Seekingalpha has a guide for ETF investing. The guide is worth a read. It covers the following topics:
1. The factors to optimize for higher investment returns.
2. Why Tech stocks dont work
3. Why one shouldnt buy mutual funds?
4. Advantages of buying ETFs
5. How to assemble and manage a ETF portfolio?
6. Analysis for different situations.
7. Putting everything together
Happy reading at http://etf.seekingalpha.com/etfguide.
Saturday, April 14, 2007
Conoco Phillips (COP) Analysis
In this analysis, we will look at Conoco Phillips in a bit more detail than we did last time. COP ended FY06 with 51.4 $/share book value compared to 37 $/share book value in 2005. The book value improved by about 38%.
Let us look at some of the different segments of Conoco Phillips and how much they contributed to earnings.
E&P section was the highest contributor to earnings. World wide average sales price per barrel of oil was $60.37. For natural gas liquids/barrel, the earnings per barrel was $41.50. The revenues from abroad was about 5.5 billion dollars and was 4.348 billion dollars from the U.S. The average production cost has also gone up at around $5.57/barrel.
The other segment that contributes heavily to COP bottom line is R&M segment. R&M is the refining arm of COP. The refining segment resulted in 4.481 billion in income in 2006.
The chemicals segment resulted in 492 million dollars of income. This segment produces petrochemicals from natural gas, liquids and other feed stock.
Emerging Business segment has a net income of 15 million in 2006.
For 2007, the company plans to invest 13.5 billion in capital expenditures. The company plans to pay out about 3 billion dollars in dividends. The remaining cash flow is used to pay out debt and buy back shares. Last year, the cash flow in COP was 21 billion dollars. The total cash flow is entirely dependent on the crude oil prices. It is likely that the crude oil prices will hower around $60 for 2007.
The company expects to generate about 3-4 billion dollars from the rationalization of assets and has a plan to buy back stocks worth 4 billion dollars. The capital expenditures for 2007 has been reduced by about 2.5 billion dollars because of the scaling back of cost intensive projects. One can expect the company to reduce debt by about 3-4 billion dollars from the current level of 27 billion dollars. The company has debt obligations of about 3 billion dollars in 2007. The Venezuela liability to COP is about 2 billion dollars in the worst case.
COP is still cheap compared to its peers Chevron, Exxon Mobil and Petro China. However, COP carries significantly higher amounts of debt on its balance sheets.
Let us look at some of the different segments of Conoco Phillips and how much they contributed to earnings.
E&P section was the highest contributor to earnings. World wide average sales price per barrel of oil was $60.37. For natural gas liquids/barrel, the earnings per barrel was $41.50. The revenues from abroad was about 5.5 billion dollars and was 4.348 billion dollars from the U.S. The average production cost has also gone up at around $5.57/barrel.
The other segment that contributes heavily to COP bottom line is R&M segment. R&M is the refining arm of COP. The refining segment resulted in 4.481 billion in income in 2006.
The chemicals segment resulted in 492 million dollars of income. This segment produces petrochemicals from natural gas, liquids and other feed stock.
Emerging Business segment has a net income of 15 million in 2006.
For 2007, the company plans to invest 13.5 billion in capital expenditures. The company plans to pay out about 3 billion dollars in dividends. The remaining cash flow is used to pay out debt and buy back shares. Last year, the cash flow in COP was 21 billion dollars. The total cash flow is entirely dependent on the crude oil prices. It is likely that the crude oil prices will hower around $60 for 2007.
The company expects to generate about 3-4 billion dollars from the rationalization of assets and has a plan to buy back stocks worth 4 billion dollars. The capital expenditures for 2007 has been reduced by about 2.5 billion dollars because of the scaling back of cost intensive projects. One can expect the company to reduce debt by about 3-4 billion dollars from the current level of 27 billion dollars. The company has debt obligations of about 3 billion dollars in 2007. The Venezuela liability to COP is about 2 billion dollars in the worst case.
COP is still cheap compared to its peers Chevron, Exxon Mobil and Petro China. However, COP carries significantly higher amounts of debt on its balance sheets.
Google and Doubleclick deal
In this blog, we have looked at google a few times. In this article, we will take a look at the double click deal to see Google prospects.
First, let us look at Google's earning yield. The trailing earning yield is 2.1% and the forward earning yield for 2007 is 3%. The expected earning yield for 2008 is 3.95%. The 10 year bond is yielding 4.76% at the moment and is more attractive as an investment than Google stock.
Secondly, Google's competition is intensifying. Yahoo!'s Panama project seems to have started well and Microsoft's search/ad strategy isnt firing yet. However, Microsoft is not expected to give up easily - expect Microsoft to continue pouring money into this space till it captures some market share or the business itself is no longer relevant. We can take cues from the way Microsoft battled AOL in the last one decade. MSN internet access got to be profitable after losing money for years.
One thing that has changed about Microsoft is that it cant afford to spend money as freely as it did in the past as it has quite a few business divisions that are leaking money.
This brings us squarely to the double click deal. At 3.1 billion dollars a year and 1200 employees, is it a good deal for Google?
First, we have to look to see if the deal is accretive to Google's bottomline. Taking into account its 2007 earning yield, double click must generate about 90 million in profit to be comparable to Google's earnings and grow at around 30% pace in the coming year.
However, it is likely that DoubleClick's profits are far lower as Google paid for the entire deal in cash. Since cash is earning a higher yield in treasury bonds, it was a bit surprising that Google paid cash for the deal.
DoubleClick has about 1200 employees and if Google keeps them all, it will end up shelling out about 150-200 million dollars a year in employee salary/benefits alone. Moreover, this deal is unlikely to provide a moat to Google against Microsoft and Yahoo! as these companies already have a significance presence in the display ads market place.
It is difficult to understand how this deal is beneficial to Google at the price paid. It will be interesting to see how the stock will perform in the next couple of years.
First, let us look at Google's earning yield. The trailing earning yield is 2.1% and the forward earning yield for 2007 is 3%. The expected earning yield for 2008 is 3.95%. The 10 year bond is yielding 4.76% at the moment and is more attractive as an investment than Google stock.
Secondly, Google's competition is intensifying. Yahoo!'s Panama project seems to have started well and Microsoft's search/ad strategy isnt firing yet. However, Microsoft is not expected to give up easily - expect Microsoft to continue pouring money into this space till it captures some market share or the business itself is no longer relevant. We can take cues from the way Microsoft battled AOL in the last one decade. MSN internet access got to be profitable after losing money for years.
One thing that has changed about Microsoft is that it cant afford to spend money as freely as it did in the past as it has quite a few business divisions that are leaking money.
This brings us squarely to the double click deal. At 3.1 billion dollars a year and 1200 employees, is it a good deal for Google?
First, we have to look to see if the deal is accretive to Google's bottomline. Taking into account its 2007 earning yield, double click must generate about 90 million in profit to be comparable to Google's earnings and grow at around 30% pace in the coming year.
However, it is likely that DoubleClick's profits are far lower as Google paid for the entire deal in cash. Since cash is earning a higher yield in treasury bonds, it was a bit surprising that Google paid cash for the deal.
DoubleClick has about 1200 employees and if Google keeps them all, it will end up shelling out about 150-200 million dollars a year in employee salary/benefits alone. Moreover, this deal is unlikely to provide a moat to Google against Microsoft and Yahoo! as these companies already have a significance presence in the display ads market place.
It is difficult to understand how this deal is beneficial to Google at the price paid. It will be interesting to see how the stock will perform in the next couple of years.
Sunday, April 08, 2007
UPS Analysis Update
In previous articles, we looked at UPS and Fedex respectively. Both the stocks have gone down somewhat since then and are relatively cheap. Let us look at these stocks, specifically UPS to consider its prospects for the next several years.
First, some high points from UPS annual report. UPS is going to celebrate its centennial this year. UPS annual report claims industry leading margins at 16.8%. For UPS, management expects 6-10% growth in 2007 over 2006. 2007 is decidely lacklustre year for this segment making it a good time to acquire shares in this industry.
UPS expects organic revenue growth of 6-8% between now and 2010 - getting the overall revenue to about $60 billion. EPS componded is expected to grow between 9 and 14%. This is good news for share holders. At the low end, the upside to share price is 40% from the current levels and at the high end, the upside is more like 70%. This is with a P/E of 18. Meanwhile, UPS will continue to pay out about 40% of the income in dividends - this comes to 2.4% yield per year. Four four years, this comes to about 9.6% over four years - it is likely that dividends will increase and the yield will be will over 10% over four years. In total, one can look at returns of 50% at the low end and 80% at the high end including dividends. This is a good pay out for the current investment.
Looking at the balance sheets - here are some trends for the past five years.
Growth of US Domestic Package - 4.6% per year
International Package - 14% per year
Supply chain and freight - 29% per year
Net income growth for the past five years is - 5.7%
EPS has grown at a rate of 6.4%
Dividends per share has increased at a rate of 15%.
The number of shares has declined in this period by 4%.
First, some high points from UPS annual report. UPS is going to celebrate its centennial this year. UPS annual report claims industry leading margins at 16.8%. For UPS, management expects 6-10% growth in 2007 over 2006. 2007 is decidely lacklustre year for this segment making it a good time to acquire shares in this industry.
UPS expects organic revenue growth of 6-8% between now and 2010 - getting the overall revenue to about $60 billion. EPS componded is expected to grow between 9 and 14%. This is good news for share holders. At the low end, the upside to share price is 40% from the current levels and at the high end, the upside is more like 70%. This is with a P/E of 18. Meanwhile, UPS will continue to pay out about 40% of the income in dividends - this comes to 2.4% yield per year. Four four years, this comes to about 9.6% over four years - it is likely that dividends will increase and the yield will be will over 10% over four years. In total, one can look at returns of 50% at the low end and 80% at the high end including dividends. This is a good pay out for the current investment.
Looking at the balance sheets - here are some trends for the past five years.
Growth of US Domestic Package - 4.6% per year
International Package - 14% per year
Supply chain and freight - 29% per year
Net income growth for the past five years is - 5.7%
EPS has grown at a rate of 6.4%
Dividends per share has increased at a rate of 15%.
The number of shares has declined in this period by 4%.
Tuesday, April 03, 2007
Roth 401(k) or Roth IRA?
In this article, we will take a look at two schemes - a Roth 401(k) and Roth IRA and see the pros/cons of both.
Wikipedia has a good description of Roth IRA. There is also a special provision where people not eligible to contribute to Roth IRA can contribute to IRA and then convert the assets to Roth IRA at a later date.
First some background on Roth IRA and IRA.
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006. This law made permanent increased contribution limits to IRAs (including Roth IRAs) that would otherwise have expired after 2010. It also made permanent the Roth 401(k), which would otherwise not have been available after 2010. For additional information, see the Roth 401(k) Web Site. On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 into law. This tax bill included a provision dealing with conversions of traditional IRAs to Roth IRAs. Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012. For additional information, see the statutory provisions and the conference report.
IRA Taxation:When you take money out of an IRA, you pay income tax on all or part of it, depending on whether your original contributions were tax-deductible or not. If your contributions were taxdeductible (in other words, made from pre-tax income), you’ll pay income taxes on the entire withdrawal. If your contributions were not deductible (in other words, you used after-tax dollars,) you generally will be taxed on the earnings only at the time of withdrawal.
If you made both deductible and non-deductible contributions, then each IRA withdrawal is taxed in proportion to the mix of deductible and non-deductible contributions in all your IRAs. For more information on calculating the tax, see IRS Publication 590.
Contribution Limits:
Year Traditional/Roth
2006 $4,000
2007 $4,000
2008 $5,000
2009 $5,000
The Roth 401(k), is also permanent. Roth 401(k) is similar to Roth IRA except that the plan works as part of the 401(k) plan. One has to forego tax deduction now to participate in the Roth 401(k) plan. Also - one has to live with the limited investment options available in the 401(k) plan.
Is it possible to have the best of both worlds? The answer is yes, absolutely. One can contribute to the traditional IRA and convert it to Roth IRA in 2010. Meanwhile, one can continue contributing to 401(k), maxing out the contributions if possible.
In 2007, there is time till 17th of April to contribute to IRA. I am going to avail this opportunity to open an IRA account. I plan to convert this to traditional Roth IRA in 2010. Meanwhile, I participate in a regular 401(k) at work where I get matching contribution and tax savings.
Wikipedia has a good description of Roth IRA. There is also a special provision where people not eligible to contribute to Roth IRA can contribute to IRA and then convert the assets to Roth IRA at a later date.
First some background on Roth IRA and IRA.
On August 17, 2006, President Bush signed into law the Pension Protection Act of 2006. This law made permanent increased contribution limits to IRAs (including Roth IRAs) that would otherwise have expired after 2010. It also made permanent the Roth 401(k), which would otherwise not have been available after 2010. For additional information, see the Roth 401(k) Web Site. On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 into law. This tax bill included a provision dealing with conversions of traditional IRAs to Roth IRAs. Starting in 2010, the existing $100,000 income test for converting a traditional IRA to a Roth IRA will no longer apply. Conversions that occur in 2010 will be able to have half of the taxable converted amount taxed in 2011 and the other half taxed in 2012. For additional information, see the statutory provisions and the conference report.
IRA Taxation:When you take money out of an IRA, you pay income tax on all or part of it, depending on whether your original contributions were tax-deductible or not. If your contributions were taxdeductible (in other words, made from pre-tax income), you’ll pay income taxes on the entire withdrawal. If your contributions were not deductible (in other words, you used after-tax dollars,) you generally will be taxed on the earnings only at the time of withdrawal.
If you made both deductible and non-deductible contributions, then each IRA withdrawal is taxed in proportion to the mix of deductible and non-deductible contributions in all your IRAs. For more information on calculating the tax, see IRS Publication 590.
Contribution Limits:
Year Traditional/Roth
2006 $4,000
2007 $4,000
2008 $5,000
2009 $5,000
The Roth 401(k), is also permanent. Roth 401(k) is similar to Roth IRA except that the plan works as part of the 401(k) plan. One has to forego tax deduction now to participate in the Roth 401(k) plan. Also - one has to live with the limited investment options available in the 401(k) plan.
Is it possible to have the best of both worlds? The answer is yes, absolutely. One can contribute to the traditional IRA and convert it to Roth IRA in 2010. Meanwhile, one can continue contributing to 401(k), maxing out the contributions if possible.
In 2007, there is time till 17th of April to contribute to IRA. I am going to avail this opportunity to open an IRA account. I plan to convert this to traditional Roth IRA in 2010. Meanwhile, I participate in a regular 401(k) at work where I get matching contribution and tax savings.
Sunday, March 18, 2007
AIG Analysis
In this segment, we will look at AIG, a Dow component and look at its prospects. AIG's business is described as follows in the 10-K.
AIG’s General Insurance subsidiaries are multiple line companies writing substantially all lines of commercial property and casualty insurance and various personal lines both domestically and abroad. Domestic General Insurance operations are comprised of the Domestic Brokerage Group (DBG), Reinsurance, Personal Lines, and Mortgage Guaranty.
AIG is diversified both in terms of classes of business and geographic locations. In General Insurance, workers compensation business is the largest class of business written and represented approximately 15 percent of net premiums written for the year ended December 31, 2006. During 2006, 8 percent and 7 percent of the direct General Insurance premiums written (gross premiums less return premiums and cancellations, excluding reinsurance assumed and before deducting reinsurance ceded) were written in California and New York, respectively. No other state accounted for more than five percent of such premiums.
The majority of AIG’s General Insurance business is in the casualty classes, which tend to involve longer periods of time for the reporting and settling of claims. This may increase the risk and uncertainty with respect to AIG’s loss reserve development.
Insurance, especially long tail insurance can make the earnings lumpy. So, in this segment, let us look at various business lines to see how things look like.
The various business lines of AIG are:
DBG:
AIG’s primary Domestic General Insurance division is DBG. DBG’s business in the United States and Canada is conducted through American Home, National Union, Lexington, HSB and certain other General Insurance company subsidiaries of AIG. During 2006, DBG accounted for 54 percent of AIG’s General Insurance net premiums written.
Reinsurance:
The subsidiaries of Transatlantic Holdings, Inc. (Transatlantic) offer reinsurance on both a treaty and facultative basis to insurers in the U.S. and abroad. Transatlantic structures programs for a full range of property and casualty products with an emphasis on specialty risk. Transatlantic is a public company owned 59.2 percent by AIG and therefore is included in AIG’s consolidated financial statements.
Personal Lines:
AIG’s Personal Lines operations provide automobile insurance through AIG Direct, a mass marketing operation, the Agency Auto Division and 21st Century Insurance Group (21st Century), as well as a broad range of coverages for high net-worth individuals through the AIG Private Client Group. 21st Century is a public company owned 61.9 percent by AIG and therefore is included in AIG’s consolidated financial statements. During the first quarter of 2007, AIG offered to acquire the outstanding shares of 21st Century not already owned by AIG and its subsidiaries.
Mortgage Guarantee:
The main business of the subsidiaries of United Guaranty Corporation (UGC) is the issuance of residential mortgage guaranty insurance, both domestically and internationally, on conventional first lien mortgages for the purchase or refinance of one to four family residences. UGC subsidiaries also write second lien and private student loan guaranty insurance.
Foreign General Insurance:
AIG’s Foreign General Insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly owned agencies and insurance companies. The Foreign General Insurance group also includes business written by AIG’s foreign-based insurance subsidiaries. The Foreign General Insurance group uses various marketing methods and multiple distribution channels to write both commercial and consumer lines insurance with certain refinements for local laws, customs and needs. AIU operates in Asia, the Pacific Rim, Europe, including the U.K., Africa, the Middle East and Latin America. During 2006, the Foreign General Insurance group accounted for 25 percent of AIG’s General Insurance net premiums written.
For followers of Berkshire, the AIG credit rating is not as good as Berkshires. In 2005, the AIG credit rating was downgraded and as a result, AIG had to put up significantl collateral. In contrast, Berkshire enjoys the top most credit rating that can be given.
2006 was an unusually good year for AIG as was the case for insurance companies in general because of the absence of major catastrophes in the world. In 2005, AIG paid out about three billion for the Katrina and other related catastrophes. AIG's business segment revenues and incomes were as follows for 2006.
General Insurance - 49.2 billion
Life insurance and retirement services - 50.1 billion
Financial Services - 8 billion
Asset management - 5.8 billion
The income was as follows:
General Insurance - 10.4 billion
Life Ins and Retirement Service - 10 billion
Financial Service - 0.5 billion
Asset Management - 2.3 billion
The major uptick in income came in the general insurance section where the income increased from 2 billion to 10 billion. Income from Financial Services declined significantly by about 2 billion in 2006 compared to 2005.
AIG is expanding aggressively in Asia and so far about 20% of its revenue is from Asia. The company is seeing growth opportunities in China, India and Japan.
One can expect the insurance rates to be soft this year - car premiums are staying flat or declining because of the decrease in accidents. The re-insurance sector is also expected to be soft this year because of catastrophe free year of 2006.
The value line investment survey published a survey of AIG. According to valueline, AIG's EPS will be 7.80 by 2011 and book value will be $60.00. Valueline thinks the share price will be 135 to 180 dollars per share in this time frame. However, this assumes the Price/Book and Price to earnings ratios to remain high or higher.
Overall, the value line forecast seems a bit aggressive to me including the low end. While AIG is a good company, my opinion is that Berkshire is a very compelling investment as well. Berkshire does insurance better than AIG and has other well diversified business and stock holdings. Currently berkshire is selling for about 28% discount to fair value.
AIG’s General Insurance subsidiaries are multiple line companies writing substantially all lines of commercial property and casualty insurance and various personal lines both domestically and abroad. Domestic General Insurance operations are comprised of the Domestic Brokerage Group (DBG), Reinsurance, Personal Lines, and Mortgage Guaranty.
AIG is diversified both in terms of classes of business and geographic locations. In General Insurance, workers compensation business is the largest class of business written and represented approximately 15 percent of net premiums written for the year ended December 31, 2006. During 2006, 8 percent and 7 percent of the direct General Insurance premiums written (gross premiums less return premiums and cancellations, excluding reinsurance assumed and before deducting reinsurance ceded) were written in California and New York, respectively. No other state accounted for more than five percent of such premiums.
The majority of AIG’s General Insurance business is in the casualty classes, which tend to involve longer periods of time for the reporting and settling of claims. This may increase the risk and uncertainty with respect to AIG’s loss reserve development.
Insurance, especially long tail insurance can make the earnings lumpy. So, in this segment, let us look at various business lines to see how things look like.
The various business lines of AIG are:
DBG:
AIG’s primary Domestic General Insurance division is DBG. DBG’s business in the United States and Canada is conducted through American Home, National Union, Lexington, HSB and certain other General Insurance company subsidiaries of AIG. During 2006, DBG accounted for 54 percent of AIG’s General Insurance net premiums written.
Reinsurance:
The subsidiaries of Transatlantic Holdings, Inc. (Transatlantic) offer reinsurance on both a treaty and facultative basis to insurers in the U.S. and abroad. Transatlantic structures programs for a full range of property and casualty products with an emphasis on specialty risk. Transatlantic is a public company owned 59.2 percent by AIG and therefore is included in AIG’s consolidated financial statements.
Personal Lines:
AIG’s Personal Lines operations provide automobile insurance through AIG Direct, a mass marketing operation, the Agency Auto Division and 21st Century Insurance Group (21st Century), as well as a broad range of coverages for high net-worth individuals through the AIG Private Client Group. 21st Century is a public company owned 61.9 percent by AIG and therefore is included in AIG’s consolidated financial statements. During the first quarter of 2007, AIG offered to acquire the outstanding shares of 21st Century not already owned by AIG and its subsidiaries.
Mortgage Guarantee:
The main business of the subsidiaries of United Guaranty Corporation (UGC) is the issuance of residential mortgage guaranty insurance, both domestically and internationally, on conventional first lien mortgages for the purchase or refinance of one to four family residences. UGC subsidiaries also write second lien and private student loan guaranty insurance.
Foreign General Insurance:
AIG’s Foreign General Insurance group accepts risks primarily underwritten through American International Underwriters (AIU), a marketing unit consisting of wholly owned agencies and insurance companies. The Foreign General Insurance group also includes business written by AIG’s foreign-based insurance subsidiaries. The Foreign General Insurance group uses various marketing methods and multiple distribution channels to write both commercial and consumer lines insurance with certain refinements for local laws, customs and needs. AIU operates in Asia, the Pacific Rim, Europe, including the U.K., Africa, the Middle East and Latin America. During 2006, the Foreign General Insurance group accounted for 25 percent of AIG’s General Insurance net premiums written.
For followers of Berkshire, the AIG credit rating is not as good as Berkshires. In 2005, the AIG credit rating was downgraded and as a result, AIG had to put up significantl collateral. In contrast, Berkshire enjoys the top most credit rating that can be given.
2006 was an unusually good year for AIG as was the case for insurance companies in general because of the absence of major catastrophes in the world. In 2005, AIG paid out about three billion for the Katrina and other related catastrophes. AIG's business segment revenues and incomes were as follows for 2006.
General Insurance - 49.2 billion
Life insurance and retirement services - 50.1 billion
Financial Services - 8 billion
Asset management - 5.8 billion
The income was as follows:
General Insurance - 10.4 billion
Life Ins and Retirement Service - 10 billion
Financial Service - 0.5 billion
Asset Management - 2.3 billion
The major uptick in income came in the general insurance section where the income increased from 2 billion to 10 billion. Income from Financial Services declined significantly by about 2 billion in 2006 compared to 2005.
AIG is expanding aggressively in Asia and so far about 20% of its revenue is from Asia. The company is seeing growth opportunities in China, India and Japan.
One can expect the insurance rates to be soft this year - car premiums are staying flat or declining because of the decrease in accidents. The re-insurance sector is also expected to be soft this year because of catastrophe free year of 2006.
The value line investment survey published a survey of AIG. According to valueline, AIG's EPS will be 7.80 by 2011 and book value will be $60.00. Valueline thinks the share price will be 135 to 180 dollars per share in this time frame. However, this assumes the Price/Book and Price to earnings ratios to remain high or higher.
Overall, the value line forecast seems a bit aggressive to me including the low end. While AIG is a good company, my opinion is that Berkshire is a very compelling investment as well. Berkshire does insurance better than AIG and has other well diversified business and stock holdings. Currently berkshire is selling for about 28% discount to fair value.
Sunday, March 11, 2007
MMM (3M) Analysis
3M is a diversified technology company with a global presence in the following businesses: industrial and transportation; health care; display and graphics; consumer and office; safety, security and protection services; and electro and communications. 3M is among the leading manufacturers of products for many of the markets it serves. Most 3M products involve expertise in product development, manufacturing and marketing, and are subject to competition from products manufactured and sold by other technologically oriented companies.
At December 31, 2006, the Company employed 75,333 people, with 34,553 employed in the United States and 40,780 employed internationally.
The company is growing at around 7-8% year over year but is facing tough comparisons this year compared to last with lower EPS this year compared to last. This is one of the reasons the stock is down. The analysts are expecting flat to slight growth this year compared to the previous year. Next year is expected to be somewhat better with a growth of about 10-12%.
Let us briefly take a look at the revenues by geographic region and growth by geographic region. The revenues by geographic region look as follows:
US - 38.6%
Asia Pacific - 27.3%
Europe - 25%
Latin America and Canada - 9.1%
The EPS has grown at around 9% for the past ten years. The top line growth is more abysmal at around 4.5% per year for the past ten years. The operating profit has increased at the rate of 6%.
In the same period, the number of outstanding shares has declined by about 8%. One can expect the total number of shares to decline slowly in the upcoming years. The cash flow from operations continues to be strong - growing at around 10% per year. The debt has also increased in 2006 compared to 2005. The dividend has grown at around 8% per year for the past five years. One can expect this ratio to continue in the upcoming years.
At December 31, 2006, the Company employed 75,333 people, with 34,553 employed in the United States and 40,780 employed internationally.
The company is growing at around 7-8% year over year but is facing tough comparisons this year compared to last with lower EPS this year compared to last. This is one of the reasons the stock is down. The analysts are expecting flat to slight growth this year compared to the previous year. Next year is expected to be somewhat better with a growth of about 10-12%.
Let us briefly take a look at the revenues by geographic region and growth by geographic region. The revenues by geographic region look as follows:
US - 38.6%
Asia Pacific - 27.3%
Europe - 25%
Latin America and Canada - 9.1%
The EPS has grown at around 9% for the past ten years. The top line growth is more abysmal at around 4.5% per year for the past ten years. The operating profit has increased at the rate of 6%.
In the same period, the number of outstanding shares has declined by about 8%. One can expect the total number of shares to decline slowly in the upcoming years. The cash flow from operations continues to be strong - growing at around 10% per year. The debt has also increased in 2006 compared to 2005. The dividend has grown at around 8% per year for the past five years. One can expect this ratio to continue in the upcoming years.
Indian market overview
In the previous article, we looked at major India funds and compared their performance against the BSE Sensex Index. We found that the mutual funds werent doing well and were lagging the BSE Sensex by a large margin. When we analyzed the Chinese market, we found the results to be identical - the funds lagged the index by a large margin.
The BSE Sensex index went down by about 15% since its peak and it is a good thing. People may think that the market should go up but this isnt the case. A correction like the one we have seen is very healthy as it ensures the long term health of the market and killing excessive speculation.
Let us take a look at different funds to see how things look like. Let us compare the charts of the various India funds and EEM looks like when comparing against the BSE Sensex Index. The comparative charts of the funds and their performance is noted below:
Chart comparing BSE Sensex vs other funds
Even with this correction - the expected return for Indian stocks in a best case scenario is 10-12% for the next four - five years. A deeper correction will provide more upside if the economy is managed well in the next several years.
The BSE Sensex index went down by about 15% since its peak and it is a good thing. People may think that the market should go up but this isnt the case. A correction like the one we have seen is very healthy as it ensures the long term health of the market and killing excessive speculation.
Let us take a look at different funds to see how things look like. Let us compare the charts of the various India funds and EEM looks like when comparing against the BSE Sensex Index. The comparative charts of the funds and their performance is noted below:
Chart comparing BSE Sensex vs other funds
Even with this correction - the expected return for Indian stocks in a best case scenario is 10-12% for the next four - five years. A deeper correction will provide more upside if the economy is managed well in the next several years.
Thursday, March 01, 2007
Berkshire Hathaway (BRK) Valuation
Today, Warren Buffett's holding company, Berkshire Hathaway released its earning report. The results were stunning - with 16.9 billion dollars of net worth added.
The annual letter provides a lot of details and is a joy to read. The worlds best investor clearly delivered in 2006 while adding significant positions to the equity portfolio and buying companies outright.
In this section we estimate the intrinsic value using two methods. First one is book value * multiple. The second one is a multiple of the book value.
For the first method, we will use two multiples - 1.9 at the low end and 2.0 on the high end. This gives a per share value of 132.5K at the low end and 139K at the higher end. The mid point between these two is 135.75K.
The second method would involve investments + sub earning * multiple. This is 80636 + ( 3625 * 12 ). This gives a value of 124316. This assumes that the insurance operations are worth only the investments per share. If we assume the insurance businesses are worth atleast 10 billion on top of the per share investments, it adds 6,600 per share. This gives a value of 130916.
Either way, we are looking at a valuation of 125K+ and currently the shares are selling at a 25% discount to intrinsic value.
The annual letter provides a lot of details and is a joy to read. The worlds best investor clearly delivered in 2006 while adding significant positions to the equity portfolio and buying companies outright.
In this section we estimate the intrinsic value using two methods. First one is book value * multiple. The second one is a multiple of the book value.
For the first method, we will use two multiples - 1.9 at the low end and 2.0 on the high end. This gives a per share value of 132.5K at the low end and 139K at the higher end. The mid point between these two is 135.75K.
The second method would involve investments + sub earning * multiple. This is 80636 + ( 3625 * 12 ). This gives a value of 124316. This assumes that the insurance operations are worth only the investments per share. If we assume the insurance businesses are worth atleast 10 billion on top of the per share investments, it adds 6,600 per share. This gives a value of 130916.
Either way, we are looking at a valuation of 125K+ and currently the shares are selling at a 25% discount to intrinsic value.
Tuesday, February 27, 2007
Market Correction
Today, the US Market reacted severely to the correction in the Chinese market of approximately 9%. The emerging market funds took a severe hit - declining by about 7%. The emerging market funds declined more than needed as it has only 11% exposure to China. The Korean stocks are undervalued compared to the SP500 and the market overreacted.
Overreacted is the right word as the fundamentals dont support the declines we saw today. The oil prices went up but the oil and oil services stocks declined with the broader market. The SP500 index was not overvalued before today's sell-off and it isnt overvalued now. There was panic selling all across the board with broad helping from automatic stop loss orders.
It didnt help that Alan Greenspan thinks the business cycle is peaking and the US economy is headed for a recession at the end of 2007 or early 2008. Some of the emerging markets - especially China, India and Mexico was ripe for a correction. Even though the prospects for emerging markets still remain very good. A correction is healthy and welcome as it prevents overheating and takes speculators out.
I expect the US market to recover somewhat in the next few days but it probably wont return to its previous levels till later in the year when the economic outlook becomes clearer.
I am holding tight and building up my cash position. I am expecting some great buy opportunities to be available in the upcoming months. It should be possible to buy great companies at bargain prices and I am looking forward to the opportunity to load up the truck.
Overreacted is the right word as the fundamentals dont support the declines we saw today. The oil prices went up but the oil and oil services stocks declined with the broader market. The SP500 index was not overvalued before today's sell-off and it isnt overvalued now. There was panic selling all across the board with broad helping from automatic stop loss orders.
It didnt help that Alan Greenspan thinks the business cycle is peaking and the US economy is headed for a recession at the end of 2007 or early 2008. Some of the emerging markets - especially China, India and Mexico was ripe for a correction. Even though the prospects for emerging markets still remain very good. A correction is healthy and welcome as it prevents overheating and takes speculators out.
I expect the US market to recover somewhat in the next few days but it probably wont return to its previous levels till later in the year when the economic outlook becomes clearer.
I am holding tight and building up my cash position. I am expecting some great buy opportunities to be available in the upcoming months. It should be possible to buy great companies at bargain prices and I am looking forward to the opportunity to load up the truck.
Sunday, February 25, 2007
Conoco Phillips update
In a previous article we looked at Conoco Phillips fundamentals and found it to be a value play among the energy players.
We will quickly take a look at the stock in light of the latest 10-K filing and see how the changes look like.
First the balance sheets and cash flow overview. The debt carried on the balance sheet declined by 4 billion to $23 billion. The book value per share increased to $50.5. The ratio of the current market value to book value is 1.33 for COP. This compares to 3.76 for Exxon Mobil, 2.29 for Chevron and ~3 for Petro China. In my opinion, this makes COP a screaming buy among the oil majors today.
For the year, COP spent 925 million dollars buying back stock and issues 2.25 billion in dividends. The plan of buying back stock makes the most sense as the stock is undervalued at the moment.
In this year, we expect COP to continue to pay down debt while buying back stock and increasing dividends. The debt should go down from the current 23 billion levels to below 20 billion level probably to 17-18 billion. This should lead to increases in book value of the company to 53 to 54 dollars a share all else being equal. This should help the stock break the $70 barrier and stay there.
We will quickly take a look at the stock in light of the latest 10-K filing and see how the changes look like.
First the balance sheets and cash flow overview. The debt carried on the balance sheet declined by 4 billion to $23 billion. The book value per share increased to $50.5. The ratio of the current market value to book value is 1.33 for COP. This compares to 3.76 for Exxon Mobil, 2.29 for Chevron and ~3 for Petro China. In my opinion, this makes COP a screaming buy among the oil majors today.
For the year, COP spent 925 million dollars buying back stock and issues 2.25 billion in dividends. The plan of buying back stock makes the most sense as the stock is undervalued at the moment.
In this year, we expect COP to continue to pay down debt while buying back stock and increasing dividends. The debt should go down from the current 23 billion levels to below 20 billion level probably to 17-18 billion. This should lead to increases in book value of the company to 53 to 54 dollars a share all else being equal. This should help the stock break the $70 barrier and stay there.
Lowes vs Home Depot - updated
In a previous article, we looked at Lowes and HD. In that article, we found that long term prospects bode well for both Lowes and HD. The analysis still remains the same but the price points have changed somewhat and the discount isnt that deep any more.
Home Depot had a few issues to sort out especially the compensation and integrity of management. The departure of Nardelli is welcome news to the share holders of HD. However, it is not clear that the mess that Nardelli created may clear anytime soon. I used to have the Pavlovian habit of going to Home Depot as it is located closer to my home compared to Lowes. The poor customer service and Nardelli behavior have helped kick my Pavlovian habit - I now go to Lowes exclusively.
I like the way Lowes is doing its business - over Chrismas, I was able to find a few interesting toys at Lowes. I am also seeing more traffic at my local Lowes store now than was the case before. This is one micro example but just points to how things have changed in a short time.
First, let us look at the performance of the two stocks over the last three months, six months and a year respectively.
3 month chart
6 month chart
1 year chart
Lowes has done as well or better than Home Depot in each of these periods. The two year and five year charts also point in favor of Lowes.
Having said this, let us look at the fundamentals briefly. Lowes has a trailing P/E of 17.29 and a market cap of 53 billion. The stock is still at a discount to its fair price - although the discount isnt as deep as it once was.
Home Depot has a market cap of 83 billion, a trailing P/E of 15. The stock is at a discount to its fair price but the discount is primarily because of concerns over growth and the management shakeup. Lowes is growing even in a dismal housing market where as Home Depot is stagnant and its year over year sales are down more sharply.
While housing is the main factor affecting both companies, Lowes better execution and closeness to the customers should help it do better than Home Depot in the next five years.
Home Depot had a few issues to sort out especially the compensation and integrity of management. The departure of Nardelli is welcome news to the share holders of HD. However, it is not clear that the mess that Nardelli created may clear anytime soon. I used to have the Pavlovian habit of going to Home Depot as it is located closer to my home compared to Lowes. The poor customer service and Nardelli behavior have helped kick my Pavlovian habit - I now go to Lowes exclusively.
I like the way Lowes is doing its business - over Chrismas, I was able to find a few interesting toys at Lowes. I am also seeing more traffic at my local Lowes store now than was the case before. This is one micro example but just points to how things have changed in a short time.
First, let us look at the performance of the two stocks over the last three months, six months and a year respectively.
3 month chart
6 month chart
1 year chart
Lowes has done as well or better than Home Depot in each of these periods. The two year and five year charts also point in favor of Lowes.
Having said this, let us look at the fundamentals briefly. Lowes has a trailing P/E of 17.29 and a market cap of 53 billion. The stock is still at a discount to its fair price - although the discount isnt as deep as it once was.
Home Depot has a market cap of 83 billion, a trailing P/E of 15. The stock is at a discount to its fair price but the discount is primarily because of concerns over growth and the management shakeup. Lowes is growing even in a dismal housing market where as Home Depot is stagnant and its year over year sales are down more sharply.
While housing is the main factor affecting both companies, Lowes better execution and closeness to the customers should help it do better than Home Depot in the next five years.
Wednesday, February 21, 2007
Comparison of large cap asset class
In december, we looked at different asset classes and evaluated the interesting asset classes for investing. Our bias for investing has always been value. Consequently, in this blog, we have taken a bearish view on stocks such as Google, Ebay, Amazon.com etc.
In this segment, we will look at large cap domestic equities and again look at value, blend and growth segments to see how things look like.
We will look at the ETFs offered by Vanguard and iShares respectively. First iShares ETFs. iShares offers several ETFs in the large cap domestic equity class but we will look at three ETFs in particular.
The three ETFs of interest are:
IVW -large cap growth - P/E of 22.38 and P/B of 4.92
IVV - mimics SP500 - P/E of 20.69 and P/B of 3.85
IVE - large cap value - P/E of 19.5, P/B of 2.84.
The returns on these three for the past three months can be visualized in the following chart.
Chart1
The chart shows the value segment outperforming the growth segment by about 3% points. The value segment is also outpacing SP500 by about 1.5% percentage points.
The second category would be the Vanguard ETFs. Vanguard has VTV, VV and VUG.
VUG - large cap growth has P/E of 21x, P/B of 4.0x and earning growth of 22%.
VV - large cap blend, mimics SP500, has P/E of 17.2x, P/B of 2.9x and earning growth of 18.8%
VTV - large cap value, P/E of 14.5x, the P/B of 2.3x and earning growth of 15%
The numbers are updated as of 1/31/2007 by Vanguard. The earning growth numbers are a bit suspect as the SP500 earning growth has moderated to about 11% YoY as of the new year.
The returns from these three funds over the past three months is noted below.
Chart2
As seen with iShares, the Vanguard funds also show the value segment outpacing the blend and growth segments in the past three months. While the difference isnt as great as was the case with iShares, value still outperformed growth by about a percentage point.
It is difficult to predict which category will do better in any given year. Growth is expected to do well this year because of the accelerating revenues from the technology sector. A defensive investor may look at various factors before committing money to an asset class. The usual risk factors for equities apply.
In this segment, we will look at large cap domestic equities and again look at value, blend and growth segments to see how things look like.
We will look at the ETFs offered by Vanguard and iShares respectively. First iShares ETFs. iShares offers several ETFs in the large cap domestic equity class but we will look at three ETFs in particular.
The three ETFs of interest are:
IVW -large cap growth - P/E of 22.38 and P/B of 4.92
IVV - mimics SP500 - P/E of 20.69 and P/B of 3.85
IVE - large cap value - P/E of 19.5, P/B of 2.84.
The returns on these three for the past three months can be visualized in the following chart.
Chart1
The chart shows the value segment outperforming the growth segment by about 3% points. The value segment is also outpacing SP500 by about 1.5% percentage points.
The second category would be the Vanguard ETFs. Vanguard has VTV, VV and VUG.
VUG - large cap growth has P/E of 21x, P/B of 4.0x and earning growth of 22%.
VV - large cap blend, mimics SP500, has P/E of 17.2x, P/B of 2.9x and earning growth of 18.8%
VTV - large cap value, P/E of 14.5x, the P/B of 2.3x and earning growth of 15%
The numbers are updated as of 1/31/2007 by Vanguard. The earning growth numbers are a bit suspect as the SP500 earning growth has moderated to about 11% YoY as of the new year.
The returns from these three funds over the past three months is noted below.
Chart2
As seen with iShares, the Vanguard funds also show the value segment outpacing the blend and growth segments in the past three months. While the difference isnt as great as was the case with iShares, value still outperformed growth by about a percentage point.
It is difficult to predict which category will do better in any given year. Growth is expected to do well this year because of the accelerating revenues from the technology sector. A defensive investor may look at various factors before committing money to an asset class. The usual risk factors for equities apply.
Monday, February 19, 2007
China Funds Comparison
In the last article in this blog, we looked at India investments through four mutual funds. In this section we will look at China mutual funds and compare it to the Shanghai Composite Index. Comparisons of the like are helpful to identify the asset classes that one can invest in with fair degree of confidence.
Some of the China funds of interest are noted below:
CHUSX Alger China-US Growth
DPCAX Dreyfus Premier Greater China
EVCGX Eaton Vance Greater China
FHKCX Fidelity Greater China
GCHAX Alliance Bernstein Greater China
GOPAX Gartmore China Opportunities
ICHKX Guinness Atkinson China & Hong Kong
MCHFX Mathews China Fund
NGCAX Columbia Greater China
OBCHX Oberweiss China Opportunities
TCWAX Templeton China World
USCOX US Global Investors China Region Opportunity
While we are not going to look at the expenses of individual funds, we will look at the performance of each fund compared to the Shanghai Composite Index.
The first chart below compares the Shanghai Composite to the first six funds noted above.
Chart1 Shanghai Composite vs First six funds
The first chart clearly shows the Shanghai composite outperforming the funds by about 80%.
Chart2 Shanghai Composite vs the last six funds
Again, all the managed funds lagged the index significantly. OBCHX was the best of the bunch trailing the index by 70%.
Next we compare the Shanghai Composite Index to FXI and PGJ. The comparison charts are noted below.
Chart3 Shanghai Composite vs FXI and PGJ
Both FXI and PGJ havent performed as well as OBCHX. FXI has done better than PGJ but lags behind OBCHX.
The main thing to note here is past performance is no guarantee of future performance. The charts presented in this blog present the funds for the past one year without looking at the focus of each fund in detail. As such, one has to look at the long term prospects, the current holdings and the expense ratio before making an investment decision.
I would also advice the readers to check the disclaimer at the very end of this blog before considering investmenting.
Some of the China funds of interest are noted below:
CHUSX Alger China-US Growth
DPCAX Dreyfus Premier Greater China
EVCGX Eaton Vance Greater China
FHKCX Fidelity Greater China
GCHAX Alliance Bernstein Greater China
GOPAX Gartmore China Opportunities
ICHKX Guinness Atkinson China & Hong Kong
MCHFX Mathews China Fund
NGCAX Columbia Greater China
OBCHX Oberweiss China Opportunities
TCWAX Templeton China World
USCOX US Global Investors China Region Opportunity
While we are not going to look at the expenses of individual funds, we will look at the performance of each fund compared to the Shanghai Composite Index.
The first chart below compares the Shanghai Composite to the first six funds noted above.
Chart1 Shanghai Composite vs First six funds
The first chart clearly shows the Shanghai composite outperforming the funds by about 80%.
Chart2 Shanghai Composite vs the last six funds
Again, all the managed funds lagged the index significantly. OBCHX was the best of the bunch trailing the index by 70%.
Next we compare the Shanghai Composite Index to FXI and PGJ. The comparison charts are noted below.
Chart3 Shanghai Composite vs FXI and PGJ
Both FXI and PGJ havent performed as well as OBCHX. FXI has done better than PGJ but lags behind OBCHX.
The main thing to note here is past performance is no guarantee of future performance. The charts presented in this blog present the funds for the past one year without looking at the focus of each fund in detail. As such, one has to look at the long term prospects, the current holdings and the expense ratio before making an investment decision.
I would also advice the readers to check the disclaimer at the very end of this blog before considering investmenting.
Saturday, February 17, 2007
Comparison of India Funds
Here is the comparison of India funds vs. the BSE Sensex Index.
IIF vs BSE Sensex for the past one year:
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=iif
IFN vs BSE Sensex for the past one year:
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=ifn
MINDX vs BSE Sensex for the past one year
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=mindx
ETGIX vs BSE Sensex for the past one year
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=etgix
Of the India funds available to US investors, MINDX has the best performance vs. the BSE Sensex Index. However the index itself has done significantly better than any of the mutual funds.
EEM vs BSE Sensex
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=eem
For the sake of comparison, we compare EEM vs BSE Sensex, the red hot Indian index has done a lot better than the emerging market as a whole for the past one year. However, EEM may offer better prospects for this year as its main component, the Korean market didnt do very well in 2006.
MINDX vs EEM
http://finance.yahoo.com/q/bc?t=2y&s=MINDX&l=on&z=m&q=l&c=eem
EEM handily beat all the India funds with the exception of MINDX. As we have examined in this blog in the past, several publications indicate that Indian market is overheating. The Walstreet journal also carried an article to the same effect this weekend. In contrast, EEM's main component is Korea where the reduced tensions with north Korea bode well to the stock market. South Korea didnt do well in 2006 and given the world wide economic growth, the Korean stock market should do a lot better this year.
In the next article in this blog, we will look at China funds in more detail.
IIF vs BSE Sensex for the past one year:
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=iif
IFN vs BSE Sensex for the past one year:
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=ifn
MINDX vs BSE Sensex for the past one year
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=mindx
ETGIX vs BSE Sensex for the past one year
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=etgix
Of the India funds available to US investors, MINDX has the best performance vs. the BSE Sensex Index. However the index itself has done significantly better than any of the mutual funds.
EEM vs BSE Sensex
http://finance.yahoo.com/q/bc?t=1y&s=%5EBSESN&l=on&z=m&q=l&c=eem
For the sake of comparison, we compare EEM vs BSE Sensex, the red hot Indian index has done a lot better than the emerging market as a whole for the past one year. However, EEM may offer better prospects for this year as its main component, the Korean market didnt do very well in 2006.
MINDX vs EEM
http://finance.yahoo.com/q/bc?t=2y&s=MINDX&l=on&z=m&q=l&c=eem
EEM handily beat all the India funds with the exception of MINDX. As we have examined in this blog in the past, several publications indicate that Indian market is overheating. The Walstreet journal also carried an article to the same effect this weekend. In contrast, EEM's main component is Korea where the reduced tensions with north Korea bode well to the stock market. South Korea didnt do well in 2006 and given the world wide economic growth, the Korean stock market should do a lot better this year.
In the next article in this blog, we will look at China funds in more detail.
Wednesday, February 14, 2007
ECR Analysis
ECR is a public company that is in the subprime lending business. It has faced some tough times of late with losses in 2005 and 2006. Currently, the company's book value is more than the per share value. The company is trading for .93/share where as the book value as of Sept 30th 2006 was $2.07/share.
The company is getting out of the mortgage origination business. It has securitized and is selling its subprime mortgages. The company was expected to pay out $80 million to shareholders one month after the close of its deal to sell the mortgage origination business to Bear Stearns. The company was also expected to pay out another 56 cents a share in dividends. The total comes to 1.36 per share about 40% premium to the current valuation.
The press release put out by the company gave the following outlook for dividends.
1. First it says a payment may not be made before March 30th( I think this is the 80 cents/share that was supposed to have beenpaid within 30 days of bear stearns deal closing )which wont be forthcoming now.
2. The second amount is 56 cents/share - it seems this paymentwill be made in two parts at worst ( by June 29 ) or in one lump sumby March 30th. Most likely, the 80 cent payout is likely be replacedby this payment.
3. Additional payments may be made outside of these two payments in the future. ( dates unknown )
4. Even then, the company re-affirmed the payment of $1.34 - timing isthe question mark. Future payments are now dependent on "cash flowsfrom ECC Capital's residual interests in securitizations and thecompletion of transactions related to the financing of its residuals."
What does this mean? Is the company not able to meet its obligations while the balance sheet is deteriorating? Here is one take on this after studying the last 10-Q in detail.
1. The company had plans to give away $80 million in dividends right after the close of Bear Stearns deal. The company also expected the payment of 33 million to happen over a period of time as opposed to happening immediately. The deal closed about a month and a half later and 33.6 million payment happened immediately. Not all issues regarding the deal are closed and may take some more time for it to close.
2. The company seems to have the subprime default rate under control with adequate provisions for losses. At least it said so in the 10-Q.
3. The CEO bought 500K shares from the co-CEO.
4. My guess is that the immediate payment of 33 million to Bear Stearns ( as opposed to over a period of time ) as well as the 10 million payment to the unit of GMAC caused the cash reserves to dip below the comfortable level for management to give away 8o cents/share dividend immediately.
The company planned to be in existence through 2007 as per the previous 10-Q. It remains to be seen if the company will be liquidated and if so, how soon.
While my estimate is based on the currently available public docuementation, the reality may differ from the estimate. This will become clearer as more information becomes available in due course. In addition, it should be disclosed that I own shares in this company.
The company is getting out of the mortgage origination business. It has securitized and is selling its subprime mortgages. The company was expected to pay out $80 million to shareholders one month after the close of its deal to sell the mortgage origination business to Bear Stearns. The company was also expected to pay out another 56 cents a share in dividends. The total comes to 1.36 per share about 40% premium to the current valuation.
The press release put out by the company gave the following outlook for dividends.
1. First it says a payment may not be made before March 30th( I think this is the 80 cents/share that was supposed to have beenpaid within 30 days of bear stearns deal closing )which wont be forthcoming now.
2. The second amount is 56 cents/share - it seems this paymentwill be made in two parts at worst ( by June 29 ) or in one lump sumby March 30th. Most likely, the 80 cent payout is likely be replacedby this payment.
3. Additional payments may be made outside of these two payments in the future. ( dates unknown )
4. Even then, the company re-affirmed the payment of $1.34 - timing isthe question mark. Future payments are now dependent on "cash flowsfrom ECC Capital's residual interests in securitizations and thecompletion of transactions related to the financing of its residuals."
What does this mean? Is the company not able to meet its obligations while the balance sheet is deteriorating? Here is one take on this after studying the last 10-Q in detail.
1. The company had plans to give away $80 million in dividends right after the close of Bear Stearns deal. The company also expected the payment of 33 million to happen over a period of time as opposed to happening immediately. The deal closed about a month and a half later and 33.6 million payment happened immediately. Not all issues regarding the deal are closed and may take some more time for it to close.
2. The company seems to have the subprime default rate under control with adequate provisions for losses. At least it said so in the 10-Q.
3. The CEO bought 500K shares from the co-CEO.
4. My guess is that the immediate payment of 33 million to Bear Stearns ( as opposed to over a period of time ) as well as the 10 million payment to the unit of GMAC caused the cash reserves to dip below the comfortable level for management to give away 8o cents/share dividend immediately.
The company planned to be in existence through 2007 as per the previous 10-Q. It remains to be seen if the company will be liquidated and if so, how soon.
While my estimate is based on the currently available public docuementation, the reality may differ from the estimate. This will become clearer as more information becomes available in due course. In addition, it should be disclosed that I own shares in this company.
Friday, February 09, 2007
Indian economy and stockmarket overheating?
There were several articles in the past week that focussed on India. The first one was in the economist which wrote that the Indian economy is overheating. The article, which requires a paid subscription described the situation as follows:
THE economy is sizzling and foreign businessmen and investors are swarming to Bangalore and Mumbai to grab a piece of the action. India's year-on-year growth rate could well hit double figures at some point in 2007, and the country may even grow faster than China for at least one quarter. But things are so hot there is a big problem: India's current pace of expansion may not be sustainable.…
If one thought this article got it wrong, the NYTimes carried an article on the same theme. The article was titled "India finds its economy on the verge of overheating". The article had the following to say:
With breakneck growth, an outsourcing industry that leads the world and hundreds of millions of consumers demanding more class and comfort, India has an economy many countries would envy.
But now, after three years of near double-digit growth, signs of a potentially dangerous inflationary spiral are beginning to emerge. Prime Minister Manmohan Singh and his closest economic advisors gathered just last weekend over fears that India’s extraordinary economic expansion was starting to overheat, an issue they labeled as a “key short-term priority.”
THE economy is sizzling and foreign businessmen and investors are swarming to Bangalore and Mumbai to grab a piece of the action. India's year-on-year growth rate could well hit double figures at some point in 2007, and the country may even grow faster than China for at least one quarter. But things are so hot there is a big problem: India's current pace of expansion may not be sustainable.…
If one thought this article got it wrong, the NYTimes carried an article on the same theme. The article was titled "India finds its economy on the verge of overheating". The article had the following to say:
With breakneck growth, an outsourcing industry that leads the world and hundreds of millions of consumers demanding more class and comfort, India has an economy many countries would envy.
But now, after three years of near double-digit growth, signs of a potentially dangerous inflationary spiral are beginning to emerge. Prime Minister Manmohan Singh and his closest economic advisors gathered just last weekend over fears that India’s extraordinary economic expansion was starting to overheat, an issue they labeled as a “key short-term priority.”
As if this werent enough, cnn carried an article titled "India a superpower? Thing again". The article highlighted some of the deep rooted problems in India.
To add more ammo to the overheated debate - the seeking alpha website carried an article that made a compelling case why one should not buy Indian equities at current prices.
Since 1997, the Indian economy has grown 146% at a compound annual growth rate [CAGR] of 9.41%. Over the same time period, earnings of the 30 companies that make up India’s BSE Sensex have grown around 150%. No surprises there. However, over that same 10 year period, India’s BSE Sensex has risen 345% at a CAGR of 16.11%.
In comparisons such as the one above, an abnormal base period can distort the figures. And January 1997 was an abnormal month for the Sensex, characterized by a depressed price/earning [P/E] multiple of 13.5. However, had the Sensex been trading at a P/E multiple of 17, which is the average multiple over the 10 year period, the Sensex would’ve still risen 260%; way above underlying companies’ earnings.
There was another article in the same site that said Indian stocks are losing momentum compared to other stock indices in the emerging markets. But the article also said that so long as the economy keeps growing, there is little chance of a steep correction.
Overall consensus is that the Indian stocks are not cheap at the moment and it is not worth investing more at the current prices.
Wednesday, February 07, 2007
Decline in SP500 earnings
CNN carried an article claiming decline in SP500 earnings in FY07 compared to FY06. The article had the following prognosis for SP500
Earnings for the energy sector are expected to fall 2 percent in the first quarter or 2007, dragging on broader earnings growth.
But downward revisions to technology and consumer earnings are also contributing. As of Jan. 1, the tech sector was forecast to post earnings growth of 17 percent, whereas now the growth is set at 12 percent.
The consumer sector was expected to see a decline of 1 percent at the time. Now the decline is pegged at 4 percent.
2007 earnings are currently on track to grow about 7.3 percent, down from a forecast of 9.3 percent on Jan. 1.
Should the numbers hold up, that would make 2007 earnings growth the slowest since 2002, when S&P 500 earnings grew one-tenth of a percent
While this may mean less than average growth for SP500 index in 2007, this may also provide opportunities to buy quality companies at reasonable prices. I already have several companies in my list who I am hoping will decline in price through the summer of 2007.
Earnings for the energy sector are expected to fall 2 percent in the first quarter or 2007, dragging on broader earnings growth.
But downward revisions to technology and consumer earnings are also contributing. As of Jan. 1, the tech sector was forecast to post earnings growth of 17 percent, whereas now the growth is set at 12 percent.
The consumer sector was expected to see a decline of 1 percent at the time. Now the decline is pegged at 4 percent.
2007 earnings are currently on track to grow about 7.3 percent, down from a forecast of 9.3 percent on Jan. 1.
Should the numbers hold up, that would make 2007 earnings growth the slowest since 2002, when S&P 500 earnings grew one-tenth of a percent
While this may mean less than average growth for SP500 index in 2007, this may also provide opportunities to buy quality companies at reasonable prices. I already have several companies in my list who I am hoping will decline in price through the summer of 2007.
Sunday, February 04, 2007
Wipro (WIT) or Infosys (INFY)?
One of the readers asked the question - which stock is a better investment Wipro or Infosys? For people that arent familiar, both are Indian information technology companies that do offshore as well as consulting work. Both the companies are listed in the NASDAQ and are competitors to American heavy weights such as IBM and Accenture. We will provide a brief overview of the two companies here.
From Infosys website, the company's description is as follows:
Infosys Technologies Ltd. (NASDAQ: INFY) provides consulting and IT services to clients globally - as partners to conceptualize and realize technology driven business transformation initiatives. With over 69,000 employees worldwide, we use a low-risk Global Delivery Model (GDM) to accelerate schedules with a high degree of time and cost predictability.
As one of the pioneers in strategic offshore outsourcing of software services, Infosys has leveraged the global trend of offshore outsourcing. Even as many software outsourcing companies were blamed for diverting global jobs to cheaper offshore outsourcing destinations like India and China, Infosys was recently applauded by Wired magazine for its unique offshore outsourcing strategy — it singled out Infosys for turning the outsourcing myth around and bringing jobs back to the US.Infosys provides end-to-end business solutions that leverage technology. We provide solutions for a dynamic environment where business and technology strategies converge. Our approach focuses on new ways of business combining IT innovation and adoption while also leveraging an organization's current IT assets. We work with large global corporations and new generation technology companies - to build new products or services and to implement prudent business and technology strategies in today's dynamic digital environment.
From Wipro's website, the company description is as follows.
Wipro becomes the first Indian IT Service Provider to be awarded Gold-Level Status in Microsoft’s Windows Embedded Partner Program
Wipro is the world’s largest independent R&D Services Provider
Worlds 1st PCMM Level 5 software company
Wipro one among the few companies in the world to be assessed at maturity level 5 for CMMI V1.2 across offshore and onsite development centers, 2007
Worlds 1st IT Services Company to use Six Sigma
The pioneers in applying Lean Manufacturing techniques to IT services
World’s first SEI CMM/CMMI Level 5 IT services company
The first to get the BS15000 certification for its Global Command Centre
Functional RFID Enabled Concept Store and Global Data Synchronization Laboratory BS7799 and ISO 9000 certified
Among the top 3 offshore BPO service providers in the world
Wipro is a strategic partner to five of the top ten most innovative companies in the world* (*Technology Review Innovation Index 2005)
Over 40 industry facing ‘Centers of Excellence’
592 clients - 53000+ employees
46 development centers across globe
Now, let us look at the two companies from financial as well as the management view points. We will also see the future trends to see how these two companies stack up against each other.
Market cap and valuation:
Wipro has a market cap of 25 billion dollars. It has a P/E of 42 ( trailing ) and forward P/E of 32. The price to earning growth is at 1.35.
Infosys has a market cap of 33 billion dollars. It has a trailing P/E of 43 and estimated forward P/E of 32. The estimated price to earning growth is at 1.28 - slightly lower than that of Wipro.
From a valuation view point, Infosys and Wipro look quite alike with a slight advantage to Infosys in price to earning growth.
Management:
Wipro is primarily owned by Azim Premji. The management succession is not clear - though most likely it will be family owned in the same way as most of Indias conglomerates. Wipro has had a history of management attrition. In some cases, this has resulted in competitors such as Mindtree.
Infosys on the other hand is not owned by one person and is more egalatarian. The management succession is clear. Infosys is also a storied Indian company as it was the first Indian company to be listed in Nasdaq and the first to be included in the Nasdaq 100 index.
From a management and succession view point, Infosys has the advantage.
Financial Ratios:
Infosys has a dividend yield of 0.9% and Wipro has a dividend yield of 0.6%. Infosys dividend has grown from 5 cents a share in 2003 to 51 cents a share in 2007. Wipro's dividend growth is sketchy - it yield about 11 cents a share now.
Infosys has a return on equity of 36% on the average for the past five years and return on asset of 30%. Both these are phenomenal numbers compared to even the best US based companies.
Wipro has a return on equity of close to 30% and return on asset of about 23% for the past five years. While these numbers are very good, they are not as good as Infosys.
Infosys's top line growth of about 35% in the most recent year moderating from a higher growth of 40%. The EPS growth has also been very strong at around 35% per year.
Wipro has had the top line growth of about 30% for the past five years while the EPS growth has been about 25%.
Infosys has a free cash flow of about 350 million dollars that has been growing steadily. Wipro has a cash flow of 280 million that has also been growing steadily.
Overall, in this section, Infosys is looking a lot stronger than Wipro.
Summary:
From a valuation point of view, niether Infosys nor Wipro is cheap. While stacking the two companies side by side, Infosys has edge in almost all the segments compared to Wipro. The outsourcing/offshoring business is getting to be more competitive but both the companies are now well entrenched and should continue to do well. If I have to allocate my investment dollars between these two companies, Infosys would be my choice.
From Infosys website, the company's description is as follows:
Infosys Technologies Ltd. (NASDAQ: INFY) provides consulting and IT services to clients globally - as partners to conceptualize and realize technology driven business transformation initiatives. With over 69,000 employees worldwide, we use a low-risk Global Delivery Model (GDM) to accelerate schedules with a high degree of time and cost predictability.
As one of the pioneers in strategic offshore outsourcing of software services, Infosys has leveraged the global trend of offshore outsourcing. Even as many software outsourcing companies were blamed for diverting global jobs to cheaper offshore outsourcing destinations like India and China, Infosys was recently applauded by Wired magazine for its unique offshore outsourcing strategy — it singled out Infosys for turning the outsourcing myth around and bringing jobs back to the US.Infosys provides end-to-end business solutions that leverage technology. We provide solutions for a dynamic environment where business and technology strategies converge. Our approach focuses on new ways of business combining IT innovation and adoption while also leveraging an organization's current IT assets. We work with large global corporations and new generation technology companies - to build new products or services and to implement prudent business and technology strategies in today's dynamic digital environment.
From Wipro's website, the company description is as follows.
Wipro becomes the first Indian IT Service Provider to be awarded Gold-Level Status in Microsoft’s Windows Embedded Partner Program
Wipro is the world’s largest independent R&D Services Provider
Worlds 1st PCMM Level 5 software company
Wipro one among the few companies in the world to be assessed at maturity level 5 for CMMI V1.2 across offshore and onsite development centers, 2007
Worlds 1st IT Services Company to use Six Sigma
The pioneers in applying Lean Manufacturing techniques to IT services
World’s first SEI CMM/CMMI Level 5 IT services company
The first to get the BS15000 certification for its Global Command Centre
Functional RFID Enabled Concept Store and Global Data Synchronization Laboratory BS7799 and ISO 9000 certified
Among the top 3 offshore BPO service providers in the world
Wipro is a strategic partner to five of the top ten most innovative companies in the world* (*Technology Review Innovation Index 2005)
Over 40 industry facing ‘Centers of Excellence’
592 clients - 53000+ employees
46 development centers across globe
Now, let us look at the two companies from financial as well as the management view points. We will also see the future trends to see how these two companies stack up against each other.
Market cap and valuation:
Wipro has a market cap of 25 billion dollars. It has a P/E of 42 ( trailing ) and forward P/E of 32. The price to earning growth is at 1.35.
Infosys has a market cap of 33 billion dollars. It has a trailing P/E of 43 and estimated forward P/E of 32. The estimated price to earning growth is at 1.28 - slightly lower than that of Wipro.
From a valuation view point, Infosys and Wipro look quite alike with a slight advantage to Infosys in price to earning growth.
Management:
Wipro is primarily owned by Azim Premji. The management succession is not clear - though most likely it will be family owned in the same way as most of Indias conglomerates. Wipro has had a history of management attrition. In some cases, this has resulted in competitors such as Mindtree.
Infosys on the other hand is not owned by one person and is more egalatarian. The management succession is clear. Infosys is also a storied Indian company as it was the first Indian company to be listed in Nasdaq and the first to be included in the Nasdaq 100 index.
From a management and succession view point, Infosys has the advantage.
Financial Ratios:
Infosys has a dividend yield of 0.9% and Wipro has a dividend yield of 0.6%. Infosys dividend has grown from 5 cents a share in 2003 to 51 cents a share in 2007. Wipro's dividend growth is sketchy - it yield about 11 cents a share now.
Infosys has a return on equity of 36% on the average for the past five years and return on asset of 30%. Both these are phenomenal numbers compared to even the best US based companies.
Wipro has a return on equity of close to 30% and return on asset of about 23% for the past five years. While these numbers are very good, they are not as good as Infosys.
Infosys's top line growth of about 35% in the most recent year moderating from a higher growth of 40%. The EPS growth has also been very strong at around 35% per year.
Wipro has had the top line growth of about 30% for the past five years while the EPS growth has been about 25%.
Infosys has a free cash flow of about 350 million dollars that has been growing steadily. Wipro has a cash flow of 280 million that has also been growing steadily.
Overall, in this section, Infosys is looking a lot stronger than Wipro.
Summary:
From a valuation point of view, niether Infosys nor Wipro is cheap. While stacking the two companies side by side, Infosys has edge in almost all the segments compared to Wipro. The outsourcing/offshoring business is getting to be more competitive but both the companies are now well entrenched and should continue to do well. If I have to allocate my investment dollars between these two companies, Infosys would be my choice.
Thursday, February 01, 2007
Google FY06 Analysis
In the past articles in this blog, we have analyzed Google and have typically taken a bearish view of the stock. Although Google is a strong growth company that is gaining market share in the search space, it doesnt have what one would term a "wide moat". Wide moat is the ability to raise prices and not lose market share. In this article, we will look at Google's FY06 earnings and see the forecast for FY07. We will also look at the analyst estimates ( a consensus target of $600 ) and see if it makes sense. We will also look at the competitors and see how Google compares to Yahoo! and Microsoft.
First FY06 results. The reported EPS is 10.21 per share where as the diluted EPS is 9.94. The diluted share count is 309 million. The year ago figure is 291 million. The share count increased by 6.2% year over year. The EPS was below the analyst consensus estimate of 10.33/share. Consequently the Google shares went down by 3.94% the day after.
The EPS for Google is expected to be around 36% higher in 2007 compared to 2006. While it is impossible to predict the future, the accounting treatment of the stock options and awards will play a large role in the EPS for 2007.
Let us now compare the competitors Google, Yahoo! and Microsoft. Let us look at the different ratios to see how they compare.
Let us start with Yahoo! The ROA and ROE for Yahoo! for the past three years are as follows.
ROA - 11%, 19% and 11.5% respectively.
ROE - 14.7%, 24.2% and 15% respectively.
The numbers for Microsoft are as follows.
ROA - 15%, 18% and 19%.
ROE - 20.3%, 28.8% and 31% respectively.
Let us finally look at Google.
ROA - 19%, 21.6% and 19.24% respectively.
ROE - 26%, 24% and 21% respectively.
Google numbers are pretty good and it is pretty clear that Google is a superior company to Yahoo! The trailing P/E for Google is 48 which is a bit pricy compared to other top companies. The predicted forward growth rate for Google is around 35 for FY07 which is lower than the P/E.
The good news for Google is that it seems to be widening its market share compared to its rivals. Although both Yahoo! and Microsoft are interested in competing, Google seems to be ahead of the curve and increasing the lead every passing year. 2007 should be very interesting as it should show the market trends and future prospects for the search based advertizing. After trailing SP500 in 2006, it is anybodies guess what will happen to Google stock in 2007. One thing is sure - Google share holders can expect a wild ride in 2007.
First FY06 results. The reported EPS is 10.21 per share where as the diluted EPS is 9.94. The diluted share count is 309 million. The year ago figure is 291 million. The share count increased by 6.2% year over year. The EPS was below the analyst consensus estimate of 10.33/share. Consequently the Google shares went down by 3.94% the day after.
The EPS for Google is expected to be around 36% higher in 2007 compared to 2006. While it is impossible to predict the future, the accounting treatment of the stock options and awards will play a large role in the EPS for 2007.
Let us now compare the competitors Google, Yahoo! and Microsoft. Let us look at the different ratios to see how they compare.
Let us start with Yahoo! The ROA and ROE for Yahoo! for the past three years are as follows.
ROA - 11%, 19% and 11.5% respectively.
ROE - 14.7%, 24.2% and 15% respectively.
The numbers for Microsoft are as follows.
ROA - 15%, 18% and 19%.
ROE - 20.3%, 28.8% and 31% respectively.
Let us finally look at Google.
ROA - 19%, 21.6% and 19.24% respectively.
ROE - 26%, 24% and 21% respectively.
Google numbers are pretty good and it is pretty clear that Google is a superior company to Yahoo! The trailing P/E for Google is 48 which is a bit pricy compared to other top companies. The predicted forward growth rate for Google is around 35 for FY07 which is lower than the P/E.
The good news for Google is that it seems to be widening its market share compared to its rivals. Although both Yahoo! and Microsoft are interested in competing, Google seems to be ahead of the curve and increasing the lead every passing year. 2007 should be very interesting as it should show the market trends and future prospects for the search based advertizing. After trailing SP500 in 2006, it is anybodies guess what will happen to Google stock in 2007. One thing is sure - Google share holders can expect a wild ride in 2007.
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