by 736,755 shares in the fourth quarter at about $36 per share, bringing his total holding to 822,460 shares. He opened the position in the third quarter of 2011 with 85,705 shares at $43.85, though he had traded the stock numerous times before. That quarter, the stock had a 30% downturn.
BMC Software makes software that helps IT organizations manage their business services and applications across distributed, mainframe, virtual and the increasingly popular cloud environments. It has the industry�� broadest choice of IT management solutions, that help clients cut costs, reduce risk and achieve their objectives.
BMC has been partnering with firms to increase its effectiveness in cloud-! based ser! vices and software-as-a-service in recent years. In December it announced it would support Cisco Network Services Manager across its cloud management product line. It also has a strategic alliance with Cisco for more than 25 cloud customers and works with them often when they unveil new products.
The same quarter, BMC also announced its second-generation service solutions that will help IT professionals avoid many of the risks associates with implementing a cloud and enhance the rewards through workshops, architecture and roadmaps.
"Our strategy for success and market leadership is proven, as evidenced by large enterprises standardizing on BMC's universal management platform, the strong demand for our cloud management and Software-as-a-Service solutions, the ongoing expansion of our strategic alliances and the number of multi-product wins across both our businesses," said Bob Beauchamp, BMC's chairman and chief executive officer, in the company�� third-quarter earnings release.
Financially, BMC has a history of strong earnings, revenue and cash flow growth. Revenue has increased each of the last 10 years to a record $2 billion in fiscal 2011, and cash flow reached $743 in 2011, compared to $613 in 2010. Earnings have also steadily increased over the last 10 years, reaching a record $456 million in fiscal 2011. Operating margins reached their highest level of the decade in the quarter ended Sept. 30, 2011, at 30.9% and its net margin was at 20.6%, lower than 22.2% in 2010, but higher than the previous years of the decade. The record earnings and stock price drop pushed BMC�� P/E to historically low levels in 2011, though higher than competitors Microsoft (MSFT) and IBM (IBM):
In its third quarter, BMC bought back 6.3 million shares for $225 million, and has $1 billion remaining in its current share repurchase program. In the last year it returned $800 million to shareholders, which is more than 100 percent of its cash flow.
Since Dalio bought the stock ! it has go! ne up approximately 8.8%.
Watson Pharmaceuticals Inc. (WPI)
Watson Pharmaceuticals stock has been on a decidedly upward trajectory in the last five years, increasing 108 percent. It became slightly cheaper in 2011, however. Dalio has been trading the stock for years but most recently he bought 314,360 shares at about $65 per share in the fourth quarter of 2011 after the stock had ventured off of its 52-week high of $73.35 it climbed to in the middle of the year.
Watson has a long-term record of profitability and growth, with an 11.9% 10-year revenue per share growth rate and 14.2% 10-year free cash flow per share growth rate.
Though the stock price declined in late 2011, the company in November reported double-digit net revenue and earnings growth. The company also announced that month an exclusive agreement with Pfizer Inc. (PFE) to launch a generic version of Lipitor, the world�� best-selling drug in the history of pharmaceuticals. It also received approval from the FDA to start producing a generic version of the birth control drug Yaz that month, a drug with sales of $173 million in the 12 months ending Sept. 30, 2011.
In February, Watson announced a full-year 2011 net revenue increase of 29 percent and EPS increase of 39 percent, due in large part to the successful launch of a total of 189 generic products globally for the year. Currently it is using its strong cash position to invest in growth markets, Canada and European operations.
In spite of the good news and increasing its full-year revenue forecast by $100 million to about $5.4 billion, the stock is up just 0.05 percent year to date.
Dalio�� next largest purchase was Berkshire Hathaway Inc. (BRK.B), and three new buys: BCE Inc. (BCE), The Goldman Sachs Group Inc. (GS), and Peabody Energy Corp. (BTU).
Dalio staking over 32 percent of his fund in emerging markets is tantamount to a forecast that emerging markets will outperform from the macro guru. His other top purchases have c! lear grow! th prospects. To see more of what Dalio bought, visit his portfolio. Also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Ray Dalio.
Best Undervalued Stocks To Buy Right Now: Pochins(PCH.L)
Pochin?s PLC engages in building and civil engineering contracting, property development and letting, house building, and specialist plant hiring businesses in the United Kingdom. It operates through four segments: Construction, Property, Residential, and Concrete Pumping. The Construction segment involves in commercial, industrial, education, health, and leisure building construction business through its partnership with clients, subcontractors, and suppliers. The Property segment invests, develops, and manages industrial, office, retail, and leisure properties. The Residential segment develops residential houses. The Concrete Pumping segment engages in concrete pump hire activity by operating a fleet of mobile concrete pumps. The company was founded in 1935 and is headquartered in Middlewich, the United Kingdom.
Best Undervalued Stocks To Buy Right Now: Yum! Brands Inc.(YUM)
YUM! Brands, Inc., together with its subsidiaries, operates as a quick service restaurant company in the United States and internationally. It develops, operates, franchises, and licenses a system of restaurants, which prepare, package, and sell various food items, as well as operates Chinese casual dining concept restaurants. The company?s restaurants specialize in chicken, pizza, and Mexican-style food categories. It operates approximately 37,000 restaurants in 110 countries and territories under the KFC, Pizza Hut, and Taco Bell brands, as well as approximately 450 casual dining concept restaurants in China. The company was formerly known as TRICON Global Restaurants, Inc. and changed its name to YUM! Brands, Inc. in May 2002. YUM! Brands, Inc. was founded in 1997 and is headquartered in Louisville, Kentucky.
Advisors' Opinion:- [By Brian Gorban]
Fellow fast food giant Yum! Brands (NYSE: YUM) serves as a nice stock to diversify with one’s McDonald’s holding to take away company specific risk, and it is no slouch in size. Operating three very well-known restaurants (KFC, Pizza Hut, and Taco Bell) that in total comprised an even more impressive 38,000 restaurants as of November 29, 2012 and a market capitalization exceeding $30 billion, investors can feel comfortable that the company will continue to withstand the current economic recession. Add in the fact that the company sports a nice 2% dividend yield and with a very low 34% payout ratio, look for that dividend to continue to be raised.
- [By Victor Mora]
Yum! Brands owns and operates KFC, Pizza Hut, and Taco Bell restaurants around the world. The company is expected to report disappointing earnings after the bell due to an avian flu scare in China. The stock has been on a powerful move higher over the last few years, but is now consolidating. Over the last four quarters, investors in the company have been pleased since earnings have been mixed and revenue figures have been mostly rising. Relative to its peers and sector, Yum! Brands has been a weak year-to-date performer. WAIT AND SEE what Yum! Brands does this coming quarter.
Best Blue Chip Stocks To Watch For 2014: HF Financial Corp.(HFFC)
HF Financial Corp. operates as the holding company for Home Federal Bank that provides consumer and commercial business banking services in the United States. It offers deposit accounts, such as savings accounts, checking accounts, money market accounts, and certificate of deposits. The company?s loan portfolio comprises one- to four-family residential, commercial business, agriculture, multi-family, commercial real estate, and construction loans; and consumer loans, including automobile loans, home equity loans, loans secured by deposit accounts, and student loans. In addition, it provides annuities, mutual funds, life insurance, and other financial products and services, as well as equipment leasing services. As of June 30, 2011, the company had 34 banking centers. HF Financial Corp. was founded in 1929 and is headquartered in Sioux Falls, South Dakota.
Sunday, August 18, 2013
DCT's Miami Asset 100% Leased - Analyst Blog
10 Best Energy Stocks To Invest In 2014
DCT Industrial Trust Inc. (DCT), a real estate investment trust (REIT), recently revealed that its development project – DCT Commerce Center at Pan American West – in Miami is 100% leased. Notably, the company completed the construction of the property in Apr 2013.DCT Commerce Center at Pan American West, which is positioned in the Airport West submarket, comprises 2 buildings spanning 334,000 square feet. The project experienced a huge demand since its course of development.
Prior to the completion of construction, the project was 82% leased. In second-quarter 2013, DCT Industrial inked 2 deals leasing the remaining space at the property, thereby making the property fully occupied.
The above-mentioned move evinces DCT Industrial's expertise in the identification and development of projects with strong growth potential. Moreover, with a larger customer base, an increase in e-Commerce application and supply chain consolidation, the demand for logistics infrastructure and efficient distribution networks has risen. DCT Industrial is poised to benefit from its proficiency in offering modern distribution facilities through acquisitions and development projects in strategic infill locations.
DCT Industrial also has a strong customer base of over 800 industry-leading companies such as ConAgra Foods, Inc. (CAG), Ford Motor Co. (F) and Xerox Corporation (XRX). Such a diversified tenant base provides the company a significant competitive edge over its peers.
DCT Industrial owns, operates and develops high-quality bulk distribution and light industrial properties in high-volume distribution markets in the U.S. and Mexico. As of Mar 31, 2013, the company owned about 74.5 million square feet of properties, including 14.2 million square feet managed on behalf of 4 institutional management partners.
DCT Industrial currently carri! es a Zacks Rank #2 (Buy).
Saturday, August 17, 2013
RetailMeNot Jumps 34% In IPO Debut--Should You Buy?
RetailMeNot (Nasdaq:SALE) went public July 18 at $21 per share. In its first day of trading its stock gained 32%. Is the world's largest digital coupon marketplace still worth owning after its big opening? I'll look at the pros and cons.
Mad Money's Jim Cramer recently outlined his criteria for investing in IPOs. His big three are: (1) good management, (2) the investors behind the company, and (3) who the underwriters are. If these three items don't pass the sniff test there's no point going on to his second set of criteria, which includes analyzing the product or service, how profitable the company is and whether the ultimate market for the product or service is big enough.
Here are the first three criteria.
SEE: How An IPO Is Valued
Good Management
Its founder and CEO is Cotter Cunningham. Prior to establishing the company in 2009, Cunningham worked for Bankrate Inc. (NYSE:RATE) for seven years, first as senior vice president of marketing from February 1999 to September 2000, whereupon he became COO until his resignation in March 2007. From there he went on to start some internet businesses such as Divorce360.com with the financial assistance of Austin Ventures, one of the main investors behind RetailMeNot. Clearly, Cunningham understands the internet.
RetailMeNot's COO is Kelli Beougher--its second employee after Cunningham--who joined the company in 2009. Prior to joining the company she worked for both Rakutan LinkShare and GE Capital. Beougher's been instrumental in the success of RetailMeNot's websites. Other key positions are held by seasoned veterans with public company experience at places such as Google (Nasdaq:GOOG) as well as privately held businesses like the Gilt Groupe.
I'd characterize its management as competent.
Investors Behind Company
Its board reads like a who's who of venture capitalists. Also on the board is Brian Sharples, the co-founder and CEO of HomeAway (Nasdaq:AWAY), the world's leading online marketplace of vacation rentals. That's a very helpful person to have on your board. It just so happens that Austin Ventures invested in both start ups to the tune of $206 million. Although Sharples' investment in RetailMeNot is likely a courtesy more than anything else because the two startups were part of the same VC stable; he strikes me as someone very committed to technology innovation.
SEE: A Primer On Private Equity
I have to give the investors a pass as well.
Underwriters
It all comes down to who sold its stock. A strong group of underwriters is usually indicative of an IPO candidate that's first rate. In RetailMeNot's public offering, Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS) and Credit Suisse (NYSE:CS) were the top three underwriters accounting for 76% of its 9.1 million shares sold. You can't get much better than that.
Second Set Of Criteria
Having passed the first set with flying colors, it's time to address the second. Here we really want to determine the viability of its business model. It's not just about the potential size of the market that's important, but how profitable its revenue is from dollar one. In this regard it's been very successful. In 2010, its first full year in operation, it generated an operating profit of $2.8 million from $17 million in revenue. This is hugely important because it shows the business has a sustainable business model. In 2013, it's looking at $48 million in operating profits from $160 million in revenue.
SEE: IPO Basics
The company estimates that globally, consumers spent more than $570 billion using coupons in 2012, a result of the proliferation of smart phones and m-commerce. While it's difficult to know how much of that pie RetailMeNot can grab for itself, it's fair to say that this number will grow as more consumers regularly use digital coupons. For this reason I see a bright future for the company. It just has to continue executing its plan to increase traffic, make more from each retail relationship, expand internationally and continue doing so on a profitable basis.
If it does all this it's a large-cap within 1-2 years.
Bottom Line
This is the first IPO in a long time where I don't have a lot of concerns. About the only thing that worries me about RetailMeNot is the inconsistency of its margins since its startup in 2009. Yes, it's made money in each of the past three years, but it's operating margin has bounced around from 16.7% in 2010 to 47.8% in 2011 and then back to 31.4% in 2012. If you do buy its IPO, which wouldn't be a bad idea for those looking for growth, I'd make sure to keep an eye on its margins over the next few quarters. If it appears the company is stabilizing its cost structure, it might make sense to add to your investment. If not, I'd be tempted to move on.
I give RetailMeNot a big thumbs up.
Friday, August 16, 2013
BP and Partners Start Hull Plant - Analyst Blog
The 350 million pound Vivergo bioethanol plant, a joint venture between BP plc (BP), AB Sugar and DuPont, has commenced operations at Hull in eastern England.
Built on a 25 acre site, the Vivergo plant is a brownfield re-development project within the Saltend Chemicals Park near Hull. The plant is one of Europe's largest biorefineries, capable of meeting about a third of Britain's bioethanol demand.
The plant is intended to convert 1.1 million tons of animal feed wheat each year into 420 million litres of bioethanol and produce 500,000 tons of protein-rich animal feed for the U.K. market.
Biorefining breaks down the starch in wheat to sugars. The sugar is then fermented into alcohol through a process comparable to that used in a whisky distillery. The bioethanol thus generated can be added to petrol to make it a lower-carbon transport fuel.
The bioethanol produced at the Vivergo plant will save more than 50% of the greenhouse gas emissions that come from standard petrol and is equal to the emission of over 180,000 British cars a year.
By 2020, the European Union targets using 10% of all fuels for transportation from renewable sources.
The application of biofuels is under examination, as some are believed to displace food production to new areas, forcing forest clearance, discharging large amounts of greenhouse gases into the atmosphere and affecting the climate even more.
BP carries a Zacks Rank #2 (Buy). Other stocks to consider include Zacks Ranked #1 (Strong Buy), Alliance Resource Partners LP (ARLP), Newpark Resources Inc (NR) and Boardwalk Pipeline Partners, LP (BWP).
Thursday, August 15, 2013
McDermott: Is Now The Time To Buy As The Company's CEO Purchases Shares?
On August 8, McDermott International (MDR) CEO Stephen Johnson made an atypically large purchase of company stock. According to the Form 4 filed here, Johnson purchased 74,180 shares of McDermott on the open market at an average price of $6.74. The transaction value of the purchase was approximately $500,000. Altogether, the CEO now directly owns 542,210 shares of company stock along with 596 more shares in his 401K Plan.
Johnson's rather large purchase of company stock marks an event that is somewhat out of the ordinary. The last insider purchase on the open market for McDermott was conducted in June 2012. Indeed, apart from a small $9,486 sale in March 2013, no insider has conducted any open market transactions over the last year.
Over the same time period, it remains clear that McDermott has struggled operationally. As seen in the chart below, McDermott's stock has fallen over 35% in the last year. A similar trend can be noted in the company's steep revenue and net income declines. Over the last year, McDermott's revenues have fallen 37%.
MDR data by YCharts
McDermott serves as a leading engineering, procurement, construction and installation company dedicated to the field of offshore oil and gas projects around the world. The company is one of the largest US-based engineering and construction companies focused exclusively on the upstream offshore oil and gas sector. In recent decades, the sector has seen an increase in activity as oil exploration begins to migrate offshore in pursuit of higher flowing oil.
On August 6, McDermott reported its Q2 2013 earnings results, which was quickly met with a negative sentiment from investors. Several analysts were also quick to issue downgrades in light of the company's perceived lack of execution credibility. In its earnings conference call, McDermott reported a much weaker than expected ! quarter and announced several intense modifications in order to realign itself back onto its core business. This was being done despite a transition to subsea projects which would require several years to complete.
The company also acknowledged its lack of top-tier employees and announced a recruitment effort to meet this need. At the same time, McDermott announced that its Chief Operating Officer, John T McCormack, would be leaving the company in Q4 of this year. It appears as if the company sacked the officer in order to pin the mismanagement of the current situation onto someone accountable.
A look at the financial picture clearly shows a deteriorating situation. Revenues for Q2 2013 fell to $647.25 million from $889.25 million in Q2 2012. Over the same time, a net income of $79.38 million for Q2 2012 swung to a net loss of $149.54 million in Q2 2013. Cash and cash equivalents fell at an alarming rate from $620.14 million in Q4 2012 to $427.71 million as of Q2 2013. Over the same period, the company's receivables actually declined from $503.26 million to $384.35 million.
Conclusion
Overall, the last quarter clearly demonstrates that McDermott is facing a tough time right now. The company is in a dire need to restructure itself even as it undergoes an ongoing transition. It remains to be seen if the worst has come about from this last failed quarter. However, there are clearly some steps being identified to help put the company back on the right course. The latest insider purchase by the company's CEO appears to be one demonstrated out of the officer's confidence in these improvement efforts.
McDermott now trades with a price-to-book ratio of 0.85 and a rather low price-to-sales ratio of 0.44. At a $1.68 billion market capitalization as of August 9, this engineering company remains far from expensive considering its $3.20 billion in total assets. Nevertheless, the company has given very little for investors to hang their hat on. Until more positive operational indicators ! emerge fr! om McDermott, it remains hard to believe that investors can feel comfortable investing in this company.
Source: McDermott: Is Now The Time To Buy As The Company's CEO Purchases Shares?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Saturday, August 10, 2013
Is Lennar a Dangerous Investment?
With shares of Lennar (NYSE:LEN) trading at around $36.72, is LEN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
Lennar CEO Stuart Miller recently stated that a gradual rise in interest rates won't stop the housing recovery. He might be right, but let's play devil's advocate.
There's a lot of talk that consumers will be able to afford homes even if rates continue to increase. Once again, while this is possible, it's important to remember that investors always want to be ahead of the curve. In other words, it's not that rates are still low; it's that the direction of rates is up. Therefore, investors (and traders) are likely to shy away from such a play. That said, there is no guarantee that rates will continue to increase. If rates stay where they are or come back down, then longs are well-positioned.
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Instead of attempting to predict the direction of interest rates, let's instead attempt to answer the question whether or not interest rates and home prices can increase at the same time in this economic environment. In other words, will there be enough demand to push up home prices even if interest rates are higher and monthly mortgages become more expensive?
Most analysts are saying that this is a likelihood. Perhaps that's the case, but Generation X isn't exactly the wealthiest generation of all time, and Generation X is a major player when it comes to home buying. Headwinds include unemployment, underemployment, and debt. A lot of the strong performance in housing has come from investment firms and speculation. But to be fair, mortgage applications have been on the rise over the past year. The problem is that they declined in May. If rates are now higher – a 30-year fixed is at 3.91 percent – is it likely for there to be a sustainable increase in mortgage applications if rates continue to increase?
Lennar has significantly improved its efficiency since the real estate bust in 2006. However, while earnings have consistently improved on an annual basis and revenue has improved over the past three years, the last quarter saw significant declines in revenue and earnings on a sequential basis.
Lennar is trading at 16 times forward earnings, which is in-line with peers Toll Brothers (NYSE:TOL) and PulteGroup (NYSE:PHM), which are trading at 21 times forward earnings, and 12 times forward earnings, respectively. In regards to profit margin, Lennar is impressive at 16.51 percent. Toll Brothers is even more impressive at 23.60 percent. However, PulteGroup sports a profit margin of just 5.87 percent. Lennar's operating cash flow is -$613.70, which is a negative.
Lennar does offer a 0.40 percent yield whereas its aforementioned peers don't offer any yield. However, this isn't a large enough yield to make a difference in an investor's decision-making process.
The company culture at Lennar is average at best. According to Glassdoor.com, employees have rated their employer a 3.1 of 5, and only 45 percent of employees would recommend the company to a friend. In regards to leadership, it's also average as 50 percent of employees approve of CEO Stuart Miller. All that said, this is by far and away an industry trade, not a company-specific trade.
Let's take a look at some important numbers prior to forming an opinion on this stock.
T = Technicals Have Weakened
Lennar had been performing extremely well for years, but momentum has shifted to the downside.
| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| LEN | -13.99% | -4.88% | 45.50% | 141.3% |
| TOL | -12.76% | -1.78% | 27.74% | 68.55% |
| PHM | -13.78% | 10.24% | 138.0% | 109.6% |
At $36.72, Lennar is trading below its averages. Even if after the recent selloff, this is a rarity throughout the broader market.
| 50-Day SMA | 41.30 |
| 200-Day SMA | 40.21 |
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E = Equity to Debt Ratio Is Normal
The debt-to-equity ratio for Lennar is close to the industry average of 1.10.
| Debt-To-Equity | Cash | Long-Term Debt | |
| LEN | 1.25 | 1.18B | 5.09B |
| TOL | 0.78 | 936.00M | 2.48B |
| PHM | 1.14 | 1.60B | 2.60B |
E = Earnings Have Been Strong
Earnings have consistently improved on an annual basis, and revenue has improved for three consecutive years.
| Fiscal Year | 2008 | 2009 | 2010 | 2011 | 2012 |
| Revenue ($) in millions | 4,575 | 3,119 | 3,074 | 3,095 | 4,105 |
| Diluted EPS ($) | -7.00 | -2.45 | 0.51 | 0.48 | 3.11 |
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Looking at the last quarter on a sequential basis, revenue and earnings both declined.
| Quarter | May. 31, 2012 | Aug. 31, 2012 | Nov. 30, 2012 | Feb. 28, 2013 |
| Revenue ($) in millions | 930.16 | 1,099.76 | 1,349.94 | 989.95 |
| Diluted EPS ($) | 2.06 | 0.40 | 0.56 | 0.26 |
Now let's take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
Conclusion
Lennar's stock-price momentum has shifted in the wrong direction as interest rates have slowly headed higher. To simplify the future potential of Lennar, if interest rates head back down, then Lennar is a great investment. If interest rates continue to increase, then Lennar is a bad investment. And if interest rates gradually move higher (a realistic possibility), then nobody really knows the answer. However, if interest rates gradually move higher, then they will eventually reach a point where most consumers (not investors) won't be able to afford a home (see weak consumer). That being the case, how can Lennar possibly be a winning long-term investment? Lennar would be a winning long-term investment if rates were already at reasonable levels and the consumer was strong. However, that isn't the environment we're currently living in.
Friday, August 9, 2013
May Sales Reassure Automotive Bulls
In April, the automotive industry's seasonally adjusted annual rate of sales, or SAAR, dropped below 15 million for the first time this year. When sales numbers came in at 14.9 million for the month, some investors began sounding warning alarms that vehicle sales could be in for a decline for the rest of 2013. I didn't buy into those headlines, and it looks like strong sales are here to stay. May sales bounced back to 15.3 million and the graph below shows recent strength in SAAR numbers.
Ford (NYSE: F ) had an excellent month, and there were bright spots for its crosstown rival General Motors (NYSE: GM ) . Let's take a look at some of last month's biggest winners.
Winner, winner!
The industry grew 8% in May led by Nissan, Ford, and Chrysler which gained 25%, 14%, and 11%, respectively. Those trailing industry growth were Honda (NYSE: HMC ) and Volkswagen at 5% and 4%, respectively. Even further behind were Toyota (NYSE: TM ) and General Motors, reporting 3% gains.
Nissan's jump was largely due to a strong May from its recently redesigned Altima, Pathfinder, and Sentra models. The percentage increases for those models were 41%, 293% and 65%, respectively. While the large percentage jumps are nice to cover in press releases, in reality only the Altima broke the top 20 in U.S. vehicle sales. Nissan's best-selling model managed to come in fifth, selling just under 32,000 vehicles.
Overall Ford was a big winner in May with its most profitable line, the F-Series, notching a 31% gain over last May and topping 70,000 for the first month since March 2007. That's pretty impressive on the eve of GM launching its 2014 Silverado. Below is a graph highlighting monthly F-Series sales, not cumulative, and the red line represents what Ford considers a good month in sales -- 50,000.
Ford's Fusion and Escape have set record monthly sales for four straight months and have become Detroit automakers' two top-selling cars. In May both models topped 29,000 in sales and ranked in the top 10 for vehicles sold in the U.S. If you look at total vehicles sold year to date, Ford owns a third of the 12 top models – more than any other manufacturer.
GM's Silverado was its only vehicle to break the top 10 in U.S. sales, but managed to grab the second spot – trailing only the F-Series. While its 25% increase compared to last May is nothing to sneeze at, it still trails Ford's F-Series by about 100,000 vehicles this year. GM hopes to bump up its sales numbers when its redesigned 2014 Silverado makes an impact this summer.
Cadillac was really GM's bright spot for the month, and for the year. Cadillac sales were up almost 40% for the month and 36% for the year. GM still is significantly behind rival Ford in its operating efficiency and margins. In time, as those improve, and as both the Cadillac line and full-size pickup sales improve, it will help GM become more profitable – something investors have been long awaiting.
Similar to Nissan, Cadillac's recent surge has been from success of its new vehicles – the ATS and XTS sedans. This is good news for GM's big picture as it plans to refresh, redesign, or replace 90% of its vehicle's by 2016. Recent success of the ATS and XTS give investors hope that the rest of the vehicle portfolio will be as well-designed and successful as its recent launches.
Bottom line
It appears that April's dip in SAAR numbers was just a minor speed bump for the industry. In fact, Ford announced that its production in the third quarter will be raised 10% compared to last year, signaling that management believes sales will remain strong throughout 2013.
Right now losses from operations in Europe are plaguing automakers, but if those losses are mitigated, expect strong second-quarter earnings reports from major automakers – especially Ford – and continued strength throughout 2013.
Those were May's winners, but which will be long-term winners? If you're interested in using the surging U.S. and global automotive rebound to boost your portfolio gains, look no further. The Motley Fool's brand-new free report highlights two major auto investments that could pay off big in the future.
Thursday, August 8, 2013
GBP/USD holding onto the 1.5500 handle
FXstreet.com (Barcelona) - There is little change in the pair from the European shift.
There is also little data on the cards today which the market will pay much attention to in respect of cable other than the Initial Jobless Claims (July 27) that printed 333k vs 336k consensus and 328k previous. There was very little reaction. The market is still digesting the Inflation report and indeed it seems we will have to wait for the BoE minutes next for more clarification in respect to the guidance on interest rates. As a result of the report, markets now understand unemployment at 7% is the target and threshold where base rates might be considered again. Until then, QE could be extended should the economic conditions require it, but for the time being, the UK economy is set to improve without it at the slowest rate in history and rates are expected to remain on hold for an extended period of time. "What we have (a promise to keep rates here at least until unemployment falls to 7%, subject to inflation not being above 2½%) risks being undone by a combination of weak growth, falling unemployment and stubbornly high inflation. What then?" – said Kit Juckes, Global Head of FX Strategy, Societe Generale.
GBP/USD testing 1.5500 handle
GBP/USD has been offered through the 1.5500 handle in London markets. The 20 dma is 1.5288, 50 dma 1.5330, 200 dma 1.5536. RSI (9) reads 66.22. Supports are ascending from 1.5205, 1.5259, 1.5310, 1.5375, and 1.5490. Spot I currently testing the 1.5500 handle and resistances come in at 1.5534, 1.5565, 1.5603 and 1.5680.
There is also little data on the cards today which the market will pay much attention to in respect of cable other than the Initial Jobless Claims (July 27) that printed 333k vs 336k consensus and 328k previous. There was very little reaction. The market is still digesting the Inflation report and indeed it seems we will have to wait for the BoE minutes next for more clarification in respect to the guidance on interest rates. As a result of the report, markets now understand unemployment at 7% is the target and threshold where base rates might be considered again. Until then, QE could be extended should the economic conditions require it, but for the time being, the UK economy is set to improve without it at the slowest rate in history and rates are expected to remain on hold for an extended period of time. "What we have (a promise to keep rates here at least until unemployment falls to 7%, subject to inflation not being above 2½%) risks being undone by a combination of weak growth, falling unemployment and stubbornly high inflation. What then?" – said Kit Juckes, Global Head of FX Strategy, Societe Generale.
GBP/USD testing 1.5500 handle
GBP/USD has been offered through the 1.5500 handle in London markets. The 20 dma is 1.5288, 50 dma 1.5330, 200 dma 1.5536. RSI (9) reads 66.22. Supports are ascending from 1.5205, 1.5259, 1.5310, 1.5375, and 1.5490. Spot I currently testing the 1.5500 handle and resistances come in at 1.5534, 1.5565, 1.5603 and 1.5680.
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