Thursday, December 21, 2006
Our analysis didnt include individual stocks. Despite the broad bull market, it is possible to find a few companies trading below intrinsic value. Such a find requires careful study and deep analysis. We will be analyzing some companies individually in this blog from time to time.
The analysis of the macro economic trends indicates a strong year for the emerging markets and a decent year for the developed economies especially the ones in the Euro zone. All in all, the future looks bright with a few road bumps along the way.
We conclude this series of investing in 2007 by wishing the readers a happy holiday season and a prosperous investing new year.
Let us start with gold. The year over year gold consumption has fallen by 3%. While the usage of gold for industrial use has increased, its use for retail and investment purposes has declined. The high prices typically reduce consumption and this has been the case with gold. The industrial use of gold will increase as the global growth increases but the retail/investment sectors are difficult to predict. Another 20% rise in gold prices most likely will dent the retail usage further.
Silver has had a comparatively weak year thus far this year after a runup. This indicates the supply is meeting or exceeding demand already. The creation of the silver ETF generated a lot of enthusiasm for the metal. The main silver production comes from mining, government selling and from scrap. The main consumers of the metal are industrial usage, photography, jewelry and coins.
The other key industrial metal, copper has also declined in value from its highs earlier in the year.
The other common commodity is coffee. Its price has also increased by about 20% from the previous year. Coffee has been very cyclical - increase in prices causes higher growth and decline in prices causes some of the smaller farmers to go bankrupt. Sustained increase in prices will result in higher production and consequently lower prices for this commodity.
Orange juice and pork bellies have also increased in price. Some of this has to do with higher inflation and the devastating hurricane seasons of the prior years. It remains to be seen if these higher price levels can be sustained in the next year.
Finally, the mother of all commodities, oil is expected to remain flat to lower in the next three years. This considers that the current situation in the middle east wont deteriorate further and increase in gas prices will curtail consumption. Oil has cyclical effect on the economy and other commodities as energy is the least common denominator in modern civilization.
Overall, the outlook for commodities doesnt look bullish for the new year. However, disruption to oil supply, further decline in the dollar or other unforeseen events can move the prices higher.
Tuesday, December 19, 2006
First, let us look at the top holdings in EFV, EFG and EFA respectively. We will start with EFV.
EFV - the top holdings for EFV are:
HBC - HSBC Holdings PLC. The analysts seem to say there is some upside to this stock still.
TM - Toyota Motor Corp has a P/E of 15 and a market cap of 203 billion
Nestle SA - no data is available.
VOD - Vodafone Group PLC has a market cap of 162 billion
RDS-A - Royal Dutch Shell PLC-Class A is selling for a P/E of about 10
Royal Bank of Scotland Group PLC - no good data available
STD, Banco Santander Central Hispano SA has a P/E of 12 and market cap of 116.5 billion
RDS-B - Royal Dutch Shell PLC-Class B is also selling for a P/E of about 10 and market cap of 230 billion
BNP Paribas - no good data available
BCS, Barclays PLC has a P/E of 13 and a market cap of 92 billion.
Overall, this ETF has done better than the ING International Value Fund - NIIVX since inception and carries a lower expense ratio. The stocks in this portfolio are similar to that in VTV except that a declining dollar would make this ETF do better. EFV has returned about 25% so far this year. This ETF has exposure to Europe, Japan and Australia. Exposure to Europe is about 70% ( Great Britain at 25% ) followed by Japan ( 22% ) and Australia ( 6% ).
EFA is the blend that has the growth and value stocks in the mix. EFA has the following companies in its top 10 holdings.
HSBC Holdings PLC
Toyota Motor Corp.
Vodafone Group PLC
Royal Dutch Shell PLC-Class A
Roche Holding AG
This portfolio includes oil, banking, technology companies and drug majors. This is overall a good mix. EFA has returned 24% thus far this year. This stock has exposure to Europe, Japan and Australia. Exposure to Europe is about 70% ( Great Britain at 24% ) followed by Japan ( 22% ) and Australia ( 5% ).
EFG is the growth counterpart of the above family. The top holdings of this segments include:
Mitsubishi UFJ Financial Grp
This ETF has returned 18.5% thus far this year. The geographic exposure of this fund is Europe, Australia and Japan. In Europe, it has exposure to Great Britain is the highest around 23%.
The Vanguard European ETF, VGK has returned 32% YTD. VGK has heavy exposure (~30%) to Great Britain market. The Vanguard Pacific ETF VPL has returned about 10% thus far this year. VPL has heavy (~70%) exposure to Japan.
Summary: The main thing to note here is that the above ETFs reflect developed country markets with focus on large stable companies. Some of these companies have significant operations in the U.S. The markets in the developed countries are not overvalued but cant be said to be undervalued either. It is prudent to wait for a market downturn before adding further capital to these ETFs.
Let us look at the emerging markets - the main ETFs here are VWO and EEM.
The country wise distribution of holdings is - Korea (18.5%), Taiwan (15.8%), Hongkong (10.64%), South Africa (10.4%), Brazil (8.3%), India (7%) and Mexico ( 6.69%). This ETF has 771 holdings altogether. The top holdings in this ETF are:
Taiwan Semiconductor Mfg.
Petroleo Brasileiro Sa Petrobras
America Movil S.A. de C.V
Petroleo Brasileiro Sa Petrobras
Teva Pharmaceutical Industries Ltd
The geographic distribution of the holdings are South Korea (15.64%), Taiwan (10.99%), Brazil (10.43%), Hongkong (9.95%), South Africa (9.73%), Mexico (7%), India (6%) and Russia (5%).
Gazprom OAO (ADR)
Samsung Electnc GDR 144A
Taiwan Semiconductor Manufacturing ADR
Kookmin Bank ADR
United Microelectronics Corporation ADR
Siliconware Precision Industries Co, Ltd. ADR
Chunghwa Telecom Company, Ltd. ADR
Korea Electric Power ADR
Summary: EEM has outperformed VWO of late inspite of the higher expense ratio. The emerging markets in India, China, Brazil and Mexico have all done extremely well in the past two years and may be ready for a correction. The correction can be significant - in the range of 10-20%. It may be time to pick up more of either of these ETFs decline significantly.
Sunday, December 17, 2006
In the past segments, we looked at vanguard ETFs for our analysis. Since there isnt any comparable vanguard funds in the midcap section, we will look at the iShares section instead. By definition, a midcap stock is a stock with valuation between 1 and 5 billion.
IWS is the ETF we will analyze for this article. As noted in the first article of this segment, this ETF has notched about 20% return already this year. The top holdings of this segment are as follows:
ETR, Entergy Corp has a P/E of 20.5 and a market cap of 19 billion.
EOP, Equity Office Properties Trust has a large P/E and a market cap of 16.9 billion.
AEP, American Electric Power Co., Inc has a P/E of 24.8 and a market cap of 16.67 billion
PCG, PG&E Corp. has a P/E of 17.48 and a market cap of 16.52 billion
XRX, Xerox Corp. has a P/E of 13.48 and a market cap of 16.44 billion
PLD, Prologis REIT has a P/E of 24.75 and a market cap of 15.13 billion
EQR, Equity Residential REIT has a P/E of 18.97 and a market cap of 15 billion
VNO, Vornado Realty Trust REIT has a P/E of 36 and a market cap of 17.47 billion
EIX, Edison International has a P/E of 12.84 and a market cap of 14.69 billion
F, Ford Motor Co. has a market cap of 13 billion
IWR is the ETF in this segment. This ETF has notched about 16.5% return already this year. The top holdings of this segment are as follows:
HD, Harley-Davidson, Inc. has a P/E of 18 and a market cap of 18 billion
CELG, Celgene Corp. has a P/E of 400 and a market cap of 21 billion
ETR, y Corp.
JCP, JC Penney Co., Inc. has a P/E of 15 and a market cap of 17 billion
Thermo Electron Corp.
EOP, Equity Office Properties Trust has a large P/E and a market cap of 16.9 billion.
AGN, Allergan, Inc. has a market cap of 18.5 billion
ERTS, Electronic Arts, Inc. has a market cap of 16.3 billion and a P/E of 90.
YUM, Yum! Brands, Inc. has a P/E of 20.29 and a market cap of 15.51 billion.
COH, Coach, Inc. has a P/E of 30.7 and a market cap of 15.45 billion
IWP is the ETF in the midcap growth segment. This ETF has returned about 13% this year. The top holdings in this group are as follows.
HD, Harley-Davidson, Inc. has a P/E of 18 and a market cap of 18 billion
CELG, Celgene Corp. has a P/E of 400 and a market cap of 21 billion
JCP, JC Penney Co., Inc. has a P/E of 15 and a market cap of 17 billion
AGN, Allergan, Inc. has a market cap of 18.5 billion
ERTS, Electronic Arts, Inc. has a market cap of 16.3 billion and a P/E of 90.
YUM, Yum! Brands, Inc. has a P/E of 20.29 and a market cap of 15.51 billion.
COH, Coach, Inc. has a P/E of 30.7 and a market cap of 15.45 billion
AMT, American Tower Corp.-Class A has a market cap of 15.6 billion
FRX, Forest Laboratories, Inc has a P/E of 23 and a market cap of 16.15 billion
AES, AES Corp. has a P/E of 42 and a market cap of 14.9 billion
The advantage of midcaps is that one gets a larger concentration of stocks that have good capitalization. If one has both large cap and small caps, a concentration of mid caps will be in the portfolio but to a far lesser extent.
Again, as we have seen in the other segments, the value segment has managed to outperform the blend and the growth segments. Overall, the value segment carries a lower P/E and P/B compared to the other segments.
In the next article, we will look at international stocks and the prospects for them.
Friday, December 15, 2006
In this segment, we will look at small cap ETFs. Again, we will use the vanguard funds as examples where they are available. If not vanguard, a similar study can be done on other funds. It is the author's belief that the investors should look at the overall valuation of a fund/ETF along with expense ratios.
The small cap value ETF VBR has 953 stocks in the ETF. As of 11/30/2006, the ETF had a P/E of 18.9, Price to book ratio of 1.9. The return on equity is 10.7% and the earnings growth rate is 10.4%. The ETF had a yield of 2%. The top stocks in this ETF are as follows:
NU, Northeast Utilities has a P/E of 38
RA, Reckson Associates Realty Corp has a P/E of 28.29
SRP, Sierra Pacific Resources has a P/E of 12.82
CMS, CMS Energy Corp has a P/E of 15.
OGE, OGE Energy Corp has a P/E of 12.
OMX, OfficeMax, Inc has a forward P/E of about 20.
CLI, Mack-Cali Realty Corp. REIT has a P/E of about 36.
CVG, Convergys Corp has a P/E of 23.59
BRE, BRE Properties Inc. Class A REIT has a P/E of 31.55
CMC, Commercial Metals Co has a P/E of 9.94
VB is the small cap blend and has a yield of 1.2% which is much lesser than the SP500 yield of 1.76%. As of 11/30/2006, the small blend stocks as a whole had a P/E of 22.6, with a price to book ratio of 2.4, ROE of 11.7% and earnings growth of 15.7%. The top holdings in this sector are:
NU, Northeast Utilities with a P/E of 38
RRC, Range Resources Corp has a P/E of 20.38
RA, Reckson Associates Realty Corp. REIT has a P/E 12.82
RMD, ResMed Inc has a P/E of 39.67
MTW, The Manitowoc Co., Inc has a P/E of 26.35
FWLT, Foster Wheeler Ltd has a P/E of 58.37
CAL, Continental Airlines, Inc. Class B has a P/E of 13.4
SRP, Sierra Pacific Resources has a P/E of 12.82
PXP, Plains Exploration & Production Co has a P/E of 13.59
CMS, CMS Energy Corp has a P/E of 9.94
VBK is Vanguard's small growth stock. It has an yield of .37%. As of 11/30/2007, this group as a whole had a P/E of 28, price to book ratio of 3.5, ROE of 13% and earnings growth of 23%. The top holdings of this group are:
RRC, Range Resources Corp. has a P/E of 20.38
RMD, ResMed Inc has a P/E of 39.67
MTW, The Manitowoc Co., Inc has a P/E of 26.35
FWLT, Foster Wheeler Ltd has a P/E of 58.37
GPN, Global Payments Inc has a P/E of 28.51
GME, GameStop Corp. Class A has a P/E of 39.17
DNR, Denbury Resources, Inc has a P/E of 18
CCK, Crown Holdings, Inc is expected to be profitable next year
AME, Ametek, Inc has a P/E of 19.35
FTO, Frontier Oil Corp has a P/E of 9.4
In the small cap category, the top ten holdings constitute about 4% of the portfolio. So, they arent indicative of the entire sector. In looking at small value, small blend and small growth, the small growth category is looking pricy and there is little margin of safety in this segment. While small blend is looking better than small growth, it is not as attractive as the small value category. The small cap value stocks are a bit cheaper and are fully valued at the moment. Market price drops may provide an opportunity to add more small value to one's portfolio.
In the next article, we will look at mid cap segment. We will also evalutate the midcap segment with respect to the large cap and small cap segments.
In this article, we will look at two other segments, large cap value and large cap blend categories. Again, we will use Vanguard funds as the examples as we have more information about the funds and vanguard funds are one of the most widely held funds.
As noted in the first part of this series, the two vanguard funds in the value and blend category are VTV and VV respectively.
The outlook for VTV is as follows. As of 11/30/2006, VTV had a P/E of 14.2 with a price to book ratio of 2.2, ROE of 18.2% and growth rate of 16%. The growth rate denotes the earnings growth for the past five years. The ETF had about 400 stocks in its core holdings. The top holdings of this group are as follows.
XOM - Exon Mobil Corp has a P/E of 12
GE - General Electric Company has a P/E of 22
C - Citigroup Inc has a P/E of 11.4
BAC - Bank of America has a P/E of 12.2
PSE - Pfizer Inc has a P/E of 14.8
MO - Altria Group has a P/E of 12
JPM - JP Morgan and Chase has a P/E of 13.6
CVX - Chevron has a P/E of 9.6
AIG - American International Group has a P/E of 17.11
T - AT&T has a P/E of 19.4
The top ten holdings accounted for ~30% of the funds portfolio. This sector looks good and can potentially rake in decent returns in 2007. The energy sector is a wild card but the share holder friendly moves by cash rich management should help.
The profile of VV is as follows. This fund holds about 790 stocks. As of 11/30/2006, this fund had a median market cap of 45.6 billion, P/E of 17.1, Price to book ratio of 2.9, ROE of 18.7% and earning growth rate of 19.1%. The earnings growth rate denotes the growth rate for the past five years. Let us look at the top holdings in the ETF as these comprise 18.2% of total net assets.
XOM Exon Mobil has a P/E 12 and market cap of 450 billion
GE General Electric has a P/E of 22 and a market cap of 385 billion
MSFT Microsoft has a P/E of 24 and a market cap of 295 billion
C Citibank has a P/E of 11.6 and a market cap of 265 billion
BAC Bank of America has a P/E of 12 and a market cap of 235 billion
PFE Pfizer has a P/E of 14.88 and a market cap of 184.88 billion
PG Proctor and Gamble has a P/E of 23.8 and a market cap of 203 billion
JNJ Johnson and Johnson has P/E of 17 and a market cap of 192 billion
MO Altria Group has a P/E of 15.78 and a market cap of 178.6 billion
CSCO Cisco has a P/E of 29 and a market cap of 167 billion
In the value category to the blend category and their top ten holdings, both have some of the same stocks. The interest is in the differences, the blend has Microsoft, JNJ and Cisco and other stocks in different composition levels. Microsoft is expected to do well in 2007 as is JNJ. Cisco is on a tear currently and may not be considered as cheap. The value segment has Chevron, JP Morgan and AT&T. The telecom sector has been hot this year and both oil and banking have had record years. This performance may be hard to beat in 2007.
I like the value and blend segments to the growth ETF we discussed in the earlier article. The growth ETF has more potential but is also priced higher. Again, the time to buy these securities is when the market is down and when the valuations are more attractive. Currently the market is going up, a situation that may not reverse itself till well into the new year.
In the next article in this series, we will look at the domestic small cap segment and go into the details of that sector.
First the vanguard REIT etf VNQ. The current yield for VNQ is 3.63%. Given that the REITs are required to return 90% of their income to the shareholders, the effective yield is 4%. The ten year bond is currently yielding 4.6% and is entirely safe. So, the REITs aren't looking attractive at the moment. Let us look at some more details to see how VNQ looks like.
As of 11/30/06, VNQ's equity characteristics were as follows. The P/E ratio was 49 with return on equity of 8% and projected earnings growth of -3.6%. The REIT ETF held 104 stocks altogether. Let us look how some of the top holdings for this ETF looks like:
SPG - Simon Property Group has a P/E of 59.
EOP - Equity Office Properties has a P/E of 40.
VNO - Vornado Realty Trust has a P/E of 37.
PLD - ProLogis has a P/E of 25.
EQR - Equity Residential has a P/E of 19.
ASN - Archstone Smith Trust has a P/E of 17.
BXP - Boston Properties has a P/E of 16.
PSA - Public Storage has a P/E of 67.
GGP - General Growth Properties has a P/E of 229.
As a group, the above equities have high P/Es and the stocks with lower P/Es have low dividend yields. Looking at the fundamentals of this sector, it is safe to stay away from this sector at this moment till the P/E and the dividend yield become more reasonable.
Looking at the large cap growth sector, let us take a look at VUG, the vanguard growth ETF. The growth ETF equities have the following characteristics as of 11/30/2006.
The ETF held 457 stocks altogether with a median market cap of 34.8 billion. The P/E of the ETF is 21.5 with a price to book ratio of 4 and earnings growth rate of 23.1%. The return on equity is 19.1% which is very respectable. Let us look at the top ten holdings from this ETF and their P/E ratios and growth prospects. The ten largest positions account for 21% of the ETF holdings.
MSFT - Microsoft Corporation has a P/E of 24.
PG - Proctor and Gamble has a P/E of 24.
JNJ - Johnson and Johnson has a P/E of 17.4
CSCO - Cisco Systems has a P/E of 27.
INTC - Intel Corpoation has a P/E of 21.
WMT - Walmart Stores has a P/E of 17.
GOOG - Google Inc has a P/E of 61.
PEP - Pepsi Inc has a P/E of 21.
IBM - International Business Machines has a P/E of 16.
AMGN - Amgen Inc has a P/E of 29.
As a group, the top ten holdings of this group are mixed. On the one hand there are fully priced stocks such as Google and on the other hand, there are low priced stocks such as WMT and JNJ with a bunch of stocks in between. It should also be noted that as a group, this sector is entirely dependent on growth to power the stock price. My bet for this group would be to do decently in 2007. The main reason being the top holdings of MSFT and INTC are expected to do well on the back of new product launches, CSCO is doing ok and the some of the low priced stocks may succeed in getting out of the negative publicity surrounding them. It is not possible to find the right time to get in but I would get in once the major indices have a correction from the current price points.
In the next segment, we will cover the large cap blend and value segments.
Monday, December 11, 2006
The size of the world economy is 50 trillion dollars with the US contributing about 26% and the EU contributing about the same. IMF forecasts the EU zone economies to expand at the rate of about 2 - 2.5%, the US economy to expand at around 2%. The growth in Canadian economy would be around the same number and the world wide economic exapnsion to remain intact at close to 5%. The emerging economies are expected to do well - growing around 5% in 2007. Of the emerging ecomonies, Indian economy is expected to grow at around 9%/year and the Chinese economy is expected to continue posting double digit growth increases.
The emerging markets comprise of economies of South America, Mexico, South Africa, Eastern Europe and Asia. Let us look at the growth prospects in these segments.
The Latin American economies are expected to grow about 5% this year, 4.2% in 2007 and about 4% in 2008. The fundamentals are good for the Latin economies with commodities prices buttressing the export engine of these countries. The large economies of Brazil and Argentina are expected to do well in the coming year. Mexico is also expected to do well with its economy growing at 3.8% in 2007 compared to this year.
According to IMF, the economies of western Europe are expected to grow around 2% in 2007 and the emerging economies of central and eastern europe are expected to grow more than 5% in 2007. Many of these economies are part of the emerging market funds.
The Asian economies are expected to do well in 2007. As noted earlier in the article, the dragon, tiger economies of China and India respectively are expected to do extremely well with growth rates of close to ten percent. The South Korean economy is expected to grow in the 4-5% range. The largest economy in the group, the Japanese economy is expected to post a modest 1-2% growth.
Given the continued projected growth, the main issue a US based investor has to look at is the strength of the US dollar versus the world currencies. Given the huge trade gap that exists between US and the rest of the world, there is a good chance the dollar will not appreciate significantly against the world currencies. On the other hand, strengthening economies of Europe and Japan may cause the local central banks to increase the interest rates to stem inflation. At the same time, if the US economy slows down, the federal reserve may have to reduce the short term rates. In this scenario, the US dollar becomes a less attractive financial instrument for the central banks and hedge funds. However, the currency rates are very difficult to predict correctly and the fundamentals may take a long time to unwind. The main reason for this is that millions of peoples jobs and livelihoods are dependent on stable currency rates and a significant decline in the dollar can cause world wide recession.
Sunday, December 10, 2006
The vanguard REIT index - VNQ has returned 32% for the year. The iShares Dow Jones US Real Estate fund IYR has returned about 30% for the year. streetTracks Wilshire REIT RWR has returned 32% for the year. Although REITs have done very well for the year, the REIT dividend yield is low compared to their long term average.
Now let us take a look at international ETFs and then the returns in some key country indices thus far this year. There are many popular international ETFs and we will take a look at the main ones.
Of the global etfs, iShares EAFE Global Large Cap Growth Fund EFG has returned 15.35% for the year. The EAFE Global Blend EFA has returned about 18% and the value fund EFV has returned about 22% thus far in the year. The interesting thing to note here is that the return from international stocks is comparable to that from the US even taking into account the depreciation in the value of the dollar.
In addition, the popular vanguard funds VGK for European Index has returned 27% YTD and the Asia Pacific Index Fund VPL has returned 6% YTD.
The iShares emerging market fund EEM has returned 17.35% YTD and the corresponding fund from Vanguard VWO has returned 15.88% YTD. EEM charges a higher management fee compared to VWO. Again the interesting part to note here is that despite a falling US dollar, the US assets have performed well and have comparable returns to that of the emerging markets. Let us now look at the country by country performance of some key economies around the world.
Wikipedia has the world's largest countries by nominal GDP. The European Union is at the top of the list at 13.5 trillion dollars followed by the US at 12.5 trillion dollars. China is at 2.2 trillion dollars and Canada is at 1.2 trillion dollars. The emerging markets of Brazil, South Korea, Russia, Mexico and India are in the 750 billion dollar range with India poised to make a significant leap over the others in the next five years.
The main index in the U.S, the SP500 index has gained close to 15% thus far this year. This came after last year's anemic growth. The other large north american economy Canada also saw its index grow by about 14% this year. The Mexican index has increased by 43% YTD as well. The Brazilian index has also grown by about 33% thus far this year.
In Europe, the British FTSE100 index has gone up by about 12%. The German DAX has gone up by almost 21% thus far in the year. The Swiss index has gone up by about 12.5% thus far this year.
In Asia, where the giant dragon (China) and Tiger(India) economies are growing at quick rates, the indices increased as follows. In India, the BSE Sensex index has grown by about 55% thus far this year. This is on top of the 45% growth observed last year. In China, the Shanghai SSE Composite Index has grown by about 75%+ thus far in the year. The Hangseng index has grown by about 26% thus far this year. The Nikkei 225 index has been relatively flat thus far in the year. The Korean index has been relatively flat where as the Taiwan stock market has surged by about 17.5% YTD.
To summarize, the global stock markets have seen more advances than declines and majority of the stock markets have advanced significantly thus far this year.
In the next article, we will look at the economies of the world and the economic growth prospects in some of these countries.
Saturday, December 09, 2006
In general, 2006 has been a stellar year for investors with many raking in double digit returns. This year has seen a steady bull market across all asset categories. Let us review the returns thus far in the various asset categories.
Large cap value:
As of 7th December, IWW, the Russel 3000 value index fund had returned 20%.
Similarly, the Vanguard value vipers VTV had returned close to 20% for the year as well.
The spider dividend ETF, SDY had returned 16.25% thus far in the year.
So any buy and hold investor has racked up double digit gains without expending a lot of effort.
Large cap blend:
In the large blend category, there are several interesting indices. The most interesting is the SP500 index. SPY, the spiders has returned 14.83% thus far in the year. The competing funds from iShares IVV has returned 14.92% and the vanguard fund VV has returned 14.7%. The most mentioned category in CNBC is the Dow Jones Industrial average. Diamonds or DIA that tracks the Dow Jones Industrial Average has returned 17.03% thus far in the year.
The iShares Russel 3000 index fund, IWV has returned 14.96% this year comparable to the SP500 index fund. The other interesting fund is the Ryder SP500 equal weight ETF that buys all stocks in the index in equal proportion. The ETF RSP has returned 13.5% this year thus far.
The vanguard total stock market vipers VTI has also done well returning 14.95% for the year.
Large cap growth:
The large cap growth category has been a laggard (comparatively) thus far this year. In the large growth category, the Nasdaq composite QQQQ has returned about 8.14% so far. The Russel 3000 growth index fund IWZ has returned 9.75%. The other interesting ETF in the category, the vanguard growth vipers, VUG has returned 9.77%.
In this category, the iShares Russel Midcap value index fund - IWS has returned close to 20%. Another ETF in this category, streetTracks DJ Wilshire Mid Cap Value ETF, EMV has returned 16.67% so far this year.
In this category, the iShares Russel Midcap Index Fund - IWR has returned 16.15% thus far this year. Midcap spider MDR has returned 11.69% and Vanguard Midcap Vipers VO has returned 14.94% thus far this year.
In the midcap growth category, iShares Russel Midcap Growth Index Fund IWP has returned 12.25% for the year. StreetTrack Wilshire Midcap Growth ETF, EMG has returned 12.22% for the year.
Small cap value:
In the domestic small value category, IJS has returned close to 20% this year. The returns from Vanguard Small Cap Value Vipers, VBR has been a shade lower at 19.7%.
Small cap blend:
In this category, the Vanguard Small Cap Vipers VB has returned 17.01% for the year. The iShares Russel 2000 Index Fund, IWM has returned 18.89% for the year.
Small cap growth:
In the small cap growth category, the Vanguard Small Cap Growth Vipers VBK has returned 14.2% for the year. The iShares Russel 2000 growth index fund IWO has returned 14.76% for the year.
The vanguard materials vipers VAW has returned 20% for the year. Similarly, XME, an ETF for the SPDR metals and mining fund has returned 18% in the last six months. The iShares Goldman Sachs Natural Resources ETF IGE has returned 16.3% for the year. The gold ETF GLD has returned about 19% for the year and silver ETF SLV has returned -2.3% for the year. The oil ETF USO has returned about -20% since inception in mid year this year.
In summary, 2006 has been a good year for domestic investments. All the fund categories have done well with many posting double digit gains. The commodities have been mixed with some doing better than others.
Next article in this series:
In the next part of this series, we will review the results from international funds thus far in 2006.
Sunday, December 03, 2006
Before jumping on to the bandwagon and selling off our Berkshire holdings, let us do some analysis. Currently, the Berkshire consensus IV is ~130K. It is likely to reach 134-135K by end of FY06. The growth in earnings from the operating companies, the equitas deal and the growth in the BRK stock portfolio should contribute another 10% to IV growth in FY07. The hurricane season is a wild card but it can trim earnings for one quarter at worst. We are looking at an IV of about 148 to 150K by year end FY07. The current stock price at 106K is selling at around 40% discount to next year's IV. Following this year's bull market across all segments, there arent as many good businesses selling at such a discount.
Let us consider a typical scenario for an investor this year. Assume the investor bought BRKA at 91K and has seen the gains to 106K. This comes to 16.5% short term gain. If we follow Jubak's advice and sell the stock, our gains reduce from 15K to 10.8K at 28% short term capital gains tax. Now, there is the secondary problem of investing the money in another investment that will provide bigger gains while providing the same AAA balance sheet.
For long term investors, following the likes of Jubak is like applying sand paper to one's portfolio. While the reasons for Mohnish Pabrai and Sequoia funds selling may never be known, it will not affect their performance as the performance is calculated before tax and the tax burden is borne by the fund investor.
From a cursory analysis of Berkshire, it is clear that it is still significantly undervalued and the bull market in all segments of the stock market has left very asset categories that are undervalued.
Saturday, December 02, 2006
The company's goals as stated in its 10-K are as follows:
Anheuser-Busch remains focused on its three core objectives designed to enhance long-term shareholder value:
▪Increasing domestic beer segment volume and per barrel profitability which, when combined with market share growth, will provide the basis for earnings per share growth and improvement in return on capital employed.
▪Increasing international beer segment profit growth. Anheuser-Busch has made significant marketing investments to build recognition of its Budweiser brands outside the United States and owns and operates breweries in China, including Harbin Brewery Group, and in the United Kingdom. The company also has a 50% equity position in Grupo Modelo, Mexico’s largest brewer and producer of the Corona brand, and a 27% equity position in Tsingtao, the largest brewer in China and producer of the Tsingtao brand.
▪Continued growth in pretax profit and free cash flow from the packaging and entertainment segments. Packaging operations provide significant efficiencies, cost savings, and quality assurance for domestic beer operations. Entertainment operations enhance the company’s corporate image by showcasing Anheuser-Busch’s heritage, values and commitment to quality and social responsibility to 21 million visitors annually.
2005 was a disappointing year for BUD as net sales increased by only 0.5% and EPS declined by 15%. In 2005, BUDs sales in the US declined slightly whereas its international volume increased significantly.
However, the company has rebounded from its disappointing 2005 with increase in operating cash flows of about 11% in 2006 compared to 2005. Let us look at some other financial ratios.
The company has very good return on equity, return on asset and return on invested capital ratios.
For ten years from 1996-2006, the EPS increased by 8.06% on the average for BUD. The number of outstanding shares declined by 23% in the same period helping the EPS as well as dividends per share. The revenues in this period have increased by 4.8% where as the gross profit has increased by 6.4% on the average. The free cash flow in the same period increased an average of 7.8% per year compounded. Dividends increased by 49% in five years from 2001 till now.
The stock price has more than doubled in the last ten years - growing at around 8% per year. About 46% of earnings are paid out in dividends. Currently the fair value of the stock is about $55 - making it undervalued by about 15%. If the stock does as well as it has in the past ten years, we are looking at a stock price of about $100 in ten years with about $15 returned back to the share holders in dividends.
So overall, one can look for a return in the 8-10% range including dividends from BUD in the next ten years. BUD's moat is the manufacturing and the distribution network and one can expect this to remain the same in the coming years in the United States.
SAB Miller, the main US competitor - though posting strong results world wide ( and showing strong stock performance as well ) got bruised in north america. In its earning report, SAB Miller says - "In North America Miller Brewing Company has continued to be impacted by competitive pricing conditions and significant increases in commodity and energy prices." The operating margins declined for SAB Miller by 1.2% points to 9.6% in the U.S. The figure for BUD is about 16%. This shows the efficiencies and the moat the company has against its competitors. SAB Miller has a good global presence and this is an area to improve for BUD.
Tuesday, November 28, 2006
Both NDAQ and NYX have been volatile through out the year.
- Creating a global network of stock exchanges - Advantage NYX. This position reversed from the last time as the NDAQ acquisition of London Stock Exchange didnt go through. However, NDAQ is making an aggressive bid for LSE and may yet succeed in owning the exchange. Current advanage - NYX
- Trend - NYX got its pop after a while. NDAQ while down, will get back if it buys LSE. Current Advantage - NYX
- Revenues - Although NYX and NDAQ have about the same revenue, NYX sells for a higher price. The reason for the premium is that NYX is executing better at the moment. Advantage - NYX
- Stock dilution/debt - Both the exchanges will take on more debt or sell equities to expand. Neutral
- Listing companies. NDAQ fees are lower but NYX still has the prestige. Advantage - NDAQ
- Management - John Thain has done a great job for NYX. The Rich Grasso excess is a long memory at the moment. Advantage - NYX.
- Cost cutting upside. NYX executed on its cost cutting upside. Neutral
- Technology - Neutral
- Valuation - NDAQ is cheaper although one might argue that it is because of the lower perceived potential for NDAQ. Advantage - NDAQ.
Sunday, November 26, 2006
Chico’s FAS, Inc. operates as a retailer of private label, casual-to-dressy clothing, intimates, complementary accessories, and other nonclothing gift items. The company offers its products under the Chico’s, White HouseBlack Market (WHBM), Soma by Chico’s, and Fitigues brand names. The Chico’s brand includes clothing focused on women who are 35 years old and over.
At that time - we found a risk for P/E contraction.
From a strict earnings point of view, the earnings per share are expected to increase by 25% year over year. However, the P/E of the stock is close to 40 - so there is definitely some mismatch here. For the first thirty nine weeks of 2005, the earnings grew by ~38% compared to 2004 and sales by 31%. The share dilution increased by 1.1% year over year. The analysts are expecting 1.34 per share in 2007 where as the expected earnings this year is 1.07 a share. The growth rate is 25% for the next year. Although the stock risk dilution is minimal, there is the risk of P/E contraction which in turn poses a risk to the stock price.
Since then, the stock has had a P/E contraction. A word from Ben Graham from intelligent investor may be mentioned in this context.
"The philosophy of investment in growth stocks parallels in part and in part contravenes the margin of safety principle. The growth-stock buyer relies on an expected earning power that is greater than the average shown in the past. Thus he may be said to substitute these expected earnings for the past record in calculating his margin of safety. In investment theory there is no reason why carefully estimated future earnings should be a less reliable guide than the bare record of the past; in fact, security analysis is coming more and more to prefer a competently executed evaluation of the future. Thus the growth-stock approach may supply as dependable a margin of safety as is found in the ordinary investment - provided the calculation of the future in conservatively made, and provided it shows a satisfactory margin in relation to the price paid"
The company is managed well - with ROE of 28.8% and ROA of 22.91%. The EPS has increased an average of 25% in the past five years. However, it is likely that the EPS growth will be far lower in the next five or ten years. Consequently the P/E has compressed to a more reasonable 20 from a more lofty 40.
The cash flow from operations have increased year over year for the past several years. However, the free cash flow has declined this year because of the increasing capital expenditure. The analysts estimate for growth next year is about 17% compared to this year but the median estimate of the stock price is around $25. If the earnings grow by the estimated amount and the stock price stays put, it should present a good buying opportunity with a good margin of safety.
First an introduction to JOSB and its businesses. Jos. A. Bank Clothiers, Inc. engages in the design, retailing, and marketing of men’s tailored and casual clothing and accessories. Its product line includes tuxedos, suits, shirts, vests, ties, sport coats, pants, sportswear, overcoats, sweaters, belts and braces, socks and underwear, branded shoes, and other items. The company sells its products through retail stores, catalog, and the Internet, as well as through franchisees.
JOSB has been a fast growing company and was priced as a growth company. However, the earnings growth has declined even though the sales growth has remained impressive. Let us look at the most recent quarter to see how things came out.
The second quarter of 06 looked good, as reported in the 10-Q,
For the second quarter of the Company’s fiscal 2006, the Company’s net income was $7.0 million compared with net income of $5.3 million for the second quarter of the Company’s fiscal 2005. The Company earned $0.38 per diluted share in the second quarter of fiscal 2006 compared with $0.30 per diluted share in the second quarter of fiscal 2005. As such, diluted earnings per share increased 27% as compared with the prior year period. The results of the second quarter of fiscal 2006 were primarily driven by:
20.8% increase in net sales with increases in both the Stores and Direct Marketing (catalog and Internet) segments;
30 basis point increase in gross profit margins;
40 basis point decrease in operating expenses as a percentage of net sales;
The opening of 58 new stores since the end of the second quarter of fiscal 2005.
Management believes that the chain can grow to approximately 500 stores. As of July 29, 2006, the Company had 340 stores opened. The Company plans to open approximately 50 stores in fiscal 2006 as part of its plan to grow the chain to the 500 store level, including 16 stores opened in the first half of fiscal 2006. The store growth is part of a strategic plan the Company initiated in the year ended February 3, 2001 (“fiscal 2000”). In the past six years, the Company has continued to increase its number of stores as infrastructure and performance has improved. As such, there were 10 new stores opened in fiscal 2000 (including two factory stores), 21 new stores opened in the year ended February 2, 2002, 25 new stores opened in the year ended February 1, 2003, 50 new stores opened in the year ended January 31, 2004, 60 new stores opened in fiscal 2004 and 56 new stores opened in fiscal 2005.
Despite the good results of the second quarter, year over year, the growth in EPS was only 4.5%. Let us look at the cash flow and other ratios to see how the company is doing. The free cash flow available to shareholders has declined this year compared to the previous years . This is primarily because of the increased capital expenditure incurred by the company. The increase in the number of outstanding shares also hasnt helped the EPS figure. The company's trailing P/E is attractive at ~15 but this isnt the lowest for the company. If the economy continues to cool off, there could be further compression in the P/E ratio for the company. This happened in the early 2000s. If this scenario repeats, it should present a more attractive buying opportunity.
Saturday, November 25, 2006
The interesting thing about SIAL is that no single product generates more than 3% of its sales. The majority of the companies orders ( around 70% ) are for labs around the world and are $400 or lower. The company derives about 60%+ sales outside the United States.
SIAL's business is viable and has growth potential. The recent decline in the US dollar should help the company improve its bottom line. In the next segment, we will look at the SIAL financials.
First, we will look at the return on equity and return on asset numbers for SIAL. The ten year averages for both the numbers are 20.88 and 14.5% respectively. Both these numbers are impressive and point to very strong fundamentals and operations at the company.
The revenue growth at the company has averaged about 5.35% for the past ten years but the EPS has grown at a faster pace of 10% per year. The key ingredient causing the increase in EPS is the decrease in outstanding shares. The outstanding shares the company has declined from 99 million to 67 million in the past ten years. In the ten year period, the cash flow from operations has almost doubled and free cash flow has increased by about 3.5 times. The dividends per share have increased by about 11.7%/year for the past five years.
SIAL is a good stock with steady ( ~10-11% earnings growth/year ) and is not cheap. The stock is currently selling for about 10% discount to its fair value. This stock is a strong buy when its price drops becuase of the market fluctuations or variations.
Thursday, November 23, 2006
- The Indian economy is growing at a fast pace and it is unlikely to slow down in the next several years
- Indian tax laws favor the investor - there are no taxes on long term capital gains or dividends. Short term capital gains are taxed at 10%
- Indian population is not exposed to equities - this should correct itself in the next several years
- The fundamentals of top two hundred Indian companies is getting better. The ROE of the companies is at 22% and ROA is at 15%.
- The slide deck also talks about the likely scenario for Indian stocks to be in the 19,000 - 23,000 range by 2010. This comes to a growth in the range of 9 % per year for the next four years.
As we have done in our previous articles, we will focus on the investment vehicles available to US residents to invest in India.
The Indian stock market - BSE Sensex has gained 45.5% thus far this year and the index is seemingly moving upwards. This comes on the heals of a 42% gain in equities in 2005. The returns are quite extra ordinary and one can be certain that this kind of returns can't be maintained to perpetuity. The returns have to go down sooner or later - the longer this lasts, the more severe will be the correction.
Let us look at the different instruments one can use to invest in India and see which ones are attractive at the moment.
EEM is the iShares emerging market fund and has returned about 17.39% YTD. If one bought the ETF at the low 80's in the second quarter, the ETF has returned more than 30%. EEM has an expense ratio of 0.77%. EEM had 5.8% exposure to India at the end of October.
VWO is the Vanguard emerging market fund and has returned about 15.88% YTD. This correlates highly with EEM but has a lower expense ratio of 0.3%. VWO has a 7.07% exposure to India.
IIF is Morgan Stanley India Investment Fund, Inc. is a non-diversified, closed-end management investment company. The Fund's investment objective is long-term capital appreciations, which it seeks to achieve by investing primarily in equity securities of Indian issuers. The Fund will invest at least 65% of its total assets in equity securities of Indian issuers; which for this purpose means common and preferred stock bonds, notes and debentures convertible into common or preferred stock, stock purchase warrants and rights, equity interests in trusts and partnerships and American , Global and other types of Depositary Receipts. The Fund may invest up to 25% of its total assets in unlisted equity securities of Indian issuers.Currently IIF sells for about 2.48% premium to the net asset value. The management fees for this stock is 1.27%. The total return of IIF is 42% compared to the BSE Sensex Index return of 45%. Interestingly enough, the fund is trading at a slight premium of ~1% to its NAV.
IFN India Fund is a closed-end management investment company. The fund seeks long-term capital appreciation through primarily investing in the equity securities of Indian companies. The fund will invest at least 80% of its total assets in the equity securities of Indian Companies. The management fees for this stock is 1.47%. The fund has returned 25% compared to the BSE Sensex index of 45%. To top it off, the fund is selling at 10% premium to its NAV.
MINDX Mathews India Fund is a relative new comer to the block. The fund carries an expense ratio of 2.75% has returned 25% YTD. This compares to the BSE Sensex index gain of 45%.
ETGIX It has an initiation fee of 5.75% for small sums of money that declines to zero if the capital is greater than a million dollars. This is not targeted for individual investors but is targeted more towards institutional investors that want an exposure to India. The fund also has an expense ratio of 2.75% on top of the initiation fee. This fund has returned 33% YTD.
EEB ( Claymore/BNY BRIC ETF ) - This is a new ETF targeting only the BRIC countries - Brazil, Russia, India and China. The fund doesnt have the assets divided equally with all the four countries but it only specializes in these four emerging markets. The fund carries an expense ratio of 0.65% and returned 8.7% since inception.Although both India and China look expensive at the moment compared to other markets, the growth in these markets make it look as though there is still upside for companies in these countries.
To summarize, EEM/VWO provide partial exposure to India with lower expense ratios. Among the pure plays, IIF is the best by far followed by MINDX. EEB is a newcomer and not enough information is available regarding per country investment break down.
Almost all the readers here should be familiar with Coke and Google. Coke is an old world company that has been around for more than hundred years. It has with stood competition and idiotic management over the course of its existence. Google on the other hand is an internet darling and has been growing revenues and earnings at an exponential rate. Google is a young company with smart founders with a new business model.
Coca Cola is fully valued at the moment when compared to the long bond. Google on the other hand fully valued against its future (2007/2008) earnings. In this segment we will look at some financial ratios to see which offers enduring competitive advantage and a long term buy opportunity. In the short term, Google definitely has more upside as momentum investors jump in to make a quick buck.
First comparison of earning yield. Based on the long bond ratios, Coke is fairly valued at today's market. Google has to earn ~$23 to be on par with Coke regarding price compared to the long bond. Google is not expected to earn $23/share till about 2009-2010.
Coke is a slowly growing company. In the last ten years, its EPS has increased from 1.40/share to 2.24/share. The EPS has grown at 4.8%/year in that period. The total outstanding shares have decreased somewhat. The dividends have increased by 55% in the past five years and the company roughly gives out about 50% of its earnings in dividends. The operating cash flow in Coke has increased from 3.43 billion to about 5.77 billion in the ten year period - a 5.3% increase per year. The free cash flow has increased at the rate of about 6.3% per year in the same period. The return on equity and return on assets have been in the double digits in that time.
Google is a fast growing company. The EPS for Google went from 41 cents a share in 2003 and is on track to hit almost $10 a share this year. The revenue growth rate in the past two years has been 100% and 70% respectively. The growth is slowing to about 40% range next year and will probably go to the 30% range in the year after. Googles cash flow has increased from 218 million in 2003 to 1.5 billion in 2006. The cash flow in 2006 is less than that of 2005 because of larger capital expenditures. Googles return on equity is less than that of Coke in the last two years whereas the return on assets is higher by a couple of points.
The return on equity is an important metric. If we look back at the 1977 Berkshire Hathaway annual letters, Warren Buffett has this to say about earning per share and managerial performance. "Except for special cases, we believe a more appropriate measure of managerial economic performance to be return on equity capital. In 1977 our operating earnings on beginning equity capital amounted to 19%, slightly better than last year and above both our own long-term average and that of American industry in aggregate. But, while our operating earning per share were up 37% from the year before, our beginning capital was up 24%, making the gain in earnings per share considerably less impressive than it might appear at first glance" He goes on to discuss why return on equity is an important metric in the subsequent annual letters.
To sumarize the above points, KO has a free cash flow of 4.5 billion where as Google has a free cash flow of 1.5 billion. Coke's return on equity is higher than that of Google whereas Google has a slightly higher return on assets compared to Coke. Coke's return on equity is better than that of Google by about 10 percentage points. However, Cokes market cap is 110 billion compared to Google's market cap of 155 billion.
We will finish off this article by looking at the various valuation ratios of the two companies. The trailing PE for Google is 74, price to book is 11.6, price to sales is 19 and price to cashflow is 52. The forward PE for Google is 50.
Coke on the other hand has a P/E of 21, price to book of 6, price to sales 5, price to cash flow ratio of 29.5. The forward PE for Coke is 18.6.
Based on these factors, each investor can make a decision for themselves which business is superior and which business is cheaper at the moment.
Sunday, November 19, 2006
The home builders have taken a beating in the second half of this year and are trading for low P/E ratios. The main reason for the low price is the decline in the U.S housing market. One interesting phenomenon is that the recent bad news on housing starts didnt depress the home builders and the wall board manufacturers. We will look into the home builders - especially DHI to see if they have hit a bottom and if the stock is a buy at the current prices.
DHI primarily has two businesses. The first one is the one that specializes in building single family homes. The second part of the business specializes in doing mortgages and financial services. The home building business accounts for 98% of the revenue whereas the financial services account for 2% of DHI's revenue. The majority of DHI's revenue comes from the six states of California, Arizona, Colarado, Texas, Florida and Nevada. One should also note that the housing bubble has been the strongest in California, Florida and Nevada.
The housing market is the strongest in spring and summer months - consequently, the sales and revenues from homes is also the strongest in those months.
Let us move forward to the latest quarterly report. The cash and cash equivalents have declined from 1.1 billion to about 100 million. The inventory of finished homes and land under development has increased sharply from the year ago period. Although the company says it is monitoring the housing industry carefully, the increased inventory in a down market is definitely going to erode the profit margins.
The analysts are expecting the EPS to improve in 2008 for DHI while expecting steep slow down in the March quarter and fiscal year 2007.
The book value of the stock is in the finished houses and the land it has under its name. Since the company uses debt to finance its operations, the decline in housing prices or new homes will erode the book value. So a book value of $21/share is not what is made out to be.
Looking at DHI's balance sheet, cash from operations and free cash flow have both been negative for the past ten years except 2003. Cash from financing has been positive primarily because of the issuance of a lot of debt. The company does sport good return on equity and return on asset numbers. Since the company doesnt have a positive free cash flow and has a heavy growth in inventory, it may be prudent to stay away from the stock till early next year. It may also be prudent to stay away till the time the inventory/accounts receivable situation improves on the balance sheet compared to the existing housing market conditions.
Saturday, November 11, 2006
The package delivery and handling business is interesting for several reasons. The growing trend of globalization and commerce needs more shipping and delivery across the world. Another factor aiding this industry in the growing wealth around the world. A third factor in favor of this business is the increasing demographic trends and e-commerce in the US needing the services of these companies.
Currently this sector is looking a bit attractive. The attractiveness is primarily because of the expected economic downturn and people expecting slow down in growth in this segment. The recent price increases by UPS and Fedex show that the companies have pricing power and the market is fairly robust. In the rest of the article, we will analyze UPS and consider its pros/cons.
UPS's competitive strength is the built up infrastructure in North America and Europe. UPS is currently building up its network in China as well. A con of UPS is that the labor force is unionized and the record of companies with unions is dismal.
Now that we are convinced that UPS has potential as a business, let us look into the financials. We will also look into the TA ( technical analysis ) to verify the trend for UPS.
Since we dont have the trends for the full ten years ( a preferred period ), we will only look at the trends for the last six years for which public data is available. UPS stock price hasnt increased significantly since its IPO but we have seen compression of its P/E ratio. The revenues have increased at the rate of 8.7% per year for the past six years. The EPS has grown at the rate of 29% in the same period though the 1999 numbers were comparitively a bit lower. The number of shares has remained steady - so the buy backs have stemmed further dilution in shares. The free cash flow has seen steady and impressive growth in this period.
The return on equity has averaged about 20% in the last five years for UPS. Approximately 40% of the income is paid out in dividends. If the current ROE holds, the EPS should be about $8 in about ten years. This would result in a divident yield of 3.25 dollars/share up from the current value of $1.55/share. If the P/E of 20 holds, the stock should be worth about $160 in that time frame. In that time, $15 would have been paid out in dividends. This would make the total return about $175 dollars at a cumulative rate of about 9%. If the stock goes further, it is a good time to accumulate UPS.
Gehl has been producing agriculture implements for nearly 150 years. Today, it is the leading non-tractor manufacturer of agricultural equipment in North America, offering a broad line of implements for the farm equipment industry.
In 1986, Gehl aggressively moved into the light construction equipment market as it established a separate construction sales division. Gehl serves small contractors, sub-contractors and owner-operators with dirt, lifting and paving equipment.
While Gehl has has a presence in international markets for over 50 years, in 1991 it focused its efforts through one group; Gehl International. Gehl International was formed to tap growing worldwide opportunities.
Some of the other big competitors in this field are CAT and AG. It is safe to say that GEHL operates in a niche environment.
Let us dive into the balance sheets to understand GEHL better.
GEHL operates in a capital intensive and cyclical business. In the second half of 2005, GEHL did a secondary public offering of its stock where it raised approximately $46 million to pay out its debt. GEHL operates in two segments - construction and agricultaral equipment category respectively. The construction segment accounts for 71% of the companies business and agricultural segment accounts for the remaining 29% of its business. The construction equipment segment is more profitable accounting for 84% of the profits whereas the agricultural division accounts for the remaining 16% of the profits.
The business is very capital intensive. In 2005, the company spent 7.5 billion in capital expenditures and had about 4.9 billion in amortization. What this figure shows is that the industry is very capital intensive and continuous capital expenditure is needed to keep the competitive position. The huge capital expenditure undermines the free cash flow generation. Even much larger competitors such as Caterpillar see huge swings in their free cash flow from year after year because of these trends.
Despite the stock dilution, the book value in the company increased in 2005 by almost 25%. This seems to be a one time event as this year the growth in book value has been more normal this year and the best case estimate would probably be around 10% gain.
Let us look at some of the ratios in the balance sheet over longer periods of time. Morningstar provides some very useful data and we can analyze the data provided by Morningstar. Ten year analysis of the earning per share shows that GEHL grew at a 8% pace compared to much more impressive 10.6% rate for caterpillar. Caterpillar also provides a dividend to put the full return at around 13%. Clearly, caterpillar is a better business to own than GEHL.
The next thing to look at is the current discount/premium compared to its peers to see if GEHL is a buy. The key factor in favor of GEHL is its price/book ratio. Caterpillar has a P/B of 4 where as GEHL has a better ratio of 1.48. Caterpillar however has a better earning yield compared to GEHL. GEHL has negative free cash flow where as Caterpillar is cash flow positive.
The short term technical analysis shows that the 100 day moving average is below the 200 day moving average - meaning the downtrend in the stock is not over. The insider buying is a clear indication that the stock is undervalued as there has been more insider buying than selling of late. As noted, the company is profitable and is probably worth about $36 a share. The estimates for next year's earnings are good but there are a lot of wild cards about next year - especially the way the economy is going to go. If those earnings estimates are met, it would provide the stock with an impetus to move higher.
Friday, November 03, 2006
First, BRK did extremely well this quarter. The book value increased by 5% from the second quarter. The increase in book value was partially helped by the increase in the equity portfolio.
Let us first analyze the different segments by revenue. The insurance premiums increased by 10% year over year for the third quarter. The primary reason for the big surge in insurance income was the reduced adjustment for insurance losses and loss adjustment accounts compared to the same quarter last year.
The increase in revenues year over year (Q3 of 05 vs Q3 of 06 ) in the various segments is as follows:
Geico - 9.35%
GenRe - -0.05%
Berkshire ReInsurance - 31%
Berkshire Primary Group - 8%
Investment Income - 22%
Total Insurance Group - increased by 11.69%.
The apparel group revenues increased by 44.7%.
The building products group increased by 4.9%
Finance products increased by 6.4%
Flight Services increased by 31%
McLane company increased by 4.4%
Retail increased by 10.4%
Shaw Industries was constant
Utilities increased by 2.85 billion this year compared to the prior year.
Other businesses increased by 87%. This includes the Iscar acquisition.
The revenues in operating businesses increased by 26% year over year.
The one segment that performed a bit below last years level is investment/derivative gains. This caused the EPS to come in below 2K level for this quarter.
The net differential in income from the insurance businesses was 3.427 billion. The income from operating businesses sky rocketed by 52% year over year to 1771 million dollars from 1032 million dollars. The new acquisitions definitely contributed to this phenomenal rise. Almost all the analysts have overlooked this part.
The cash flows from operating activities increased by 39% year over year. Cash and equivalents were at 39 billion dollars. About 7 billion out of this amount is spoken for in the equitas deal in the form of additional reserves to be kept aside. Subtracting the ten billion needed for catastrophic events, there is 22 billion available for general investments.
The quarter was very strong. The net earning came in at 4301 million before income taxes. Both the revenues and net earnings from insurance and other operating businesses have beaten the whisper numbers. The earnings per share beat the wallstreet consensus estimates by a wide margin.
The intrinsic value of BRKA is some where in the 125-131K range from a very conservative view point. If the shares dont go up further this year, investors can expect 10%+ growth in stock price in 2007 and 2008. BRKA is still a cheap stock and a bargain compared to the more popular dot.com stocks of the type of Google, Apple variety.
Thursday, October 26, 2006
The top line revenue increased by 11% this quarter compared to the previous years quarter. The break down in revenue in different divisions is as follows. Out of the one billion increase in revenue, XBox contributed about 400 million. Since XBox is selling at a loss, the top line growth in core businesses was 6.9%. The growth in each of the sub groups was as follows. Client grew by 2.7%, server grew by 17.5%, Office grew by 4.3%. The Online business saw a decline with more losses in the pipeline for the rest of the year.
Since XBox doesnt generate profits, let us look at the rest of the balance sheet to see how the operating margin looks like for this quarter. The operating income margin was still decent without significant deterioration and comparable to the FY06 Q1 levels. The R&D costs and sales, marketing costs increased by 17% and 12% respectively. If the same number of shares were outstanding as last year, the earnings would have come in at 32 cents a share. The share buy backs helped boost the earnings by three cents to 45 cents.
Surprisingly, the cash flow from operations declined year over year. The decline is about 6-7% compared to the same quarter from the prior year. This is despite the decrease in stock option expense and increase in receivables. The capital expenditures increased by 93% year over year. It looks as though the cash flows for the entire year will probably decline compared to the same period last year.
Despite the lackluster balance sheet, the stock will probably stabilize around the current price for FY07. The upside for Microsoft stock ( if any ) is going to be in fiscal FY08 when revenues from vista and office start kicking in and XBox losses decline further or make a slight profit.
Sunday, October 22, 2006
"In this article, we take a quick look at some of the flash memory manufacturers
and the trends in this area. Some of the companies in the flash memory area are
- Sandisk (SNDK), Micron Technology (MU), Lexar Media Inc ( LEXR ), Infineon,
Samsung and Toshiba. Samsung mainly makes deals with OEMs and doesnt deal with
retail marketing. We will analyze a couple of companies and SNDK in this
In the intervening months, the usage of flash memory has increased. It is used more commonly now and the volume is growing. Along with the volume, the cost per memory unit is declining. Meanwhile, the industry is consolidating. This is a very competitive business with many players. Meanwhile, the business is also consolidating with Lexar going private and Sandisk buying the Israeli based M Systems. Eli Harari, the CEO of SNDK estimates a growth of 200% in flash memory volume in 2006 compared to 2005.
Most of the electronic equipments get sold in the holiday season. Consequently the last quarter of the year is a big one for flash/memory manufacturers as well. As much as 40% of Sandisk's business occurs in the fourth quarter. Sandisk as a company is the leading provider of flash memory in the world and has done well to expand its base. SNDK has diversified into MP3 players and have cornered 10% of the market - a market dominated by Apple's iPod.
Next we will look into SanDisk's operarting margins. For the three months ended in July, the operating margin was 13.29%. ( net income/total revenues ). This was about 13.69% for the same period the year before. For the first six months, the operating margin is 13.89% - this compares to a margin of 22.73% in the same period the year before. Now let us move to this quarter - the operating margin this quarter was 13.74% where as the margin was 18.22% in the same quarter a year before. So clearly, the trend is for the margins to go down year over year. The cause for the margins to decline is primarily attributed to a glut in the Flash market where one of the manufacturers oversupplied the market.
Another important metric is the free cash flow. The company's free cash flow has been going up and down over the past ten years. Specifically, in the past four years, the numbers are 217 million, 101 million, 347 million and 241 million for this year respectively. So the cash flows are erratic and this typically means the company doesnt have market dominating power.
Another metric of interest in the high tech companies is the stock dilution year over year. Year over year, the dilution is about 4% and is expected to be much higher once the all stock deal closes for Israeli based MSystems Limited.
The stock dropped by over 20% on Friday last week because of the declining margins sited by the CEO - Eli Harari. There are two types of valuations that can be done - one is relative valuation where a company is compared to its peers in the same sector and the second is by looking at the future discounted cash flows to see the intrinsic value. In the technology sector, primarily the relative valuation approach works best. The intrinsic valuation approach doesnt work as well as one would find that the stocks are typically overpriced with huge expectations for future growth.
Doing relative analysis, one finds that SNDK is fairly priced with Friday's drop and probably can go up a bit to the $56 range. The comparison of SNDK is with Micron Technology and SNDK should enjoy a slight premium because of bette margins and its market leading position.
Sunday, October 15, 2006
FedEx Corporation (“FedEx”) provides a broad portfolio of transportation, e-commerce and business services through companies operating independently, competing collectively and managed collaboratively under the respected FedEx brand. These operating companies are primarily represented by Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery services; FedEx Freight Corporation (“FedEx Freight”), a leading U.S. provider of regional less-than-truckload (“LTL”) freight services; and FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”), a leading provider of document solutions and business services. These companies form the core of our reportable segments.
Other business units in the FedEx portfolio are FedEx Trade Networks, Inc. (“FedEx Trade Networks”), a global trade services company; FedEx SmartPost, Inc. (“FedEx SmartPost”), a small-parcel consolidator; FedEx Supply Chain Services, Inc. (“FedEx Supply Chain Services”), a contract logistics provider; FedEx Custom Critical, Inc. (“FedEx Custom Critical”), a critical-shipment carrier; Caribbean Transportation Services, Inc. (“Caribbean Transportation Services”), a provider of airfreight forwarding services, and FedEx Corporate Services, Inc. (“FedEx Services”), a provider of customer-facing sales, marketing and information technology functions, primarily for FedEx Express and FedEx Ground.
Fedex revenue break down by segment is as follows:
Fedex Express - 66%
Fedex Ground - 16%
Fedex Freight - 11%
Kinkos - 6.6%
From volume growth point of view, Fedex express saw a one percent decline, Fedex ground increased by 13%. The latest 1o-Q provides more details:
Revenue growth for the first quarter of 2007 was primarily attributable to yield improvement across all of our transportation segments, volume growth at FedEx Ground and FedEx Freight and package volume growth in our International Priority (“IP”) services at FedEx Express. Yield improvements were principally due to higher fuel surcharges and rate increases. Volume increases at FedEx Ground resulted from increases in both commercial business and FedEx Home Delivery service, which helped mitigate the impact of domestic volume declines at FedEx Express. Shipment volumes grew 8% at FedEx Freight in the first quarter of 2007, while IP package volumes at FedEx Express grew 6% for the quarter. Revenues at FedEx Kinko’s decreased during the first quarter of 2007 primarily due to a continued competitive environment for copy services.
Operating income increased in the first quarter of 2007 primarily due to revenue growth and improved margins at FedEx Express and was slightly offset by reduced operating income at FedEx Kinko’s. Effective cost controls and revenue management actions contributed to increased operating margin at FedEx Express in the first quarter of 2007. FedEx Express operating income in the first quarter of 2006 included a $75 million charge described below.
The most interesting part of the 10-Q is the outlook statement:
While our growth rate is expected to moderate in comparison to our strong growth in 2006, we expect revenue and earnings improvement across all transportation segments in 2007. Our outlook is based on solid global economic growth, with the U.S. economy growing at a moderate, sustainable rate. We anticipate revenue growth in our high-margin services, productivity improvements and continued focus on yield management.
We anticipate growth in total U.S. domestic package volumes and yields, as well as continued growth in FedEx Express IP shipments and yields. We also anticipate year-over-year increases in volumes and yields at FedEx Freight as that segment continues to expand its LTL network and service offerings.
FedEx Kinko’s will focus on key strategies related to adding new locations, improving customer service and increasing investments in employee development and training, which we expect to result in decreased profitability in the short-term. In the first quarter of 2007, FedEx Kinko’s announced the model for new centers, which will be approximately one-third the size of a traditional center and will include enhanced pack-and-ship stations and a doubling of the number of office products offered. FedEx Kinko’s plans to open approximately 200 new centers across the United States during 2007, which will bring the total number of domestic centers to over 1,500.
We expect to continue to make investments to expand our networks and broaden our service offerings, in part through the integration and expansion of FedEx National LTL and our investments overseas. We anticipate that our new FedEx National LTL business will extend our leadership position in the heavy freight sector and provide new growth opportunities for our LTL operations in 2007 and beyond.
On September 25, 2006, we announced a $2.6 billion multi-year program to acquire and modify approximately 90 Boeing 757-200 aircraft to replace our narrow body fleet of Boeing 727-200 aircraft. We expect to bring the new aircraft into service during the eight-year period between calendar years 2008 and 2016 contingent upon identification and purchase of suitable 757 aircraft. The impact to 2007 of this program has been reflected in our expected 2007 capital expenditures of approximately $3 billion.
All of our transportation businesses operate in a competitive pricing environment, exacerbated by continuing high fuel prices. While our fuel surcharges have been sufficient to offset increased fuel prices, we cannot predict the impact on the overall economy if fuel costs significantly fluctuate from current levels. Volatility in fuel costs may also impact quarterly earnings because adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, the trailing impact of adjustments to FedEx Express and FedEx Ground fuel surcharges can significantly affect earnings in the short-term.
The pilots of FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on May 31, 2004. In August 2006, FedEx Express and the pilots’ union reached a tentative agreement on a new labor contract. The proposed new contract includes signing bonuses and other compensation that would result in a charge in the period of ratification of approximately $145 million. Contract ratification is expected during the second quarter of 2007 but cannot be assured. If ratified, the new four-year contract will become amendable in 2010.
In July 2006, FedEx Express entered into a new seven-year transportation agreement with the United States Postal Service (“USPS”) under which FedEx Express will continue to provide domestic air transportation services to the USPS, including for its First Class, Priority and Express Mail. The agreement is expected to generate more than $8 billion in revenue for FedEx Express over its term, which begins on September 25, 2006, and ends on September 30, 2013. The agreement will replace the existing seven-year transportation agreement between FedEx Express and the USPS.
Interesting facts on Fedex are as follows:
The earning yield on Fedex ( at trailing P/E ) is 5.5 - which is slightly better than the long bond yield of 4.7%. On the forward P/E basis, the yield is 5.9% for FY07. However, FDX is growing at a brisk pace of about 10% per year along with cash flows and the growth rate will continue for the next several years. From the discount cash flow point of view, Fedex is definitely looking good at current prices with upside in the future. The demographics in the US and increasing wealth around the world will always need Fedex service for decades to come.
Saturday, October 07, 2006
At this years earnings of $10.00 and next years earnings of $13.50, the earning yield for Google in the next two years at today's price is 2.4% and 3.21% respectively. The ten year bond is currently trading at 4.6%.
Let us do a quick comparison to Microsoft and Yahoo! Googles top two competitors. Yahoo! has an earning yield of 1.9% and 2.56% respectively. Microsoft on the other hand has an earning yield of 5.15% and 5.99% respectively. On a comparative basis, one can see Microsoft, Google and then Yahoo! as the stocks to buy from the perspective of stability.
Aswath Damodar has done a discount cash flow analysis of Google. His analysis in his website based on discount cash flows puts a value of $110.00 for Google based on discount cash flow analysis.
The summary of these analysis shows that Google is a great momentum play. Google is likely do well in the short term but longer term the stock is likely remain stagnant or go down in value. One can definitely expect wild swings in Google stock in the upcoming months.
Sunday, October 01, 2006
First an outlook of the Indian economy. The Indian economy was expected to grow at ~7% rate this year and next. This is higher than the world wide economic growth prediction of 5.1% and 4.9% repsectively for this year and next. Financial Times reported that Indian economy grew at the rate of 8.9% in the first quarter of 06-07 fiscal year. This was above the analysts estimates of 8.5% growth. The inflation rate is going around 5-5.5% and the RBI is expected to increase the interest rates to 6.25% as a result. The interest rates are already much higher than that in China.
The Wallstreet Journal reports that the BSE Sensex Index has grown by 32.5% this year and on the average sports a P/E of 21. Of all the stock markets in the world, the Chinese and Indian markets are on the higher end of the valuation spectrum with a P/E of 21.
The prognosis for Indian economy is good and the economy is expected to grow at around 8% for the next three-four years. India runs a trade deficit with the rest of the world like the U.S. India has a very high degree of domestic consumption unlike the other Asian Tigers whose economy is propelled by export to the United States. At this rate of growth, the Indian companies will probably continue to grow at very fast rates making the current P/E not that high.
Now, let us take a look at India funds. We start by looking at the generic emerging market funds and then look at Indian funds in particular.
EEM is the iShares emerging market fund and has returned about 9.7% YTD. If one bought the ETF at the low 80's in the second quarter, the ETF has returned more than 20%. EEM has an expense ratio of 0.77%. EEM has approximately 5% exposure to India.
VWO is the Vanguard emerging market fund and has returned about 10.3% YTD. This correlates highly with EEM but has a lower expense ratio of 0.3%. VWO has a 7.1% exposure to India and it has done better than EEM recently.
IIF is Morgan Stanley India Investment Fund, Inc. is a non-diversified, closed-end management investment company. The Fund's investment objective is long-term capital appreciations, which it seeks to achieve by investing primarily in equity securities of Indian issuers. The Fund will invest at least 65% of its total assets in equity securities of Indian issuers; which for this purpose means common and preferred stock bonds, notes and debentures convertible into common or preferred stock, stock purchase warrants and rights, equity interests in trusts and partnerships and American , Global and other types of Depositary Receipts. The Fund may invest up to 25% of its total assets in unlisted equity securities of Indian issuers.
Currently IIF sells for about 2.48% premium to the net asset value. The management fees for this stock is 1.27%. The total return of IIF is 14.2% compared to the BSE Sensex Index return of 32.5%.
IFN India Fund is a closed-end management investment company. The fund seeks long-term capital appreciation through primarily investing in the equity securities of Indian companies. The fund will invest at least 80% of its total assets in the equity securities of Indian Companies. The management fees for this stock is 1.47%. The fund has returned 8.2% compared to the BSE Sensex index of 32.5%.
MINDX Mathews India Fund is a relative new comer to the block. The fund carries an expense ratio of 2.75% has returned 18.82% YTD.
ETGIX It has an initiation fee of 5.75% for small sums of money that declines to zero if the capital is greater than a million dollars. This is not targeted for individual investors but is targeted more towards institutional investors that want an exposure to India. The fund also has an expense ratio of 2.75% on top of the initiation fee. This fund has returned 19.67% YTD.
EEB ( Claymore/BNY BRIC ETF ) - This is a new ETF targeting only the BRIC countries - Brazil, Russia, India and China. The fund doesnt have the assets divided equally with all the four countries but it only specializes in these four emerging markets. The fund carries an expense ratio of 0.65% and returned 3% since inception.
Although both India and China look expensive at the moment compared to other markets, the growth in these markets make it look as though there is still upside for these companies.
Saturday, September 30, 2006
For the purposes of this analysis, we will take 2005 annual report as the basis. Taking the 2005 report gives us a conservative basis as the company was impacted by massive gulf hurricanes - Karina, Rita and Wilma.
Total berkshire hathaway share holder equity at the end of 2005 was 91,484 million dollars. The share holder equity is up significanly this year and is likely increase by 10% or more this year.
The next thing to look at is the cash flows. The cash flows in Berkshire balance sheet is divided into three segments. Cash flows from operating acitivities, cash flows from investing activities and cash flows from financing activities.
Cash flows from operating activities in 2005 was 9446 million dollars. The cash flows from operating activities were 7311 million dollars and 8341 million in the previous two years respectively. The average cash flow for the past three years is 8344 million dollars. We will take this value for our analysis purposes.
We are going to leave the cash flows from investing activities alone as this should be in the negative territoty for a while as Warren Buffett and Charlie Munger find home for the boatloads of cash on Berkshire balance sheet.
Earnings from financing activities is expected to be the positive category in the future for Berkshire Hathaway. We will take the low end of this figure and estimate gains of about a billion dollars per year till perpetuity.
Adding these two figures gives a net cash flow per year of 9344 billion dollars a year. Using the infinite geometric series with a discount rate of 11%, the intrinsic value of Berkshire Hathaway through cash flows is 94180 million dollars.
Adding the book value and the value of future cash flows gives an intrinsic value of 185664 million dollars to Berkshire Hathaway. This puts Berkshire Hathaways current stock price at a 25% discount to its intrinsic value.
This valuation puts Berkshires intrinsic value at 119750 as per the financial statements from the 2005 annual report. The cash flows used for this valuation are extremely conservative. Giventhe growth and improvement this year, the intrinsic value is significantly higher - more likely in the 130-140K range by end of 2006.