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Saturday, February 25, 2012
Friday, February 24, 2012
Get Used To Positive Surprises Ahead For U.S. Economy
In 2008 it seemed a sure thing that the economy would wind up in the next Great Depression.
Look at all that was happening with the bursting of the real estate bubble, collapse of the sub-prime mortgage market, freeze-up of the banking system, ravages of the Great Recession, collapse of the auto industry, bailout of mortgage-insurance giant AIG and the bankruptcy of General Motors and Chrysler.
It was then a sure thing that the massive stimulus and bailout efforts would not work, and the costs would bankrupt the country and drop it into third-world economy status.
There was no chance that the banks or the U.S. auto industry would ever pay back the bailout loans. The assets the Federal Reserve was also putting on its books to help the banks clean up their balance sheets, by exchanging Treasury bonds for some of the toxic assets on the books of banks, was just further money down the drain.
The way the banks seemed to be using the bailout loans to expand, buying out competitors, expanding into Asia, rather than using it to make loans, was going to make the ��too big to fail�� problem even worse for the future.
Even since the recovery began, it has been derided as just an illusion, as could be seen by the housing industry still being mired in depression-like conditions, and no progress being made in the terribly high unemployment situation.
Sometimes it seems we��re so focused on the negatives that we haven’t noticed the unexpected positive surprises in the recovery
For instance, how many realize that most of the government loans made to the banks and auto industry have already been paid back, with interest.
Or that the U.S. auto industry has bounced back dramatically. Global auto sales recovered sharply in 2011 and the U.S. led the way, with sales up 9.2%, topping even the 6% auto sales growth in China.
Yesterday it was reported that General Motors has bounced back from its bankruptcy ! three ye ars ago to a degree that it has regained its crown as the top-selling car-maker in the world.
Look at all that was happening with the bursting of the real estate bubble, collapse of the sub-prime mortgage market, freeze-up of the banking system, ravages of the Great Recession, collapse of the auto industry, bailout of mortgage-insurance giant AIG and the bankruptcy of General Motors and Chrysler.
It was then a sure thing that the massive stimulus and bailout efforts would not work, and the costs would bankrupt the country and drop it into third-world economy status.
There was no chance that the banks or the U.S. auto industry would ever pay back the bailout loans. The assets the Federal Reserve was also putting on its books to help the banks clean up their balance sheets, by exchanging Treasury bonds for some of the toxic assets on the books of banks, was just further money down the drain.
The way the banks seemed to be using the bailout loans to expand, buying out competitors, expanding into Asia, rather than using it to make loans, was going to make the ��too big to fail�� problem even worse for the future.
Even since the recovery began, it has been derided as just an illusion, as could be seen by the housing industry still being mired in depression-like conditions, and no progress being made in the terribly high unemployment situation.
Sometimes it seems we��re so focused on the negatives that we haven’t noticed the unexpected positive surprises in the recovery
For instance, how many realize that most of the government loans made to the banks and auto industry have already been paid back, with interest.
Or that the U.S. auto industry has bounced back dramatically. Global auto sales recovered sharply in 2011 and the U.S. led the way, with sales up 9.2%, topping even the 6% auto sales growth in China.
Yesterday it was reported that General Motors has bounced back from its bankruptcy ! three ye ars ago to a degree that it has regained its crown as the top-selling car-maker in the world.
Thursday, February 23, 2012
Is Whole Foods' Stock Cheap or Expensive by the Numbers?
Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:
The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.
Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.
Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
Whole Foods has a P/E ratio of 34.7 and an EV/FCF ratio of 28.6 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Whole Foods has a P/E ratio of 57.5 and a five-year EV/FCF ratio of 76.4.
A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.
Whole Foods is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates.?
The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.
In the past five years, Whole Foods' net income margin has ranged from 1.4% to 3.4%. In that same time frame, unlevered free cash flow margin has ranged from -2.2% to 3.9%.
How do those figures compare with those of the company's peers? See for yourself:
Next, let's figure out...
How much growth we can expect
Analysts tend to comically oversta! te their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company's done over the past five years. In that time period, Whole Foods has put up past EPS growth rates of 6.5%. Meanwhile, Wall Street's analysts expect future growth rates of 16.7%.
Here's how Whole Foods compares to its peers for trailing five-year growth:
The pile of numbers we've plowed through has shown us the price multiples shares of Whole Foods?are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 34.7 P/E ratio, and we see high price multiples all around. It's had some negative free cash flow years as it invests in growth, but it looks like it's turned the corner to having this figure be consistently positive. Unlike its peers, Whole Foods is the rare growth-stock grocer -- it's a pioneer in mainstream organic food. It's hard to call Whole Foods cheap by traditional metrics. You have to believe in the growth story for that to b! e true.< /p>
But these initial numbers are just the beginning. If you find Whole Foods' numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.
To see the stocks that I've researched beyond the initial numbers and bought in my public real-money portfolio, click here.
- The current price multiples.
- The consistency of past earnings and cash flow.
- How much growth we can expect.
The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.
Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.
Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.
Whole Foods has a P/E ratio of 34.7 and an EV/FCF ratio of 28.6 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Whole Foods has a P/E ratio of 57.5 and a five-year EV/FCF ratio of 76.4.
A positive one-year ratio under 10 for both metrics is ideal (at least in my opinion). For a five-year metric, under 20 is ideal.
Whole Foods is zero for four on hitting the ideal targets, but let's see how it compares against some competitors and industry mates.?
Company | 1-Year P/E | 1-Year EV/FCF | 5-Year P/E | 5-Year EV/FCF |
|---|---|---|---|---|
| Whole Foods | 34.7 | 28.6 | 57.5 | 76.4 |
| Kroger (NYSE: KR ) | 11.5 | 13.0 | 13.9 | 18.3 |
| Safeway (NYSE: SWY ) | 13.2 | 12.8 | 17.9 | 11.7 |
| SUPERVALU (NYSE: SVU ) | 58.9 | 10.6 | NM | 9.3 |
Source: S&P Capital IQ. NM = not meaningful due to losses.
Numerically, we've seen how Whole Foods' valuation rates on both an absolute and relative basis. Next, let's examine...The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.
In the past five years, Whole Foods' net income margin has ranged from 1.4% to 3.4%. In that same time frame, unlevered free cash flow margin has ranged from -2.2% to 3.9%.
How do those figures compare with those of the company's peers? See for yourself:
Source: S&P Capital IQ; margin ranges are combined.
Additionally, over the last five years, Whole Foods has tallied up five years of positive earnings and five years of positive free cash flow.Next, let's figure out...
How much growth we can expect
Analysts tend to comically oversta! te their five-year growth estimates. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.
Let's start by seeing what this company's done over the past five years. In that time period, Whole Foods has put up past EPS growth rates of 6.5%. Meanwhile, Wall Street's analysts expect future growth rates of 16.7%.
Here's how Whole Foods compares to its peers for trailing five-year growth:
Source: S&P Capital IQ; EPS growth shown.
And here's how it measures up with regard to the growth analysts expect over the next five years:Source: S&P Capital IQ; estimates for EPS growth.
The bottom lineThe pile of numbers we've plowed through has shown us the price multiples shares of Whole Foods?are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.
The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 34.7 P/E ratio, and we see high price multiples all around. It's had some negative free cash flow years as it invests in growth, but it looks like it's turned the corner to having this figure be consistently positive. Unlike its peers, Whole Foods is the rare growth-stock grocer -- it's a pioneer in mainstream organic food. It's hard to call Whole Foods cheap by traditional metrics. You have to believe in the growth story for that to b! e true.< /p>
But these initial numbers are just the beginning. If you find Whole Foods' numbers or story compelling, don't stop. Continue your due diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.
To see the stocks that I've researched beyond the initial numbers and bought in my public real-money portfolio, click here.
Wednesday, February 22, 2012
Recent pullback offers excellent opportunity to buy mining stock
Randgold Resources (NASDAQ:GOLD) — For months, gold bullion prices have been running ahead of the gold mining stocks. But miners forged ahead in Q3 as higher earnings from increasingly better bullion prices improved their outlook.
With that rise in the price of gold bullion, Randgold is estimated to increase revenues by 108% in 2011, and looks for an increase of 38% in 2012. Earnings are expected to rebound to $6.74 in 2012 from $3.52 in 2011, and S&P has a ��four-star buy�� on GOLD with a price target of $140 within 12 months.
Technically the pullback from $120 and the successful consolidation at $110 offers buyers an excellent opportunity to purchase this quality mining stock at a discounted price.
The trading target for GOLD is $120 with a longer-term projected target of $150, as the recent decision by the Fed to keep interest rates low until at least late 2014 is a boost to most commodities, including gold.
With that rise in the price of gold bullion, Randgold is estimated to increase revenues by 108% in 2011, and looks for an increase of 38% in 2012. Earnings are expected to rebound to $6.74 in 2012 from $3.52 in 2011, and S&P has a ��four-star buy�� on GOLD with a price target of $140 within 12 months.
Technically the pullback from $120 and the successful consolidation at $110 offers buyers an excellent opportunity to purchase this quality mining stock at a discounted price.
The trading target for GOLD is $120 with a longer-term projected target of $150, as the recent decision by the Fed to keep interest rates low until at least late 2014 is a boost to most commodities, including gold.
Nvidia: One Downgrade, But Bulls Unfazed
Shares of Nvidia (NVDA) closed down 9 cents, or 0.6%, at $14.84, and the stock received one downgrade today, after the company last night said floods in Thailand that have hampered disk drive production were affecting shipments of graphics processing units (GPU) from Nvidia in personal computers, and would impact its fiscal Q4.
For the quarter ending this month, the company sees about $950 million in revenue, below the $1.07 billion it previously forecast back in October. Up until last night, analysts had been modeling $1.06 billion, but the majority have cut their number to $979 million.
The company also said its sales of its “Tegra 2” application processor for phones and tablets dropped as it moved the new version, “Tegra 3,” into production.
Alex Gauna with JMP Securities cut his rating on the shares to Underperform from Market Perform, with a $12.50 price target.
Gauna writes, “Our primary concern with the stock is less these backward-looking and well understood developments and more so the lackluster design win picture emerging for Tegra 3 relative to rivals, the timing and nature of the Ivy Bridge refresh, and our doubts that Windows 8 can prove a meaningful driver in the 2012 timeframe.”
Gauna thinks there is some “headline risk” that competitors such as Qualcomm (QCOM) will have a stronger showing at the Mobile World Congress trade show that takes place at the end of February.
But other than Gauna, many this morning seem to be inclined to give Nvidia a pass on what they deem an extraordinary but not altogether surprising development:
Hans Mosesmann, Raymond James: Reiterates a Strong Buy rating, while cutting his price target to $23 from $28. The pre-announcement is “not all that different from Intel��s pre-announced December quarter” and actu! ally rem oves an “overhang” from the stock, he writes. “The Tegra3 ramp remains intact in our opinion, and the ARM SoC game was never going to be won or lost in CY4Q11.” The hard disk issue is more of a threat to desktop add-in graphics cards than notebooks, he thinks, and he still expects Nvidia to take notebook GPU share as machines come to market with Intel’s (INTC) Ivy Bridge processors.
Rajvindra Gill, Needham & Co.: Reiterates a Buy rating and cuts his price target to $17 from $18. “Given Intel��s preannouncement on 12/12 and AMD��s lower C1Q guidance yesterday, NVDA��s preannouncement was not a huge surprise [��] Now that a bottom has been set in the earnings level (we think F1Q), we would be aggressive buyers on any pull-back in the shares. We remain bullish for the following reasons: 1) broader traction of Tegra 3 in the smartphone market, specifically LTE quad-core smartphones, 2) strong market position on Windows-ARM based notebook platforms; 3) second-half ramp on Intel��s Ivy-bridge processors; and 4) compelling valuation (trading at 8.9x FY13 Non-GAAP EPS).” Gill cut his fiscal 2013 estimate to $4.16 billion in revenue from $4.46 billion, with $1.10 in EPS, down from $1.30 previously.
Brendan Furlong, Miller Tabak: Reiterates a Buy rating and a $20 price target. “We see the short fall in revenue and EPS for the January quarter as largely industry related due to supply chain disruptions in the PC market. Slower Tegra2 sales are a disappointment but the company does indicate that Tegra3 sales will be ramping in the current calendar quarter, which is a positive.” Furlong is enthusiastic about the company’s opportunity in “Windows-on-ARM” devices coming, assumedly, this year.
There was some grumbling, however, about where Nvidia stands in the context of very bullish forecasts just a few months ago:
Craig Ellis, Caris & Co.: R eiterates an “Average” rating while cutting his price target to $15 from $17. The company has “effectively” withdrawn the promised fiscal 2013 target model it had laid out, he thinks. “Since early-September NVDA has targeted $4.7B-5.0B in F13 revenues. [��] After our recent cuts, and even modeling in steeper F1Q-F4Q13 qq growth, our new revenue estimates fall to $4.2B/+5.1% from $4.5B/+9.7% with whopping 21% yy growth now needed to hit the target revenue mid-point, something we just don��t see.”
For the quarter ending this month, the company sees about $950 million in revenue, below the $1.07 billion it previously forecast back in October. Up until last night, analysts had been modeling $1.06 billion, but the majority have cut their number to $979 million.
The company also said its sales of its “Tegra 2” application processor for phones and tablets dropped as it moved the new version, “Tegra 3,” into production.
Alex Gauna with JMP Securities cut his rating on the shares to Underperform from Market Perform, with a $12.50 price target.
Gauna writes, “Our primary concern with the stock is less these backward-looking and well understood developments and more so the lackluster design win picture emerging for Tegra 3 relative to rivals, the timing and nature of the Ivy Bridge refresh, and our doubts that Windows 8 can prove a meaningful driver in the 2012 timeframe.”
Gauna thinks there is some “headline risk” that competitors such as Qualcomm (QCOM) will have a stronger showing at the Mobile World Congress trade show that takes place at the end of February.
But other than Gauna, many this morning seem to be inclined to give Nvidia a pass on what they deem an extraordinary but not altogether surprising development:
Hans Mosesmann, Raymond James: Reiterates a Strong Buy rating, while cutting his price target to $23 from $28. The pre-announcement is “not all that different from Intel��s pre-announced December quarter” and actu! ally rem oves an “overhang” from the stock, he writes. “The Tegra3 ramp remains intact in our opinion, and the ARM SoC game was never going to be won or lost in CY4Q11.” The hard disk issue is more of a threat to desktop add-in graphics cards than notebooks, he thinks, and he still expects Nvidia to take notebook GPU share as machines come to market with Intel’s (INTC) Ivy Bridge processors.
Rajvindra Gill, Needham & Co.: Reiterates a Buy rating and cuts his price target to $17 from $18. “Given Intel��s preannouncement on 12/12 and AMD��s lower C1Q guidance yesterday, NVDA��s preannouncement was not a huge surprise [��] Now that a bottom has been set in the earnings level (we think F1Q), we would be aggressive buyers on any pull-back in the shares. We remain bullish for the following reasons: 1) broader traction of Tegra 3 in the smartphone market, specifically LTE quad-core smartphones, 2) strong market position on Windows-ARM based notebook platforms; 3) second-half ramp on Intel��s Ivy-bridge processors; and 4) compelling valuation (trading at 8.9x FY13 Non-GAAP EPS).” Gill cut his fiscal 2013 estimate to $4.16 billion in revenue from $4.46 billion, with $1.10 in EPS, down from $1.30 previously.
Brendan Furlong, Miller Tabak: Reiterates a Buy rating and a $20 price target. “We see the short fall in revenue and EPS for the January quarter as largely industry related due to supply chain disruptions in the PC market. Slower Tegra2 sales are a disappointment but the company does indicate that Tegra3 sales will be ramping in the current calendar quarter, which is a positive.” Furlong is enthusiastic about the company’s opportunity in “Windows-on-ARM” devices coming, assumedly, this year.
There was some grumbling, however, about where Nvidia stands in the context of very bullish forecasts just a few months ago:
Craig Ellis, Caris & Co.: R eiterates an “Average” rating while cutting his price target to $15 from $17. The company has “effectively” withdrawn the promised fiscal 2013 target model it had laid out, he thinks. “Since early-September NVDA has targeted $4.7B-5.0B in F13 revenues. [��] After our recent cuts, and even modeling in steeper F1Q-F4Q13 qq growth, our new revenue estimates fall to $4.2B/+5.1% from $4.5B/+9.7% with whopping 21% yy growth now needed to hit the target revenue mid-point, something we just don��t see.”
2 Stocks That Are Wasting Your Money
According to research conducted by Boston University finance professor Allen Michel, when a company announces it's buying back stock, that stock tends to outperform the market by about 2% to 4% more than it otherwise would have over the ensuing six months.
But multiple studies show that over the long term, buybacks actually destroy shareholder value. CNBC pundit Jim Cramer cites the example of big banks that bought back shares in 2007-2008 -- just before their stocks fell off a cliff. Far from being buy signals, Cramer calls buybacks "a false sign of health ... and often a waste of shareholders' money." Indeed, the Financial Times recently warned that "the implied returns over a period from buy-backs by big companies would have been laughed out of the boardroom if they had been proposed for investment in ... conventional projects."
So why run buybacks at all? According to FT, management can use them to goose per-share earnings, which helps CEOs earn bonuses based on "performance." Also, the investment banks that run buybacks for management earn income and fees from promoting buybacks. But you and me? We miss out on gains unless the purchase price is less than the actual intrinsic value of the shares.
And we're about to miss out again.
Two bad buybacks
StreetInsider.com keeps a running tally of which companies are buying back stock, and how much they're spending. SI is too polite to accuse companies of actually wasting shareholders' money, of course -- but I'm not. With SI's help, I've come up with two examples of popular stocks that I believe are squandering shareholder dollars on ill-timed buybacks... and one idea for how shareholders could do better.
Stryker (NYSE: SYK )
At first glance, surgical implants-maker Stryker seems a strange subject for an "anti-buyback" article. At 16 times earnings, the company carries a cheaper P/E than archrival Zimmer Holdi! ngs (NYSE: ZMH ) . Stryker's also growing faster, and pays a dividend, while Zimmer does not. While competitor Medtronic (NYSE: MDT ) -- and Zimmer, too -- is laden with debt, Stryker boasts a cash-rich balance sheet.
It's what Stryker intends to do with its cash that should concern investors. In October, you see, Stryker reduced estimates for revenue growth, yet at the same time promised to earn more than expected, upping its fiscal 2011 target to approximately $3.72 per share. With profit margins declining, hitting this new target may depend on reducing the share count, boosting per-share earnings.
Cue buyback. Earlier this month, Stryker announced it would boost its buyback plan by $500 million. With the growth rate still estimated at less than 11%, and free cash flow lagging reported net income, the shares don't look cheap enough that I'd buy them. Then again, I'm not on the hook for hitting an ill-considered profits promise. (Promise in haste, repent in leisure.)
JPMorgan Chase (NYSE: JPM )
Speaking of promises made in haste, did you hear that JPMorgan is increasing its buyback plan, too? It's true. With $8 billion in buybacks already authorized (and apparently spent) for this year, JP announced in December that it's upping its repurchase authorization by a further $950 million.
Good idea? JP's shares cost only seven times earnings, after all, and Wall Street has the stock pegged for 8% growth. That certainly looks cheap. The problem is that it may be "cheap for a reason." By now, you've no doubt heard about the troubles with European sovereign debt, the risk it may default... and the credit default swaps that banks like Bank of America (NYSE: BAC ) , Citigroup (NYSE: C ) , and JPMorgan could be o! n the ho ok for if default happens. Maybe the risk is overblown, maybe not. But until we're sure, JP might be better advised to keep a little extra cash on hand to deal with the risks -- not blow it all on another $0.95 billion worth of buybacks.
A better use of cash
Now, I don't want to end this column on a down note, and in fact, I have spotted one company out there that's spending its shareholders' money prudently. It's a name you probably know, seeing as I publicly recommended it just last week: Caterpillar (NYSE: CAT ) .
Doubling down on a program that's already rewarded shareholders richly, Caterpillar says that rather than allow its 2007 buyback program to expire as planned on Dec. 31, the company will extend it for another four years -- reopening a $3.75 billion war chest for opportunistic buys.
I think this is a great idea. At 14 times earnings, a strong 2% dividend yield, and a projected growth rate that tops 23%, the stock's already bargain-priced. If you ask me, this is one buyback program to bank on -- for Caterpillar, and for the investors who choose to buy it as well.
Looking for more great stock at "buyable" prices? You're in luck, because we've just found five of them. Read all about them in the Fool's new -- and free! -- report: "5 Stocks The Motley Fool Owns -- And You Should Too."
But multiple studies show that over the long term, buybacks actually destroy shareholder value. CNBC pundit Jim Cramer cites the example of big banks that bought back shares in 2007-2008 -- just before their stocks fell off a cliff. Far from being buy signals, Cramer calls buybacks "a false sign of health ... and often a waste of shareholders' money." Indeed, the Financial Times recently warned that "the implied returns over a period from buy-backs by big companies would have been laughed out of the boardroom if they had been proposed for investment in ... conventional projects."
So why run buybacks at all? According to FT, management can use them to goose per-share earnings, which helps CEOs earn bonuses based on "performance." Also, the investment banks that run buybacks for management earn income and fees from promoting buybacks. But you and me? We miss out on gains unless the purchase price is less than the actual intrinsic value of the shares.
And we're about to miss out again.
Two bad buybacks
StreetInsider.com keeps a running tally of which companies are buying back stock, and how much they're spending. SI is too polite to accuse companies of actually wasting shareholders' money, of course -- but I'm not. With SI's help, I've come up with two examples of popular stocks that I believe are squandering shareholder dollars on ill-timed buybacks... and one idea for how shareholders could do better.
Stryker (NYSE: SYK )
At first glance, surgical implants-maker Stryker seems a strange subject for an "anti-buyback" article. At 16 times earnings, the company carries a cheaper P/E than archrival Zimmer Holdi! ngs (NYSE: ZMH ) . Stryker's also growing faster, and pays a dividend, while Zimmer does not. While competitor Medtronic (NYSE: MDT ) -- and Zimmer, too -- is laden with debt, Stryker boasts a cash-rich balance sheet.
It's what Stryker intends to do with its cash that should concern investors. In October, you see, Stryker reduced estimates for revenue growth, yet at the same time promised to earn more than expected, upping its fiscal 2011 target to approximately $3.72 per share. With profit margins declining, hitting this new target may depend on reducing the share count, boosting per-share earnings.
Cue buyback. Earlier this month, Stryker announced it would boost its buyback plan by $500 million. With the growth rate still estimated at less than 11%, and free cash flow lagging reported net income, the shares don't look cheap enough that I'd buy them. Then again, I'm not on the hook for hitting an ill-considered profits promise. (Promise in haste, repent in leisure.)
JPMorgan Chase (NYSE: JPM )
Speaking of promises made in haste, did you hear that JPMorgan is increasing its buyback plan, too? It's true. With $8 billion in buybacks already authorized (and apparently spent) for this year, JP announced in December that it's upping its repurchase authorization by a further $950 million.
Good idea? JP's shares cost only seven times earnings, after all, and Wall Street has the stock pegged for 8% growth. That certainly looks cheap. The problem is that it may be "cheap for a reason." By now, you've no doubt heard about the troubles with European sovereign debt, the risk it may default... and the credit default swaps that banks like Bank of America (NYSE: BAC ) , Citigroup (NYSE: C ) , and JPMorgan could be o! n the ho ok for if default happens. Maybe the risk is overblown, maybe not. But until we're sure, JP might be better advised to keep a little extra cash on hand to deal with the risks -- not blow it all on another $0.95 billion worth of buybacks.
A better use of cash
Now, I don't want to end this column on a down note, and in fact, I have spotted one company out there that's spending its shareholders' money prudently. It's a name you probably know, seeing as I publicly recommended it just last week: Caterpillar (NYSE: CAT ) .
Doubling down on a program that's already rewarded shareholders richly, Caterpillar says that rather than allow its 2007 buyback program to expire as planned on Dec. 31, the company will extend it for another four years -- reopening a $3.75 billion war chest for opportunistic buys.
I think this is a great idea. At 14 times earnings, a strong 2% dividend yield, and a projected growth rate that tops 23%, the stock's already bargain-priced. If you ask me, this is one buyback program to bank on -- for Caterpillar, and for the investors who choose to buy it as well.
Looking for more great stock at "buyable" prices? You're in luck, because we've just found five of them. Read all about them in the Fool's new -- and free! -- report: "5 Stocks The Motley Fool Owns -- And You Should Too."
Tuesday, February 21, 2012
Facebook Readies IPO Filing
Facebook Inc. could file papers for its initial public offering as early as this coming week, people familiar with the matter said, as anticipation mounts for what is likely to be one of the biggest debuts for a U.S. company.
The deal, seen as defining moment for the latest Web investing boom, could raise as much as $10 billion and value the social network between $75 billion and $100 billion, said people familiar with the matter. A valuation of $75 billion would be below earlier expectations.
The website, which in less than eight years has attracted more than 800 million members, has changed the way people across the globe communicate, from organizing political protests to sharing baby pictures.
The ! Internet giant is close to picking Morgan Stanley to lead the deal, these people said. Wall Street banks, many of them struggling amid a crimp in trading profits, have been jostling for a leading role in the deal, which could yield them tens of millions of dollars in banker fees, potential new business and bragging rights.
A nod for Morgan Stanley would mark a disappointment for rival Goldman Sachs Group Inc., which a year ago was viewed as having an edge to lead the deal. One person familiar with the matter said that while Morgan Stanley would likely land the coveted "lead-left" spot on an IPO financial filing, Goldman would also likely play a significant role.
Spokespeople for Facebook, Morgan Stanley and Goldman Sachs declined to comment.
Facebook could file documents with the Securities and Exchange Commission as early as this coming Wednesday, said one person familiar with the matter. But that timing is just one scenario Facebook executives are considering, the person said. Executives are also considering filing a few weeks later, the person said.
!
Is Facebook Ready for the Big Time? (1/14/12)
People familiar with the matter have sai! d the co mpany is targeting an IPO sometime between April and June.
A $10 billion Facebook offering would rank fourth among IPOs for U.S. companies, behind Visa Inc., General Motors Co. and AT&T Wireless, according to Dealogic. It would rank Facebook as the biggest U.S. Internet offering ever, replacing Google Inc., which raised $1.9 billion in 2004 at a $23 billion valuation.
At a $100 billion valuation, Facebook would be worth about the same as McDonald's Corp. and nearly half of Google.
Facebook's revenue is driven by its advertising business, as big brands rush to the site to interact with consumers through display ads and fan pages. Facebook has been able to increase its world-wide advertising revenue from $738 million in 2009 to $3.8 billion in 2011, according to estimates from research firm eMarketer. It isn't known if Facebook is profitable.
Facebook's final valuation will be determined by a variety of factors, people familiar with the matter said, such as investor demand for social media, the IPO market and the health of the European economy.
![[FBOOK]](http://si.wsj.net/public/resources/images/BF-AC213_FBOOK_NS_20120127173003.jpg)
The IPO will mint a new generation of Silicon Valley millionaires on the level not seen since Google's offering. Some 3,000 people work at Facebook.
An IPO will also test the ability of Chief Executive Mark Zuckerberg, age 27, to manage a global company whose financial performance will be scrutinized every three months by investors. Mr. Zuckerberg started the company in 2004 out of his Harvard University dorm room. Overall, about 500 million users now log into the site daily, according to Facebook.
Mr. Zuckerberg had been reluctant to push forwar! d with a n IPO. People familiar with his thinking said he has been fearful of the damage an IPO could do to the company's culture. He wants employees focused on making great products, not the stock price, they said.
But outside forces are partly pushing his hand. Facebook executives began to realize in 2010 that Facebook would have more than 500 shareholders by the end of 2011, which would trigger a regulatory requirement that Facebook start publicly reporting financial information.
Mr. Zuckerberg decided it made more sense for Facebook to go public and reap some financial benefit from an IPO, rather than stay private but have to release its financial information, said people familiar with his thinking.
Leading the Facebook sale would be a huge win for Morgan Stanley, which last year cemented its position as the top Internet stock underwriter by leading the IPOs of LinkedIn Corp., Groupon Inc., and Zynga Inc. The bank's global tech banking team, led by Michael Grimes and Paul Chamberlain, is also based in Menlo Park.
Facebook would cap a recent wave of Web IPOs, some of which have struggled amid growing investor scrutiny of the new Internet companies. But investors and analysts said now could be a good time for a Facebook offering.
This year, the overall market has risen, and on Friday other Internet stocks rallied on news that Facebook would soon file for a deal. "The excitement around Facebook is still enormous," said Max Wolff, an analyst at GreenCrest Capital, which researches companies going public.
The recent IPO climate "hasn't been particularly strong," said Peter Falvey, co-head of the technology banking group at Morgan Keegan & Co. But Mr. Falvey added that with "the recent stock market strength and maybe some green shoots in the economy, there could be a fortuitous window for Facebook."
Write to Shayndi Raice at shayndi.raice@wsj.com and Randall Smith at
The deal, seen as defining moment for the latest Web investing boom, could raise as much as $10 billion and value the social network between $75 billion and $100 billion, said people familiar with the matter. A valuation of $75 billion would be below earlier expectations.
The website, which in less than eight years has attracted more than 800 million members, has changed the way people across the globe communicate, from organizing political protests to sharing baby pictures.
The ! Internet giant is close to picking Morgan Stanley to lead the deal, these people said. Wall Street banks, many of them struggling amid a crimp in trading profits, have been jostling for a leading role in the deal, which could yield them tens of millions of dollars in banker fees, potential new business and bragging rights.
A nod for Morgan Stanley would mark a disappointment for rival Goldman Sachs Group Inc., which a year ago was viewed as having an edge to lead the deal. One person familiar with the matter said that while Morgan Stanley would likely land the coveted "lead-left" spot on an IPO financial filing, Goldman would also likely play a significant role.
Spokespeople for Facebook, Morgan Stanley and Goldman Sachs declined to comment.
Facebook could file documents with the Securities and Exchange Commission as early as this coming Wednesday, said one person familiar with the matter. But that timing is just one scenario Facebook executives are considering, the person said. Executives are also considering filing a few weeks later, the person said.
Journal Community
Facebook's Rise
See a timeline of key events in Facebook's history.Facebook in Photos
Who's Who at Facebook
Read about the company's top executives.!
IPO: Go, No-Go?
Track the performance of some notable initial public offerings—the highfliers and flame-outs—of past and present.- More photos and interactive graphics
Related
Facebook's Goal: To Be a Blue Chip (12/22/12)Is Facebook Ready for the Big Time? (1/14/12)
- Facebook's Investors Poised for Jackpot
- MarketBeat: NYSE, Nasdaq Battle For Big Kahuna Of Stock Listings
- Deal Journal: Bragging Rights at Stake for Underwriters
- Morgan Stanley Shares
- What Is Facebook Worth?
A $10 billion Facebook offering would rank fourth among IPOs for U.S. companies, behind Visa Inc., General Motors Co. and AT&T Wireless, according to Dealogic. It would rank Facebook as the biggest U.S. Internet offering ever, replacing Google Inc., which raised $1.9 billion in 2004 at a $23 billion valuation.
At a $100 billion valuation, Facebook would be worth about the same as McDonald's Corp. and nearly half of Google.
Facebook's revenue is driven by its advertising business, as big brands rush to the site to interact with consumers through display ads and fan pages. Facebook has been able to increase its world-wide advertising revenue from $738 million in 2009 to $3.8 billion in 2011, according to estimates from research firm eMarketer. It isn't known if Facebook is profitable.
Facebook's final valuation will be determined by a variety of factors, people familiar with the matter said, such as investor demand for social media, the IPO market and the health of the European economy.
An IPO will also test the ability of Chief Executive Mark Zuckerberg, age 27, to manage a global company whose financial performance will be scrutinized every three months by investors. Mr. Zuckerberg started the company in 2004 out of his Harvard University dorm room. Overall, about 500 million users now log into the site daily, according to Facebook.
Mr. Zuckerberg had been reluctant to push forwar! d with a n IPO. People familiar with his thinking said he has been fearful of the damage an IPO could do to the company's culture. He wants employees focused on making great products, not the stock price, they said.
But outside forces are partly pushing his hand. Facebook executives began to realize in 2010 that Facebook would have more than 500 shareholders by the end of 2011, which would trigger a regulatory requirement that Facebook start publicly reporting financial information.
Mr. Zuckerberg decided it made more sense for Facebook to go public and reap some financial benefit from an IPO, rather than stay private but have to release its financial information, said people familiar with his thinking.
Leading the Facebook sale would be a huge win for Morgan Stanley, which last year cemented its position as the top Internet stock underwriter by leading the IPOs of LinkedIn Corp., Groupon Inc., and Zynga Inc. The bank's global tech banking team, led by Michael Grimes and Paul Chamberlain, is also based in Menlo Park.
Facebook would cap a recent wave of Web IPOs, some of which have struggled amid growing investor scrutiny of the new Internet companies. But investors and analysts said now could be a good time for a Facebook offering.
Experience WSJ professional
Editors' Deep Dive: Companies Navigate Toward IPOs
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Access thousands of business sources not available on the free web. L! earn Mor e
The recent IPO climate "hasn't been particularly strong," said Peter Falvey, co-head of the technology banking group at Morgan Keegan & Co. But Mr. Falvey added that with "the recent stock market strength and maybe some green shoots in the economy, there could be a fortuitous window for Facebook."
Write to Shayndi Raice at shayndi.raice@wsj.com and Randall Smith at
Monday, February 20, 2012
Thursday’s ETF To Watch: Telecom ETF (VOX)
As we dive further into earnings season, investors will do their best to focus on relatively strong U.S. data, as opposed to decisions by the Fed, the Greek debt crisis, and other factors hindering the recovery. On Tuesday, investors saw Apple (AAPL) crush market estimates with their quarterly earnings. The shares soared the most in three years as iPhone and iPad sales doubled that of last year’s holiday season. What’s more, Apple has now narrowly taken over Exxon Mobil (XOM) for the world’s most valuable company by market capitalization. While it is unclear how long the firm will remain in first place, Apple’s rally is certainly helping to prop up markets amid investor concerns [see also The Ten Commandments of Commodity Investing].
Today will follow suit with more bellwether earnings as AT&T (T) will be releasing their most recent quarter’s results. The telecom giant will look to make a statement as its largest competitor, Verizon Wireless, missed analyst estimates on Tuesday and saw its share price tumble. Investors will be especially curious to see how AT&T’s quarter turned out given the news that Apple sold a record number of iPhones last quarter. Though AT&T is no longer the exclusive iPhone provider, this will still account for a good chunk of their revenues and it could mean a strong quarter for the firm [see also How To Invest Like UBS In 2012 (Using Only ETFs)].
Analysts are calling for EPS of $0.43 with revenues just below the $32 billion mark. If all figures are met, this will represent a 1.5% growth in sales for all of 2011 with total revenues eclipsing the $125 billion line. Investors will note that T has either met or surpassed its last four earnings estimates, which bodes well for a good report today. The firm will report before market open so look for the stock to gap at opening depending on which way the report goes.
With this major announcement on tap, to! day̵ 7;s ETF to watch will be the?Telecom ETF (VOX) from Vanguard. This fund seeks to replicate a benchmark that?consists of stocks of large, medium, and small U.S. companies in the telecommunication services sector. Top holdings include none other than AT&T (22.9%), along with Verizon, Sprint Nextel, and a number of other household names. This fund has been relatively flat over the past year, but with a dividend yield of 3.2%, that may be just fine for those utilizing this ETF for its income stream. As far as today’s trading is concerned, VOX will rely heavily on AT&T’s earnings and will likely move in line with the announcement [see also Three ETFs For Smart Phone Exposure].
[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]
Today will follow suit with more bellwether earnings as AT&T (T) will be releasing their most recent quarter’s results. The telecom giant will look to make a statement as its largest competitor, Verizon Wireless, missed analyst estimates on Tuesday and saw its share price tumble. Investors will be especially curious to see how AT&T’s quarter turned out given the news that Apple sold a record number of iPhones last quarter. Though AT&T is no longer the exclusive iPhone provider, this will still account for a good chunk of their revenues and it could mean a strong quarter for the firm [see also How To Invest Like UBS In 2012 (Using Only ETFs)].
Analysts are calling for EPS of $0.43 with revenues just below the $32 billion mark. If all figures are met, this will represent a 1.5% growth in sales for all of 2011 with total revenues eclipsing the $125 billion line. Investors will note that T has either met or surpassed its last four earnings estimates, which bodes well for a good report today. The firm will report before market open so look for the stock to gap at opening depending on which way the report goes.
With this major announcement on tap, to! day̵ 7;s ETF to watch will be the?Telecom ETF (VOX) from Vanguard. This fund seeks to replicate a benchmark that?consists of stocks of large, medium, and small U.S. companies in the telecommunication services sector. Top holdings include none other than AT&T (22.9%), along with Verizon, Sprint Nextel, and a number of other household names. This fund has been relatively flat over the past year, but with a dividend yield of 3.2%, that may be just fine for those utilizing this ETF for its income stream. As far as today’s trading is concerned, VOX will rely heavily on AT&T’s earnings and will likely move in line with the announcement [see also Three ETFs For Smart Phone Exposure].
[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]
Sunday, February 19, 2012
Should We Follow Seth Klarman on the Purchase of Targacept?
Any free fall in a stock price would signal investment opportunities for any value investors. The reason for the fall might be varied, from a pending law suit, a change in auditors, a resignation of key executives, to a miss in expected earnings, etc. Just recently, Targacept (TRGT), the biopharmaceutical company engaging in the design, discovery and development of neuronal nicotinic receptor (NNR) for the treatment of diseases and disorders of the nervous system, experienced a free fall in just a month. In the beginning of November 2011, the stock price was around $19, and it dropped 63% to $7. It is currently staying at $7.8 per share.
And with that significant downfall in TRGT��s stock price, our famous value investor, Seth Klarman had initiated its position, along with other gurus�� trades such as Jean Marie Eveillard and George Soros; they had bought into this stock in the past for the same price. As we can see below, the price range that those gurus paid for the stock is around $7-$8 per share. Seth Klarman moved aggressively, taking more than 16% of company��s total shares outstanding. However, it is just 1.38% compared to the total dollar value of his portfolio.
That was the guru trades. How about the insider trades in the same period?
A very consistent and large share sale of company��s executives was detected in the year 2011, from its director to vice president, senior vice president, CFO and treasurer. But at that time, the price was very high, from $21 to $30 per share, and the stock price is now off 60%-70% from insiders�� average selling price.
So there are two questions appearing in our minds. Should we follow our guru to initiate a position in this stock? And if we! follow Seth Klarman to purchase the shares, how much of our total portfolio should this position account for?
Let��s start with the fundamentals of the company. Like any biotech company, TRGT experienced a very high swing in its operating performance over the years. Operating income and net income have been mainly negative, and only positive in 2 out of 10 years. The same situation is reflected in its operating cash flow and its free cash flow over time.
So it was hardly that Seth was buying in because of the company��s earning power. So it is mainly because of the asset plays. Let��s look at its asset value:
We can see the financial structure of TRGT is quite conservative, with D/A only at 35%, whereas 77.5% of the liabilities are in deferred revenue, with very little long-term and short-term debt. On the asset side, the main asset TRGT is holding is cash and short-term investments, up to $213 million, or 76% of its total assets. So when adjusting its cash and level of debt, the $264 million market cap becomes only $55 million in enterprise value. So the investor effectively pays $55 million for the marketable securities that the company is making, bearing some accrued liabilities and has deferred revenues ahead. The investment in marketable securities is rather safe, as it is mainly in U.S. Treasuries, some corporate debt instruments and certificate of deposits.
Clearly, it was a ��cigar butt�� purchase, and by putting out $55 million, the investors can get $57 million investment in marketable securities and nearly no bank debt ahead. It seemed to be quite cheap. However, with any ��cigar butt�� or asset play, a reasonable amount of diversification should be implemented. Even Seth acquired more than 16% of the company, but in his portfolio, this transaction was only nearly 1.4% in his total dollar value of his portfolio. Should any investors follow Seth, remember the ample diversification should not be ignored also.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
And with that significant downfall in TRGT��s stock price, our famous value investor, Seth Klarman had initiated its position, along with other gurus�� trades such as Jean Marie Eveillard and George Soros; they had bought into this stock in the past for the same price. As we can see below, the price range that those gurus paid for the stock is around $7-$8 per share. Seth Klarman moved aggressively, taking more than 16% of company��s total shares outstanding. However, it is just 1.38% compared to the total dollar value of his portfolio.
That was the guru trades. How about the insider trades in the same period?
A very consistent and large share sale of company��s executives was detected in the year 2011, from its director to vice president, senior vice president, CFO and treasurer. But at that time, the price was very high, from $21 to $30 per share, and the stock price is now off 60%-70% from insiders�� average selling price.
So there are two questions appearing in our minds. Should we follow our guru to initiate a position in this stock? And if we! follow Seth Klarman to purchase the shares, how much of our total portfolio should this position account for?
Let��s start with the fundamentals of the company. Like any biotech company, TRGT experienced a very high swing in its operating performance over the years. Operating income and net income have been mainly negative, and only positive in 2 out of 10 years. The same situation is reflected in its operating cash flow and its free cash flow over time.
So it was hardly that Seth was buying in because of the company��s earning power. So it is mainly because of the asset plays. Let��s look at its asset value:
We can see the financial structure of TRGT is quite conservative, with D/A only at 35%, whereas 77.5% of the liabilities are in deferred revenue, with very little long-term and short-term debt. On the asset side, the main asset TRGT is holding is cash and short-term investments, up to $213 million, or 76% of its total assets. So when adjusting its cash and level of debt, the $264 million market cap becomes only $55 million in enterprise value. So the investor effectively pays $55 million for the marketable securities that the company is making, bearing some accrued liabilities and has deferred revenues ahead. The investment in marketable securities is rather safe, as it is mainly in U.S. Treasuries, some corporate debt instruments and certificate of deposits.
Clearly, it was a ��cigar butt�� purchase, and by putting out $55 million, the investors can get $57 million investment in marketable securities and nearly no bank debt ahead. It seemed to be quite cheap. However, with any ��cigar butt�� or asset play, a reasonable amount of diversification should be implemented. Even Seth acquired more than 16% of the company, but in his portfolio, this transaction was only nearly 1.4% in his total dollar value of his portfolio. Should any investors follow Seth, remember the ample diversification should not be ignored also.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.
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