In this account, we will take a look at Infosys, the Indian outsourcing giant that has continued to do well inspite of the economic turmoil in the last two quarters.
Infosys is an Indian outsourcing company that has done remarkably well in the past ten years. The net income after income taxes has increased from 61.5 million dollars in 1998 to 1.281 billion dollars in 2008. The EPS has also grown from 0.12 cents a share to 2.25 dollars a share in the same period. The number of shares has increased from 526 million to 570 million in the same period. The growth in the number of shares has diminished somewhat from 2008 till now primarily because of the elimination of stock option grants to employees.
The cashflow and balance sheet at Infosys is very sound. Infosys has about 1.1 billion in free cash flow yearly with about 2.7 billion in net cash in the balance sheet. Although the current economic climate may last for sometime, Infosys is well equipped to weather the storm.
Infosys employs about 100,000 people world wide with more than 75 nationalities represented. Infosys revenue grew by 35% in 2008 and 12% in 2009 in dollar terms. However, in Rupee terms, it grew by 20% in 2008 and 30% in 2009. Since most of Infosys employees are based in India, the depreciation in the value of the Indian currency has played to Infosys's advantage. During fiscal 2009, Infosys has added more clients (579) compared to the year before (538) with average sales per client coming in at 8.05 million dollars. The average sales per client has increased in 2009 compared to 2008. The revenue mix from the top ten clients has increased in 2009 compared to 2008.
From a price/cashflow basis, Infosys stock is cheaper than Google, RIMM and Amazon. However, it is also slightly more expensive than Microsoft and Apple.
Comparing companies in the outsourcing business, Infosys is cheaper than Wipro and Cognizant. However, it is more expensive than Accenture, Hewlett Packard and IBM. In the general market, there may also be better value plays than Infosys at the moment.
From a business model perspective, Infosys has fewer risks compared to tech giants such as Google, RIMM, Microsoft and Apple. Changes in technology are unlikely to hurt Infosys in any major way and may infact help increase Infosys revenues significantly.
In this blog, we will look at the balance sheets of Microsoft, Google and Yahoo! to see how these companies are doing in the downturn.
In the last quarter of 2008, the market was in a freefall causing dislocations in the search, advertising businesses. Thus Q1 of 2009 provides a good picture of how the companies are doing with respect to search and advertising businesses. Let us take a look.
Google:Google had total income of 1.4 billion dollars after income taxes. Google spent 262 million dollars to purchase plant, property and equipment. Google doesnt pay a dividend - this makes the overall cash available for other activities 1.138 billion dollars.
Yahoo!:Yahoo!'s income from operations fell to 117 million dollars in Q1 of 2009 from about 530 million dollars in Q1 of 2008. Yahoo! also spent about 70 million on capex. Thus the cash available for other activities is about 47 million dollars.
Microsoft:Microsoft on the other hand relies exclusively on its other businesses to fund the search operations. Let us take a look at Microsoft's online services business.
In the January - March quarter, the online services business had revenues of 721 million dollars and a loss of 575 million dollars. For the first nine months of the year, Microsoft had revenues of 2.4 billion dollars and a loss of 1.5 billion dollars.
Let us see how Microsoft's other businesses are doing to see if Microsoft can keep up these losses without impairing its ability to compete in other areas.
In the Jan-March quarter, Microsoft had 2.977 billion in net income. Microsoft paid 1.155 billion dollars in dividends in the quarter. In addition, Microsoft had capital expenditures for plant, property and equipment of 632 million dollars. Overall cash that is available after these expenses is 1.19 billion dollars.
Microsoft took a large hit in the windows client operating profits with profits dropping by more than a billion dollars because of the rise of netbooks.
Thus looking at the cash flows and the cash on the balance sheet, it doesnt look as though Microsoft will be able to unseat the incumbent Google in the search market unless Google makes mistakes and hands over the reigns to Microsoft.
The Yahoo! market cap is about 22 billion dollars. It is unlikely that any buyout can happen for less than 30-35 billion dollars. Also, the parting of Yahoo! search to Microsoft is likely to cost Microsoft good amounts of money.
There are several players in the cloud computing market at the moment. They vary from tech behemoths such as Microsoft, Amazon and Google to small players such as Rackspace. In this blog, we will analyze the different players and check their strengths and weaknesses.
Google offers web hosting and provides storage services through its app engine platform. However, the range of programming languages one can use with Google app engine platform is limited. The limited options also limit Google's ability to attract more programmers.
Microsoft has started offering web hosting and storage service. Currently this service is free and can be used within limits.
Offering widely used cloud services may not work well for Microsoft or Google. This business is a low margin business. While Microsoft enjoys wide margins on its productivity and operating system businesses, Google enjoys wide profit margins in its search business. The cloud business offers very low margins and it is a model that can threaten Microsoft's entire business model.
Amazon offers the best of breed cloud storage service. It also provides EC2 compute service. Amazon has also moved to offer CDN services based off of its storage engine.
Rackspace offers better pricing than Amazon in providing cloud storage and web hosting services. It also offers to host e-mail for qualified customers. Rackspace has teamed up with limelight networks to offer CDN service.
Sun Microsystems and EMC are also interested in cloud computing. Sun has historically been a player with storage technologies. EMC meanwhile has an interest in the cloud to sell more storage. It could get really interesting if IBM buys SUN. IBM would likely sell consulting services on top of the cloud software developed by SUN. There are other players such as AT&T, EDS, CSC who are also in this market.
Rackspace Systems is based off of San Antonio, Texas. It is a public company and provides details of its operations. It has been in the cloud business for some time now – its 10K shows revenue of $720/customer/year. The company doesn’t break down its profit margins for cloud vs other services ( like web hosting, hosted e-mail etc. ) The majority of the company’s revenue is through non cloud services. In fact, cloud services only make up 4% of Rackspace's market segment. However, the cloud segment is growing very quickly with 500% growth year over year. Overall, Rackspace's business is growing at 46% year over year. Rackspace has a pretax margin of 7% and after tax margin of 4%
The allure of cheaper maintenance and less capex will lure more services to migrate to the cloud in the coming years. It is difficult to predict a winner at this time, more likely than not, the winner will be a company that is not a prominent tech titan. The low margins make this model particularly attractive to companies such as Amazon and Rackspace. Others such as IBM ( with SUN ) may also find this space interesting as they add value added services and special hardware.
http://www.fairholmefunds.com/player/feb11.pdfBruce Berkowitz explains why he sold Berkshire.
Berkshire Hathaway released its Q4 and annual report today. We have covered Berkshire in other sections in this blog. For the previous sections please take a look at this report:
The last report in this blog.Now fast forward to the current year, will Berkshire be a sound investment for 2009 and 2010?
The company continues to be very sound and is increasing its moat in many segments of its operating businesses. Let us do a quick intrinsic value check as of 12/31/2008. If we use Warren Buffett's two column method, we have 122 billion in cash and investments + earnings per share of 3224. At the end of 2008, the intrinsic value of the company was around 110K/A share.
Berkshire as a company earns between 10-12 billion dollars a year from its various operations. This is accretive to the book value of the company. Typically, this money is invested to return 10-15% returns. It is very important to note that Berkshire is a compounding asset even when the markets are down as opposed to some of the other companies which rely on the consumer spending to rebound.
To see how the operating businesses will do, let us look at how the operating businesses did in Q4 of 2008 and equate it to 2009. In 2009, we have:
1. Insurance, Re-insurance:
This should do better than 2008. Primarily this is because of the financial position of hedge funds and other businesses having problems with capital.
2. Utility sector:
This sector should continue to do well in 2009 inspite of the economy. We can peg its earnings at par with 2008 if not more.
3. Investment and derivative gains/losses:
This should abate from its 2008 levels. My expectation is that it should start posting a gain from 2010 onwards.
4. Dividend and interest income:
I believe this should increase significantly in 2009 compared to 2008. This declined slightly in 2008 compared to 2008 but should pick up in 2009, 2010.
5. Income from manufacturing and other businesses:
This may decline by upto 20% but such a decline will reduce operating earnings by about 500 million dollars. I believe this should be made up by the gains in insurance which is gaining market share.
6. Investment portfolio:
This should recover from current position by end of 2009 or atleast in 2010.
From a three-five year horizon, Berkshire looks attractive. It looks more attractive than many other stand alone businesses which are trading at low prices in today's market.
Let us take a look at what constitutes a preferred stock. From investopedia, we have the following definition:
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
Many of the preferred stocks are callable. Let us see what does this mean, again from investopedia:
A type of preferred stock that carries the provision that the issuer has the right to call in the stock at a certain price and retire it. Also known as "redeemable preferred stock".
The preferred stock is different than a convertible. A convertible is typically a bond that pays a certain interest that later can be converted to common stock.
When we analyze some of the preferred stocks, it is common to see the term "debenture" in the literature. Let us see what this stands for. Investopedia helps us again.
"A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital."
Now, let us take a look to see who issues preferred stocks. It is typically the financial institutions and utilities that issue preferred stocks. The banks typically issue preferred stocks as they are able to raise capital without diluting the equity holders.
Typically, a preferred is not a great investment as they may not be called on the callable date as they typically pay a dividend to perpetuity. The second problem with preferred stocks is that the dividend doesnt increase with the companies earnings but the price of the preferred may see wide fluctuations.
So, why is the preferred stock interesting? From
Wall Street Journal page, many preferred stocks are generating attractive yields. Some of the banks are particularly interesting. The strongest banks in the US include Wells Fargo and USB. How do we analyze the preferred stocks? There are two tests that come to play.
1. Is the bank stable enough to pay the dividends and outlast this downturn?
2. How is the interest rate calculated? E.g: If the interest is a fixed percentage, one may lose out if the market rebounds and inflation creeps in. However, if the interest is pegged to the LIBOR, the odds of failing against inflation is low.
Investopedia helps us define LIBOR again:
The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.
Now, let us see which banks have yield against the LIBOR and which ones dont. The WSJ article shows us the current yields on preferred stocks. The yields are wider on banks with troubled assets - e.g: Bank of America and MBNA. The yields are lower on Wells Fargo and USB which have stronger franchises. The regional banks such as Suntrust also enjoy a higher yield as they are perceived to be weaker franchises compared to the larger operations.
The website
Quantum Online lists some exotic securities one can follow through. Let us look at a couple of securities.
The first one is USB-L and USB-H. USB-L is currently trading at a higher price but offers about the same dividend as USB-L. While there is certainly more downside risk for both, there is a key difference between these two offerings. While offering identical yields, USB-H is trading at a significantly lower price than USB-L. This is because USB-L offers a higher yield that is fixed at a specific rate. If the inflation is to increase, USB-H will become more attractive than USB-L. From a longer term point of view, USB-H is more attractive than USB-L as USB-H offers more upside. Specifically, USB-H offers more opportunities for capital gains than USB-L.
There are other preferred stocks that one can browse in the above links. Each of them offers its own risks and rewards. One should do one's own due diligence before jumping and buying these stocks.
Amazon's business is as follows:
We seek to be Earth’s most customer-centric company for three primary customer sets: consumer customers, seller customers and developer customers. In addition, we generate revenue through co-branded credit card agreements and other marketing and promotional services, such as online advertising.
Consumer CustomersWe serve our consumer customers through our retail websites and focus on selection, price, and convenience. We design our websites to enable millions of unique products to be sold by us and by third parties across dozens of product categories. We strive to offer our customers the lowest prices possible through low everyday product pricing and free shipping offers, including Amazon Prime, and to improve our operating efficiencies so that we can continue to lower prices for our customers. We also provide easy-to-use functionality, fast and reliable fulfillment through our global fulfillment center network, timely customer service, and a trusted transaction environment.
We fulfill customer orders in a number of ways, including through the U.S. and international fulfillment centers and warehouses that we operate and through co-sourced and outsourced arrangements in certain countries. We operate customer service centers globally, which are supplemented by co-sourced arrangements. See Item 2 of Part I, “Properties.”
Seller Customers
We offer programs that enable seller customers to sell their products on our websites and their own branded websites and to fulfill orders through us. We are not the seller of record in these transactions, but instead earn fixed fees, revenue share fees, per-unit activity fees, or some combination thereof.
Developer CustomersWe serve developer customers through Amazon Web Services, which provides access to technology infrastructure that developers can use to enable virtually any type of business.
It is interesting that Amazon has added a new category of customers called "Developer Customers" for whom it provides technology infrastructure to enable any type of technology business.
Amazon's top line increased by 29.19% whereas the bottom line increased by 35.5% year over year before the dilutive effects of stock options. More importantly, the free cash flow increased by 15.5% year over year, a lower rate than EPS growth. Although free cash flow increased at a lower rate, Amazon has been able to retire debt ( almost 800 million ) and increase its assets.
46.6% of Amazon's sales come outside of north america. The remaining 53.4% come from within north america. While the north america margins declined year over year, the international margins increased.
From a growth perspective, Amazon's growth in media was 20%, growth in electronics and other goods was 45% and the other segment was 29%. The total other revenue was 542 million in 2008.
Also, Amazon's shipping costs are negative. It costs Amazon money to ship goods to the customers. In 2008, Amazon spent 1.465 billion in shipping costs of which it was able to recover 835 million from the customers.
While amazon is a well run business and is doing well, the total share count has increased by about 30% in the last ten years. Amazon also trades at a price/cashflow multiple of 19, which is higher than some better run businesses in this field. The trend of increasing in share count continues to go up. Also, in this environment, there are many cheaper alternatives available to invest one's money.
