Sunday, September 30, 2007

Proctor and Gamble Analysis

PG ( Proctor and Gamble ) is in the consumer staples business. It was the best performing dow jones stocks for the recently ended quarter. Let us quickly take a look at the financials to see if it is a buy at current prices. With a P/E of 23 and Price/Cash flow of close to 18, the stock doesnt appear cheap at current prices. Let us take a deeper look at the numbers to see how things look like.

The company bought Gillette recently, which has helped its cashflow and net margins. The EPS has grown at the rate of 9% a year for the past ten years and is likely to grow at that rate in the future.

The business is doing well on all fronts as noted in the company's 10-Q:

Net sales fiscal year to date increased 14 percent to $57.20 billion behind 11 percent volume growth, including an additional three months of Gillette results during the current fiscal year to date period versus the comparable year ago period. Organic volume grew five percent with broad-based growth across the business. Every reportable segment delivered year-on-year organic volume growth driven by product initiatives including Tide Simple Pleasures, Febreze Noticeables, Pantene Color Expressions, Olay Regenerist and Definity and the Head & Shoulders and Herbal Essences restages. Price increases taken across several segments added one percent to sales growth while favorable foreign exchange trends had a positive two percent impact. Product mix had no net impact on sales growth as the favorable mix impact from the additional period of Gillette results was offset by disproportionate growth in developing regions, where unit selling prices are below the Company average. Organic sales increased six percent fiscal year to date.

Additionally, the per share growth has been impressive partly because of the accretive nature of Gillette's business.

Net earnings increased 19 percent to $8.07 billion behind organic sales growth, the impacts from the addition of Gillette, including financing and other acquisition-related expenses, and profit margin expansion. Diluted net earnings per share were $2.37, up 13 percent versus the prior year. Earnings per share growth lagged net earnings growth due to a net increase in the weighted average shares outstanding in the current year to date period (incremental shares issued in conjunction with the Gillette acquisition on October 1, 2005, net of share repurchases, primarily under the Gillette repurchase program).

The fastest growing business segment was health care products. The gillette razors and blade segment is growing impressively in the developing countries.

Overall, PG is a great business. The current price levels are a bit too high - the right time to buy this was during the summer months during the peak of the credit crisis.

Saturday, September 08, 2007

Bed Bath and Beyond (BBBY) Analysis

In this blog, we have looked at retailers such as Walmart, American Eagle and Joseph A Bank. Let us analyze another specialty retailer, BBBY and see if it is a good investment opportunity at this time.

BBBY is a retailer specializing in bedding, bath and kitchen products. It also sells electronics, electrical equipment ( kitchen electrics ), furniture, wall and home decor. It targets the rich to upper middle class customer and competes with a slew of other retailers in this space. Its closest competitors are Target ( which targets the middle class customer ) and Linen and Things. In each of the segments it operates in, there are a slew of speciality retailers that compete for the same business.

Let us look at the latest 10-Q report and past reports to see how BBBY stacks up against some of the other retailers. In the most recent quarter, BBBY saw increase of sales (~11%) through store expansion and through the acquisition of buy buy BABY. Meanwhile, the gross profit margin declined because of rising inventory costs and selling, general and administrative cost went up. The result was a decline in operating profit margins to 9.9% from 10.7% from the same period a year ago. Does the declining profit margins show a fiercer competitive environment? Let us look at the profit margins for the past five years to figure this out.

The operating income for the past five years are as shown below with a compound annual growth rate of 7%.

895.0 (expected for this year )

The operating margin has declined sharply this year and last compared to the previous two years to the 2003 levels. This is a bit early to say if this is because of fiercer competition. The reduction in margins could also be because of the decline in the housing market. However, this should have been more pronounced in 2007 as opposed to 2006 which is not the case.

The company has decided to buy back about a billion dollar worth of shares in December 2006 and the total number of outstanding shares has declined in the most recent quarter by about 7 million compared to the same period a year ago. The company has about 20 million shares outstanding (options) and about 6 million shares in restricted stock. While many of the options are under water at the moment, the addition of close to 9% of additional shares can dilute the impact of buy back.

On a positive note, the company carries no debt and is funding its expansion through operating cash flow.

From a cash flow perspective, there are cheaper alternatives such as Walmart and Target and a slew of other retailers noted earlier in this blog such as AEO and JOSB.

While the company is healthy, the impact of housing slow down and competitive pressures is not fully clear at the moment. It is our view that there are other retailers that offer a better discount to intrinsic value than BBBY.

Monday, September 03, 2007

Infosys Q1 Analysis

In this blog, we have looked at Indian outsourcer, Infosys quite a few times. We found Infosys to be the best run of the Indian outsourcers with solid management. In the first six months of the year, the Indian currency appreciated by about 10% against the US dollar. This appreciation was partly precipitated by the Indian central bank keen to cut inflationary pressures. The exchange rate of the Indian currency is artificially maintained as the currency is not freely traded. This is similar to the way the Chinese government maintains its peg against the US dollar.

The problem for Indian companies that are exported focussed is that it increases their cost of operations. While some of the cost can be passed on to the customers, it will not be possible to pass on all the costs to the customers. In addition, Infosys and other Indian companies are facing increase in operating costs with wages increasing at double digit rates of 15%. This impact is probably not fully felt yet and show up further in the coming year. The wage increase is expected to be about 15% in the coming year as well.

The operating income margin in Q1 of 2006 for Infosys was 25.75%. The operating margin in Q1 of 2007 was 24.67%. In general, the business did well, with revenues and profits growing strongly. As usual, the stock market looks at future prospects as opposed to past results. Infosys is expected to continue to do well with growth in the 28-31% range for FY2008.

Other points of note is attrition rate of 4% in the quarter and 10% new employees in Q1 alone. Infosys expects to pay new employees higher wages compared to the ones hired before. Infosys now employs about 75000 people world wide. The increase in cost will increasingly be felt in the next couple of years which is reflected in the stock price.

The company has a strong balance sheet with about $1.6 billion in cash. The company is run well and this is reflected in the stock price. However, we feel that the company is fairly valued at current price levels.