This is a rehash and update of the previous article where we discussed some of the pros and cons of investing in India. In the previous article we discussed the Indian stock market, some factors in Indian economy, some of the Indian companies listed in the U.S stock market and some of the mutual funds that allow one to invest in India. After the Bush visit to India, there is renewed interest about India in the U.S. Recently, Newsweek carried an article on India where it called India the rising power. In this article, we are going to re-examine India and investment opportunities.
First let us look at the similarities between the U.S and India. Both are very diverse countries with multi cultural democracies. India has had a stock market for more than one hundred years and has deep roots in entrepreneurship. The Indian government has been moribund but the economy has galloped through individual ingenuity. Another similarity between India and U.S is the high amount of internal consumption. India has a very large population and unlike other countries in Asia, runs a trade deficit with the rest of the world. No one knows if running a deficit is a good thing or a bad thing, there are opinions on both sides. Countries that rely on exports have had problems as exemplified by the Japanese and European economy in recent times.
The differences are also stark. U.S has good infrastructure and some world leading companies. India lacks infrastructure and has a very large population that is below the poverty level. However, the stock market is always focused on the future. Future in India looks very bright with economy for the next two years being predicted to grow at the rate of 8% or higher by the U.N. Let us look at the mutual funds investing in India and the Indian companies trading in the U.S stock market.
First the mutual funds and ETFs. Unfortunately, there is no ETF that exclusively invests in Indian market yet. Hopefully, an ETF will be available to U.S investors in the near future. Meanwhile IShares Emerging Markets Index Fund, EEM provides about 6% exposure to India. Vanguards VWO provides about 6% exposure to India as well. VWO has a lower expense ratio compared to EEM and the fund hasnt been around enough to see if EEM provides better returns than VWO.
Then there is IFN - the India Fund Inc. (expense ratios are from morningstar) The fund has done really well but has an expense ratio of 2.74%. There is also IIF - Morgan Stanley India Investment Fund with an expense ratio of 2.5% as well. Both the funds have done extremely well in the past twelve months.
There is ETGIX ( Eaton Vance Greater India Fund ). According to both Morningstar and Fidelity, this is a fund that charges front end load for balances less than a million dollars. It also has management fees, 12-b1 fees, an expense ratio of 2.77%.
There is MINDX ( Mathews India Fund ) has a 90 day redemption fee. It has an administrative fee of .25% and management fee of .75%.
Both these funds have done extremely well this year and will probably will continue to do well in the next couple of years.
Let us take a quick look at the Indian stocks trading in the U.S market to see how they are doing.
INFY - Infosys Technologies Limited. This traded for $78 in the U.S market with a P/E of 41. It trades at a discount in the Indian stock market for about $68.
SAY - Satyam Computer Services. It trades for $44 in the U.S market with a P/E of 30. It trades in India for about $20=00 in the Indian market. It is likely that the U.S ADR is equivalent to two stocks in the Indian market.
SIFY - Satyam Infoway trades for about $14=00 in the U.S market. I couldnt find the equivalent share in the Indian market.
WIT - Wipro Limited sells for about $12 in the Indian market but sells for about $15=00 in the U.S market.
HDB - HDFC Bank Limited. Trades for $54.50 in the U.S stock market and goes for about a third in the Indian market. Indian shares are equivalent to 1/3 of their U.S ADRs.
IBN - ICICI Bank Lmtd trading for $28 and goes for about $14 in Indian stock market. U.S ADR is equivalent to two stocks in Indian market.
VSL - Videsh Sanchar Nigam Limited for $22 and sells in India for about $11. U.S ADR is equivalent to two stocks in Indian market.
MTE - Mahanagar Telephone Nigam Limited for $8 and for about $4 in India. U.S ADR is equivalent to two stocks in Indian market.
RDY - Doctor Reddy's Labs for $31 and for about the same price in India.
TTM - Tata Motors Limited trades for $21 and for about the same price in India.
PTI - Patni Computer Systems Ltd trades for $20.45 and for about $11 in India. It is likely that the U.S ADR is equivalent to two stocks in the Indian market.
MT - Mittal Steel Company, NV trades for $37.75. Couldnt find an equivalent stock in India.
There are numerous opportunities to invest in India for U.S based investors. The Indian economy is expected to continue to do well in the next couple of years and the underlying fundamentals are strong. The democratic underpinnings provide a good foundation to India and make it less volatile compared to some of the other emerging markets.
Update:
Missed one company in the original report.
REDF - REDIFF.COM Selling for $22.5 in the U.S market.
Sunday, April 02, 2006
Thursday, March 30, 2006
Microsoft and EU
CNN carried an artile on the continuing fight between Microsoft and the European Union. Wall Street Journal is also carrying articles on the hawkish stance taken by European Union officials against Microsoft. While the merits and demerits of the case are not clear to a lay person, it is fairly certain that the EU is going to impose 2.4 million dollar fine on Microsoft. What does this mean for the stock and overall trade relations between US and Europe?
While the EU has its own motives for fining Microsoft, Microsoft hasnt helped its own cause by its confrontational attitude after paying a 540 million dollar fine. Microsoft could have easily released two versions of windows and charged different prices for the version with better features. It is also not helping Microsoft that many of the companies complaining are U.S companies. It undermines the U.S government from lobbying for Microsoft.
The fine is already priced into the Microsoft stock. The investors are expecting some type of settlement that will not require Microsoft to pay the daily fine after some time. If Microsoft has to pay fine on a daily basis, it will cost it 876 million dollars a year. This will reduce Microsoft's cash flow by approximately 6% a year.
The estimate is that Microsoft derives roughly 20% of its revenue from Europe. Out of this, the countries in the European Union probably contribute some where aroud 15% of the revenues. If we equate profits with revenues, 15% of the profits would be contributed by the European Union countries. If the government siphons off 6% of the profits, it is pretty much charging 40% of the after tax profit again. As I mentioned earlier, the EU's intentions are far from noble is putting this tax on Microsoft. The investors are not expecting this to be resolved quickly in some manner without Microsoft having to pay the penalty for every day of the year.
As the world stands today, Europe is dependent on the U.S far more than the U.S is dependent on Europe. U.S is the largest market for the fine french wines, the German automobiles and every European country with the exception of Netherlands runs a huge trade surplus with the U.S. A full blooded trade war will cost Europe more than it would cost the U.S. Since many of the companies complaining against Microsoft are based in U.S., it is likely that the Microsoft case will not get the full backing of the U.S government. Apple, another U.S company is being asked to open its ITunes so every music player can work like an IPod. In any case, the investors are betting on the issue to be resolved with minor financial loss to Microsoft. This is evident in the options market where most people are betting Microsoft to be around the $27.5 neighborhood for the next nine-twelve months.
While the EU has its own motives for fining Microsoft, Microsoft hasnt helped its own cause by its confrontational attitude after paying a 540 million dollar fine. Microsoft could have easily released two versions of windows and charged different prices for the version with better features. It is also not helping Microsoft that many of the companies complaining are U.S companies. It undermines the U.S government from lobbying for Microsoft.
The fine is already priced into the Microsoft stock. The investors are expecting some type of settlement that will not require Microsoft to pay the daily fine after some time. If Microsoft has to pay fine on a daily basis, it will cost it 876 million dollars a year. This will reduce Microsoft's cash flow by approximately 6% a year.
The estimate is that Microsoft derives roughly 20% of its revenue from Europe. Out of this, the countries in the European Union probably contribute some where aroud 15% of the revenues. If we equate profits with revenues, 15% of the profits would be contributed by the European Union countries. If the government siphons off 6% of the profits, it is pretty much charging 40% of the after tax profit again. As I mentioned earlier, the EU's intentions are far from noble is putting this tax on Microsoft. The investors are not expecting this to be resolved quickly in some manner without Microsoft having to pay the penalty for every day of the year.
As the world stands today, Europe is dependent on the U.S far more than the U.S is dependent on Europe. U.S is the largest market for the fine french wines, the German automobiles and every European country with the exception of Netherlands runs a huge trade surplus with the U.S. A full blooded trade war will cost Europe more than it would cost the U.S. Since many of the companies complaining against Microsoft are based in U.S., it is likely that the Microsoft case will not get the full backing of the U.S government. Apple, another U.S company is being asked to open its ITunes so every music player can work like an IPod. In any case, the investors are betting on the issue to be resolved with minor financial loss to Microsoft. This is evident in the options market where most people are betting Microsoft to be around the $27.5 neighborhood for the next nine-twelve months.
Wednesday, March 29, 2006
Google(GOOG) Secondary Stock Offering
The CNN Article details Google's plans to do a stock sale of upto 5.3 million shares raising 2.1 billion dollars at current prices.
Companies sell stock primarily if they are over values. Companies use stock as a currency to make deals when the stock is over valued. Warren Buffett used Berkshire stock instead of money to buy General Re as he though the Berkshire stock was over valued. In Google's case, not only does the company think the stock is over valued, the company leadership also seems to think the stock price will decline further in the coming couple of years.
The competition is definitely going to heat up in the second half of this year and next year. In the prior article we discussed Google and Yahoo and found that a price of $340=00 provided a rough upside comparable to investing in U.S treasuries for the next two years. Given that the sale of 5.3 million shares will dilute the shares by about 2%, the target price in 2008 falls to 372 dollars.
In the previous segment we talked about the possible down side to Google stock. This included competitive pressures as well as stock dilution. In after hours trading, the stock was selling for $382=00. While stock price tends to overshoot in after hours trading, I believe this is a good opportunity for people that bought the stock in the 280-330 range to unload some of this stock and do some profit taking. A return of 9.725% can be achieved by investing the profits in treasury bonds with zero risk. As our analysis shows, there is little upside to Google at current prices. While the stock will likely continue to be volatile with more gyrations in the upcoming months.
Companies sell stock primarily if they are over values. Companies use stock as a currency to make deals when the stock is over valued. Warren Buffett used Berkshire stock instead of money to buy General Re as he though the Berkshire stock was over valued. In Google's case, not only does the company think the stock is over valued, the company leadership also seems to think the stock price will decline further in the coming couple of years.
The competition is definitely going to heat up in the second half of this year and next year. In the prior article we discussed Google and Yahoo and found that a price of $340=00 provided a rough upside comparable to investing in U.S treasuries for the next two years. Given that the sale of 5.3 million shares will dilute the shares by about 2%, the target price in 2008 falls to 372 dollars.
In the previous segment we talked about the possible down side to Google stock. This included competitive pressures as well as stock dilution. In after hours trading, the stock was selling for $382=00. While stock price tends to overshoot in after hours trading, I believe this is a good opportunity for people that bought the stock in the 280-330 range to unload some of this stock and do some profit taking. A return of 9.725% can be achieved by investing the profits in treasury bonds with zero risk. As our analysis shows, there is little upside to Google at current prices. While the stock will likely continue to be volatile with more gyrations in the upcoming months.
Sunday, March 26, 2006
American Pharmaceutical Partners (APPX) Analysis
Toddi Gutner from Business Week wrote an article titled - "Where to Go For Growth" in the March 27th issue. In this article, she profiled a handful of companies including APPX. Let us quickly take a look at APPX and then see what Toddi has got to say about this stock. We will then analyze the balance sheets to see if APPX is a buy at today's prices.
In the 1o-K, the company is described as follows:
"We are a pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. We believe that we are the only independent U.S. public company with a primary focus on the injectable oncology, anti-infective and critical care markets, and we further believe that we offer one of the most comprehensive injectable product portfolios in the pharmaceutical industry. We manufacture products in each of the three basic forms in which injectable products are sold: liquid, powder and lyophilized, or freeze-dried. We hold the exclusive North American right to sell Abraxane®, a proprietary nanoparticle injectable oncology product that is a patented formulation of paclitaxel. In January 2005, ABI’s New Drug Application, or NDA, for Abraxane® was approved by the U.S. Food and Drug Administration, or FDA, and we launched the product on February 7, 2005. Our wholly-owned subsidiary, Pharmaceutical Partners of Canada, Inc., markets injectable pharmaceutical products in Canada."
APPX is a majority owned subsidiary of American BioScience, Inc., a California corporation. At December 31, 2005, American BioScience owned 47,984,160 shares, or 66.2%, of APPX outstanding common stock. ABI is 98% owned by Patrick Soon-Shiong. APPX and ABI are merging to form a common company to be called ABBI. ABI owns world wide licensing for Abraxane - the cancer drug. The terms of the agreement are disclosed in the 10-K.
"On November 27, 2005, we entered into an agreement and plan of merger with American BioScience, Inc., or ABI, under which ABI will merge with and into us, with our company continuing as the surviving corporation. In the merger, holders of shares of ABI common stock will receive 86,096,523 shares of our common stock, plus the number of shares of our common stock held by ABI at the effective time of the merger (which was 47,984,160 shares as of December 31, 2005), less the number of shares of our common stock issuable after the effective time of the merger with respect to restricted stock units issued under the ABI restricted unit plan contemplated to be adopted by ABI under the merger agreement (with this number of shares of our common stock to be issued as part of the merger consideration, but to be issued to holders of ABI restricted stock units in cancellation of such units). The 47,984,160 shares of our common stock held by ABI prior to the merger and acquired by our company in connection with the merger will be cancelled without payment of any additional merger consideration. Upon completion of the merger, the former holders of ABI common stock, together with the holders of ABI restricted stock units, will be issued shares of our common stock representing approximately 83.5% of our common stock outstanding on a fully-diluted basis immediately after the merger. This percentage reflects only the shares to be issued in the merger but does not include any shares of our common stock held by individual ABI shareholders prior to the merger. In connection with the merger, our certificate of incorporation will be amended to (a) increase the authorized number of shares of our common stock to 350,000,000 and (b) change our name to “Abraxis BioScience, Inc.” Following the merger, our common stock will be traded and quoted on The Nasdaq National Market under the symbol “ABBI.”"
Toddi has this to say about this merger. "... Many analysts believe APP overpaid for ABS and they turned negative on the stock, but, says Morningstar analyst Brian Laegeler, "the underlying business hasnt been affected"". Furthermore, she projects the earnings and profitability to increase after the merger. Five year revenue growth is expected to be 33.4% and earnings growth of 61.8%. Morningstar estimates the stock to be selling 25% below its market value.
Obviously, the company's profit engine is Arbaxane. The 10-K had the following to say about Arbaxane (developed by ABI ) prospects.
ABI, which is responsible for the clinical development of Abraxane® under the license agreement, has embarked upon an aggressive and comprehensive clinical development plan to maximize the commercial potential of Abraxane® in cancers involving the breast, lung, prostate, ovary, cervix, head and neck, pancreas, stomach and skin. Approximately 77 Abraxane® clinical studies (including investigator-initiated studies) were planned or underway as of December 31, 2005 .
Let us look at the balance sheets to see how the company did in the past year. Although past performance is not indicator of the future, it does give some indication of how the company is doing.
Net sales increased 27% in 2005 from 2004. Sales increased by 14% in 2004 compared to 2003. The operating income increased by 27% and 69% respectively in the two years. The stock holders equity a.k.a book value increased by 40% year over year in 2005 compared to 2004.
The only damper is the pending merger which will cause the company to issue 134 million new shares to take the total to 206 million shares altogether. This will take the market cap of the combined company to 5.84 billion if the stock price stays at the current levels. If we assume that ABI doesnt add anything to the revenues by merging but only provides full access to the cancer drug. This means the P/E of the stock will jump to 87 from its current levels of 27. If the stock jumps to 40 as suggested by Business Week, the P/E will jump to 110. Also, the merger will cause APPX not to pay the royalty and split its profits with ABI. With 90% growth in oncology products year over year, the elimination of royalty payments should help reduce the P/E to below 100.
Still, if Business Week analysis is to be believed, the stock is selling at a discount to its fair value at current levels. The article assumes upside for the merged company because of the higher profit margins for the cancer drung.
In the 1o-K, the company is described as follows:
"We are a pharmaceutical company that develops, manufactures and markets injectable pharmaceutical products. We believe that we are the only independent U.S. public company with a primary focus on the injectable oncology, anti-infective and critical care markets, and we further believe that we offer one of the most comprehensive injectable product portfolios in the pharmaceutical industry. We manufacture products in each of the three basic forms in which injectable products are sold: liquid, powder and lyophilized, or freeze-dried. We hold the exclusive North American right to sell Abraxane®, a proprietary nanoparticle injectable oncology product that is a patented formulation of paclitaxel. In January 2005, ABI’s New Drug Application, or NDA, for Abraxane® was approved by the U.S. Food and Drug Administration, or FDA, and we launched the product on February 7, 2005. Our wholly-owned subsidiary, Pharmaceutical Partners of Canada, Inc., markets injectable pharmaceutical products in Canada."
APPX is a majority owned subsidiary of American BioScience, Inc., a California corporation. At December 31, 2005, American BioScience owned 47,984,160 shares, or 66.2%, of APPX outstanding common stock. ABI is 98% owned by Patrick Soon-Shiong. APPX and ABI are merging to form a common company to be called ABBI. ABI owns world wide licensing for Abraxane - the cancer drug. The terms of the agreement are disclosed in the 10-K.
"On November 27, 2005, we entered into an agreement and plan of merger with American BioScience, Inc., or ABI, under which ABI will merge with and into us, with our company continuing as the surviving corporation. In the merger, holders of shares of ABI common stock will receive 86,096,523 shares of our common stock, plus the number of shares of our common stock held by ABI at the effective time of the merger (which was 47,984,160 shares as of December 31, 2005), less the number of shares of our common stock issuable after the effective time of the merger with respect to restricted stock units issued under the ABI restricted unit plan contemplated to be adopted by ABI under the merger agreement (with this number of shares of our common stock to be issued as part of the merger consideration, but to be issued to holders of ABI restricted stock units in cancellation of such units). The 47,984,160 shares of our common stock held by ABI prior to the merger and acquired by our company in connection with the merger will be cancelled without payment of any additional merger consideration. Upon completion of the merger, the former holders of ABI common stock, together with the holders of ABI restricted stock units, will be issued shares of our common stock representing approximately 83.5% of our common stock outstanding on a fully-diluted basis immediately after the merger. This percentage reflects only the shares to be issued in the merger but does not include any shares of our common stock held by individual ABI shareholders prior to the merger. In connection with the merger, our certificate of incorporation will be amended to (a) increase the authorized number of shares of our common stock to 350,000,000 and (b) change our name to “Abraxis BioScience, Inc.” Following the merger, our common stock will be traded and quoted on The Nasdaq National Market under the symbol “ABBI.”"
Toddi has this to say about this merger. "... Many analysts believe APP overpaid for ABS and they turned negative on the stock, but, says Morningstar analyst Brian Laegeler, "the underlying business hasnt been affected"". Furthermore, she projects the earnings and profitability to increase after the merger. Five year revenue growth is expected to be 33.4% and earnings growth of 61.8%. Morningstar estimates the stock to be selling 25% below its market value.
Obviously, the company's profit engine is Arbaxane. The 10-K had the following to say about Arbaxane (developed by ABI ) prospects.
ABI, which is responsible for the clinical development of Abraxane® under the license agreement, has embarked upon an aggressive and comprehensive clinical development plan to maximize the commercial potential of Abraxane® in cancers involving the breast, lung, prostate, ovary, cervix, head and neck, pancreas, stomach and skin. Approximately 77 Abraxane® clinical studies (including investigator-initiated studies) were planned or underway as of December 31, 2005 .
Let us look at the balance sheets to see how the company did in the past year. Although past performance is not indicator of the future, it does give some indication of how the company is doing.
Net sales increased 27% in 2005 from 2004. Sales increased by 14% in 2004 compared to 2003. The operating income increased by 27% and 69% respectively in the two years. The stock holders equity a.k.a book value increased by 40% year over year in 2005 compared to 2004.
The only damper is the pending merger which will cause the company to issue 134 million new shares to take the total to 206 million shares altogether. This will take the market cap of the combined company to 5.84 billion if the stock price stays at the current levels. If we assume that ABI doesnt add anything to the revenues by merging but only provides full access to the cancer drug. This means the P/E of the stock will jump to 87 from its current levels of 27. If the stock jumps to 40 as suggested by Business Week, the P/E will jump to 110. Also, the merger will cause APPX not to pay the royalty and split its profits with ABI. With 90% growth in oncology products year over year, the elimination of royalty payments should help reduce the P/E to below 100.
Still, if Business Week analysis is to be believed, the stock is selling at a discount to its fair value at current levels. The article assumes upside for the merged company because of the higher profit margins for the cancer drung.
CarMax (KMX) Analysis
CarMax is a growth stock and was recommended by businessweek in one of their recent issues. In this segment, we look at CarMax and see if it looks like a good investment.
From its 10-Q, the description of CarMax business is noted below:
CarMax, Inc. ("CarMax" and "the company"), including its wholly owned subsidiaries, is the largest retailer of used cars and light trucks in the United States. CarMax was the first used vehicle retailer to offer a large selection of quality used vehicles at low, "no-haggle" prices using a customer-friendly sales process in an attractive, modern sales facility. CarMax also sells new vehicles under various franchise agreements. CarMax provides its customers with a full range of related services, including the financing of vehicle purchases through its own finance operation, CarMax Auto Finance ("CAF"), and third-party lenders; the sale of extended service plans; and vehicle repair service.
CarMax business is also seasonal. As noted below from its 10-K:
CarMax’s business is seasonal. Most CarMax superstores experience their strongest traffic and sales in the spring and summer fiscal quarters. Sales and gross margins are typically lowest in the fall quarter, which coincides with the new vehicle model-year-changeover period. In the fall quarter, the new model year introductions and discounting on model year closeouts can cause rapid depreciation in used car pricing, particularly for late-model used cars. Seasonal patterns for car buying and selling may vary in different parts of the country, and as CarMax expands geographically, these differences could have an effect on the overall seasonal pattern of the company’s results. In addition, the growth in sales to subprime customers, whose buying activity tends to peak early in the tax refund season, could modestly affect the seasonality.
KMX is a through and through growth story. From its inception in 1996 till to date it has grown revenues and profits consistently. The EPS for the stock declined in 2005 compared to 2004. This is one of the reasons the stock hasnt moved up a lot. Again from 10-K
"We believe the primary driver for future earnings growth will be vehicle unit sales growth from comparable store sales increases and from geographic expansion. We target a roughly similar fixed dollar amount of gross profit per used unit, regardless of retail price. Used unit sales growth is our primary focus. In fiscal 2006, we plan to focus our store growth primarily on adding standard superstores in new mid-sized markets, which we define as those with television viewing audiences between 1 million and 2.5 million people, and satellite fill-in superstores in established markets. We also are broadening our store base in the Los Angeles market, with one additional superstore opened in fiscal 2005 and two additional superstores opened early in fiscal 2006, which gives us a total of five stores in the Los Angeles market. We plan to open used car superstores at a rate of approximately 15% to 20% of our used car superstore base each year. For the foreseeable future, we expect used unit comparable store sales increases to average in the range of 4% to 8%, reflecting the multi-year ramp in sales of newly opened stores as they mature and continued market share gains at stores that have reached base maturity sales levels."
The company also states the projected earnings per share in 2006 in its 10-K.
"We currently expect fiscal 2006 earnings per share in the range of $1.20 to $1.30. We expect CAF income to increase only slightly from the fiscal 2005 level, as projected continuing interest rate increases will likely cause our cost of funds to once again rise more rapidly than consumer rates. Consequently, we expect CAF’s gain spread for fiscal 2006 to be slightly below the normalized range of 3.5% to 4.5%. "
The growth rate is 20% while accomodating the cost associated with the opening of new stores.
Let us take a look at the CarMax balance sheets to see how the company is doing.
On a positive note - the stock holders equity or book value increased by 17% to 800,976 million inspite of the EPS going down on a per share basis from the previous year. The company makes money primarily by selling used cars. Although the compnay does sell new cars, the new cars make a small percentage of the total revenue of Car Max. The company earns 11% of its earnings through financing. The rest of the income comes through the margins for used/new cars. Interestingly enough - the company earns better margins through the sale of used cars than the sale of new cars. The margins are in the 11% and 3% range respectively. If the business week story holds true - one can expect operating earnings growth of 25% per year for the next five years from CarMax.
From its 10-Q, the description of CarMax business is noted below:
CarMax, Inc. ("CarMax" and "the company"), including its wholly owned subsidiaries, is the largest retailer of used cars and light trucks in the United States. CarMax was the first used vehicle retailer to offer a large selection of quality used vehicles at low, "no-haggle" prices using a customer-friendly sales process in an attractive, modern sales facility. CarMax also sells new vehicles under various franchise agreements. CarMax provides its customers with a full range of related services, including the financing of vehicle purchases through its own finance operation, CarMax Auto Finance ("CAF"), and third-party lenders; the sale of extended service plans; and vehicle repair service.
CarMax business is also seasonal. As noted below from its 10-K:
CarMax’s business is seasonal. Most CarMax superstores experience their strongest traffic and sales in the spring and summer fiscal quarters. Sales and gross margins are typically lowest in the fall quarter, which coincides with the new vehicle model-year-changeover period. In the fall quarter, the new model year introductions and discounting on model year closeouts can cause rapid depreciation in used car pricing, particularly for late-model used cars. Seasonal patterns for car buying and selling may vary in different parts of the country, and as CarMax expands geographically, these differences could have an effect on the overall seasonal pattern of the company’s results. In addition, the growth in sales to subprime customers, whose buying activity tends to peak early in the tax refund season, could modestly affect the seasonality.
KMX is a through and through growth story. From its inception in 1996 till to date it has grown revenues and profits consistently. The EPS for the stock declined in 2005 compared to 2004. This is one of the reasons the stock hasnt moved up a lot. Again from 10-K
"We believe the primary driver for future earnings growth will be vehicle unit sales growth from comparable store sales increases and from geographic expansion. We target a roughly similar fixed dollar amount of gross profit per used unit, regardless of retail price. Used unit sales growth is our primary focus. In fiscal 2006, we plan to focus our store growth primarily on adding standard superstores in new mid-sized markets, which we define as those with television viewing audiences between 1 million and 2.5 million people, and satellite fill-in superstores in established markets. We also are broadening our store base in the Los Angeles market, with one additional superstore opened in fiscal 2005 and two additional superstores opened early in fiscal 2006, which gives us a total of five stores in the Los Angeles market. We plan to open used car superstores at a rate of approximately 15% to 20% of our used car superstore base each year. For the foreseeable future, we expect used unit comparable store sales increases to average in the range of 4% to 8%, reflecting the multi-year ramp in sales of newly opened stores as they mature and continued market share gains at stores that have reached base maturity sales levels."
The company also states the projected earnings per share in 2006 in its 10-K.
"We currently expect fiscal 2006 earnings per share in the range of $1.20 to $1.30. We expect CAF income to increase only slightly from the fiscal 2005 level, as projected continuing interest rate increases will likely cause our cost of funds to once again rise more rapidly than consumer rates. Consequently, we expect CAF’s gain spread for fiscal 2006 to be slightly below the normalized range of 3.5% to 4.5%. "
The growth rate is 20% while accomodating the cost associated with the opening of new stores.
Let us take a look at the CarMax balance sheets to see how the company is doing.
On a positive note - the stock holders equity or book value increased by 17% to 800,976 million inspite of the EPS going down on a per share basis from the previous year. The company makes money primarily by selling used cars. Although the compnay does sell new cars, the new cars make a small percentage of the total revenue of Car Max. The company earns 11% of its earnings through financing. The rest of the income comes through the margins for used/new cars. Interestingly enough - the company earns better margins through the sale of used cars than the sale of new cars. The margins are in the 11% and 3% range respectively. If the business week story holds true - one can expect operating earnings growth of 25% per year for the next five years from CarMax.
NDAQ vs NYX
Here are some comparisons between NDAQ and NYX. ( my opinion ofcourse ) Do you have other points?
- Trend - Every IPO has had a pop. CME, NDAQ after going public. Advantage NYX.
- Size - The market cap of all securities listed in NYX is 20+ trillion. NDAQ is 2.2 trillion. NYX market cap is four times that of NDAQ. Advantage NYX.
- Revenues - NDAQ recovered after years of stagnant/declining growth after buying INET and others. NYX has had steady revenues and Archipelago is gaining market share. Advantage NYX.
- Stock dilution - NYX former seat holders will oppose significant dilution by acquisitions without adding value. Advantage NYX.
- Listing companies - NDAQ fees are lower. Advantage NDAQ.
- Cost cutting upside - NYX has been a non profit. ( Grasso's pay excess is one example ). More opportunities to cut costs to make it a leaner organization. Advantage NYX.
- Moving the big board to electronic trade - neutral for the moment.
- Valuation - Difficult to put proper numbers around NYX right now - neutral for the moment.
Saturday, March 25, 2006
Nasdaq (NDAQ) Analysis
Nasdaq is a leading provider of securities listing, trading, and information products and services. Nasdaq gets revenues from transaction services, market data products and services, listing fees, and financial products. NDAQ operates The Nasdaq Stock Market, the largest electronic equity securities market in the United States, both in terms of number of listed companies and traded share volume. As of December 31, 2005, NDAQ was home to approximately 3,200 listed companies with a combined market capitalization of over $3.8 trillion. NDAQ also operates The Nasdaq Market Center, which provides market participants with the ability to access, process, display and integrate orders and quotes in The Nasdaq Stock Market and other national stock exchanges. Transactions involving 363.3 billion equity securities were executed on or reported t in 2005, 13.9% higher than the 319.1 billion in 2004.
Nasdaq business can be divided into two major segments: From NDAQ - 10Q
Issuer Services. Our Issuer Services segment includes our securities listings business and our financial products business. The companies listed on The Nasdaq Stock Market represent a diverse array of industries including information technology, financial services, healthcare, consumer products and industrials. We also develop and license financial products and associated derivatives based on Nasdaq indexes. These include the QQQ, which is an exchange traded fund, or ETF, based on the Nasdaq-100 Index. The QQQ is one of the most actively traded ETFs in the world and the most actively traded listed security in the United States. We have also introduced financial products based on other Nasdaq indexes, including the Nasdaq Composite Index and the Nasdaq Biotechnology Index. In addition, we generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs.
For the year ended December 31, 2005, Issuer Services accounted for revenues of $226.1 million, which represented 25.7% of our total revenues and 43.0% of our gross margin (total revenues less cost of revenues). See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements.
Market Services. Our Market Services segment includes our transaction-based business and our market information services business. The Nasdaq Market Center is our transaction-based platform that provides our market participants with the ability to access, process, display and integrate orders and quotes, which enabled our customers to execute trades in over 7,700 equity securities during 2005. The Nasdaq Market Center allows us to route and execute buy and sell orders as well as report transactions for Nasdaq-listed securities and those listed on national stock exchanges, including the New York Stock Exchange, or the NYSE, and the American Stock Exchange, or the Amex, providing fee-based revenues. We also generate revenues by providing varying levels of quote and trade information to market participants and to data vendors, who in turn sell subscriptions for this information to the public. Our systems enable vendors to gain direct access to our detailed order data, index information, mutual fund pricing information, and corporate action information on Nasdaq-listed securities.
For the year ended December 31, 2005, Market Services revenues were $653.6 million, which represented 74.3% of Nasdaq’s total revenues. Market Services gross margin was $299.7 million, which represented 57.0% of total gross margin. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements.
NYX's acquisition of Archipelago and Nasdaq's acquisition of INET is making the two exchanges go head to head as competitors. Nasdaq charges lesser fee for companies to list in Nasdaq where as Nyse charges a higher fee. Nyse has reduced its maximum fee to half a million dollars a year from a million dollars a year. Nasdaq already has a lower maximum fee of $75,000=00 a year. Nasdaq's growth strategy is through acquisition as seen by Nasdaq's bid for London Stock Exchange. There could be considerable stock dilution beause of these acquisitions. This is also the case with Nyse - however, the presence of former seat holders is a blocking factor against significant dilution.
Let us now take a look at the balance sheets to see how NDAQ is doing. The NDAQ stock has done extremely well going from a low of about $5=00/share in 2004 to the current levels of $40=00/share. The company swung to a profit in 2005 from a loss in 2004. The revenues increased in 2005 primarily due to the acquisition of Inet after years of declining revenues. The overall revenues in 2005 increased to 62% from 2004. The stock holders equity increased in 2005 by 60% from 2004. However, the stock dilution increased by 42% in one year. The revenues are growing at 30-50% range on a year over year basis.
According to the analyst opinion, the EPS is expected to grow by about 17% this year and more than 200% in the coming year. NYX looks like a better bet than NDAQ at the moment primarily because of Archipelago gaining market share and possible cost optimizations in the big board. Hilary Kramer sums up the stock best - as the stock for risk takers with a potential upside at $50=00 in the next eight weeks.
Nasdaq business can be divided into two major segments: From NDAQ - 10Q
Issuer Services. Our Issuer Services segment includes our securities listings business and our financial products business. The companies listed on The Nasdaq Stock Market represent a diverse array of industries including information technology, financial services, healthcare, consumer products and industrials. We also develop and license financial products and associated derivatives based on Nasdaq indexes. These include the QQQ, which is an exchange traded fund, or ETF, based on the Nasdaq-100 Index. The QQQ is one of the most actively traded ETFs in the world and the most actively traded listed security in the United States. We have also introduced financial products based on other Nasdaq indexes, including the Nasdaq Composite Index and the Nasdaq Biotechnology Index. In addition, we generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs.
For the year ended December 31, 2005, Issuer Services accounted for revenues of $226.1 million, which represented 25.7% of our total revenues and 43.0% of our gross margin (total revenues less cost of revenues). See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements.
Market Services. Our Market Services segment includes our transaction-based business and our market information services business. The Nasdaq Market Center is our transaction-based platform that provides our market participants with the ability to access, process, display and integrate orders and quotes, which enabled our customers to execute trades in over 7,700 equity securities during 2005. The Nasdaq Market Center allows us to route and execute buy and sell orders as well as report transactions for Nasdaq-listed securities and those listed on national stock exchanges, including the New York Stock Exchange, or the NYSE, and the American Stock Exchange, or the Amex, providing fee-based revenues. We also generate revenues by providing varying levels of quote and trade information to market participants and to data vendors, who in turn sell subscriptions for this information to the public. Our systems enable vendors to gain direct access to our detailed order data, index information, mutual fund pricing information, and corporate action information on Nasdaq-listed securities.
For the year ended December 31, 2005, Market Services revenues were $653.6 million, which represented 74.3% of Nasdaq’s total revenues. Market Services gross margin was $299.7 million, which represented 57.0% of total gross margin. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements.
NYX's acquisition of Archipelago and Nasdaq's acquisition of INET is making the two exchanges go head to head as competitors. Nasdaq charges lesser fee for companies to list in Nasdaq where as Nyse charges a higher fee. Nyse has reduced its maximum fee to half a million dollars a year from a million dollars a year. Nasdaq already has a lower maximum fee of $75,000=00 a year. Nasdaq's growth strategy is through acquisition as seen by Nasdaq's bid for London Stock Exchange. There could be considerable stock dilution beause of these acquisitions. This is also the case with Nyse - however, the presence of former seat holders is a blocking factor against significant dilution.
Let us now take a look at the balance sheets to see how NDAQ is doing. The NDAQ stock has done extremely well going from a low of about $5=00/share in 2004 to the current levels of $40=00/share. The company swung to a profit in 2005 from a loss in 2004. The revenues increased in 2005 primarily due to the acquisition of Inet after years of declining revenues. The overall revenues in 2005 increased to 62% from 2004. The stock holders equity increased in 2005 by 60% from 2004. However, the stock dilution increased by 42% in one year. The revenues are growing at 30-50% range on a year over year basis.
According to the analyst opinion, the EPS is expected to grow by about 17% this year and more than 200% in the coming year. NYX looks like a better bet than NDAQ at the moment primarily because of Archipelago gaining market share and possible cost optimizations in the big board. Hilary Kramer sums up the stock best - as the stock for risk takers with a potential upside at $50=00 in the next eight weeks.
Chicago Mercantile Exchange (CME) Analysis
Chicago Mercantile Exchange (CME) is the largest futures exchange in the United States for the trading of futures contracts and options on futures contracts, often called derivatives, as measured by 2005 annual trading volume. In 2005, the yearly trading volume of our products surpassed one billion contracts. CME posted record trading volume of 1.0 billion contracts in 2005, an increase of 33% over 2004, which was previously our busiest year. . CME's key products include CME Eurodollar contracts and contracts based on major U.S. stock indexes, including the S&P 500 and the NASDAQ-100. CME also offers contracts for the principal foreign currencies and for a number of commodity products, including cattle, hogs and dairy. CME is the clearing house for CBOT - Chicago Board of Trade.
CME - according to its 10-K has the following strengths.
• highly liquid markets
• global benchmark products
• diverse portfolio of products and services
• wholly owned clearing house
• proven and scalable technology and
• global reach.
CME has the following growth strategy
- expand our current core business;
- add new products;
- provide processing services and other business services to third parties; and
- pursue select alliances and acquisitions.
Now let us take a look at the financial data to see how CME is doing.
In 2005, the stock holders equity increased by 37% to 1.127 billion from 2004. In 2004, the stock holder equity was 812 million. The investment income increased three fold in 2005 from 2004 and again three times in 2004 compared to 2003. The interesting thing however is net income from operations. The net income increased by 37% in 2005 from 2004 and by 80% in 2004 from 2003.
From the stock dilution point of view - CME has diluted by 1.25% in 2005 from 2004. The dilution is reasonable and not over the top. Income per share increased by 37% in 2005 from 2004 and by 77% in 2004 from 2003.
However, the EPS growth has slowed in 2005 from 2004. The expectation is for the growth to slow further to around 25% per year in 2006 from the mid 30% in 2005. The growth is further expected to slow to 20% in 2007 from 2006. The forward P/E for the stock is at 39 and the trailing P/E is 49. The stock is fully valued at its current levels of $435=00/share. I would continue to monitor the stock for dips and possibly buy it when it dips.
CME - according to its 10-K has the following strengths.
• highly liquid markets
• global benchmark products
• diverse portfolio of products and services
• wholly owned clearing house
• proven and scalable technology and
• global reach.
CME has the following growth strategy
- expand our current core business;
- add new products;
- provide processing services and other business services to third parties; and
- pursue select alliances and acquisitions.
Now let us take a look at the financial data to see how CME is doing.
In 2005, the stock holders equity increased by 37% to 1.127 billion from 2004. In 2004, the stock holder equity was 812 million. The investment income increased three fold in 2005 from 2004 and again three times in 2004 compared to 2003. The interesting thing however is net income from operations. The net income increased by 37% in 2005 from 2004 and by 80% in 2004 from 2003.
From the stock dilution point of view - CME has diluted by 1.25% in 2005 from 2004. The dilution is reasonable and not over the top. Income per share increased by 37% in 2005 from 2004 and by 77% in 2004 from 2003.
However, the EPS growth has slowed in 2005 from 2004. The expectation is for the growth to slow further to around 25% per year in 2006 from the mid 30% in 2005. The growth is further expected to slow to 20% in 2007 from 2006. The forward P/E for the stock is at 39 and the trailing P/E is 49. The stock is fully valued at its current levels of $435=00/share. I would continue to monitor the stock for dips and possibly buy it when it dips.
Saturday, March 18, 2006
Buffalo Wild Wings (BWLD) Analysis
Buffalo Wild Wings (BWLD) is a small cap stock in the restaurant business. From BWLD 10K, we get a good description of the business.
We are an established and growing owner, operator and franchisor ofrestaurants featuring a variety of boldly flavored, made-to-order menu itemsincluding our Buffalo, New York-style chicken wings spun in any of our signaturesauces. Our restaurants create an inviting neighborhood atmosphere that includesan extensive multi-media system, a full bar and an open layout, which appeals tosports fans and families alike. Our concept offers elements of the quick casualand casual dining restaurant concepts featuring a flexible service model thatallows our guests to choose among convenient dining options such as quick casualcounter service, casual dining table service or take-out. Our award-winning foodand inviting atmosphere, combined with our guests' ability to customize theirdining experience, drives guest visits and loyalty.
BWLD has about 350 restaurants in about 35 states in the U.S. Management clearly states its operational goal as follows:
Our goal is to continue to grow and develop the Buffalo Wild Wings(R)Grill & Bar concept into a leading national restaurant chain. To do so, we planto execute the following strategies:
o Open restaurants in new and existing markets;
o Offer boldly-flavored menu items with broad appeal;
o Create an inviting, neighborhood atmosphere;
o Enable our guests to customize their dining experience;
o Continue to strengthen the Buffalo Wild Wings brand;
o Focus on operational excellence;
o Increase same-store sales and average unit volumes.
In other words, BWLD is a growth story. One can realize stock appreciation through growth of the company. Let us take a look at the balance sheets to see if this is a worthwhile investment at this time or not.
The company was has grown revenues at 37% rate in 2004 and 25% rate in 2005. The operating income has increased at the rate of 49.4% in 2004 and 22% in 2005. The operating expenses - especially the labor costs increased at a faster pace causing the decline in operating income compared to revenue growth. The EPS increased 33% and 19% repsectively in the last two years. The stock dilution is at 1.22% in 2005 which is pretty reasonable.
Looking at the balance sheets, the companies growth is slowing and EPS is declining. However, the companies shares are trading at a P/E of 38. The next thing to check for is the companies guidance for expansion in the upcoming years to see if the company has enough growth to justify the price.
BWLD's goal is to grow the number of units to 1000 nationally in the next several years with a yearly unit rate growth rate of 20%. The company primarily plans to expand in places where it already has a presence. It also plans to keep an eye on the cost of materials which tends to vary significantly. On the positive side, the operations side of the company doesnt require much expertise and can be learned fairly easily. Food and non alcoholic beverages account for 71% of the company revenues while alcoholic beverages account for 29% of the companies revenues. 25% of the companie's revenues come from the sales of chicken wings. The establishment of new restuarants is not a guarantee for increased revenue growth.
It is a safe bet that BWLD can grow in the 10-20% range for the next few years. Given the P/E, this growth is already factored into BWLD price. The analyst consensus price estimate of $41 for this year doesnt give much upward room at current prices.
We are an established and growing owner, operator and franchisor ofrestaurants featuring a variety of boldly flavored, made-to-order menu itemsincluding our Buffalo, New York-style chicken wings spun in any of our signaturesauces. Our restaurants create an inviting neighborhood atmosphere that includesan extensive multi-media system, a full bar and an open layout, which appeals tosports fans and families alike. Our concept offers elements of the quick casualand casual dining restaurant concepts featuring a flexible service model thatallows our guests to choose among convenient dining options such as quick casualcounter service, casual dining table service or take-out. Our award-winning foodand inviting atmosphere, combined with our guests' ability to customize theirdining experience, drives guest visits and loyalty.
BWLD has about 350 restaurants in about 35 states in the U.S. Management clearly states its operational goal as follows:
Our goal is to continue to grow and develop the Buffalo Wild Wings(R)Grill & Bar concept into a leading national restaurant chain. To do so, we planto execute the following strategies:
o Open restaurants in new and existing markets;
o Offer boldly-flavored menu items with broad appeal;
o Create an inviting, neighborhood atmosphere;
o Enable our guests to customize their dining experience;
o Continue to strengthen the Buffalo Wild Wings brand;
o Focus on operational excellence;
o Increase same-store sales and average unit volumes.
In other words, BWLD is a growth story. One can realize stock appreciation through growth of the company. Let us take a look at the balance sheets to see if this is a worthwhile investment at this time or not.
The company was has grown revenues at 37% rate in 2004 and 25% rate in 2005. The operating income has increased at the rate of 49.4% in 2004 and 22% in 2005. The operating expenses - especially the labor costs increased at a faster pace causing the decline in operating income compared to revenue growth. The EPS increased 33% and 19% repsectively in the last two years. The stock dilution is at 1.22% in 2005 which is pretty reasonable.
Looking at the balance sheets, the companies growth is slowing and EPS is declining. However, the companies shares are trading at a P/E of 38. The next thing to check for is the companies guidance for expansion in the upcoming years to see if the company has enough growth to justify the price.
BWLD's goal is to grow the number of units to 1000 nationally in the next several years with a yearly unit rate growth rate of 20%. The company primarily plans to expand in places where it already has a presence. It also plans to keep an eye on the cost of materials which tends to vary significantly. On the positive side, the operations side of the company doesnt require much expertise and can be learned fairly easily. Food and non alcoholic beverages account for 71% of the company revenues while alcoholic beverages account for 29% of the companies revenues. 25% of the companie's revenues come from the sales of chicken wings. The establishment of new restuarants is not a guarantee for increased revenue growth.
It is a safe bet that BWLD can grow in the 10-20% range for the next few years. Given the P/E, this growth is already factored into BWLD price. The analyst consensus price estimate of $41 for this year doesnt give much upward room at current prices.
Google and Yahoo! analysis update
In the prior article we analyzed Google and Yahoo!. We found that there is more downside risk in owning these stocks inspite of what Cramer says in his MadMoney show.
The cnn article below discusses on how Google's growth rates are slowing to 50-60 this year and to about 40 next year. This is lower than my earlier expectation of 60-70% growth this year and 40-50% next year.
We analyzed in the past segments that search is going to be a three way fight between Microsoft, Yahoo! and Google.
We are going to see declining P/E ratios at both Yahoo! and Google as the search battle intensifies. Microsoft is already loosening the purse strings by offering cash to people to use MSN Search. Expect Yahoo! to do the same as they figure out how to roll out their own adsense program within a year.
I think the Google model is still very viable but the catch is to diversify the revenue stream quickly. With the P/E declines, Google can expect to see its price decline further or remain steady. With 50% growth this year, Google's earnings will be 7.53/share. With 40% growth next year, Google's earnings will be about 10.54/share. If we take a P/E of 35 to account for further deceleration in Google's P/E, we are looking at a price of 370=00 in 2008. This is still up of about 8.8% compared to Friday's price. I can make about the same investing in U.S treasuries at 4.5% with zero risk in two years.
This doesnt account for competitive pressures in the ad market, more expenses because of additional stock compensation or venture into additional markets to increase revenue. It is likely all three will happen simultaneously.
Yahoo! price point is still not attractive to buy the stock. The growth rates for Yahoo! should decline further next year compared to this year. The stock is fully priced at the current levels and it doesnt provide any significant advantages over the treasuries at this time.
The cnn article below discusses on how Google's growth rates are slowing to 50-60 this year and to about 40 next year. This is lower than my earlier expectation of 60-70% growth this year and 40-50% next year.
We analyzed in the past segments that search is going to be a three way fight between Microsoft, Yahoo! and Google.
We are going to see declining P/E ratios at both Yahoo! and Google as the search battle intensifies. Microsoft is already loosening the purse strings by offering cash to people to use MSN Search. Expect Yahoo! to do the same as they figure out how to roll out their own adsense program within a year.
I think the Google model is still very viable but the catch is to diversify the revenue stream quickly. With the P/E declines, Google can expect to see its price decline further or remain steady. With 50% growth this year, Google's earnings will be 7.53/share. With 40% growth next year, Google's earnings will be about 10.54/share. If we take a P/E of 35 to account for further deceleration in Google's P/E, we are looking at a price of 370=00 in 2008. This is still up of about 8.8% compared to Friday's price. I can make about the same investing in U.S treasuries at 4.5% with zero risk in two years.
This doesnt account for competitive pressures in the ad market, more expenses because of additional stock compensation or venture into additional markets to increase revenue. It is likely all three will happen simultaneously.
Yahoo! price point is still not attractive to buy the stock. The growth rates for Yahoo! should decline further next year compared to this year. The stock is fully priced at the current levels and it doesnt provide any significant advantages over the treasuries at this time.
Thursday, March 16, 2006
Berkshire Hathaway (BRKA) Analysis Updated
In the previous articles ( links noted below ), we analyzed Berkshire Hathaway's annual earnings and its potential liquidation value.
http://finnews.blogspot.com/2006/03/berkshire-hathaway-brkabrkb-analysis.html
http://finnews.blogspot.com/2006/01/berkshire-hathaway-brkabrkb-analysis.html
In the article in January, we expected the liquidation value to be around 83,100 by the end of 2005 with more solid growth this year. Let us revisit the analysis and the factors for and against further appreciation in Berkshire's sharevalue.
Looking at the creativeacademics site, http://www.creativeacademics.com/finance/IV.html we get the following numbers.
current liquidation value: 83476
current conservative value: 112127
current cost of capital value: 123029
current optimistic value: 161427
The intrinsic value grew by 8.2% between 2005, 13.2% in 2004, 17% in 2003 and 13.5% in 2002.
The intrinsic value growth declined in 2005 compared the previous two years - does this mean the prospects for continued growth in intrinsic value are lower moving forward? Probably not as the hurricanes Katrina and Rita wreaked havoc this hurricane season. We would need to see further acquisitions for the IV to grow years down stream and an increase in equity investments in the large cap, international sectors.
Another factor not working in Berkshire favor is that the large cap value stocks are out of favor with the market at the moment. This is causing some very good buying opportunities. The small cap rally has lasted for a while and is likely continue this year. However, in general small caps are not as attractive from a valuation view point as large caps are at the moment. When the large caps come into favor, expect the rally to last four-five years with significant upside in share prices in the entire sector.
http://www.moneychimp.com analyzed the returns by large cap and small cap value, growth over the past eighty years and came up with these numbers.
Large Cap Value: 9.21%
Large Cap Growth: 6.17%
Small Cap Value: 12.13%
Small Cap Growth: 5.77%
Total Stock market:6.72%
Currently, large value is lower in price compared to small value from P/E perspective by atleast two points if not more. If the hurricane seasons dont end up being as bad as 2005, the next few years should be good in general for the economy and the market as a whole.
As for the price of Berkshire - impossible to say when it will start moving, but this stock is currently in the deep value territory with solid earnings. If the Fama and French three factor model holds good ( http://www.moneychimp.com/articles/risk/multifactor.htm ), this stock should eventually do well.
http://finnews.blogspot.com/2006/03/berkshire-hathaway-brkabrkb-analysis.html
http://finnews.blogspot.com/2006/01/berkshire-hathaway-brkabrkb-analysis.html
In the article in January, we expected the liquidation value to be around 83,100 by the end of 2005 with more solid growth this year. Let us revisit the analysis and the factors for and against further appreciation in Berkshire's sharevalue.
Looking at the creativeacademics site, http://www.creativeacademics.com/finance/IV.html we get the following numbers.
current liquidation value: 83476
current conservative value: 112127
current cost of capital value: 123029
current optimistic value: 161427
The intrinsic value grew by 8.2% between 2005, 13.2% in 2004, 17% in 2003 and 13.5% in 2002.
The intrinsic value growth declined in 2005 compared the previous two years - does this mean the prospects for continued growth in intrinsic value are lower moving forward? Probably not as the hurricanes Katrina and Rita wreaked havoc this hurricane season. We would need to see further acquisitions for the IV to grow years down stream and an increase in equity investments in the large cap, international sectors.
Another factor not working in Berkshire favor is that the large cap value stocks are out of favor with the market at the moment. This is causing some very good buying opportunities. The small cap rally has lasted for a while and is likely continue this year. However, in general small caps are not as attractive from a valuation view point as large caps are at the moment. When the large caps come into favor, expect the rally to last four-five years with significant upside in share prices in the entire sector.
http://www.moneychimp.com analyzed the returns by large cap and small cap value, growth over the past eighty years and came up with these numbers.
Large Cap Value: 9.21%
Large Cap Growth: 6.17%
Small Cap Value: 12.13%
Small Cap Growth: 5.77%
Total Stock market:6.72%
Currently, large value is lower in price compared to small value from P/E perspective by atleast two points if not more. If the hurricane seasons dont end up being as bad as 2005, the next few years should be good in general for the economy and the market as a whole.
As for the price of Berkshire - impossible to say when it will start moving, but this stock is currently in the deep value territory with solid earnings. If the Fama and French three factor model holds good ( http://www.moneychimp.com/articles/risk/multifactor.htm ), this stock should eventually do well.
Saturday, March 11, 2006
NYSE Group (NYX) Analysis
NYSE Group Inc. went public last week. In the past years, Chicago Mercantile Exchange has done extremely well after going public. This blog takes a look at NYSE Group and its financials to see if NYX can have the same upside.
From the investor relations site, we have the following information about NYX.
NYSE Group, Inc. (NYSE: NYX) is a holding company that, through its subsidiaries, is a leading global multi-asset financial marketplace that operates multiple securities market centers, including the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or Arca Ex®, and the Pacific Exchange). Through these market centers, the NYSE Group is a leader in securities listings, market-information products and services, and offers a range of investment vehicles and order execution services.
Nyse is a leader in its field - providing the largest and the most liquid equities market. On an average day $69billion worth of transactions are carried out in NYSE with an average volume of 1.8 billion. The market capitalization of listed securities is 22.5 trillion.
Since NYX is a merger between NYSE and Archipelago, we will look at the individual companies to see their strengths. NYSE has acted as a non profit organization whereas archipelago was a for profit organization.
The NYSE Group revenues are flat around 1 billion dollars between 2003 and 2004. The listing fees the company charges for listing has increased while revenues through other streams remained steady or slightly declined. The company makes money by charging data processing fees, market information fees, trading fees, regulatory fees, facility and equipment fees, membership fees and through investment income.
We wont go in to the financial details as they are a bit old. However, some trends are worth noting. Number of companies listed on NYSE continues to increase as does the stock volume. Given the continued globalization in the world economy, we should continue to see an increase in this trend in the upcoming years. This will be offset by declining fees charged for equity trades. One other factor to notice is members equity in NYSE has increased over the past several years.
This bodes well for the stock holders of this company.
ArcaEx on the other hand has been a growth story through and through. It has been growing market share in Amex, Nyse and Nasdaq every year. Its overall U.S market share has grown from 8.9% to 14.2% from 2002 to 2004. Meanwhile revenues have grown from 357 million to 541 million in the same period.
The combined company has about 1.6 billion in revenues and 11.8 billion in market cap currently. While this stock is not going to be a ten bagger like Chicago Mercantile Exchange, the global trends definitely give this stock some upside in the next three years.
From the investor relations site, we have the following information about NYX.
NYSE Group, Inc. (NYSE: NYX) is a holding company that, through its subsidiaries, is a leading global multi-asset financial marketplace that operates multiple securities market centers, including the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or Arca Ex®, and the Pacific Exchange). Through these market centers, the NYSE Group is a leader in securities listings, market-information products and services, and offers a range of investment vehicles and order execution services.
Nyse is a leader in its field - providing the largest and the most liquid equities market. On an average day $69billion worth of transactions are carried out in NYSE with an average volume of 1.8 billion. The market capitalization of listed securities is 22.5 trillion.
Since NYX is a merger between NYSE and Archipelago, we will look at the individual companies to see their strengths. NYSE has acted as a non profit organization whereas archipelago was a for profit organization.
The NYSE Group revenues are flat around 1 billion dollars between 2003 and 2004. The listing fees the company charges for listing has increased while revenues through other streams remained steady or slightly declined. The company makes money by charging data processing fees, market information fees, trading fees, regulatory fees, facility and equipment fees, membership fees and through investment income.
We wont go in to the financial details as they are a bit old. However, some trends are worth noting. Number of companies listed on NYSE continues to increase as does the stock volume. Given the continued globalization in the world economy, we should continue to see an increase in this trend in the upcoming years. This will be offset by declining fees charged for equity trades. One other factor to notice is members equity in NYSE has increased over the past several years.
This bodes well for the stock holders of this company.
ArcaEx on the other hand has been a growth story through and through. It has been growing market share in Amex, Nyse and Nasdaq every year. Its overall U.S market share has grown from 8.9% to 14.2% from 2002 to 2004. Meanwhile revenues have grown from 357 million to 541 million in the same period.
The combined company has about 1.6 billion in revenues and 11.8 billion in market cap currently. While this stock is not going to be a ten bagger like Chicago Mercantile Exchange, the global trends definitely give this stock some upside in the next three years.
Sunday, March 05, 2006
LEG Updated Analysis
In the previous article, we looked at LEG balance sheets and analyzed its prospects. The link to the previous article is in:
http://finnews.blogspot.com/2006/01/leggett-and-platt-leg-analysis-leggett.html
As noted in the above report, LEG has a very disciplined and principled management. The pointer to the companie's investor relations page is http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=LEG&script=2100. Very few companies state their objectives as clearly as LEG does. This is one of the reasons I like this company.
LEG revenues increased by 2.83% in 2005 compared to 2004. This is a significant drop from close to 16% revenue growth in 2004 compared to 2003. The previous two years, revenue growth has been somewhat stagnant at 2.73% and and 3.8% respectively.
Let us look at the 10-K form to see what management thinks the prospects of the company are for the next year.
The company has assets worth about $13/share. This is after subtracting the liabilities from the balance sheet. If one takes into account cash flow from operating activities, it has averaged about 400 million dollars per year for the past three years. Assuming 7% growth in cash flow and a 5% discount, in five years, there should be another 2billion added to the balance sheet. Subtracting the dividends paid, there should be about 1.350 billion dollars left over. If this is added to the assets the value of the stock is about $20=00. This doesnt count in the dividends. Including the dividends - the stock is currently rightly valued at 23-24$/share. The company is pursuing some acquisitions and if all goes well - there is more of an upside to the stock.
http://finnews.blogspot.com/2006/01/leggett-and-platt-leg-analysis-leggett.html
As noted in the above report, LEG has a very disciplined and principled management. The pointer to the companie's investor relations page is http://www.corporate-ir.net/ireye/ir_site.zhtml?ticker=LEG&script=2100. Very few companies state their objectives as clearly as LEG does. This is one of the reasons I like this company.
LEG revenues increased by 2.83% in 2005 compared to 2004. This is a significant drop from close to 16% revenue growth in 2004 compared to 2003. The previous two years, revenue growth has been somewhat stagnant at 2.73% and and 3.8% respectively.
Let us look at the 10-K form to see what management thinks the prospects of the company are for the next year.
The company has assets worth about $13/share. This is after subtracting the liabilities from the balance sheet. If one takes into account cash flow from operating activities, it has averaged about 400 million dollars per year for the past three years. Assuming 7% growth in cash flow and a 5% discount, in five years, there should be another 2billion added to the balance sheet. Subtracting the dividends paid, there should be about 1.350 billion dollars left over. If this is added to the assets the value of the stock is about $20=00. This doesnt count in the dividends. Including the dividends - the stock is currently rightly valued at 23-24$/share. The company is pursuing some acquisitions and if all goes well - there is more of an upside to the stock.
Saturday, March 04, 2006
Berkshire Hathaway (BRK.A/BRK.B) Analysis
In the previous report, we analyzed Berkshire Hathaway's third quarter results. http://finnews.blogspot.com/2006/01/berkshire-hathaway-brkabrkb-analysis.html which were good accounting for Hurricanes Katrina and Rita. In this section, we analyze Berkshire's earnings for 2005 and its outlook for 2006.
The fourth quarter earnings and Warren Buffetts letter to share holders are both a bonus. First, Berkshire did remarkably well in the earnings front in the fourth quarter. Berkshire earned 3,331 dollars in the fourth quarter to put up the best year ever in terms of earnings. Investment and derivative gains made 41% of the earnings this year. Even considering that, Berkshire's earnings in the fourth quarter beat the analyst estimates by almost a thousand dollars to 1965.00.
Let us do a rough estimate of Berkshire's intrinsic value. As denoted in the annual report, the per share amount is 59,377.00 dollars. This is an increase of 6.35% from the year before. In addition to this, Berkshire earned $5538/share. The average in the last three years has hovered around $5000=00. Putting a P/E of 10 against the earnings yields $50000=00/share. Adding the two, one gets an intrinsic value of 109,377=00/share.
This however doesnt account for the company operations in 2006. The companies revenues increased by 9.8% in 2005 compared to 2004. This compares to growth rates of 16% in 2004 from 2003. The company should do well in 2006 as MidAmerican comes under Berkshire fold where Berkshire will own 89% of the holdings. As the merger of Pacificorp goes through this year, it should add further to Berkshire's bottom line. Even if large hurricanes hit the gulf coast, the company has taken adequate precautions to underwrite policies more carefully. All in all, 2006 looks like a good year for Berkshire.
Separately, Warren Buffett also cleared the issue of succession which has been holding this stock back clearly in his letter to share holders. Warren disclosed that a person has been chosen to replace him if were to pass away or get incapicitated. He also mentioned that he remains in excellent health which is a good news to Berkshire share holders. It remains to be seen how Berkshire stock does in the coming week. As we discussed in the previous article, the stock will be a great buy below $86,000=00/share. In the past several years, the stock has done badly after announcing full year results. It is unlikely the scenario will repeat this year - however, I am ready to pick up some stocks if the price points fall below $86,000=00/share.
The fourth quarter earnings and Warren Buffetts letter to share holders are both a bonus. First, Berkshire did remarkably well in the earnings front in the fourth quarter. Berkshire earned 3,331 dollars in the fourth quarter to put up the best year ever in terms of earnings. Investment and derivative gains made 41% of the earnings this year. Even considering that, Berkshire's earnings in the fourth quarter beat the analyst estimates by almost a thousand dollars to 1965.00.
Let us do a rough estimate of Berkshire's intrinsic value. As denoted in the annual report, the per share amount is 59,377.00 dollars. This is an increase of 6.35% from the year before. In addition to this, Berkshire earned $5538/share. The average in the last three years has hovered around $5000=00. Putting a P/E of 10 against the earnings yields $50000=00/share. Adding the two, one gets an intrinsic value of 109,377=00/share.
This however doesnt account for the company operations in 2006. The companies revenues increased by 9.8% in 2005 compared to 2004. This compares to growth rates of 16% in 2004 from 2003. The company should do well in 2006 as MidAmerican comes under Berkshire fold where Berkshire will own 89% of the holdings. As the merger of Pacificorp goes through this year, it should add further to Berkshire's bottom line. Even if large hurricanes hit the gulf coast, the company has taken adequate precautions to underwrite policies more carefully. All in all, 2006 looks like a good year for Berkshire.
Separately, Warren Buffett also cleared the issue of succession which has been holding this stock back clearly in his letter to share holders. Warren disclosed that a person has been chosen to replace him if were to pass away or get incapicitated. He also mentioned that he remains in excellent health which is a good news to Berkshire share holders. It remains to be seen how Berkshire stock does in the coming week. As we discussed in the previous article, the stock will be a great buy below $86,000=00/share. In the past several years, the stock has done badly after announcing full year results. It is unlikely the scenario will repeat this year - however, I am ready to pick up some stocks if the price points fall below $86,000=00/share.
Wednesday, March 01, 2006
Apollo Group (APOL) Updated Analysis
We analyzed Apollo Group sometime back and liked the stock. http://finnews.blogspot.com/2006/02/apollo-group-apol-analysis-apollo.html
In this article, we liked the industry Apollo operated in and also its growth prospects. We noted however, that the stock is not cheap.
Yesterday, the company issues a profit warning for the current quarter. The earnings are expected to be 8-9% lesser than expected for the quarter. The revenues are going to lower by about 3%. The company has not given guidance for the rest of the year on this stock. The stock duly took a beating and lost approximately 15% of its value.
The stock is still not cheap after yesterday's drop. The expenses increased sharply at Apollo diluting earnings per share. The reason for increased expenses is not clear. It is also not clear if this is a one time event. The revenues are slightly lighter. It remains to be seen if the company is suffering from a resurgent economy (less need to retrain oneself as jobs are easier to come by) or some other fundamental shift. The report by the company in the second half of this month should provide more answers.
In this article, we liked the industry Apollo operated in and also its growth prospects. We noted however, that the stock is not cheap.
Yesterday, the company issues a profit warning for the current quarter. The earnings are expected to be 8-9% lesser than expected for the quarter. The revenues are going to lower by about 3%. The company has not given guidance for the rest of the year on this stock. The stock duly took a beating and lost approximately 15% of its value.
The stock is still not cheap after yesterday's drop. The expenses increased sharply at Apollo diluting earnings per share. The reason for increased expenses is not clear. It is also not clear if this is a one time event. The revenues are slightly lighter. It remains to be seen if the company is suffering from a resurgent economy (less need to retrain oneself as jobs are easier to come by) or some other fundamental shift. The report by the company in the second half of this month should provide more answers.
Tuesday, February 28, 2006
Google Update
Google (GOOG) went down from 395 to 358 in a matter of minutes because of some comments by their CFO. The comments indicates that the increase in ad revenues are largely realized and the growth rates will slow down. This shouldnt come as a surprise as Google currently has more downside as opposed to upside.
Pointer to the previous article is noted below:
http://finnews.blogspot.com/2006/02/more-sell-signs-at-google-goog-cnn-ran.html
Pointer to the previous article is noted below:
http://finnews.blogspot.com/2006/02/more-sell-signs-at-google-goog-cnn-ran.html
Sears Holding (SHLD) Analysis
Sears holding is in the retail business. . It offers home appliances, tools, lawn and garden products, home electronics, clothing and automotive repair and maintenance products. The company sells its products in various brands, including Kenmore, Craftsman and DieHard, Lands' End, Jaclyn Smith, Martha Stewart Everyday, and Joe Boxer, as well as the Apostrophe and Covington. As of December 6, 2005, the company operated 3,900 full-line and specialty retail stores in the United States and Canada.
Sears Holding is run by Eddie Lampert, considered as a clone of Warren Buffett. He holds a very good track record in increasing earnings. He shot to the limelight with his deal for Kmart, where the real estate was more valuable than the company. He then bought Sears which only increased the buzz. Currently Sears is in talks to buy the rest of Sears Canada. Sears is in the retailing business. Let us quickly take a look at Sears balance sheets to see how it compares to Berkshire.
As per the latest 10-Q, Sears holding has an operating marging of .98%. This is lower than both Walmart (5.8%) and Amazon.com.
In the latest 10-Q, Sears holding had 163.6 million shares outstanding. The share holders equity was 10.945 billion. Dividing the share holder equity by total shares outstanding, one gets a value of $66.9/share. This is the liquidation value of the enterprise.
Cash flow from operating activities increased 12.2% year over year. Let us discount this slightly and say that cash flow from operations will increase by 12% a year for the next five years. SHLD's operating cash flows were 193 million for the first 39 weeks of 2005. Pro-rating this over 52 weeks, one gets an annual cash flow of 253 million/year. This number is likely a conservative estimate as most retailers have better cash flows during the X'mas season. With a discount rate of 8%, this adds to the bottom line of another 9 dollars a share. In total, this brings the underlying value of the share to 76 dollars a share. Even if one adds the premium for the Sears brand and Lampert ( who got great press ) to the tune of $20/share, we are looking at a price of $96/share.
The stock is currently trading in the 120 range. The median analyst target for this stock is $170/share. They are expecting earnings of 6.05/share in 2006 and 7.49 in 2007. Looking at the balance sheets, the earnings of SHLD is highly unpredictable and is likely fluctuate a lot. The operating earnings are unlikely to provide a fillip to this stock. It is more the investment prowess of Eddie Lampert that will make the difference. The stock doesnt look attractive at current prices. The stock is more attractive as a buy when it dips below $100.
Sears Holding is run by Eddie Lampert, considered as a clone of Warren Buffett. He holds a very good track record in increasing earnings. He shot to the limelight with his deal for Kmart, where the real estate was more valuable than the company. He then bought Sears which only increased the buzz. Currently Sears is in talks to buy the rest of Sears Canada. Sears is in the retailing business. Let us quickly take a look at Sears balance sheets to see how it compares to Berkshire.
As per the latest 10-Q, Sears holding has an operating marging of .98%. This is lower than both Walmart (5.8%) and Amazon.com.
In the latest 10-Q, Sears holding had 163.6 million shares outstanding. The share holders equity was 10.945 billion. Dividing the share holder equity by total shares outstanding, one gets a value of $66.9/share. This is the liquidation value of the enterprise.
Cash flow from operating activities increased 12.2% year over year. Let us discount this slightly and say that cash flow from operations will increase by 12% a year for the next five years. SHLD's operating cash flows were 193 million for the first 39 weeks of 2005. Pro-rating this over 52 weeks, one gets an annual cash flow of 253 million/year. This number is likely a conservative estimate as most retailers have better cash flows during the X'mas season. With a discount rate of 8%, this adds to the bottom line of another 9 dollars a share. In total, this brings the underlying value of the share to 76 dollars a share. Even if one adds the premium for the Sears brand and Lampert ( who got great press ) to the tune of $20/share, we are looking at a price of $96/share.
The stock is currently trading in the 120 range. The median analyst target for this stock is $170/share. They are expecting earnings of 6.05/share in 2006 and 7.49 in 2007. Looking at the balance sheets, the earnings of SHLD is highly unpredictable and is likely fluctuate a lot. The operating earnings are unlikely to provide a fillip to this stock. It is more the investment prowess of Eddie Lampert that will make the difference. The stock doesnt look attractive at current prices. The stock is more attractive as a buy when it dips below $100.
Sears Holding (SHLD) Analysis
Sears holding is in the retail business. . It offers home appliances, tools, lawn and garden products, home electronics, clothing and automotive repair and maintenance products. The company sells its products in various brands, including Kenmore, Craftsman and DieHard, Lands' End, Jaclyn Smith, Martha Stewart Everyday, and Joe Boxer, as well as the Apostrophe and Covington. As of December 6, 2005, the company operated 3,900 full-line and specialty retail stores in the United States and Canada.
Sears Holding is run by Eddie Lampert, considered as a clone of Warren Buffett. He holds a very good track record in increasing earnings. He shot to the limelight with his deal for Kmart, where the real estate was more valuable than the company. He then bought Sears which only increased the buzz. Currently Sears is in talks to buy the rest of Sears Canada. Sears is in the retailing business. Let us quickly take a look at Sears balance sheets to see how it compares to Berkshire.
As per the latest 10-Q, Sears holding has an operating marging of .98%. This is lower than both Walmart (5.8%) and Amazon.com.
In the latest 10-Q, Sears holding had 163.6 million shares outstanding. The share holders equity was 10.945 billion. Dividing the share holder equity by total shares outstanding, one gets a value of $66.9/share. This is the liquidation value of the enterprise.
Cash flow from operating activities increased 12.2% year over year. Let us discount this slightly and say that cash flow from operations will increase by 12% a year for the next five years. SHLD's operating cash flows were 193 million for the first 39 weeks of 2005. Pro-rating this over 52 weeks, one gets an annual cash flow of 253 million/year. This number is likely a conservative estimate as most retailers have better cash flows during the X'mas season. With a discount rate of 8%, this adds to the bottom line of another 9 dollars a share. In total, this brings the underlying value of the share to 76 dollars a share. Even if one adds the premium for the Sears brand and Lampert ( who got great press ) to the tune of $20/share, we are looking at a price of $96/share.
The stock is currently trading in the 120 range. The median analyst target for this stock is $170/share. They are expecting earnings of 6.05/share in 2006 and 7.49 in 2007. Looking at the balance sheets, the earnings of SHLD is highly unpredictable and is likely fluctuate a lot. The operating earnings are unlikely to provide a fillip to this stock. It is more the investment prowess of Eddie Lampert that will make the difference. The stock doesnt look attractive at current prices. The stock is more attractive as a buy when it dips below $100.
Sears Holding is run by Eddie Lampert, considered as a clone of Warren Buffett. He holds a very good track record in increasing earnings. He shot to the limelight with his deal for Kmart, where the real estate was more valuable than the company. He then bought Sears which only increased the buzz. Currently Sears is in talks to buy the rest of Sears Canada. Sears is in the retailing business. Let us quickly take a look at Sears balance sheets to see how it compares to Berkshire.
As per the latest 10-Q, Sears holding has an operating marging of .98%. This is lower than both Walmart (5.8%) and Amazon.com.
In the latest 10-Q, Sears holding had 163.6 million shares outstanding. The share holders equity was 10.945 billion. Dividing the share holder equity by total shares outstanding, one gets a value of $66.9/share. This is the liquidation value of the enterprise.
Cash flow from operating activities increased 12.2% year over year. Let us discount this slightly and say that cash flow from operations will increase by 12% a year for the next five years. SHLD's operating cash flows were 193 million for the first 39 weeks of 2005. Pro-rating this over 52 weeks, one gets an annual cash flow of 253 million/year. This number is likely a conservative estimate as most retailers have better cash flows during the X'mas season. With a discount rate of 8%, this adds to the bottom line of another 9 dollars a share. In total, this brings the underlying value of the share to 76 dollars a share. Even if one adds the premium for the Sears brand and Lampert ( who got great press ) to the tune of $20/share, we are looking at a price of $96/share.
The stock is currently trading in the 120 range. The median analyst target for this stock is $170/share. They are expecting earnings of 6.05/share in 2006 and 7.49 in 2007. Looking at the balance sheets, the earnings of SHLD is highly unpredictable and is likely fluctuate a lot. The operating earnings are unlikely to provide a fillip to this stock. It is more the investment prowess of Eddie Lampert that will make the difference. The stock doesnt look attractive at current prices. The stock is more attractive as a buy when it dips below $100.
Saturday, February 25, 2006
Chesapeake Energy (CHK) Updated Analysis
In the prior article http://finnews.blogspot.com/2005/12/chesapeake-energy-chk-analysis-chk-or.html we analyzed Chesapeake energy balance sheets and potential for this quarter. Chesapeake Energy announced its fourth quarter earnings last week. We will update the analysis after the fourth quarter results to see how Chesapeake looks like.
We will divide this article into two parts. First - a look at the fourth quarter earnings ( we can't analyze the earnings as the 10-Q is not filed ) and the second part which will analyze the future outlook.
The company beat the analyst estimates and earned $2.51/share for 2005. The stock market is driven primarily by the rosy future as opposed to the rosy past. So, let us take a look at Chesapeake. The fools have also analyzed and are bullish about this stock. http://biz.yahoo.com/fool/060224/114079871606.html?.v=2
The analysts think highly of the stock with a median recommended price target of $41=00. The low price target is $35=00 and the high target is $49. The EPS estimate by analysts for 2006 is 3.49 with a decline in 2007. The increase in 2006 revenues is about 40%. The analysts are expecting the earnings to go up by about 80% this year compared to last. The 2007 outlook is not very clear yet. However, the company is growing organically and through acquisitions quite rapidly and expect it to continue to grow at a quick pace. The current P/E for the company is 12, taking into account dilution and other factors, the price target of $40=00 remains highly likely for this stock. ( 3.5 x 12 == 42 ). The P/E is likely not expand anytime soon. The company's EPS will likely be higher than 3.5 this year because of hedging. It will likely contract in 2007 as the market expects lower prices for oil and natural gas.
The daily production of natural gas increased by 35% in 2004 from 2003. It increased by 29.5% in 2005 compared to 2004. It is expected to increase in the 25-28% range in 2006. The company is expecting the prices of natural gas to be $9.47 in 3/31/06, $7.91 by 12/31/2006 and $7 by 12/31/2007. The prices are oil are expected to be $58, $54 and $50 respectively in the same time period. As we know, the prices of natural gas and oil are subject to fluctuations and are not driven by the suppy/demand equation alone. The middle east, africa and south american politics not all of which are friendly to the U.S are helping the fluctuation in prices.
Interestingly enough, management doesnt think there would be considerable dilution in stocks till 7/31/2007. The percentage dilution by 12/31/2007 as projected in February 2006 is about 20%. The company has hedged 71% of 2006 production at $9.49/mcf, 31% of 2007 production at $9.91/mcf and the 20% of 2008 production at $9.1/mcf. This looks like a good deal considering the price of natural gas at the moment. The oil production is also similarly hedged with 63%, 22% and 14% of the production being hedged at $61, $62 and $65 dollars per barrel respectively.
Although the price of natural gas has fallen from its peaks, oil continues to be volatile. The volatility is primarily because of the politics in the middle east. Chesapeake owns it natural gas resources in the U.S and has very little foreign exposure. Management outlook for the company is also positive as noted in the press release.
Our business strategy features delivering growth through a balance of acquisitions and organic drilling, focusing on natural gas to take advantage of strong long- term natural gas supply/demand fundamentals, building dominant regional scale to achieve low operating costs and high returns on capital and successfully mitigating risk through the opportunistic hedging of commodity prices and service costs. We believe Chesapeake's management team can continue the successful execution of the company's distinctive business strategy and continue to deliver significant investor value for years to come
The stock definitely has an upside - a twenty percent appreciation definitely looks possible in the next couple of years. The main worry for this stock is the price of natural gas. Fluctuations in the price of natural gas will drive the price of this stock irrespective of the fundamentals.
We will divide this article into two parts. First - a look at the fourth quarter earnings ( we can't analyze the earnings as the 10-Q is not filed ) and the second part which will analyze the future outlook.
The company beat the analyst estimates and earned $2.51/share for 2005. The stock market is driven primarily by the rosy future as opposed to the rosy past. So, let us take a look at Chesapeake. The fools have also analyzed and are bullish about this stock. http://biz.yahoo.com/fool/060224/114079871606.html?.v=2
The analysts think highly of the stock with a median recommended price target of $41=00. The low price target is $35=00 and the high target is $49. The EPS estimate by analysts for 2006 is 3.49 with a decline in 2007. The increase in 2006 revenues is about 40%. The analysts are expecting the earnings to go up by about 80% this year compared to last. The 2007 outlook is not very clear yet. However, the company is growing organically and through acquisitions quite rapidly and expect it to continue to grow at a quick pace. The current P/E for the company is 12, taking into account dilution and other factors, the price target of $40=00 remains highly likely for this stock. ( 3.5 x 12 == 42 ). The P/E is likely not expand anytime soon. The company's EPS will likely be higher than 3.5 this year because of hedging. It will likely contract in 2007 as the market expects lower prices for oil and natural gas.
The daily production of natural gas increased by 35% in 2004 from 2003. It increased by 29.5% in 2005 compared to 2004. It is expected to increase in the 25-28% range in 2006. The company is expecting the prices of natural gas to be $9.47 in 3/31/06, $7.91 by 12/31/2006 and $7 by 12/31/2007. The prices are oil are expected to be $58, $54 and $50 respectively in the same time period. As we know, the prices of natural gas and oil are subject to fluctuations and are not driven by the suppy/demand equation alone. The middle east, africa and south american politics not all of which are friendly to the U.S are helping the fluctuation in prices.
Interestingly enough, management doesnt think there would be considerable dilution in stocks till 7/31/2007. The percentage dilution by 12/31/2007 as projected in February 2006 is about 20%. The company has hedged 71% of 2006 production at $9.49/mcf, 31% of 2007 production at $9.91/mcf and the 20% of 2008 production at $9.1/mcf. This looks like a good deal considering the price of natural gas at the moment. The oil production is also similarly hedged with 63%, 22% and 14% of the production being hedged at $61, $62 and $65 dollars per barrel respectively.
Although the price of natural gas has fallen from its peaks, oil continues to be volatile. The volatility is primarily because of the politics in the middle east. Chesapeake owns it natural gas resources in the U.S and has very little foreign exposure. Management outlook for the company is also positive as noted in the press release.
Our business strategy features delivering growth through a balance of acquisitions and organic drilling, focusing on natural gas to take advantage of strong long- term natural gas supply/demand fundamentals, building dominant regional scale to achieve low operating costs and high returns on capital and successfully mitigating risk through the opportunistic hedging of commodity prices and service costs. We believe Chesapeake's management team can continue the successful execution of the company's distinctive business strategy and continue to deliver significant investor value for years to come
The stock definitely has an upside - a twenty percent appreciation definitely looks possible in the next couple of years. The main worry for this stock is the price of natural gas. Fluctuations in the price of natural gas will drive the price of this stock irrespective of the fundamentals.
Good Financial Blogs
As you know, this site is dedicated to discuss financial news and investments. Of late, we have been analyzing some investments, especially stocks as opposed to discussing financial news. In this section, I wanted to highlight some interesting financial blogs I have stumbled upon. Not only do these blogs give a different perspective on investing, they are very educational and can help fine tune or adjust ones strategy. I have broadened my horizons by reading these blogs myself. Get a decent RSS reader and subscribe to these blogs, you will know when new articles are published.
2million blog
This is a great blog where 2million describes his quest to reach 2million dollars in net worth. 2million describes his strategy with useful points that one can use in ones own quest to achieve a financial goal. 2million is very open and discusses some of the road blocks and gotchas in achieving his goal. You can also learn some neat tricks and special deals by watching 2million achieve his goal.
Jane Dough Blog
This is similar to 2million blog except that a lot of personal details and anecdotes are shared. I like to read bostongal at the beginning of every month when she publishes her networth table. It is interesting to see how income and expenses stack up for a person in a different part of the country.
Hilary Kramers Stock Picks
I like this blog as Hilary goes about picking new stocks every day. Just like this board, not every stock she picks is a buy. She also doesnt share financial analysis of the balance sheets. However, it is a good read and does show a good stock once in a while.
Middle Way of Investing
This site is similar to mine with some nuances. Middleway's four part analysis of asset allocation was very good. He provided some very good links and good coverage of material in general. Middleway has a passively managed account and an actively managed account. The passive accounts invest in mutual funds or ETFs and the active accounts work in the stock market.
2million blog
This is a great blog where 2million describes his quest to reach 2million dollars in net worth. 2million describes his strategy with useful points that one can use in ones own quest to achieve a financial goal. 2million is very open and discusses some of the road blocks and gotchas in achieving his goal. You can also learn some neat tricks and special deals by watching 2million achieve his goal.
Jane Dough Blog
This is similar to 2million blog except that a lot of personal details and anecdotes are shared. I like to read bostongal at the beginning of every month when she publishes her networth table. It is interesting to see how income and expenses stack up for a person in a different part of the country.
Hilary Kramers Stock Picks
I like this blog as Hilary goes about picking new stocks every day. Just like this board, not every stock she picks is a buy. She also doesnt share financial analysis of the balance sheets. However, it is a good read and does show a good stock once in a while.
Middle Way of Investing
This site is similar to mine with some nuances. Middleway's four part analysis of asset allocation was very good. He provided some very good links and good coverage of material in general. Middleway has a passively managed account and an actively managed account. The passive accounts invest in mutual funds or ETFs and the active accounts work in the stock market.
Friday, February 24, 2006
Ctrip.com International (CTRP)
Ctrip.com stock rose by ~15% in the last couple of days after announcing its quarterly results. It is a company that is similar to Expedia with the exception that the company operates mostly in China. From ctrip.com website,
"Ctrip.com International Ltd. is a leading consolidator of hotel accommodations and airline tickets in China. The company aggregates information on hotels and flights and enable customers to make informed and cost-effective hotel and flight bookings. It acts as an agent in substantially all of the booking transactions. It targets primarily business and leisure travelers in China who do not travel in group. These travelers form a traditionally under-served yet fast-growing segment of the China travel industry.
The company has experienced substantial growth since its inception in 1999 and has become one of the best-known travel brands in China. It is the largest consolidator of hotel accommodations in China in terms of the number of room nights booked. The company is also one of the leading consolidators of airline tickets in Beijing and Shanghai in terms of number of airline tickets booked and sold. The company is the only airline ticket consolidator in China with a centralized reservation system and ticket fulfillment infrastructure covering all of the economically prosperous regions of China.
The company offers its services through an advanced transaction and service platform consisting of its centralized toll-free, 24-hour customer service center and bilingual websites.
The company’s goal is to create long-term shareholder value by enhancing its position as a leading hotel and airline ticket consolidator in China. Going forward, the company intends to leverage the Ctrip brand to attract new travel suppliers and negotiate more favorable contractual terms with its existing suppliers, expand its hotel supplier network and room inventory, and expand air-ticketing and other travel product offerings. The company also intends to pursue selective strategic acquisitions and expand into Hong Kong, Macau and Taiwan.
The company is incorporated in the Cayman Islands and conducts substantially all of its operations in China. With its operational headquarter in Shanghai, it has branches in Beijing, Guangzhou, Shenzhen and Hong Kong. The company also maintains a network of sales offices in about 30 cities in China."
The growth rate for ctrip is in the 30-40% range year over year. The revenue growth rate year over year was 58% in 2005 compared to 2004. The profit growth year over year is 50%. The earnings per share increased close to 48%. The dilution in the number of shares is about 2.7% year over year.
The cash flow from operations increased by 55% year over year. The company is in a high margin business. Gross margin was 81% in the fourth quarter of 2005, compared to 84% in the same period in 2004. The decrease in margin is largely due to higher cost of service. Operating margin increased substantially to 39% in the fourth quarter of 2005, compared to 33% in the same period in 2004.
The company currently sports a P/E of 48 which is higher than its anticipated growth rate. However, it seems the stock still has some juice in it at least in the immediate future. Like expedia, 81% profit margin should attract some competition and in the long run, the stock may face some head winds. For the moment though, Ctrip looks sweet.
Ctrip.com stock rose by ~15% in the last couple of days after announcing its quarterly results. It is a company that is similar to Expedia with the exception that the company operates mostly in China. From ctrip.com website,
"Ctrip.com International Ltd. is a leading consolidator of hotel accommodations and airline tickets in China. The company aggregates information on hotels and flights and enable customers to make informed and cost-effective hotel and flight bookings. It acts as an agent in substantially all of the booking transactions. It targets primarily business and leisure travelers in China who do not travel in group. These travelers form a traditionally under-served yet fast-growing segment of the China travel industry.
The company has experienced substantial growth since its inception in 1999 and has become one of the best-known travel brands in China. It is the largest consolidator of hotel accommodations in China in terms of the number of room nights booked. The company is also one of the leading consolidators of airline tickets in Beijing and Shanghai in terms of number of airline tickets booked and sold. The company is the only airline ticket consolidator in China with a centralized reservation system and ticket fulfillment infrastructure covering all of the economically prosperous regions of China.
The company offers its services through an advanced transaction and service platform consisting of its centralized toll-free, 24-hour customer service center and bilingual websites.
The company’s goal is to create long-term shareholder value by enhancing its position as a leading hotel and airline ticket consolidator in China. Going forward, the company intends to leverage the Ctrip brand to attract new travel suppliers and negotiate more favorable contractual terms with its existing suppliers, expand its hotel supplier network and room inventory, and expand air-ticketing and other travel product offerings. The company also intends to pursue selective strategic acquisitions and expand into Hong Kong, Macau and Taiwan.
The company is incorporated in the Cayman Islands and conducts substantially all of its operations in China. With its operational headquarter in Shanghai, it has branches in Beijing, Guangzhou, Shenzhen and Hong Kong. The company also maintains a network of sales offices in about 30 cities in China."
The growth rate for ctrip is in the 30-40% range year over year. The revenue growth rate year over year was 58% in 2005 compared to 2004. The profit growth year over year is 50%. The earnings per share increased close to 48%. The dilution in the number of shares is about 2.7% year over year.
The cash flow from operations increased by 55% year over year. The company is in a high margin business. Gross margin was 81% in the fourth quarter of 2005, compared to 84% in the same period in 2004. The decrease in margin is largely due to higher cost of service. Operating margin increased substantially to 39% in the fourth quarter of 2005, compared to 33% in the same period in 2004.
The company currently sports a P/E of 48 which is higher than its anticipated growth rate. However, it seems the stock still has some juice in it at least in the immediate future. Like expedia, 81% profit margin should attract some competition and in the long run, the stock may face some head winds. For the moment though, Ctrip looks sweet.
Sunday, February 19, 2006
Freeport-McMoRan Copper & Gold Inc (FCX) Analysis
FCX is one of the world’s largest copper and gold mining and production operations in terms of reserves and production. We are also one of the lowest-cost copper producers in the world, after taking into account credits for related gold and silver production. FCX's principal asset is the Grasberg minerals district in Indonesia. FCX discovered the largest ore body in the district, Grasberg, in 1988. The Grasberg minerals district contains the largest single gold reserve and the second-largest copper reserves of any mine in the world. FCX also smelts and refines copper concentrates in Spain, as well as markets the refined copper products.
The company has the following financial policy. The policy is:
Maintain strong balance sheet and financial flexibility
Maintain regular quarterly dividend that can be sustained through broad range of commodity prices.
In times of high commodity prices, augment regular dividends with special dividends and share repurchases.
This is in general a good policy and it is always good to see a company that has very clear objectives. The company's share prices have leaped ahead of the earnings in the past few months. Let us take a look at the stock to see if it is a buy at these prices.
The company's business is cyclical in nature. The earnings per share is dependent on the commodity prices. The higher the commodity prices, the higher will be the earnings. As an example, the earnings in 2004 were lesser than that in 2003. The revenues have steadily increased in the past five years helped in part by increasing commodity prices for gold, copper and silver. The stock holders equity has steadily increased over the past five years.
The revenues in 2005 were up almost 85% from 2004 looking at the first three quarters of 2005. The EPS almost tripled as cost and expenses rose at a much smaller percentage than revenue. The company also increased its dividends as per its financial policy. The mean target for the stock value is $59=00 this year. The EPS is expected to decline to 3.28 and 2.71 respectively in 2006 and 2007. Given the cyclical nature of the business, it is likely that we are at the peak of earnings before they start to decline. The decline is also largely related to commodity prices. If the EPS declines, it is also likely that the stock price will decline.
FCX is one of the world’s largest copper and gold mining and production operations in terms of reserves and production. We are also one of the lowest-cost copper producers in the world, after taking into account credits for related gold and silver production. FCX's principal asset is the Grasberg minerals district in Indonesia. FCX discovered the largest ore body in the district, Grasberg, in 1988. The Grasberg minerals district contains the largest single gold reserve and the second-largest copper reserves of any mine in the world. FCX also smelts and refines copper concentrates in Spain, as well as markets the refined copper products.
The company has the following financial policy. The policy is:
Maintain strong balance sheet and financial flexibility
Maintain regular quarterly dividend that can be sustained through broad range of commodity prices.
In times of high commodity prices, augment regular dividends with special dividends and share repurchases.
This is in general a good policy and it is always good to see a company that has very clear objectives. The company's share prices have leaped ahead of the earnings in the past few months. Let us take a look at the stock to see if it is a buy at these prices.
The company's business is cyclical in nature. The earnings per share is dependent on the commodity prices. The higher the commodity prices, the higher will be the earnings. As an example, the earnings in 2004 were lesser than that in 2003. The revenues have steadily increased in the past five years helped in part by increasing commodity prices for gold, copper and silver. The stock holders equity has steadily increased over the past five years.
The revenues in 2005 were up almost 85% from 2004 looking at the first three quarters of 2005. The EPS almost tripled as cost and expenses rose at a much smaller percentage than revenue. The company also increased its dividends as per its financial policy. The mean target for the stock value is $59=00 this year. The EPS is expected to decline to 3.28 and 2.71 respectively in 2006 and 2007. Given the cyclical nature of the business, it is likely that we are at the peak of earnings before they start to decline. The decline is also largely related to commodity prices. If the EPS declines, it is also likely that the stock price will decline.
Saturday, February 18, 2006
Graco (GGG) Analysis
Graco is not the manufacturer of the popular car seats - but in the business of providing equipments for managing fluids for industrial and commercial applications. From, the companies 10-K,
"Graco Inc. (“Graco” or “the Company”) supplies systems and equipment for the management of fluids in industrial, commercial and vehicle lubrication applications. The Company’s products help customers solve difficult manufacturing problems, increase productivity, improve quality, conserve energy, save expensive material, control environmental emissions and reduce labor costs. Graco Inc. is the successor to Gray Company, Inc., which was incorporated in 1926 as a manufacturer of automobile lubrication equipment, and became a public company in 1969.
Headquartered in Minneapolis, Minnesota, Graco serves customers around the world in the manufacturing, process, construction and maintenance, and vehicle lubrication industries. It designs, manufactures and markets systems and equipment to move, measure, mix, proportion, control, dispense and spray a wide variety of fluids and viscous materials.
Graco’s strategic objectives include: increasing the proportion of sales outside North America, expanding its distribution network, penetrating new markets and actively pursuing focused acquisitions where the Company can add significant value. The Company’s long term financial targets include: growing revenue by 10 percent and net earnings by 12 percent per year; achieving returns on sales exceeding 10 percent, on assets of at least 15 percent and on equity of at least 20 percent; generating at least 30 percent of each year’s sales from products introduced in the last three years; and generating at least 5 percent of each year’s sales from markets entered in the last three years. Initiatives for 2005 include the establishment of regional manufacturing, expansion of global sourcing and investment in emerging markets."
Graco's business is classified into three segments by management. Industrial/Automotive Equipment, Contractor Equipment and Lubrication Equipment. The break down by sales is 50%, 42% and 8% in each of these sectors.
Let us quickly look at the growth rate and the balance sheets to see how the company is doing and if it is a buy at current prices.
The stock holders equity is about 270 million dollars comes to about four dollars per share. The company has a dividend yield of 0.9%. The dividend yield has increased by about 44% year over year. The company has very clear objectives for innovation, management and growth. The growth in each of the segments for the company is as follows: Industrial/automative section grew by 25% year over year. Contractor section grew by 4% year over year. Lubrication section grew 13% year over year. Net sales increased by 15% compared to the previous year and net earnings increased by 18% compared to the previous year.
The analyst estimates for GGG is to grow around 10% a year for the next two-three years. While the stock is definitely expected to meet or beat these expectations, the current prices are a bit high for the investor to pay to get something from this growth. The analyst estimate available through Yahoo! for the stock is a median target of $38=00 for this stock this year. The current price for the stock is $41.10. Using smart money calculator, the stock is valued at $36=00. It will help the investors to wait for a dip in prices and add to their positions at a price point of below $36=00.
Graco is not the manufacturer of the popular car seats - but in the business of providing equipments for managing fluids for industrial and commercial applications. From, the companies 10-K,
"Graco Inc. (“Graco” or “the Company”) supplies systems and equipment for the management of fluids in industrial, commercial and vehicle lubrication applications. The Company’s products help customers solve difficult manufacturing problems, increase productivity, improve quality, conserve energy, save expensive material, control environmental emissions and reduce labor costs. Graco Inc. is the successor to Gray Company, Inc., which was incorporated in 1926 as a manufacturer of automobile lubrication equipment, and became a public company in 1969.
Headquartered in Minneapolis, Minnesota, Graco serves customers around the world in the manufacturing, process, construction and maintenance, and vehicle lubrication industries. It designs, manufactures and markets systems and equipment to move, measure, mix, proportion, control, dispense and spray a wide variety of fluids and viscous materials.
Graco’s strategic objectives include: increasing the proportion of sales outside North America, expanding its distribution network, penetrating new markets and actively pursuing focused acquisitions where the Company can add significant value. The Company’s long term financial targets include: growing revenue by 10 percent and net earnings by 12 percent per year; achieving returns on sales exceeding 10 percent, on assets of at least 15 percent and on equity of at least 20 percent; generating at least 30 percent of each year’s sales from products introduced in the last three years; and generating at least 5 percent of each year’s sales from markets entered in the last three years. Initiatives for 2005 include the establishment of regional manufacturing, expansion of global sourcing and investment in emerging markets."
Graco's business is classified into three segments by management. Industrial/Automotive Equipment, Contractor Equipment and Lubrication Equipment. The break down by sales is 50%, 42% and 8% in each of these sectors.
Let us quickly look at the growth rate and the balance sheets to see how the company is doing and if it is a buy at current prices.
The stock holders equity is about 270 million dollars comes to about four dollars per share. The company has a dividend yield of 0.9%. The dividend yield has increased by about 44% year over year. The company has very clear objectives for innovation, management and growth. The growth in each of the segments for the company is as follows: Industrial/automative section grew by 25% year over year. Contractor section grew by 4% year over year. Lubrication section grew 13% year over year. Net sales increased by 15% compared to the previous year and net earnings increased by 18% compared to the previous year.
The analyst estimates for GGG is to grow around 10% a year for the next two-three years. While the stock is definitely expected to meet or beat these expectations, the current prices are a bit high for the investor to pay to get something from this growth. The analyst estimate available through Yahoo! for the stock is a median target of $38=00 for this stock this year. The current price for the stock is $41.10. Using smart money calculator, the stock is valued at $36=00. It will help the investors to wait for a dip in prices and add to their positions at a price point of below $36=00.
Friday, February 17, 2006
USG(USG) Analysis
USG Corporation is in the building materials business. The company had to file for bankruptcy because of asbestos litigation and is currently emerging from bankruptcy. The company operates in three segments: North American Gypsum, Worldwide Ceilings, and Building Products Distribution. North American Gypsum segment manufactures and markets gypsum wallboards, cement boards, and fiber panels. North American Gypsum segment is the one that has exposure to asbestos litigation. Its products are used for various building applications, such as interior walls, ceilings, and floors in residential, commercial, and institutional construction, as well as for industrial applications. The company's Sheetrock(T) line of products are particularly popular. Worldwide Ceilings segment manufactures and markets interior systems products worldwide. Its interior ceilings products, such as ceiling grid and acoustical ceiling tile are primarily used in commercial applications in United States, Canada, Mexico, Europe, Latin America, and the Asia-Pacific region. Building Products Distribution segment distributes gypsum wallboard, drywall metal, ceilings products, joint compound, and other building products in the United States. The company distributes its products through building materials dealers, home improvement centers and other retailers. It also manufactures mineral fiber products and metal specialty systems.
In this section, we will analyze USG's balance sheets and see the risk of asbestos litigation and balance it against the cash flow and growth of the company.
The Corporation's operations are organized into three operating segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution. Net sales for the respective segments accounted for approximately 54%, 12% and 34% of 2005 consolidated net sales respectively. North American Gypsum has 30% of U.S market share.
USG has to pay 3.95 billion in the worst case scenario for asbestos litigation related charges. The sales in 2005 increased by 14% compared to 2004. The operating margins also increased in 2005 50 21.4% compared to 2004 where the margins were at 18.6%. The company had 1.577 billion of cash or equivalents at the end of 2005. The company recorded a net loss of $1.436 billion, or $32.92 per share, was recorded in 2005. This loss included the after-tax provision of $1.935 billion, or $44.36 per share, for asbestos claims and an after-tax charge of $11 million, or $0.26 per share, for the cumulative effect of an accounting change related to the adoption of FIN 47. Excluding these charges, 2005 net earnings were $510 million, or $11.70 per share. The expectation for 2006 is about 14% increase in earnings to $13.35/share.
Cash flow from operations increased by 18% year over year to 506 million from 428 million. The sales in the North American Gypsum segment increased by 17%. The sales in the world wide ceilings department increased by 2.7%. Sales in the building products group increased by 18%.
The total assets of the company was 6.142 billion with 5.34 billion set aside for asbestos litigation settlements. Taking into account cash flow from operations of 506 million per year growing at 8% for the next ten years with a discount rate of 6% per year, provides net cash flow of approximately 6 billion dollars in the next ten years. Given this cash flow, if no further money is set aside for asbestos based litigation and if there is no further stock dilution, we get a per share price of 139 dollars. The growth rate could be higher in the immediate future and further sums of money may need to be allocated for asbestos litigation. There could be further dilution in the company's stock once it emerges from bankruptcy reducing the attractiveness of the stock. I believe a growth rate of 8% is is reasonable for building products given the population growth in the U.S and the consequent demand for housing.
USG Corporation is in the building materials business. The company had to file for bankruptcy because of asbestos litigation and is currently emerging from bankruptcy. The company operates in three segments: North American Gypsum, Worldwide Ceilings, and Building Products Distribution. North American Gypsum segment manufactures and markets gypsum wallboards, cement boards, and fiber panels. North American Gypsum segment is the one that has exposure to asbestos litigation. Its products are used for various building applications, such as interior walls, ceilings, and floors in residential, commercial, and institutional construction, as well as for industrial applications. The company's Sheetrock(T) line of products are particularly popular. Worldwide Ceilings segment manufactures and markets interior systems products worldwide. Its interior ceilings products, such as ceiling grid and acoustical ceiling tile are primarily used in commercial applications in United States, Canada, Mexico, Europe, Latin America, and the Asia-Pacific region. Building Products Distribution segment distributes gypsum wallboard, drywall metal, ceilings products, joint compound, and other building products in the United States. The company distributes its products through building materials dealers, home improvement centers and other retailers. It also manufactures mineral fiber products and metal specialty systems.
In this section, we will analyze USG's balance sheets and see the risk of asbestos litigation and balance it against the cash flow and growth of the company.
The Corporation's operations are organized into three operating segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution. Net sales for the respective segments accounted for approximately 54%, 12% and 34% of 2005 consolidated net sales respectively. North American Gypsum has 30% of U.S market share.
USG has to pay 3.95 billion in the worst case scenario for asbestos litigation related charges. The sales in 2005 increased by 14% compared to 2004. The operating margins also increased in 2005 50 21.4% compared to 2004 where the margins were at 18.6%. The company had 1.577 billion of cash or equivalents at the end of 2005. The company recorded a net loss of $1.436 billion, or $32.92 per share, was recorded in 2005. This loss included the after-tax provision of $1.935 billion, or $44.36 per share, for asbestos claims and an after-tax charge of $11 million, or $0.26 per share, for the cumulative effect of an accounting change related to the adoption of FIN 47. Excluding these charges, 2005 net earnings were $510 million, or $11.70 per share. The expectation for 2006 is about 14% increase in earnings to $13.35/share.
Cash flow from operations increased by 18% year over year to 506 million from 428 million. The sales in the North American Gypsum segment increased by 17%. The sales in the world wide ceilings department increased by 2.7%. Sales in the building products group increased by 18%.
The total assets of the company was 6.142 billion with 5.34 billion set aside for asbestos litigation settlements. Taking into account cash flow from operations of 506 million per year growing at 8% for the next ten years with a discount rate of 6% per year, provides net cash flow of approximately 6 billion dollars in the next ten years. Given this cash flow, if no further money is set aside for asbestos based litigation and if there is no further stock dilution, we get a per share price of 139 dollars. The growth rate could be higher in the immediate future and further sums of money may need to be allocated for asbestos litigation. There could be further dilution in the company's stock once it emerges from bankruptcy reducing the attractiveness of the stock. I believe a growth rate of 8% is is reasonable for building products given the population growth in the U.S and the consequent demand for housing.
Sunday, February 12, 2006
Brown and Brown (BRO) Analysis
Brown and Brown ( Ticker BRO) is a general insurance agency with operations in thirty of the fifty states. The company is headquartered in Florida and has approximately 20% of its locations in that state. BRO sells insurance products and services, primarily in the property, casualty and employee benefits areas.
BRO primarily is an agent and doesnt have underwriting risks. BRO makes money compensate for its services primarily by commissions paid by insurance companies and fees paid by customers. The commission is usually a percentage of the premium paid by the insured. In some cases BRO also receive from an insurance company a “contingent commission”, which is a profit-sharing commission based primarily on underwriting results, but may also contain considerations for volume, growth and/or retention. Fees are principally generated by the Services Division, which offers third-party administration, benefit consulting and managed healthcare services, primarily in the area of workers’ compensation.
The company has four divisions - retail division, national programs division, brokerage division, services division and other. The revenues in the company ( and EPS ) have grown steadily year over year. The growth has been 20% year over year in 2003 and 18% year over year in 2004. The company expected a soft market in 2005 for insurance products. For the first nine months of 2005, the earnings were growing at close to 17% rate. The share holders equity increased by 22% year over year in 2005.
In 2005, the revenue growth in primarily came from the brokerages division as revenue growth in the retail division was not spectacular. The increased number of Hurricanes in the gulf coast area should boost the insurance rates this year as many of the policies come up for renewal. Let us quickly look at the analyst estimates for BRO in this year.
According to the consensus estimates, the EPS growth is expected to slow down to 15% and 14% respectively in 2006 and 2007. Currently, the company sports a P/E of 28 while the earnings growth rate is half of that. The revenue growth in this company is pretty solid when comparing to competitors in this sector. I would watch this stock for dips in prices and buy it on dips.
Brown and Brown ( Ticker BRO) is a general insurance agency with operations in thirty of the fifty states. The company is headquartered in Florida and has approximately 20% of its locations in that state. BRO sells insurance products and services, primarily in the property, casualty and employee benefits areas.
BRO primarily is an agent and doesnt have underwriting risks. BRO makes money compensate for its services primarily by commissions paid by insurance companies and fees paid by customers. The commission is usually a percentage of the premium paid by the insured. In some cases BRO also receive from an insurance company a “contingent commission”, which is a profit-sharing commission based primarily on underwriting results, but may also contain considerations for volume, growth and/or retention. Fees are principally generated by the Services Division, which offers third-party administration, benefit consulting and managed healthcare services, primarily in the area of workers’ compensation.
The company has four divisions - retail division, national programs division, brokerage division, services division and other. The revenues in the company ( and EPS ) have grown steadily year over year. The growth has been 20% year over year in 2003 and 18% year over year in 2004. The company expected a soft market in 2005 for insurance products. For the first nine months of 2005, the earnings were growing at close to 17% rate. The share holders equity increased by 22% year over year in 2005.
In 2005, the revenue growth in primarily came from the brokerages division as revenue growth in the retail division was not spectacular. The increased number of Hurricanes in the gulf coast area should boost the insurance rates this year as many of the policies come up for renewal. Let us quickly look at the analyst estimates for BRO in this year.
According to the consensus estimates, the EPS growth is expected to slow down to 15% and 14% respectively in 2006 and 2007. Currently, the company sports a P/E of 28 while the earnings growth rate is half of that. The revenue growth in this company is pretty solid when comparing to competitors in this sector. I would watch this stock for dips in prices and buy it on dips.
Saturday, February 11, 2006
Apollo Group (APOL) Analysis
Apollo Group focuses on providing education to working adults. From the 10-Q of APOL, Apollo Group, Inc. (“Apollo” or the “Company”), through its wholly-owned subsidiaries: The University of Phoenix, Inc. (“University of Phoenix”), Institute for Professional Development (“IPD”), The College for Financial Planning Institutes Corporation (the “College”), and Western International University, Inc. (“WIU”), has been providing higher education to working adults for almost 30 years.
Recently, APOL was in the Standards and Poors "Warren Buffett" screen portfolio. According to Standards & Poors, this is one of the stocks that is expected to do well in this year. Let us first look at the publicly filed statements to understand APOL business and then we will look at the balance sheets.
The APOL business is in the education industry and especially working adults section. Working adults are a significant and growing component of the post-secondary education market. The market for adult education should continue to increase as working adults seek additional education and training to update and improve their skills, to enhance their earnings potential, and to keep pace with the rapidly expanding, knowledge-based economy.
The opportunities for APOL are as follows:
University of Phoenix expansion both locally and internationally. The US and other advanced countries are increasingly focussing on knowledge based economy and career change. The plan by APOL group to expand in this space should pay well. This should work well as University of Phoenix accomodates the need of working people well.
Expand Student Base in Associates Degree Programs. The plan is for this to be expanded through the Axia college. Axia College has been specifically designed to meet the special needs of low-credit working adults.
Approximately 93% of Apollo revenue is expected to accrue through tuition revenue and University of Phoenix provides 83% of the revenue. The yearly growth rate is approximately 10% in operating income. However, the earnings per share increased by 24% year over year. The company is aggressively buying back shares which is helping boost the earnings per share. The number of outstanding shares declined by approximately 5% year over year.
The Apol stock has a P/E of 23 - very close to its EPS growth. While the stock is not cheap, this stock is setup to capitalize on the general trends in the United States. More people will need to retrain in north america and Apollo is all set to capitalize on this trend. Not surprisingly, the EPS is expected to grow at around 20% for the next couple of years. The operating earning margin has remained steady around 20% and Apollo has the pricing power to raise its tuition to keep up the margins. The competition to Apollo is primarily from other well established universities but Apollo group is currently doing a better job in addressing the need of rank and file Americans.
Apollo Group focuses on providing education to working adults. From the 10-Q of APOL, Apollo Group, Inc. (“Apollo” or the “Company”), through its wholly-owned subsidiaries: The University of Phoenix, Inc. (“University of Phoenix”), Institute for Professional Development (“IPD”), The College for Financial Planning Institutes Corporation (the “College”), and Western International University, Inc. (“WIU”), has been providing higher education to working adults for almost 30 years.
Recently, APOL was in the Standards and Poors "Warren Buffett" screen portfolio. According to Standards & Poors, this is one of the stocks that is expected to do well in this year. Let us first look at the publicly filed statements to understand APOL business and then we will look at the balance sheets.
The APOL business is in the education industry and especially working adults section. Working adults are a significant and growing component of the post-secondary education market. The market for adult education should continue to increase as working adults seek additional education and training to update and improve their skills, to enhance their earnings potential, and to keep pace with the rapidly expanding, knowledge-based economy.
The opportunities for APOL are as follows:
University of Phoenix expansion both locally and internationally. The US and other advanced countries are increasingly focussing on knowledge based economy and career change. The plan by APOL group to expand in this space should pay well. This should work well as University of Phoenix accomodates the need of working people well.
Expand Student Base in Associates Degree Programs. The plan is for this to be expanded through the Axia college. Axia College has been specifically designed to meet the special needs of low-credit working adults.
Approximately 93% of Apollo revenue is expected to accrue through tuition revenue and University of Phoenix provides 83% of the revenue. The yearly growth rate is approximately 10% in operating income. However, the earnings per share increased by 24% year over year. The company is aggressively buying back shares which is helping boost the earnings per share. The number of outstanding shares declined by approximately 5% year over year.
The Apol stock has a P/E of 23 - very close to its EPS growth. While the stock is not cheap, this stock is setup to capitalize on the general trends in the United States. More people will need to retrain in north america and Apollo is all set to capitalize on this trend. Not surprisingly, the EPS is expected to grow at around 20% for the next couple of years. The operating earning margin has remained steady around 20% and Apollo has the pricing power to raise its tuition to keep up the margins. The competition to Apollo is primarily from other well established universities but Apollo group is currently doing a better job in addressing the need of rank and file Americans.
Grant Prideco Inc (GRP) Analysis
Recently, there was interest in GRP as many analysts upgraded this stock and this stock was also mentioned in CNBC as a strong buy. Let us look at this company and its financials to see if this is a buy.
First an introduction to the company's business. There is no better place to look than the company's 10-K or 10-Q. In one sentence, GRP business can be described as "GRP is a world leader in drill stem technology development and drill pipe manufacturing, sales and service; a global leader in drill bit technology, manufacturing, sales and service; and a leading provider of high-performance engineered connections and premium tubular products and services".
GRP's business is primarily dependent on the level of oil and gas drilling activity worldwide. This in turn, depends on the level of capital spending by major, independent and state-owned exploration and production companies.
This clearly shows in the company's share price as the stock jumped from $20 in January to $45 on Feb 10th. The current P/E is 31. Let us take a look at the balance sheets to see if the stock price jump is because of P/E expansion or significant improvement in the stock fundamentals.
Year over year, revenues increased by 45%. The operating income jumped by 146% as the cost of sales and marketing remained the same year over year. There was also a refinancing charge of 57 million dollars and equity income of 38 million in 2005. These charges werent present in 2004. From the latest 10-Q, the stocks diluted by about 4% year over year.
On a positive note, the long term debt declined by 100 million. The company's profitability is based on the rig count in general. The company owns more rigs in the U.S compared to the rest of the world. The number of rigs in the U.S increased by 27% while the international rigs increased by 7.6%. The company is also forecasting a strong 2005, as noted in the 10-Q.
"When forecasting our results for the remainder of 2005, we relied on assumptions about the market, customers, and suppliers, and we also considered the Company’s results and backlog from the first three quarters of 2005. All these indicators appear strong. We anticipate commodity price strength for the foreseeable future driven by strong worldwide demand. Improving pricing, profitability and outlook of our customers should translate into a continuation of strong worldwide drilling activity levels through year-end. Also, in Canada, the seasonal drilling activity increase should be accompanied by a shift toward more complex drilling in the North, which should incrementally help our drill bit product mix. Finally, our backlog is at record levels. At September 30, 2005, our total backlog was $742.5 million, up $450.6 million from December 31, 2004. This is the highest backlog level since the Company became public in April 2000. Using these indicators, we anticipate that fourth quarter earnings will be another record, in the range of $0.50 to 0.52 per share. This should bring earnings for the full year to be in the range of $1.35 to $1.37 per share, including refinancing charges."
The company has beat its own expectations by seven cents and it beat its own expectations on the high end with earnings coming in at 1.45/share. The company had a great run in 2005 and the company's exposure is mostly in north america. (U.S and Canada). The stock doubled in January and I would wait for the 10-Q/10-K to come out for the entire year before jumping into this stock.
Recently, there was interest in GRP as many analysts upgraded this stock and this stock was also mentioned in CNBC as a strong buy. Let us look at this company and its financials to see if this is a buy.
First an introduction to the company's business. There is no better place to look than the company's 10-K or 10-Q. In one sentence, GRP business can be described as "GRP is a world leader in drill stem technology development and drill pipe manufacturing, sales and service; a global leader in drill bit technology, manufacturing, sales and service; and a leading provider of high-performance engineered connections and premium tubular products and services".
GRP's business is primarily dependent on the level of oil and gas drilling activity worldwide. This in turn, depends on the level of capital spending by major, independent and state-owned exploration and production companies.
This clearly shows in the company's share price as the stock jumped from $20 in January to $45 on Feb 10th. The current P/E is 31. Let us take a look at the balance sheets to see if the stock price jump is because of P/E expansion or significant improvement in the stock fundamentals.
Year over year, revenues increased by 45%. The operating income jumped by 146% as the cost of sales and marketing remained the same year over year. There was also a refinancing charge of 57 million dollars and equity income of 38 million in 2005. These charges werent present in 2004. From the latest 10-Q, the stocks diluted by about 4% year over year.
On a positive note, the long term debt declined by 100 million. The company's profitability is based on the rig count in general. The company owns more rigs in the U.S compared to the rest of the world. The number of rigs in the U.S increased by 27% while the international rigs increased by 7.6%. The company is also forecasting a strong 2005, as noted in the 10-Q.
"When forecasting our results for the remainder of 2005, we relied on assumptions about the market, customers, and suppliers, and we also considered the Company’s results and backlog from the first three quarters of 2005. All these indicators appear strong. We anticipate commodity price strength for the foreseeable future driven by strong worldwide demand. Improving pricing, profitability and outlook of our customers should translate into a continuation of strong worldwide drilling activity levels through year-end. Also, in Canada, the seasonal drilling activity increase should be accompanied by a shift toward more complex drilling in the North, which should incrementally help our drill bit product mix. Finally, our backlog is at record levels. At September 30, 2005, our total backlog was $742.5 million, up $450.6 million from December 31, 2004. This is the highest backlog level since the Company became public in April 2000. Using these indicators, we anticipate that fourth quarter earnings will be another record, in the range of $0.50 to 0.52 per share. This should bring earnings for the full year to be in the range of $1.35 to $1.37 per share, including refinancing charges."
The company has beat its own expectations by seven cents and it beat its own expectations on the high end with earnings coming in at 1.45/share. The company had a great run in 2005 and the company's exposure is mostly in north america. (U.S and Canada). The stock doubled in January and I would wait for the 10-Q/10-K to come out for the entire year before jumping into this stock.
Thursday, February 09, 2006
More sell signs at Google (GOOG)
Cnn ran this story yesterday about Google titled "Google - factory installed from Dell?" http://money.cnn.com/2006/02/07/technology/google_dell/index.htm. The article talked about Google pre-installing search and other software on Dell machines and Dell being paid upto a billion dollars to place Google software prominently. There is also an analysis by Henry Blodget that comments why this will reduce Google's cash flows will deteriorate because of this placement.
While Blodgets analysis is right on the mark, the main reason for Google to do this deal is competition from Microsoft. Expect live.com to be the default web page on every version of windows that is shipped in vista onwards. Over the next three-five year period, MSN Search will be on every PC that is shipped to the tune of several hundred million machines. Despite making noises by investing in OpenOffice (known as Star Office before) and Firefox, Microsoft still is very strong and not having a prominent position on the desktop can stifle Google not to mention Yahoo!.
The main reason Google is doing this deal is not to cut into Microsoft's profit but to survive in the search business in five years time. Microsoft is investing heavily into search and its search engine is slowly but surely catching up with Googles. Google's solution will not be relevant in five years time as Microsoft ramps up in this market. Microsoft can cause a slight deflation in the search revenue by reducing the pricing for live.com ads. Microsoft doesnt rely on ads from its live.com today for generating its revenues and it can easily undercut Yahoo! and Google. Yahoo! doesnt have this power as it earns about 18 cents on every dollar of revenue.
The dell deal will blead money for Google which is just fine with Microsoft. It is going to depress Google stock and eventually Microsoft is going to win as Google cant afford to pay every OEM the money it is paying Dell and still run a profitable business. The main reason for increased profitability at Google and Yahoo! is increased price points for online ads. Expect it to decline in the next two-five years.
We discussed Google, Yahoo! and Microsoft in the following articles and why Google stock is not a buy at the moment.
http://finnews.blogspot.com/2006/01/google-goog-analysis-google-internet.html
http://finnews.blogspot.com/2006/01/google-and-search-engine-wars-part-iii.html
Cnn ran this story yesterday about Google titled "Google - factory installed from Dell?" http://money.cnn.com/2006/02/07/technology/google_dell/index.htm. The article talked about Google pre-installing search and other software on Dell machines and Dell being paid upto a billion dollars to place Google software prominently. There is also an analysis by Henry Blodget that comments why this will reduce Google's cash flows will deteriorate because of this placement.
While Blodgets analysis is right on the mark, the main reason for Google to do this deal is competition from Microsoft. Expect live.com to be the default web page on every version of windows that is shipped in vista onwards. Over the next three-five year period, MSN Search will be on every PC that is shipped to the tune of several hundred million machines. Despite making noises by investing in OpenOffice (known as Star Office before) and Firefox, Microsoft still is very strong and not having a prominent position on the desktop can stifle Google not to mention Yahoo!.
The main reason Google is doing this deal is not to cut into Microsoft's profit but to survive in the search business in five years time. Microsoft is investing heavily into search and its search engine is slowly but surely catching up with Googles. Google's solution will not be relevant in five years time as Microsoft ramps up in this market. Microsoft can cause a slight deflation in the search revenue by reducing the pricing for live.com ads. Microsoft doesnt rely on ads from its live.com today for generating its revenues and it can easily undercut Yahoo! and Google. Yahoo! doesnt have this power as it earns about 18 cents on every dollar of revenue.
The dell deal will blead money for Google which is just fine with Microsoft. It is going to depress Google stock and eventually Microsoft is going to win as Google cant afford to pay every OEM the money it is paying Dell and still run a profitable business. The main reason for increased profitability at Google and Yahoo! is increased price points for online ads. Expect it to decline in the next two-five years.
We discussed Google, Yahoo! and Microsoft in the following articles and why Google stock is not a buy at the moment.
http://finnews.blogspot.com/2006/01/google-goog-analysis-google-internet.html
http://finnews.blogspot.com/2006/01/google-and-search-engine-wars-part-iii.html
Monday, February 06, 2006
Walgreen (WAG) Analysis
From Walgreen 10-Q, Walgreens is a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, cosmetics, toiletries, food, beverages, household items and photofinishing. Customers can have prescriptions filled at the drugstore counter, as well as through the mail, by telephone and on the Internet. As of November 30, 2005, we operated 5,068 locations (including seven mail service facilities) located in 45 states and Puerto Rico. The store total now includes 33 home care locations but excludes 22 stores closed due to Hurricane Katrina.
The drugstore industry is highly competitive. In addition to other drugstore chains, independent drugstores and mail order prescription providers, we also compete with various other retailers including grocery stores, mass merchants and dollar stores.
The long-term outlook for prescription sales is strong due in part to the aging population, as well as the continued development of innovative drugs that improve quality of life and control healthcare costs. As of January 1, 2006, the new Medicare Part D prescription drug program will be in effect. While it is difficult to fully predict the business impact, we believe we are well positioned to capture additional Medicare prescription sales. During fiscal year 2005, the precursor to this program, Medicare senior discount cards, gave us additional prescription sales, although the gross margin rates on these sales were lower.
The number of stores operated by Walgreens increased by 7.5% year over year. The revenues increased by 10% year over year. Approximately 65% of Walgreen earnings are through prescription drugs. The risk to Walgreen is that many drugs are going off the patent list with equivalent generics available. In the latest quarter, the impact of the generics was as follows. From Walgreen 10-Q, "The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 2.0% in the first quarter versus 2.3% for the same period a year ago. Third party sales, where reimbursement is received from managed care organizations as well as government and private insurance, were 92.5% of prescription sales compared to 92.6% a year ago." Even then, prescription based generics didnt seem to have negative impact on sales. Again from 10-Q "Gross margins as a percent of total sales were 27.5% in the quarter compared to 27.4% last year. Prescription margins increased primarily because of higher generic drug utilization. The higher generic drug utilization was principally due to a steady stream of new generics over the past year. Non-prescription margins decreased due to our sales mix moving to lower margin categories."
The morning star article rates Walgreens a buy. (http://news.morningstar.com/article/article.asp?id=155248&pgid=wwhome1a) The analyst estimates are for 15% growth in 2007 compared to 2006. The ageing population + increase in stores should bode well for Walgreens. The sales growth is expected to be about 12%. The current market cap for Walgreens is 43billion with a P/E of 28. The stock is not cheap given its growth rate and P/E. If the price of the stock dropped by five-ten dollars, it would be a much stronger buy.
From Walgreen 10-Q, Walgreens is a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, cosmetics, toiletries, food, beverages, household items and photofinishing. Customers can have prescriptions filled at the drugstore counter, as well as through the mail, by telephone and on the Internet. As of November 30, 2005, we operated 5,068 locations (including seven mail service facilities) located in 45 states and Puerto Rico. The store total now includes 33 home care locations but excludes 22 stores closed due to Hurricane Katrina.
The drugstore industry is highly competitive. In addition to other drugstore chains, independent drugstores and mail order prescription providers, we also compete with various other retailers including grocery stores, mass merchants and dollar stores.
The long-term outlook for prescription sales is strong due in part to the aging population, as well as the continued development of innovative drugs that improve quality of life and control healthcare costs. As of January 1, 2006, the new Medicare Part D prescription drug program will be in effect. While it is difficult to fully predict the business impact, we believe we are well positioned to capture additional Medicare prescription sales. During fiscal year 2005, the precursor to this program, Medicare senior discount cards, gave us additional prescription sales, although the gross margin rates on these sales were lower.
The number of stores operated by Walgreens increased by 7.5% year over year. The revenues increased by 10% year over year. Approximately 65% of Walgreen earnings are through prescription drugs. The risk to Walgreen is that many drugs are going off the patent list with equivalent generics available. In the latest quarter, the impact of the generics was as follows. From Walgreen 10-Q, "The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 2.0% in the first quarter versus 2.3% for the same period a year ago. Third party sales, where reimbursement is received from managed care organizations as well as government and private insurance, were 92.5% of prescription sales compared to 92.6% a year ago." Even then, prescription based generics didnt seem to have negative impact on sales. Again from 10-Q "Gross margins as a percent of total sales were 27.5% in the quarter compared to 27.4% last year. Prescription margins increased primarily because of higher generic drug utilization. The higher generic drug utilization was principally due to a steady stream of new generics over the past year. Non-prescription margins decreased due to our sales mix moving to lower margin categories."
The morning star article rates Walgreens a buy. (http://news.morningstar.com/article/article.asp?id=155248&pgid=wwhome1a) The analyst estimates are for 15% growth in 2007 compared to 2006. The ageing population + increase in stores should bode well for Walgreens. The sales growth is expected to be about 12%. The current market cap for Walgreens is 43billion with a P/E of 28. The stock is not cheap given its growth rate and P/E. If the price of the stock dropped by five-ten dollars, it would be a much stronger buy.
Sunday, February 05, 2006
Chicos (CHS) Analysis Update
Chicos is in the specialty retailer business including women's clothing, apparel, gifts and under garments. Chicos caters primarily to baby boomer women who are thirty five or older. Chicos operates under the Chico's, White House, Black Market and Soma brands. Chicos operated 743 retail stores as of October 29, 2005 and plans to expand the retail space by 20% in 2005 and between 20-30% in 2006. The company grew same store sales by 16% year over year while opening new stores.
We analyzed Chicos ( http://finnews.blogspot.com/2006/01/chico-chs-analysis-chicos-has-been.html ) in the prior article. Recently there have been some stories suggesting that Chicos is overpriced and its stock price has overtaken its growth.
In the morningstar article (http://news.morningstar.com/article/article.asp?id=155248&pgid=wwhome1a), the authors conclude that the stock will return less than the government bond in the long run. Let us look at the Chicos numbers again to see if this is correct.
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.
Chicos is in the specialty retailer business including women's clothing, apparel, gifts and under garments. Chicos caters primarily to baby boomer women who are thirty five or older. Chicos operates under the Chico's, White House, Black Market and Soma brands. Chicos operated 743 retail stores as of October 29, 2005 and plans to expand the retail space by 20% in 2005 and between 20-30% in 2006. The company grew same store sales by 16% year over year while opening new stores.
We analyzed Chicos ( http://finnews.blogspot.com/2006/01/chico-chs-analysis-chicos-has-been.html ) in the prior article. Recently there have been some stories suggesting that Chicos is overpriced and its stock price has overtaken its growth.
In the morningstar article (http://news.morningstar.com/article/article.asp?id=155248&pgid=wwhome1a), the authors conclude that the stock will return less than the government bond in the long run. Let us look at the Chicos numbers again to see if this is correct.
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.
Merck (MRK) Analysis
Merck has been in the news lately because of the lawsuits related to Vioxx. It also lost a Vioxx trial in Texas where the jury awarded $250 million to the deceased. In this segment, we look at Merck business and see if it is a worth a buy at these levels.
From Merck's 10-K, the business can be described as follows. "Merck & Co., Inc. (“Merck” or the “Company”) is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health, directly and through its joint ventures."
The companies business segments are Atherosclerosis, Hypertension/heart failure, Osteoporosis, Respiratory, Anti-inflammatory/analgesics, Anti-bacterial/anti-fungal, Vaccines/biologicals, Urology, Ophthalmologicals, HIV and other category. The pharma sector in general has been down in the past couple of years as many drugs are coming off patent protection which would mean the company would lose exclusivity in the markets they are in.
First let us look at the drugs coming off the patent list in the next few years and look at the Vioxx effect.
Zocor, an anti cholesterol drug lost its patents in Canada and Germany in 2003. It is expected that it will lose its market exclusivity in June 2006 in the U.S. Drugs for atheroscerosis make up about 25% of Merck's revenue and Merck has stated that this will cause decline in Merck's revenues. Another drug, Fosamax to fight osteoporosis is also expected to lose its exclusivity in Feb 2008. Fosamax and other drugs contribute 14% to the companies revenue.
In the first nine months of this fiscal year, Merck's revenues declined by 5.5% on a year on year basis. However, the operating earnings increased by 7%. The increase in operating earnings is primarily because of focus on the bottom line. Also, on a positive note, Merck's Rotateq won an approval in the U.S. This is a drug that fights the leading cause of severe diarrhea in infants. This news should give Merck a boost in the coming weak.
Merck also pays out 50% of its operating earnings as dividends which gives an yield of 4.6% given the current stock price of the company. However, earnings are expected to decline as Merck states in its 10-K once the Zocor patent is lifted in the second half of this year. There would be more competition from the generics which provide the same benefit. The other big challenge Merck faces is the large number of Vioxx trials. Merck has already earmarked about 650 million dollars for its legal defence and it thinks it can claim some money from insurers for its defence.
The company has an attractive P/E but as earnings are expected to decline somewhat moving forward, it is in the 18-20 range for forward earnings. It is not clear yet if the market has factored in the decline in sales from Zocor. Since the exact numbers are difficult to come by, waiting till the end of December 2006 for the numbers to be clear may not be a bad idea.
Merck has been in the news lately because of the lawsuits related to Vioxx. It also lost a Vioxx trial in Texas where the jury awarded $250 million to the deceased. In this segment, we look at Merck business and see if it is a worth a buy at these levels.
From Merck's 10-K, the business can be described as follows. "Merck & Co., Inc. (“Merck” or the “Company”) is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health, directly and through its joint ventures."
The companies business segments are Atherosclerosis, Hypertension/heart failure, Osteoporosis, Respiratory, Anti-inflammatory/analgesics, Anti-bacterial/anti-fungal, Vaccines/biologicals, Urology, Ophthalmologicals, HIV and other category. The pharma sector in general has been down in the past couple of years as many drugs are coming off patent protection which would mean the company would lose exclusivity in the markets they are in.
First let us look at the drugs coming off the patent list in the next few years and look at the Vioxx effect.
Zocor, an anti cholesterol drug lost its patents in Canada and Germany in 2003. It is expected that it will lose its market exclusivity in June 2006 in the U.S. Drugs for atheroscerosis make up about 25% of Merck's revenue and Merck has stated that this will cause decline in Merck's revenues. Another drug, Fosamax to fight osteoporosis is also expected to lose its exclusivity in Feb 2008. Fosamax and other drugs contribute 14% to the companies revenue.
In the first nine months of this fiscal year, Merck's revenues declined by 5.5% on a year on year basis. However, the operating earnings increased by 7%. The increase in operating earnings is primarily because of focus on the bottom line. Also, on a positive note, Merck's Rotateq won an approval in the U.S. This is a drug that fights the leading cause of severe diarrhea in infants. This news should give Merck a boost in the coming weak.
Merck also pays out 50% of its operating earnings as dividends which gives an yield of 4.6% given the current stock price of the company. However, earnings are expected to decline as Merck states in its 10-K once the Zocor patent is lifted in the second half of this year. There would be more competition from the generics which provide the same benefit. The other big challenge Merck faces is the large number of Vioxx trials. Merck has already earmarked about 650 million dollars for its legal defence and it thinks it can claim some money from insurers for its defence.
The company has an attractive P/E but as earnings are expected to decline somewhat moving forward, it is in the 18-20 range for forward earnings. It is not clear yet if the market has factored in the decline in sales from Zocor. Since the exact numbers are difficult to come by, waiting till the end of December 2006 for the numbers to be clear may not be a bad idea.
Saturday, February 04, 2006
UGI Analysis (updated)
In the past section, we covered UGI and looked at its balance sheet. (http://finnews.blogspot.com/2006/01/ugi-corporation-ugi-analysis-ugi.html)
UGI is in the propane, natural gas/electric utility and services business. In the past several years, it has been growing faster than its industry peers and has consequently seen its stock price rise. Of late, UGI's star has fallen because of the missed earnings compared to analyst estimates. While the company remains solid, we will look at this quarter's balance sheet.
UGI had a good quarter overall - with revenues increasing in every business segment with the exclusion of international propane. There were some tax related gains in this segment in the same period last year. The increase in revenue and operating income (year over year) by percentages are as follows:
Amerigas Propane +13%
International Propane -3.96%
Gas Utility +19%
Electric Utility +7%
Energy Services +37%
The earnings growth in each business (year over year) is as follows:
Amerigas Propane +27%
International Propane -56%
Gas Utility + 25%
Electric Utility +38%
Energy Services +34%
The operating income took a hit because of the 56% drop in income in international propane. This likely is a one time event that probably wont last in the upcoming quarters.
The revenues in the gas utility business should continue to increase given the companies decision to buy Souther Unions decision to sell PG Gas in Pennsylvania to UGI. The energy services business is humming at full speed and the growth rates across all busineses with the exception of international propane looks good.
The debt to total capitalization is one of the highest in the industry at around 64% compared to the industry average of 55%. However, it does look like the company has plans to pay off some debt in the upcoming quarter. The stock looks attractive at the current P/E of 12 compared to its peers. Although earnings will decline this year compared to last, the growth should resume from the next fiscal year.
In the past section, we covered UGI and looked at its balance sheet. (http://finnews.blogspot.com/2006/01/ugi-corporation-ugi-analysis-ugi.html)
UGI is in the propane, natural gas/electric utility and services business. In the past several years, it has been growing faster than its industry peers and has consequently seen its stock price rise. Of late, UGI's star has fallen because of the missed earnings compared to analyst estimates. While the company remains solid, we will look at this quarter's balance sheet.
UGI had a good quarter overall - with revenues increasing in every business segment with the exclusion of international propane. There were some tax related gains in this segment in the same period last year. The increase in revenue and operating income (year over year) by percentages are as follows:
Amerigas Propane +13%
International Propane -3.96%
Gas Utility +19%
Electric Utility +7%
Energy Services +37%
The earnings growth in each business (year over year) is as follows:
Amerigas Propane +27%
International Propane -56%
Gas Utility + 25%
Electric Utility +38%
Energy Services +34%
The operating income took a hit because of the 56% drop in income in international propane. This likely is a one time event that probably wont last in the upcoming quarters.
The revenues in the gas utility business should continue to increase given the companies decision to buy Souther Unions decision to sell PG Gas in Pennsylvania to UGI. The energy services business is humming at full speed and the growth rates across all busineses with the exception of international propane looks good.
The debt to total capitalization is one of the highest in the industry at around 64% compared to the industry average of 55%. However, it does look like the company has plans to pay off some debt in the upcoming quarter. The stock looks attractive at the current P/E of 12 compared to its peers. Although earnings will decline this year compared to last, the growth should resume from the next fiscal year.
Thursday, February 02, 2006
Amazon.com (AMZN) Analysis
In a previous segment, we analyzed Walmart and Amazon.com and the profit margins and business models.
http://finnews.blogspot.com/2006/01/walmart-wmt-and-amazon.html
We found that Walmart is a superior business with better margins compared to Amazon.com. Let us look at Amazon's current quarter to see how it compares to its previous quarters and see if Amazon.com is a buy.
In the current quarter, amazon.com's operating expenses increased by 1% from the same quarter last year. The income from operations declines by 1% from 6% to 5%.
On a positive note, the stock dilution was limited in 2005 compared to 2004. The number of stocks outstanding increased by one million to 426 million from 425 million - an increase of .25%. This would make even Warren Buffett proud! The year over year operating earnings declined in north america. The operating earnings increased internationally.
There will be continued pressure on Amazon operating income because of continued pressure from search engines. The online market is changing rapidly and search is becoming the best way to look for things on the web. This trend and also opening up book contents by Google is going to put additional pressure on Amazon.com. In my opinion, the current P/E of 36 is still a high price to pay for Amazon. A fairer price would be a lower P/E than Walmart. Amazon is down after hours and is likely open lower tomorrow. The reason for the lower stock price is because Amazon missed analyst's estimates for revenues if not earnings.
In a previous segment, we analyzed Walmart and Amazon.com and the profit margins and business models.
http://finnews.blogspot.com/2006/01/walmart-wmt-and-amazon.html
We found that Walmart is a superior business with better margins compared to Amazon.com. Let us look at Amazon's current quarter to see how it compares to its previous quarters and see if Amazon.com is a buy.
In the current quarter, amazon.com's operating expenses increased by 1% from the same quarter last year. The income from operations declines by 1% from 6% to 5%.
On a positive note, the stock dilution was limited in 2005 compared to 2004. The number of stocks outstanding increased by one million to 426 million from 425 million - an increase of .25%. This would make even Warren Buffett proud! The year over year operating earnings declined in north america. The operating earnings increased internationally.
There will be continued pressure on Amazon operating income because of continued pressure from search engines. The online market is changing rapidly and search is becoming the best way to look for things on the web. This trend and also opening up book contents by Google is going to put additional pressure on Amazon.com. In my opinion, the current P/E of 36 is still a high price to pay for Amazon. A fairer price would be a lower P/E than Walmart. Amazon is down after hours and is likely open lower tomorrow. The reason for the lower stock price is because Amazon missed analyst's estimates for revenues if not earnings.
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