The Informed Observer

Repair Your Portfolio With AutoZone Shares

2011-12-06T05:03:00.000-08:00

AutoZone (NYSE: AZO) reported earnings Tuesday and Advance Auto Parts (NYSE: AAP) reported last month. Which auto parts retailer had the better quarter and should you invest in either?

To answer that, one of the first questions to consider is the growth rate of the auto parts industry. And the answer to that is that the auto parts industry is growing at about the same rate as the general economy -- rising at a 2.6% annual rate since 2006 to $41.9 billion in 2011 while generating a 7.2% profit margin on $3 billion in net income, according to IBISWorld.

That rate is expected to slow to 1.3% growth through 2016. Over the last couple of years, a drop in consumer disposable income due to the recession let more people to fix their own vehicles. But as the economy recovers, more people are expected to pay mechanics to fix their cars and the industry will be sustained by demand from commercial vehicle owners.

The two biggest players in the industry are AutoZone with 19.6% market share and Advance with 14.9%.

Prior to its earnings announcement Tuesday, analysts were expecting AutoZone to report rapid revenue and EPS growth. Specifically, revenues were expected to grow 5.5% to $1.89 billion and analysts expected EPS to rise 18% to $4.45 a share.

And Tuesday's report blew through those expectations. After all, AutoZone reported a 7.3% revenue increase to $1.92 billion and EPS that spiked 24% to $4.68. Underlying this performance was a 4.6% boost in same store sales and some new store openings -- 17 in the U.S. and two in Mexico.

This brought AutoZone's total store count to 4,832 -- including 4,551 stores in the U.S. and 281 stores in Mexico. Profit was also aided by lower distribution costs and a drop in so-called shrink expense -- e.g., employee stealing.

This is not the first quarter that AutoZone has been growing nicely. For example, in its fourth quarter, AutoZone net income rose 12.1%, in the third quarter it was up 12.1% again, and before that net income rose 20%, according to Narrative Science. Advance also did well but it's not growing as fast as AutoZone.

Specifically, in its third quarter report -- released November 9, Advance reported a 4% increase in sales of $1.46 billion (meeting expectations) on adjusted EPS of $1.41 a share -- a whopping 23 cents ahead of Thomson Reuters I/B/E/S forecasts. That growth was aided by "higher same-store sales and new store openings," according to Reuters.

So here's what the investment choice between AutoZone and Advance boils down to:

AutoZone: fast growing, fat margins; slightly expensive stock. AutoZone's sales have risen 9.6% in the past 12 months to $8.1 billion while its net income rose 15% to $849 million -- yielding an industry-beating 10.5% net margin. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.18 is a bit pricey on a P/E of 17.4 and expected earnings growth of 14.7% to $25.87 in its fiscal year 2013.
Advance: fast growing, fair margins; somewhat pricey stock. Advance's sales have increased 9.5% in the past 12 months to $6.1 billion, while net income has increased 28% to $375 million – yielding an industry-lagging 6.2% net margin. Its PEG of 1.14 is slightly over-valued on a P/E of 14.7 and expected earnings growth of 12.9% to $5.61 in 2012.

AutoZone is the winner in this auto parts faceoff. It's growing and has market-beating margins thanks to its ability to meet cost reduction targets. And given its track record of beating earnings growth targets, its stock should benefit from future upside surprises.

Discounters Dollar General and 99 Cents Only Stores Selling at Premium

2011-12-05T04:59:00.000-08:00

With the economy in the doldrums, there must be millions of people looking to buy what they need at the lowest possible price. But if people don't need what the discount stores sell, then they might pass despite the low price.

This is the dilemma that faces investors considering whether to buy shares of discounters Dollar General (NYSE: DG) and 99 Cents Only (NYSE: NDN). Are these two doing better due to the economic slowdown? Are they likely to exceed future analyst expectations? If so, should you invest?

These dollar stores sell products that manufacturers can't sell in the higher-priced retail stores. But surprisingly, the sales growth among dollar stores has come from affluent consumers.

Sure most of their customers are low-wage earners -- the New York Times reported that 42% earn no more than $30,000; financial anxiety among people earning over $70,000 is driving demand. As Dollar General's CEO, Rick Dreiling, told the Times, those affluent consumers make up 22% of its sales and the vast majority of its growth.

Dollar General was expected to continue to do well -- but it blew through estimates. After all, analysts were looking for it to report Monday a 10.8% increase in revenues to $3.57 billion and a 23% increase in EPS to 48 cents. And Monday it reported an 11.5% revenue increase to nearly $3.6 billion while it reported EPS of $0.50 -- two cents higher than expected.

In announcing Monday's earnings, Dreiling raised its earnings expectations for the full year. As he stated in the announcement, Dollar General's same store sales increased 6.3% for the third consecutive quarter and "we are raising our full year adjusted earnings per share guidance to the range of $2.29 to $2.32."

Competitor, 99 Cents Only Stores -- it operates 289 discount stores of which 74% are in California and the rest in Texas, Arizona, and Nevada -- had a strong fiscal second quarter when it reported November 10 -- but not as good as Dollar General's report.

99 Cents' revenue was up 8.8% to $363 million and its profit rose a strong 17% to $15.1 million. But its 21 cents a share fell a penny short of analysts' expectations even as sales were 2% above forecasts.

So here's what the investment choice between Dollar General and Warnaco boils down to:

Dollar General: fast growing, fair margins; expensive stock. Dollar General's sales have risen 10.5% in the past 12 months to $13.7 billion while its net income soared 85% to $654 million -- yielding a thin 4.8% net margin. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.36 is a pricey on a P/E of 21 and expected earnings growth of 15.5% to $2.64 in fiscal year 2013.
99 Cents Only Stores: growing, fair margins; pricey stock. 99 Cents Only Stores' sales have increased 5.1% in the past 12 months to $1.48 billion, while net income has increased 23% to $77 million – yielding a decent 5.2% net margin. Its PEG of 1.60 is over-valued on a P/E of 20 and expected earnings growth of 12.5% to $1.29 in fiscal 2012.

These two discount retailing stocks are selling at a premium. If forced to choose one, I would go with Dollar General because it is growing faster and it less over-priced. But there is no rush to buy their shares -- consider them more closely the next time the market plunges on bad news from the Eurozone.

Try on PVH for Size, Leave Warnaco on the Rack

2011-12-02T04:57:00.000-08:00

Demand in emerging markets for prestigious U.S. brands is turning the mundane clothing industry into a fast grower. And that trend is helping PVH (PVH) and Warnaco (WRC) to post strong financial results. But should you invest in either stock?

Thanks largely to exports, the global apparel manufacturing industry is big and growing. In 2011, IBISWorld estimates that sales will total $449 billion, 3% higher than in 2010. And exports account for a whopping 69% of the total.

The clothing manufacturing location varies by price level. Less expensive apparel is made in developing regions of Asia and South America while "designers, large wholesalers and retailers are predominantly located in Europe, the United States and developed Asian countries, such as Hong Kong and Japan," according to IBISWorld.

PVH is benefiting from exports of its Tommy Hilfiger and Calvin Klein brands in international markets. And that explains how its third quarter results exceeded expectations when it reported Thursday after the bell.

Its results were great and the stock is up 3% in after-hours trading. For example, its adjusted EPS of $1.89 beat forecasts by 8 cents; its revenues climbed 6.6% to $1.65 billion compared to the same quarter in 2010 and that figure was $10 million higher than expectations. PVH's best brands were Tommy Hilfiger whose sales rose 17% and Calvin Klein that enjoyed an 11% increase.

Warnaco enjoyed growth in its most recent report -- also benefiting from international demand. Its third quarter sales rose 8% to $645.1 thanks to international sales (up 16%) and so-called direct-to-consumer (up 31%) demand growth. The bad news was that its U.S. sales were down 3%.

And Warnaco's adjusted earnings met analysts' estimates. More specifically, Warnaco earned $1.07 per share -- 2.9% more than in 2010.

So here's what the investment choice between PVH and Warnaco boils down to:

PVH: fast growing, thin margins; slightly expensive stock. PVH sales have risen 93% in the past 12 months to $5.6 million while its net income plunged 68% to $251 million -- yielding a thin 4.6% net margin. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.07 is a bit pricey on a P/E of 16.1 and expected earnings growth of 15% to $5.87 in fiscal year 2013.
Warnaco: fast growing, good margins; fairly pricey stock. Warnaco sales have increased 13.7% in the past 12 months to $2.5 billion, while net income has soared 44.5% to $165 million – yielding a decent 6.7% net margin. Its PEG of 1.15 is slightly over-valued on a P/E of 13.5 and expected earnings growth of 11.7% to $4.50 in 2012.

Neither of these stocks is a screaming buy because their valuations on expected earnings growth are not cheap. However, PVH has done a better job of exceeding expectations and its current valuation is relatively low. But PVH has work to do in trimming weak brands and boosting its margins.

If management makes progress on that front, I'd expect the stock to rise -- particularly if it can keep beating expectations. By contrast, Warnaco stock looks like it could hover in a trading range until management can find an EPS growth catalyst.

Fossil Can Make Your Portfolio Come Alive

2011-12-01T05:18:00.000-08:00

There are plenty of people in emerging markets who are delighted to buy watches to let the world know about their newly acquired wealth. If that growth is higher than analysts expect, then investors might be able to profit from investing in leading watchmakers such as Movado Group (MOV) and Fossil (FOSL). But is the industry attractive and growing? And are these two stocks priced low enough to create a margin for error?

The watch industry has different segments based on price ranges. At the very top are Exclusive watches in the $10,000 and above category -- its Concord brand is a leader there. And at the bottom are mass market watches that sell for less than $55, according to Movado's 2011 10K.

Movado is a leader in the so-called premium category -- these are quartz-analog watches that sell in the $500 to $1,499 range. Made mostly in Switzerland, premium watches have gold or stainless steel finishes. Movado competes with Gucci, Rado and Raymond Weil.

Fossil is similarly well-positioned in the higher-price ranges. And despite competition from cell phones that give people the time of day wherever they may be in the world, people appear to be gobbling up these watches because they show off the newly acquired wealth of the wearers.

Movado blew through earnings expectations when it reported earnings Thursday. Analysts were expecting an 8.5% sales increase to $133.4 million -- but it reported 16% growth to $143 million. Analysts had forecast EPS of $0.43 per share -- but Movado reported adjusted EPS of $0.65 cents a share -- a whopping 22 cents more than expected. Behind the growth was strong demand growth for Movado watches.

Fossil reported much faster third quarter growth on November 8th. Fossil's revenues rose a whopping 22.7% to $642.9 million -- $700,000 more than analysts expected. And its EPS of $1.09 were six cents above analysts' expectations.

But all was not well with Fossil. The strong dollar has led to higher watch prices and this has reduced demand from consumers in recession-hit economies. The result is that Fossil cut ist earnings outlook by three cents a share to a range from its $1.75 to $1.78 -- that makes analysts' $1.78 a share target look tougher for Fossil to hit, according to Reuters.

So here's what the investment choice between Movado and Fossil boils down to:

Movado: growing, unprofitable; fairly expensive stock. Movado sales have risen 9.3% in the past 12 months to $427 million while it lost $10 million. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.11 is pricey on a forward P/E of 19.4 and expected earnings growth of 17.4% to $0.81 in fiscal year 2013.
Fossil: fast growing, wide margins; fairly price stock. Fossil sales have increased 31% in the past 12 months to $2.4 billion, while net income has soared 83% to $273 million – yielding a slim an attractive 11.7% net margin. Its PEG of 0.96 is slightly under-valued on a P/E of 21.4 and expected earnings growth of 22.2% to $5.53 in 2012.

If you think that the last 12 months are good predictors of the future, then you should invest in Fossil because it is enjoying rapid growth, wide margins, and trades at an attractive price. By contrast, Movado has been growing more slowly, losing money, and is over-valued.

However, the predictions of future results for both companies suggest that Fossil is likely to stumble while Movado's upward momentum is going to continue. I would give the edge to Fossil because its past performance suggests that it has a good chance of blowing through lowered expectations.

Wait For Market Break To Suit Up in Jos. Bank Shares

2011-11-30T04:57:00.000-08:00

With unemployment at 9% do the out-of-work buy new suits to interview for scarce jobs or do they hold on to their dwindling cash and make do with their old duds? One way to answer that question is to look at the men's apparel retailers such as Jos. Bank (NYSE: JOSB) and Men's Warehouse (NYSE: MW) -- back in May I thought this one was too pricey. Should you suit up your portfolio with the shares of either company?

The men's clothing retailing industry is large -- $9 billion -- but it has gotten smaller in the last year at a 1.3% rate, according to IBISWorld. Behind this drop is the weak economy that crimps demand. As IBISWorld wrote: "Sinking consumer sentiment, brought about by skyrocketing unemployment and a slowdown in personal disposable income growth" cuts into demand for men's clothing.

However, IBISWorld expect the industry to grow slightly -- at a 2.3% annual rate through 2016 as the economy recovers.

And Men's Wearhouse and Jos. Bank are among the biggest players with market share of 20.2% and 10.3%, respectively.

Based on this analysis suggesting a tight link between the state of the economy and the change in sales at these men's retailing industry leaders, their recent financial results could well be a barometer of the state of the American consumer.

And by that measure -- it looks like that consumer is in surprisingly healthy shape. Prior to Jos. Bank's Wednesday's earnings announcement, analysts expected a strong performance. They were looking for a 13.1% revenue boost to $196 million and EPS of $0.51 per share.

But Jos. Bank exceeded those expectations handily -- reporting a 21% sales pop to $210 million and EPS of $0.54 -- three cents more than expected. Behind the great results were a 14.6% increase in same-store sales and a 28.6% boost to sales from so-called direct sales.

When it last reported its fiscal second quarter, Men's Wearhouse did even better.Its adjusted EPS of $1.11 beat analysts' expectations by seven cents and its revenues climbed 22% to about $656 million thanks to its 2010 acquisition of two British corporate uniform companies and sales increases from its retail, tuxedo rental, and alteration business units.

So here's what the investment choice between Jos. Bank and Men's Wearhouse boils down to:

Jos. Bank: fast growing, good margins; fairly expensive stock. Jos. Bank sales have risen 11.4% in the past 12 months to $915 million while its net income rose 20.6% to $91 million -- yielding a slim net margin of 4%. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.29 is pricey on a P/E of 15.6 and expected earnings growth of 12.1% to $3.91 in fiscal year 2013.
Men's Wearhouse: growing, slim margins; somewhat pricey stock. Men's Wearhouse sales have increased 10% in the past 12 months to $2.3 billion, while net income has soared 47% to $95 million – yielding a slim net margin of 4.1%. Its PEG of 1.16 is slightly over-valued on a P/E of 15.1 and expected earnings growth of 13% to $2.49 in fiscal 2013.

I am not jumping up and down about either of these stocks. They are both a bit expensive but Jos. Bank has much wider profit margins than Men's Wearhouse. And that means that if its sales grow faster than expected, its earnings will grow even faster than the same sales growth boost would induce at Men's Wearhouse.

I would look for a broad market dip to buy shares of Jos. Bank and hold off on Men's Wearhouse. But the good news for the broad economy is that if these two are bellwethers, their rapid sales growth bodes well for the future.

Take a Spoonful of Ralcorp Stock

2011-11-29T05:59:00.000-08:00

Do people eat more cereal during a recession? And if so, is there an investment opportunity in the stock of leading ready-to-eat (RTE) cereal makers Ralcorp (NYSE: RAH) and Kellogg (NYSE: K)? The hedge fund that famously popped Enron's bubble, Highfields Capital Management, is loading up on Ralcorp shares. Should you follow?

Highfields Capital Management asked a question about Enron's financial statements during an April 2001 conference call. In response to the question, then-CEO, Jeff Skilling, called Highfields' analyst Richard Grubman an unprintable expletive that begins with 'a' and ends with 'e'.

Highfields made a fortune shorting Enron and recently Highfields turned its money-making sights on Ralcorp -- boosting its stake in Ralcorp by 200% to 1.5 million shares in the three months between June 2011 and September 2011.

Why might Highfields be interested in an industry as mature as RTE cereal? According to IBISWorld, it's growing steadily despite economic turbulence. Over the last five years, it's grown at an average rate of 3.2% and it is expected to end 2011 with $13.3 billion in revenue -- 1.9% above its 2010 level. Moreover, IBISWorld predicts the industry will grow at a 2% annual rate through 2016.

But Ralcorp is hardly the industry leader. That spot goes to Kellogg with 34.2% of the market to Ralcorp's 13.9%, according to IBISWorld. And Kellogg gained that lead by winning when it comes to the industry key success factors such as advertising, filling up retail shelves with different varieties, and economies of scale in purchasing and manufacturing.

Could Highfields be attracted to Ralcorp's financial performance? It looks like the interest is in a possible buyout. That's because Ralcorp postponed its fiscal fourth quarter earnings report from November 8th to November 29th so it could calculate the accounting impact of its spinoff of its cereal division -- Post Foods, according to Dow Jones Newswires. This could affect ConAgra Foods Inc.'s (NYSE: CAG) bid to acquire Ralcorp.

Meanwhile, Ralcorp narrowed the range of its expected fiscal year earnings to a range between $5.21 and $5.27 a share -- it had previously forecast 2011 earnings ranging from $5.20 to $5.35. And earlier in November, analysts were expecting Ralcorp to report an 11.1% EPS increase to $1.40 on an 8% rise in sales to $1.2 billion, according to Narrative Science.

Kellogg's third quarter results were a big disappointment to its investors. It reported a 14% decline in earnings to 80 cents a share -- nine cents short of analysts' expectations. Kellogg attributed this to supply chain investments. Meanwhile, Kellogg revenue rose 4.9% to $3.31 billion but fell $10 million short of expectations, according to ActiveInvestor.

So here's what the investment choice between Ralcorp and Kellogg boils down to:

Ralcorp: growing modestly, narrow margins; expensive stock. Ralcorp sales have risen 4% in the past 12 months to $4.7 billion while its net income fell 28% to $225 million -- yielding a low net margin of 4.8%. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.33 is pricey on a P/E of 20 and expected earnings growth of 15.1% to $6.03 in fiscal year 2012.
Kellogg: shrinking, decent margins; over-priced stock. Kellogg sales have fallen 1.4% in the past 12 months to $13 billion, while net income has soared 2.9% to $1.2 billion – yielding a decent 9.1% net profit margin. Its PEG of 3.06 is very expensive on a P/E of 15 and expected earnings growth of 4.9% to $3.54 in fiscal 2012.

Ralcorp is the better tasting of these two stocks. It is still over-priced so it would only make sense to buy its shares now if you think -- as Highfields probably does -- that ConAgra will make a bid for the company at a higher price. Kellogg seems to be blundering despite its market dominance -- as a result, its stock is tremendously over-valued.

If forced to pick one -- I'd buy Ralcorp.

Try On Foot Locker Stock For Size

2011-11-25T06:15:00.000-08:00

Everyone needs shoes -- but is there enough growth in demand for shoes for you to make a profit investing in shares of retailers such as Genesco (NYSE: GCO) and Foot Locker (NYSE: FL)?

The footwear retailing industry is big and shrinking. According to IBISWorld, 2011 revenues will total $20 billion but that figure will be 5% below its 2010 level. Underlying that decline is a slow economy. And profitability in the industry is capped by a variety of rivals -- including mass merchandisers, discount stores, and non-traditional retailers who are selling products that are mostly commodities.

Foot Locker is the industry leader while Genesco is much smaller. Specifically, IBISWorld estimates that Foot Locker is the industry leader with 18.7% market share while Genesco controls a mere 3.5%. In 2007, Foot Locker made an unsuccessful bid to acquire Genesco.

Foot Locker's recent financial performance has been good. It earned 43 cents a share -- four cents above expectations when it reported third quarter 2011 results on November 17th. Thanks to sales of running shoes, Foot Locker was able to report its seventh quarter in a row of expectations beating results and its sales of $1.39 billion grew 9% -- a big improvement in a declining industry.

But Genesco is growing even faster than its larger rival. Its third-quarter earnings spiked 54% in its Tuesday report -- its EPS of $1.21 were a whopping 25 cents above expectations and its revenues of $617 million were 33% higher and $22 million more than expected due to strong same-store sales growth (up 12%) and Genesco's acquisition of UK shoe company Schuh Group, according to BusinessWeek.

So here's what the investment choice between Foot Locker and Genesco boils down to:

Foot Locker: growing strongly, narrow margins; cheap stock. Foot Locker sales have risen 4% in the past 12 months to $5.5 million while its net income spiked 260% to $254 million -- yielding a low net margin of 4.6%. Its PEG (where a PEG of 1.0 is considered fairly priced) of 0.97 is cheap on a P/E of 13.1 and expected earnings growth of 13.5% to $2 in fiscal year 2013.
Genesco: rapidly growing, narrow margins; expensive stock. Genesco sales have increased 13.7% in the past 12 months to $2.1 billion, while net income has soared 88.1% to $73 million – yielding a narrow 3.4% net profit margin. Its PEG of 1.34 is expensive on a forward P/E of 18.1 and expected earnings growth of 13.5% to $4.18 in fiscal 2013.

Foot Locker wins this investment foot race on a more reasonable valuation. But I would consider Genesco if it keeps up its zooming earnings growth and its stock price falls along with the general market.

Store Your Net Worth with QLogic

2011-11-23T05:39:00.000-08:00

All those Facebook pokes and tweets create lots of data that companies need to store and retrieve across far-flung computer networks. To keep up with the growth in all that data, companies need to buy so-called network storage. Does this demand growth mean you should buy shares in two of the biggest network storage vendors -- Brocade Communications Systems (NASDAQ: BRCD) and QLogic (NASDAQ: QLGC)?

The network storage industry is big and growing fast. According to Infonetics Research, in the first quarter of 2011, the so-called Storage Area Network (SAN) switch and adapter market grew 9.8% from the previous year to $755 million. And Infonetics cites the tremendous demand for cloud storage in estimating that the market will grow at a 20% annual rate through 2015 and ending that year at three times its 2011 revenues.

And Brocade and QLogic are significant players there. Brocade claims to have 70% of the SAN market while in 2010 QLogic claimed that it controlled 54.5% of a related market -- Fibre Channel adapters.

Brocade reported better than expected financial results Tuesday and its shares rose 6%. Its quarterly revenue of $550 million and EPS of 16 cents compared favorably to analysts' expectations. According to Barron's those expectations were for revenue of $527 million and EPS of 10 cents a share and Brocade beat them by 4% and 60% respectively.

Moreover, Brocade looks to beat expectations in the current quarter as well. That's because it forecasts revenue in the range of $530 million to $550 million and adjusted EPS ranging from 12 cents to 14 cents -- and both are above analysts' forecasts of $535 million and 11 cents, according to Barron's.

When QLogic reported its second quarter results at the end of October, revenues and EPS were ahead of expectations. QLogic's 2.5% higher revenues of $150.2 million were better than expected and its unchanged-from-2010 adjusted EPS of 28 cents were 2 cents ahead of Zacks Consensus Estimate.

So here's what the investment choice between Brocade and QLogic boils down to:

Brocade: barely growing, narrow margins; cheap stock. Brocade sales have increased 2.7% in the past 12 months to $2.2 billion, while net income has plunged, down 57% to $51 million – yielding a narrow 2.4% net profit margin. Its PEG of 0.62 (where a PEG of 1.0 is considered fairly priced) is inexpensive on a forward P/E of 10.1 and expected earnings growth of 16.2% to $0.39 in fiscal 2013.
QLogic: growing strongly, wide margins; cheap stock. QLogic sales have risen 8.8% in the past 12 months to $610 million while its net income soared 153% to $145 million -- yielding a whopping net margin of 23.7%. Its PEG of 0.86 is cheap on a P/E of 10.4 and expected earnings growth of 12.1% to $1.17 in fiscal year 2013.

QLogic wins this SAN faceoff. Its valuation is very compelling for a solidly growing company with very attractive profit margins. Brocade seems to be lagging but it could be a takeover target for the likes of Dell (NASDAQ: DELL) and might be an interesting holding for that reason alone.

But based purely on stand-alone fundamentals, QLogic is the better bet.

St. Jude Can Keep Your Portfolio Pumping -- But Wait For Price Drop

2011-11-22T05:20:00.000-08:00

If your heart is not pumping with a regular rhythm, then you've got yourself a serious problem. But if so -- and you're still reading this -- it may be because you are a customer of the cardiovascular rhythm management (CRM) industry.

CRM makes devices that doctors implant in your chest -- they give you a nice electric shock to get your heart pumping if it gets off track. And the industry is big -- although shrinking. Should you invest in it? If so, what are the prospects for profit in the stocks of Medtronic (NYSE: MDT) and St Jude Medical (NYSE: STJ).

The CRM market is big but shrinking. According to Medtech Insight, the global CRM market is likely to total $11.4 billion in revenue, down 2% from 2010. The reason for the decline is research that argued CRM products are mis-used and a Department of Justice investigation into the industry.

A January 2011 study in the Journal of the American Medical Association argued that "a substantial percentage of US physicians may not be following evidence-based guidelines" for CRM devices. Though its findings are controversial, the study suggests that some patients may be getting the devices even though that might not be the best treatment for what ails them.

And it that was not bad enough, there is an ongoing DOJ investigation into whether health care providers are improperly billing Medicare for CRM devices. Specifically, the DOJ is trying to gather evidence of whether providers are improperly billing Medicare for "nonqualified [implantable cardioverter defibrillators] ICD implants." reports Medtech Insight.

Medtronic and St. Jude are big players in this industry. MEdtronic has 45% of the U.S. ICD market and St. Jude has 27%. But a JPMorgan analyst, Michael Weinstein, sees a rapidly contracting market -- he expects the US ICD market to get smaller at a 5.2% annual rate from $4.18 billion in 2010 to $3.38 billion in 2014.

Medtronic has been affected by this contraction. And that contributed to low expectations for its fiscal second quarter 2012 results. FactSet-polled analysts were expecting earnings of 82 cents on revenue of $4.07 billion. The EPS expectations for Tuesday's report was the same as the same period in 2010 while the revenue forecast was up 4.4% from the year before.

Medtronic's actual result was good and the stock is rising in pre-market as a result. Revenue was $4.13 billion -- $40 million higher than forecast and EPS of 84 cents were two cents more than forecast.

St. Jude has been performing more impressively. When it reported results in October, its adjusted EPS of 78 cents for the third quarter beat expectations by six cents a share. And its revenues increased 11.5% to $1.38 billion -- beating the Zacks Consensus Estimate by around $10 million. Although St. Jude had problems in its CRM product line, other products offset the bad news.

So here's what the investment choice between Medtronic and St. Jude boils down to:

Medtronic: barely growing, wide margins; expensive stock. Medtronic sales have risen 0.7% in the past 12 months to $16.2 billion, while net income has slipped 0.1% to $3.1 billion – yielding an impressive 19.1% net profit margin. Its PEG of 1.37 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 11.6 and expected earnings growth of 8.5% to $3.73 in fiscal 2013.
St. Jude: growing, wide margins; expensive stock. St. Jude sales have sales have risen 10.3% in the past 12 months to $5.56 billion, while net income has increased 16.8% to $907 million -- yielding a solid net margin of 16.3%. Its PEG of 1.34 is expensive on a P/E of 12.9 and expected earnings growth of 9.6% to $3.58 in 2012.

Medtronic and St. Jude are over-valued given their slow expected earnings growth. If forced to choose, I would pick St. Jude because it's growing faster. In light of the never ending drip of nasty global debt rumors, keep an eye on St. Jude for an opportunity to buy its shares at a lower price.

Take a Bite Out of Wendy's Stock; Skip Jack in the Box

2011-11-21T05:08:00.000-08:00

During a period of slow economic growth do people buy more fast food? If so, is there an investment opportunity in buying stock in the Quick Service Restaurant (QSR) companies that serve it? A comparison of the earnings of Jack in the Box (NYSE: JACK) -- that reports its third quarter results Monday -- and Wendy's (NYSE: WEN) reveals some answers.

The QSR market totaled $166 billion and was expected to barely budge in 2011 at a 1% rate to $167.7 billion in 2011, according to a March 2011 report from WorldStreetFundamentals.com. The report noted that thanks to the economic downturn, there was significant pent up demand -- 40% of consumers were "not dining out or using takeout as often as they would like." And the report speculated that by unleashing that demand, QSR industry revenues would recover rapidly as the economy recovered.

The biggest player in the industry is McDonald's (NYSE: MCD), according to QSR. In 2010 its sales totaled $32.4 billion -- earning it QSR's top rank -- based in part on the strength of its very high $2.4 million in annual sales per store. Wendy's 2010 sales of $8.3 billion gave it 24% of McDonald's revenues or $1.4 million per store -- and QSR's #4 rank. And Jack in the Box's 2010 sales of $2.9 billion gave it 9% of McDonald's revenues or $1.3 million per store -- and QSR's #15 rank.

In 2010, Wendy's implemented new menu ideas and cut a lagging brand. Among the new ideas were "adding Garden Sensations Salads to the menu and offering a Pair 2 Menu that gave customers a chance to choose among 35 salad combinations for $5," according to QSR. Wendy's also added Natural Cut Fries with Sea Salt -- tossing out its old fries altogether -- and it dumped its Arby’s unit in the first half of 2011.

These changes have contributed to good results. In the third quarter of 2011, Wendy's adjusted EPS of 5 cents a share were a penny ahead of the Zacks Consensus Estimate. Wendy’s total revenue grew 1.8% to $611.4 million in the quarter. This was due to 3% growth in company-owned restaurants and 1.7% more franchise revenues. Its average transaction was up due to "menu improvements [and] brand repositioning," according to Zacks.

Meanwhile, Jack in the Box is good at advertising, it added new items to its menu in 2010, and it added low-priced items. According to QSR, Jack in the Box won "another gold Effie Award for its Jack campaign." Its new menu items included "Breakfast Pita, Pastrami Grilled Sandwich, Really Big Chicken Sandwich, and a Grilled Chicken Sandwich," wrote QSR. And it added low-priced options such as paying $3 for "a Hamburger Deluxe, a small fountain drink, and french fries."

This approach has not been enough to boost its results though. On Monday, before its report, the average analyst estimate was 41 cents a share, up 2.5% the year before. But this positive expectation follows two quarters in a row of disappointing results -- in its fiscal third quarter its reported EPS of 38 cents was 2 cents a share short of expectations and in its second quarter the company missed by 9 cents.

So here's what the investment choice between Wendy's and Jack in the Box boils down to:

Wendy's: Shrinking, narrow margins; cheap stock. Wendy's sales have fallen 4.6% in the past 12 months to $2.66 billion, while net income has plunged, down 223% to $2.9 million – yielding a miniscule 0.1% net profit margin. Its PEG of 0.44 (where a PEG of 1.0 is considered fairly priced) is inexpensive on a forward P/E of 22.7 and expected earnings growth of 52% to $0.23 in 2012.
Jack in the Box: shrinking, narrow margins; expensive stock. Jack in the Box's sales have dropped 7% in the past 12 months to $2.3 billion while its net income declined 46.4% to $62 million -- yielding a narrow net margin of 2.75%. Its PEG of 1.43 is expensive on a P/E of 17.1 and expected earnings growth of 12% to $1.63 in fiscal year 2012.

Wendy's looks like the winner in this fast food faceoff. But that success depends heavily on a big turnaround in 2012. Jack in the Box looks like it's in pretty rough shape but a better than expected result in its third quarter report could change that.

Watch CBS, Disney Make Your Portfolio Grow

2011-11-11T05:03:00.000-08:00

In an economy that's hardly booming, it would seem that people would want to watch TV and go to movies to take their minds off economic hardship. But an entertainment company would need to produce compelling content to snag a big share of those potential viewers.

And if they could, would advertisers be willing to spend to reach them or would they figure that consumers don't have the money to buy their products so why should they bother? These questions come to mind in considering the financial performance of the entertainment industry these days. And here's another: If the entertainment industry is doing well, should you invest in Walt Disney (DIS) and CBS (CBS) -- two of its biggest participants?

These companies get revenues from TV advertising and movies, among other sources. But a look at global TV advertising revenues suggests it's a big market that's growing solidly. According to ZenithOptimedia, advertising revenue on TV was expected to grow at a 2.4% compound annual rate to $191 billion by the end of 2011 and 6% more in 2012 to $202 billion. That would make the market for TV advertising more than twice as large as the second biggest one -- newspaper ads.

The market for movies is much smaller but growing far faster. Pricewaterhousecoopers expects 2011 North America film revenues to hits $40.8 billion in 2011 and to rise at a 5.4% annual rate to $50.3 billion by 2015. And globally, the film industry is growing faster -- 6.2% annually -- from $88.8 billion in 2011 to $113.1 billion in 2015.

Both industries are growing because of more people in emerging markets such as China, India, and Brazil who are watching TV and going to movies.

When Disney reported its fourth quarter earnings Thursday, it blew through estimates on the strength of its other businesses -- cable TV and at U.S. resorts. Specifically, according to Bloomberg, Disney's profit rose 20% in the quarter. Its sales climbed 7% to meet analysts' estimates of $10.4 billion while its adjusted EPS of 59 cents a share beat estimated by four cents.

Disney benefited most from three factors: fees from pay-TV operators rose, ESPN ratings were up 13% and Disney resorts charged higher ticket prices and added a new cruise ship.

CBS's third quarter report, issued Nov. 3, was not quite as strong. Its net income spiked 38% to $338 million. Its $0.50 per share beat by four cents EPS expectations but its 2% increase in revenue to $3.37 billion fell $60 million short of Wall Street forecasts. While its advertising revenue held steady at almost $2 billion, CBS received higher licensing and affiliate fees in the quarter.

So here's what the investment choice between DIS and CBS boils down to:

Disney: slow growth, strong margins; fairly priced stock. Disney's sales have increased 7.4% in the past 12 months to $41 billion while net income rose 21% to $4.8 billion – yielding a 12.9% net profit margin. Its PEG of 1.03 (where a PEG of 1.0 is considered fairly priced) is reasonably valued on a P/E of 14.68 and expected earnings growth of 14.3% to $3.30 in fiscal 2013.
CBS: Decent growth, small margins; cheap stock. Revenues for CBS have grown 8% in the past 12 months to $14 billion while net income jumped 220% to $1.22 billion – yielding an 8.77% net profit margin. Its PEG of 0.75 is pretty cheap on a P/E of 14.24 and expected earnings growth of 18.89% to $2.24 in 2012.

Both of these entertainment companies are performing well and Disney shares are poised to pop in Friday trading. But due to its low PEG, CBS looks like the better value if it keeps beating EPS growth expectations.

Don't TAP BUD for Your Portfolio

2011-11-10T05:30:00.000-08:00

Do people drink less beer during periods of slow economic growth so they can save money or do they drink more to drown their sorrows? The great thing about this question is that there are two publicly traded companies -- Anheuser-Busch InBev (BUD) and Molson Coors (TAP) -- whose earnings we can analyze to gain insight into this question. And here's another: should you invest in either company?

Beer is big business. According to First Research, there are 400 U.S. brewers with $20 billion in annual sales. And it's a highly concentrated market with eight companies controlling 90% of the sales. Among these Anheuser-Busch (Budweiser brands) and MillerCoors (Miller and Coors brands) are the biggest.

The concentration in the industry makes sense given its economics. After all, the costs of buying beer raw materials, brewing, distributing, and advertising are very high and therefore it is easy for a company that isn't gaining market share to fall further behind thanks to the high costs and seek to be acquired by consolidators like InBev.

But there is a parallel trend in the industry -- beer lovers who take advantage of cheap home brewing methods to start their own breweries. There are plenty of craft brewers, brewpubs, and microbreweries that bring the total to 1,753 establishments, according to the Brewers Association.

And craft brewing seems to be more popular than the overall industry. Craft brewer dollar sales rose 15% in the first half of 2011 -- whereas SABMiller expected 2.5% growth for the industry in 2011.

BUD appeared poised to grow faster than the industry when it announced results Wednesday. Analysts expected third quarter 2011 revenue to rise 7% to $9.98 billion; operating profit was forecast to be up 2.1% to $3 billion; net income was poised to climb 3.7% to $1.58 billion; and EPS was estimated to be $0.98 -- four cents higher than in 2010.

But BUD beat all the expectations when it reported Wednesday. Its revenues of $10.22 billion beat expectations by $240 million or 2.4%; its earnings of $1.59 billion were $10 million above expectations, and its EPS of $1.09 was a whopping 11 cents higher than expected.

The big negative in the quarter was that volumes sold in BUD's third quarter slipped 0.2% due to a 0.6% decline in beer and a 6.4% increase in non-beer beverages.

For its part, TAP has already reported declining results. On Nov. 2, it posted a 44% plunge in third quarter net income. Meanwhile, TAP's revenue fell 3% to $2.29 billion on a 4% volume decline to 17.2 million barrels.

The reason revenues did not fall as fast as volume was that some customers were willing to buy more high-priced brew. For example, according to the Associated Press, "higher priced seasonal craft brand extensions, like Blue Moon Summer Honey Wheat and Leinenkugel's Summer Shandy, were popular. But sales of Miller Lite and Miller Genuine Draft fell, as did sales of the company's lowest-priced beers following a price increase."

So here's what the investment choice between BUD and TAP boils down to:

Anheuser Busch: shrinking steadily, but high margins; expensive stock. BUD's sales have dropped 1.3% in the past 12 months to $37.8 billion while net income shrank 12.7% to $4.8 billion – yielding a wide 18.02% net profit margin. Its PEG of 2.16 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 22.48 and expected earnings growth of 10.4% to $4.15 in 2012.
Molson Coors: growing sales, but shrinking profits, good margins; expensive stock. TAP's sales have gone up 7.3% in the past 12 months to $3.4 billion while net income dropped 8.4% to $620 million – yielding a solid 17.95% net profit margin. Its PEG of 2.9 is very expensive on a P/E of 12.15 and expected earnings growth of 4.2% to $3.66 in 2012.

Both stocks look way too expensive to quaff for your portfolio. But if you want to follow consumer trends, drink craft beer.

Macy's Trading At a Discount, Ralph Lauren's Premium Priced

2011-11-09T05:03:00.000-08:00

The U.S. economy is limping along at 2.5%, the unemployment rate is 9%, 16 million are looking for full-time work. So retailers must be suffering terribly, right? Not at all. With the wealthy enjoying a great decade, upscale American retailers are booming -- not solely in the U.S. but in Asia and Europe as well. Among those are Ralph Lauren (NYSE: RL) that reports earnings Wednesday and Macy's (NYSE: M). But should you stock up your portfolio with their shares?

Wall Street is expecting some earnings and revenue growth for RL. Specifically, the consensus EPS estimate for its second quarter of $2.24 is expected to be 7.2% higher than in 2010. But revenue is expected to grow much faster -- up 20.1% to $1.84 billion in the quarter.

And RL blew through first quarter 2012 expectations. In August 2011, it reported EPS of $1.90 that were $0.44 higher than analysts polled by Capital IQ.

And a contributing factor was growth in its international revenues. They rose 60% in the first quarter and accouted for 36% of RL's consolidated sales. RL's international growth included expansion in Europe where the company added "new wholesale and retail distribution, [expanded] existing and highly productive locations and [generated sales from] new merchandized categories such as Lauren and accessories," according to RL's Q1 2012 earnings transcript.

But RL is hardly the only upscale retailer that's doing well. Macy's is expected to report higher sales and EPS when it reports Wednesday. FactSet-surveyed analysts expected Macy's to report sales up 4.8% to $5.87 billion and EPS of 16 cents -- double the 2010 figure.

Underyling Macy's financial performance are three key strategic choices regarding pricing, merchandising, and product selection. Specifically, investors will seek details on how consumers are reacting to Macy's higher prices -- to preserve margins as production costs rise; its merchandising strategy of tailoring stores to local markets; and its efforts to "lock up exclusive brands," according to the Associated Press.

So here's what the investment choice between RL and M boils down to:

Ralph Lauren: Steady growth, decent margins; expensive stock. Ralph Lauren's sales have increased 13.7% in the past 12 months to $6 billion while net income rose 18.4% to $631 million – yielding a 10.46% net profit margin. Its PEG of 1.62 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 24.7 and expected earnings growth of 15.22% to $7.89 in fiscal 2013.
Macy's: Decent growth, thin margins; cheap stock. Macy's sales have increased 6.4% in the past 12 months to $25.7 billion while net income jumped 157% to $1.1 billion – yielding a slim 4.08% net profit margin. Its PEG of 0.93 is cheap on a P/E of 13.18 and expected earnings growth of 14.15% to $3.04 in 2012.

Both stocks have been performing well -- near their 52 week highs -- but Macy's gets the nod due to its far more reasonable valuation.

Activision To Hit Gaming Target, EA Could Miss

2011-11-08T05:16:00.000-08:00

The electronic gaming industry is in a shooting war between traditional console gamers and social network gaming. With Activision (NYSE: ATVI) reporting its earnings Tuesday, investors can see just how well it's doing. But should you invest in Activision or would Electronic Arts (NASDAQ: ERTS) be a better bet?

And these two companies are in a shooting war. That's because Activision's Call of Duty controls 90% of the so-called shooter segment. and EA wants to take that down to 70%. It’s no secret that EA are directly going after Call of Duty, mainly because the company mentions it at any given opportunity. This latest episode sees EA claiming they want to take Activison’s 90% share of the shooter market down to at least 70%.

As EA's Jens Uwe Intat told ButtonCombo in September, “We will give Activison a hard time in the space. And we have done it when we won back the football category from PES. That’s what we are doing in the shooter space. One of my favourite sayings is ‘Rome wasn’t built in a day’. We might not do it Day One, but we are going to take a decent amount share from Activision. In broad numbers, Activision has 90 per cent of the shooter market, and we want to see that go down to 70. I would be even happier if they were left with 60 per cent.”

Experts agree with EA's assessment of Activision's market position. As Jesse Divnich, an industry expert, told IndustryGamers, the "Call of Duty franchise is outperforming the category's growth, and since release counts have been similar over the year the data would conclude that Call of Duty is both growing the Shooter category while growing its share."

And that category has been growing rapidly. Since 2008, the number of Shooter games sold has been growing at an 8.5% annual rate from 68 million in 2008 to 80 million in 2010. That amounts to $5 billion in revenue -- up from $3 billion in 2006 -- a 13.6% annual rate, according to IndustryGamers.

With all this good news on Activision, you might expect it to be reporting outstanding results for the third quarter. If so, you would be disappointed. That's because analysts expect a 75% drop in earnings per share from 2010. They forecast Activision will earn a penny a share -- down from 4 cents a share the year before .And revenue is expected to be down 25% to $558 million for the quarter compared to the 2010 third quarter.

This decline does not come as surprise. After all, in September, total U.S. game sales—including videogame console hardware and games—fell 6% to $1.16 billion in the year to date, down 6% from $1.23 billion a year earlier, according to NPD Group. And this decline is due in part to Activision and EA's slow response to social games like Zynga -- whose pending IPO could value it at $20 billion.

Zynga's prospectus indicates that it's outperforming Activision. For example, for the nine months ending Sept. 2011, Zynga's revenues rose 106% to $829 million while its net income fell 35% to $31 million.

But Activision's weak earnings will not be the public's focus Tuesday. Instead, attention will be paid to the debut of Activision latest "Call of Duty" game -- the $60 "Call of Duty: Modern Warfare 3" that will battle for shooter market share with EA's just-released "Battlefield 3." Both companies are hoping these games will reverse the negative trend.

Meanwhile EA's latest results for its second quarter ended Sept. 30, were better than expected. Its adjusted profit of $17 million was 5 cents a share -- better than the 5 cents a share loss that analysts had projected.

And EA's sales rose 17% to $1.03 billion -- exceeding expectations by over 9%. However, without the adjustments, EA reported a loss of $340 million -- $139 million worse than its 2010 second-quarter loss.

So here's what the investment choice between Activision and EA boils down to:

Activision: Strong growth, decent margins; slightly expensive stock. Activision's sales have increased a small 3.9% in the past 12 months to $4.77 billion, but net income has soared, up 270% to $645 million – yielding a 13.8% net profit margin. Its PEG of 1.17 (where a PEG of 1.0 is considered fairly priced) is a bit expensive on a P/E of 24.1 and expected earnings growth of 20.63% to $0.89 in 2012.
EA: slow growth, losing money; cheap stock. EA's sales have dropped 1.8% in the past 12 months to $3.86 billion while its net loss declined 59.2% to ($290 million). Its PEG of 0.54 is cheap on a forward P/E of 27.8 and expected earnings growth of 51.47% to $0.88 in fiscal year 2013.

I would rather take a chance on Activision than EA. Both are facing a considerable threat from social gaming to which they are having trouble adapting. But Activision's financial house is in much better order. Nevertheless, if EA achieves its fiscal 2013 earnings goal, it's stock is now screamingly cheap. I think that target could be hard to hit.

In this shooting war, I'd give the edge to Activision.

Take Your Portfolio on a Trip with Priceline, Shun Orbitz

2011-11-07T05:04:00.000-08:00

When it comes to booking online travel, Priceline.com (NASDAQ: PCLN) and Orbitz (NASDAQ: OWW) are among the biggest players. But with U.S. economic growth a mere 2.5% in the third quarter, are people cutting back or are they flocking to these sites to save money? And should you invest or avoid these two stocks?

Priceline will report its third quarter earnings after Monday's close and those results are expected to be explosive. Analysts forecast an 85% spike in revenue to $1.42 billion and an 82% EPS rise to $9.02. During its second quarter, 50% of its revenue came from outside the U.S. -- a 90% increase over 2010.

And Priceline must be doing something right because it is growing much faster than the industry. According to an April 2011 eMarketer forecast, online travel sales in the U.S. were expected to increase a relatively paltry 8.5% in 2011 to $107.4 billion -- increasing at a somewhat faster 11% rate in 2012.

I found it interesting that eMarketer expects online travel growth will be mainly due to rising airfares. Specifically, it expects a 5.9% rise in the average amount booked online from $1,145 in 2011 to $1,213 in 2012. Another source of growth is that 4.7% more people are expected to book travel online -- from 93.9 million in 2011 to 98.3 million in 2012.

And Priceline is holding on to its number two market rank as people look to cap how much they pay to travel. As of October 8, 2011, it remained the number two online travel agency -- with 10.11% of visits behind market leader Expedia (NASDAQ: EXPE) with 12.54% and ahead of Orbitz (7.54%), according to Experian Hitwise.

Meanwhile, Orbitz is is growing at half the industry rate. Its net income for the third quarter, reported November 3rd, fell 37% to $11.2 million but its EPS of 11 cents beat analyst estimated by six cents a share. And Orbitz's revenue was up 4% in the quarter to $202.9 million.

But Orbitz seems to be struggling with a range of strategic issues from costs that are too high to legal disputes with suppliers. For example, Orbitz incured $7.3 million in contract labor costs, its marketing expenses rose 8% to $61 million and most troubling -- its overhead costs increased 17% to $67.7 million.

And Orbitz has not been able to include as many travel options as competitors. For example, AMR Corp.(NYSE: AMR)'s American Airlines tried to keep its price display off of Orbitz but recently lost a court fight to do so.

So should you invest in Priceline and avoid Orbitz? Here's why you should consider it:

Priceline: rapid growth, highly profitable; reasonably priced stock. Priceline's sales have increased 31.9% in the past 12 months to $3.65 billion while net income rose 7.8% to $720 million -- yielding an impressive 19.8% net profit margin. Its PEG of 1.18 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 36.4 and expected earnings growth of 30.8% to $28.31 in 2012.
Orbitz: slow growth, unprofitable; dirt cheap stock. Orbitz's sales have increased 2.6% in the past 12 months to $772 million while it lost $69 million. Its PEG of 0.09 is extremely cheap on a forward P/E of 24.8 and expected earnings growth of 288% to $0.12 in 2012.

Both Priceline and Orbitz are risky bets at this point -- but for different reasons. Priceline is poised to plunge unless it beats expectations and raises guidance. But based on its recent performance, there is a good chance it will do just that and its price will rise -- when it has beaten in recent quarters, its stock has risen nearly 10% in the aftermath.

Orbitz appears to be in a weak position strategically but it could be a tempting acquisition target for a larger competitor. If it survives through 2012 and actually achieves its earnings growth forecast, its stock would be screamingly cheap at this level. But given its most recent report -- it appears to be having significant management problems.

I would consider investing in Priceline and avoid Orbitz.

KKR and Blackstone Only Good for Insiders

2011-11-04T06:08:00.000-07:00

Private-equity firms collect funds from limited partners and couple them with debt to buy companies and sell them -- either to other compaines or to public investors. That's one reason that it is ironic that two of the biggest private equity firms, KKR (NYSE: KKR) and Blackstone Group (NYSE: BX) are publicly traded companies.

As Jerome Kohlberg, the first K in KKR told me in a 2004 interview, private-equity investing was originally called bootstrapping. Kohlberg started this idea while a partner at the now-defunct Bear Stearns.

In bootstraps, he explained, investors purchase control of companies financed largely through bank loans, while giving managers a significant equity stake to link their personal wealth to the companies' financial results. The managers streamline operations and sell the company at a profit within 5 to 7 years.

"I insisted on [Bear Stearns] management having a piece of the equity," says Kohlberg. "I brought up the idea of long-term investments in these bootstraps to the Bear Stearns partners. My proposal was overruled."

Kohlberg who founded KKR in 1976, was also over-ruled by his other KKR partners, Henry Kravis and George Roberts who wanted to put too much debt on acquired companies' balance sheets. So in 1987 he left just as KKR was engaging in conduct that made it famous in Barbarians at the Gate.

Meanwhile, KKR, is now a publicly-traded company that in July 2010 sold so-called common units on the NYSE while removing the shares from Euronext Amsterdam. Those common units are not the same as shares of stock but they give investors some rights to the cash flows from the KKR partnerships.

KKR makes money in two ways. It receives management fees -- in the industry they average 2% -- as a share of the amount of money they raise from limited partners. And KKR gets 20% of the profits it can generate by investing the capital -- known as carry. So if a private equity firm raises $60 billion and generates $10 billion investing that money, it gets $1.2 billion in management fees and $2 billion in carry.

Friday morning, KKR reported results that were not good. Instead of reporting economic net income (ENI) -- a commonly used profit measure in the private equity industry -- it reported an economic net loss (ENL). And that was a step down from the year before. More specifically, KKR's ENL was $592 million in the third quarter compared to $317.3 million ENI in 2010.

But KKR's results were not as bad as expected -- its reported 91 cents a share loss was 11 cents better than the average loss of $1.02 a share estimated by 12 analysts in a Bloomberg survey. According to KKR, the loss was due to an 8.5% accounting charge for a decline in the market value of investments that KKR is holding and has not yet sold.

Meanwhile, in its latest report, competitor Blackstone Group posted an unexpected loss after an 11% drop in the value of its buyout holdings. In its third quarter, Blackstone reported a loss of $274.6 million, about $230 million worse than the year before. And its loss per unit of 56 cents was 44 cents worse than in 2010.

Since their initial public offerings, Blackstone stock has lost 60% of its value since its 2007 IPO, while KKR's is up 40%. So why are these companies publicly traded? They give partners an easier way to turn their stakes into cash. But does that mean you should buy their common units? Avoid both -- despite their apparently low valuations.

Blackstone: rapid growth, unprofitable; very inexpensive stock. Blackstone's sales have increased 75.9% in the past 12 months to $3.42 billion while it lost $156.6 million . Its PEG of 0.19 (where a PEG of 1.0 is considered fairly priced) is cheap on a forward P/E of 8.4 and expected earnings growth of 43.5% to $1.69 in 2012.
KKR: fast growth, high margins; dirt cheap stock. KKR's sales have increased 31.4% in the past 12 months to $592 million while net income dropped 60.8% to $388 million – yielding a 66% net profit margin. Its PEG of 0.06 is extremely cheap on a P/E of 7.35 and expected earnings growth of 134% to $1.92 in 2012.

Both of these companies are hard for the average investor to understand. If they actually achieve the kind of earnings growth that analysts expect, however, their shares are extremely inexpensive. The reality is that these private equity firms will do well if investors' appetite for buying the companies they acquired revives.

Unfortunately, there is no evidence that such a fever is anywhere on the horizon.

Satellite TV's Boom Good for DIRECTV, News Corp

2011-11-03T05:33:00.000-07:00

Is satellite TV the wave of the future? After all, it's expensive to dig up the ground and put cables in to emerging markets -- and far cheaper to put a satellite dish in front of your house. A look at DIRECTV (NASDAQ: DTV) and News Corp (NASDAQ: NWSA) shows that the satellite TV business is booming.

Prior to its Thursday morning third quarter earnings report, analysts were expecting a big profit increase over the same period in 2010. Specifically, expectations were for EPS of 73 cents a share -- up from 55 cents in 2010 -- and an 11.7% sales increase to $6.74 billion.

But its actual results were a mixed bag. The good news is that DIRECTV enjoyed faster-than-expected sales growth -- up 14% to $6.84 billion. The bad news is that its 27% increase in EPS to 70 cents fell three cents short of expectations.

Interestingly, its revenue growth benefited from new subscribers in emerging markets -- Latin America set "records with 957,000 gross and 574,000 net additions in the quarter while Sky Mexico adds 238,000 net new subscribers," according to its earnings press release.

Meanwhile, News Corp. -- it does cable programming, newspapers, book publishing and films in addition to satellite TV -- reported better than expected adjusted EPS on Tuesday night. While its first-quarter 2012 net income declined 5% due to the cost of closing News of the World and a dropped takeover bid for DIRECTV competitor, British Sky Broadcasting, News Corp's adjusted EPS of 32 cents a share -- three cents more than Factset analysts had expected.

News Corp boosted the performance of its Direct Broadcast Satellite Television unit. Specifically, it reported DBST revenue of $922 million -- up 7.7% -- and DBST operating income of $119 million -- a 45% spike. In the quarter, DBST represented 12% of News Corp revenues and 8.6% of its operating income.

So should you buy shares of DIRECTV and avoid News Corp.'s? No -- you should consider buying both. Here's why:

DIRECTV: decent growth, good margins; cheap stock. DIRECTV's sales have increased 11.8% in the past 12 months to $25.57 billion while net income soared 133.3% to $2.47 billion – yielding a 10.1% net profit margin. Its PEG of 0.58 (where a PEG of 1.0 is considered fairly priced) is very cheap on a P/E of 14.76 and expected earnings growth of 25.8% to $4.22 in 2012.
News Corp: slow growth, small margins; cheap stock. News Corp's sales have increased 1.9% in the past 12 months to $33.9 billion while net income climbed 17.9% to $3 billion – yielding a 9.2% net profit margin. Its PEG of 0.66 is very cheap on a P/E of 14.82 and expected earnings growth of 22.63% to $1.68 in fiscal 2013.

If forced to choose, I would pick DIRECTV due its greater exposure to the booming satellite TV market. But News Corp. stock looks cheap if it can keep beating expectations.

Peter Cohan has consulted to Rupert Murdoch and has no financial interest in the securities mentioned

To Sate Your Stock Thirst, Stick With Dunkin', Shun Starbucks

2011-11-01T04:56:00.000-07:00

Dunkin' Brands (NASDAQ: DNKN) touts itself as the people's coffee to Starbucks' (NASDAQ: SBUX) more pompous positioning. But which of these equities will put you in the top 1%?

Dunkin' Brands owns the coffee and food shops, which owns Dunkin' Donuts and the Baskin-Robbins ice cream chain, and it went public about a year ago to cut debt and free up capital for expansion. It's looking to expand from the Northeast, where it gets about 75% of its revenue, to the West Coast and globally.

Moreover, Dunkin has been facing a cost squeeze -- dairy prices are rising and it's struggling with the risk that raising prices to cover the higher costs will turn off its customers.

Prior to its report Tuesday, analysts were expecting Dunkin to report third quarter revenue of $159.3 million and EPS of $0.25. According to its report, Dunkin beat both the revenue and adjusted EPS expectations. More specifically, Dunkin reported $163.5 million in revenue, 2.6% higher than expected, and its $0.28 a share in adjusted EPS was three cents more than expected.

There is not just good news for Dunkin shareholders. While same-store-sales at Dunkin' Donuts are up, that measure barely budged for its Baskin Robbins outlets. Dunkin’ Donuts U.S. comparable store sales rise 6% due both to higher prices per transaction and traffic while Baskin-Robbins U.S. comparable store sales inched up a mere 1.7%.

Meanwhile, Starbucks reports its earnings Thursday and analysts are predicting a slight increase in sales and adjusted EPS. Specifically, Starbucks is expected to report $2.95 billion in revenue, $90 million more than in 2010, and adjusted EPS of $0.36 -- three cents above its 2010 performance.

In the previous quarter, Starbucks knocked it out of the park. That's when it reported a 33% profit spike to $887.4 million on a 12% revenue rise to $2.93 billion. Not only that, but Starbucks reported EPS of $0.36 four cents more than analysts expected.

Should your portfolio should imbibe Venti Soy Lattes or suck down a large cup of Dunkin' Joe? Stick with the Dunkin'.

Dunkin' Brands slow growth, small margins; cheap stock. Dunkin's sales have increased 7.3% in the past 12 months to $595 million while net income dropped 23.3% to $19 million – yielding a 3.19% net profit margin. Its PEG of 0.72 (where a PEG of 1.0 is considered fairly priced) is pretty cheap on a forward P/E of 24.67 and expected earnings growth of 34.1% to $1.18 in 2012.
Starbucks: decent growth, healthy margins; expensive stock. Revenues for Starbucks have increased 9.5% in the past 12 months to $11.51 billion while net income jumped 142% to $1.17 billion – yielding a 10.15% net profit margin. Its PEG of 1.43 is expensive on a P/E of 27.87 and expected earnings growth of 19.47% to $1.81 in 2012.

Starbucks makes fine coffee but its earnings growth does not seem to justify the high valuation. Dunkin' stock looks cheap if its 2012 earnings growth forecast is right. Tuesday's report boosts Dunkin's credibility when it comes to exceeding expectations.

Buy Up Shares in Quest Software, Oracle Pass By

2011-10-28T04:37:00.000-07:00

It's been a long time since a pure software company went public. But there are a handful of large software companies that spike their growth through acquisitions. Oracle (NASDAQ: ORCL) is the most well known of these -- but a less popular software acquirer -- Quest Software (NASDAQ: QSFT) could be a better stock buy.

Quest and Oracle sell software to companies. But companies view buying software as an expensive risk. That's because it is never possible for a business to download software and get an immediate boost in its financial performance that exceeds the software's cost.

Getting that payoff means changing the way the organization works. And that change means that management must take time away from other activities to manage the change process. Not only that, but new software often requires a company to hire consultants to help with the process. And almost always, the company needs help using the software after it's installed as well as upgrades to improve its performance.

So business software companies must be willing to invest in a long sales process to convince a company to buy their wares. And since companies started throttling back on IT spending after the dot-com crash, the number of software companies that can afford such a sales force has diminished.

And the survivors of this Darwinian process are scooping up these weaker competitors at bargain prices. Moreover, after paying those prices, companies like Oracle and Quest can lop off the sales forces and other un-needed people to make their acquisitions pay off even faster.

On November 3, Quest is expected to report an increase in profit compared to 2010. Specifically, analysts are looking for EPS of $0.36 a share on sales of $214.7 million. This represents a four cents a share increase in EPS and an 11% sales increase.

Meanwhile, Oracle keeps on acquiring. On Wednesday, Oracle announced it would pay $1.43 billion to buy a so-called cloud-based customer service computing provider, RightNow Technologies.

And its earnings have been doing nicely. In its September 20th report on its fiscal first-quarter earnings, Oracle beat by a penny expectations for adjusted EPS of $0.47. And its sales rose 12% to $8.37 billion -- as analysts had expected.

At the core of Oracle's success is its acquisition of Sun Microsystems a few years ago. Companies are now buying Sun hardware and operating systems as they grow and are also buying Oracle software to boost computing performance. Oracle sells these packages -- dubbed Exadata and Exalogic, that combine Sun's Sparc chips and Solaris operating system with Oracle software.

Should you invest in both of these winners? Skip Oracle and consider Quest. Here's why:

Quest Software: Good growth, decent margins; cheap stock. Revenue for Quest have increased 10.3% in the past 12 months to $801 million while net income climbed 40.1% to $75.5 million – yielding a 9.4% net profit margin. Its PEG of 0.65 (where a PEG of 1.0 is considered fairly priced) is cheap on a P/E of 23.14 and expected earnings growth of 35.8% to $1.43 in 2012.
Oracle: Healthy growth, strong margins; expensive stock. Oracle's sales have climbed 32.8% in the past 12 months to $36.5 billion while net income jumped 39.3% to $9.04 billion – yielding a 24.8% net profit margin. Its PEG of 1.99 is expensive on a P/E of 19.46 and expected earnings growth of 9.74% to $2.56 in fiscal 2013.

Their relative valuations suggest that investors are on to the Oracle story -- but if Quest achieves the 2012 results that investors expect, they could enjoy a pleasant upward journey.

Moody's, McGraw Hill Still Don't Rate

2011-10-27T05:00:00.000-07:00

Remember the financial crisis? That was way back in 2008 when all that AAA-rated sub-prime mortgage backed debt turned out not to be worth as much as the ratings suggested. For that, we can tip our hats, in part, to Moody's (NYSE: MCO) and McGraw Hill (NYSE: MHP).

But recently, these paragons of corporate virtue are trying to boost their image. So they're getting tough. Most recently, in August McGraw-Hill's S&P decided to downgrade the U.S.'s credit rating. A move that had exactly the opposite effect as had been intended -- investors scrambled to buy the U.S. 10 year bond, driving its interest rate down 35%.

Before delving into their recent performance, it's worth thinking a moment about why a tip of the hat is due to the ratings agencies. Contrary to the popular refrain in 2008, there were plenty of people who saw disaster coming before the financial crisis. In December 2006, I recommended betting on a drop in the price of a big sub-prime mortgage lender, NovaStar (PK: NOVS) -- its stock has since lost 99.7% of its value -- plunging from $106 to $0.36.

And without ratings agencies, NovaStar and its peers would never have grown as much as they did. How so? As I wrote in August 2007, the rating agencies wrapped that financial toxic waste in gold. Moody's and S&P used data supplied by the investment banks that pooled sub-prime mortgages to compete with each other to win lucrative ratings business from those banks.

The winner of some $3 billion in ratings business for this toxic waste was the agency willing to supply a AAA rating on the increasingly low quality pools of mortgages so investors around the world would be cleared to buy them. And as good quality borrowers had all taken on as much debt as they could, the lower quality loans supplied by the likes of NovaStar were the only thing left to fill the pipeline.

Thursday, Moody's reported on how it's been doing in the wake of this disaster -- and it put in a mixed performance. It was expected to report EPS of 49 cents down 15% from the year before on $542.8 million in revenue, up 5.7%. Its actual revenue was $531.3 million for the quarter -- 2.2% below expectations and its EPS of 57 cents beat expectations by over 16%.

And Moody's gave an upbeat outlook -- its CEO noted, "we are reaffirming our 2011 EPS guidance of $2.38 to $2.48 and we expect to be at the upper end of the range."

Meanwhile, McGraw-Hill has decided that it does not like all the attention it got for its S&P unit during the downgrade episode. So it announced in September that it would spin out S&P. And that will mean giving up a strong financial performer. After all, S&P - newly dubbed McGraw-Hill Markets will have $4 billion in revenue while the publishing business - McGraw-Hill Education will have only $2.4 billion in revenue.

When McGraw-Hill reported its third quarter results, they disappointed analysts. It $365.6 million in net income was down 3.8% from the year before and it missed by two cents analysts' $1.23 forecast for earnings. Not only that but McGraw-Hill lowered its full-year profit forecast as sales from its textbook division dropped for a fourth quarter in a row, while its credit-ratings revenue fell along with a drop in corporate bond issuance.

So does this mean you should skip McGraw-Hill shares and buy Moody's? Unless you like overpaying, you should skip.

Moody's: Steady growth, good margins; expensive stock. Moody's sales have increased 13.1% in the past 12 months to $2.3 billion while net income jumped 26% to $618 million – yielding a whopping 27.6% net profit margin. Its PEG of 2.89 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 12.71 and expected earnings growth of 4.4% to $2.60 in 2012.
McGraw Hill: Slow growth, decent margins; expensive stock. McGraw-Hill's sales have inched up 3.6% in the past 12 months to $6.25 billion while net income jumped 13.4% to $852 million – yielding a 14% net profit margin. Its PEG of 1.23 is high on a P/E of 15.64 and expected earnings growth of 12.7% to $3.20 in 2012.

With the situation in Europe seemingly resolved -- the global ratings businesses of both companies could improve. In that case, McGraw-Hill looks like the least expensive way to invest in a possible business rebound. But I might wait until McGraw Hill Markets is separately traded. Meanwhile, Moody's valuation is too darned high.

Ford Should Drive Your Portfolio

2011-10-26T04:37:00.000-07:00

Ford (NYSE: F) managed to ride out the great recession without a government bailout. But General Motors (NYSE: GM) simply could not survive on its own. Nobody knows whether the U.S. will ever get its money back from the GM bailout, but at least the new, publicly-traded version of GM is a more viable business. Should you invest in the car company that survived on its own or the one that the U.S. bailed out?

GM failed for six reasons that serve as a warning for all businesses. As I wrote in 2009, GM took a $19 billion bailout from the U.S. that ended its 101 year existence. And it failed due to six management weaknesses:

Bad financial policies. By 2006, GM's liabilities exceeded its assets and it was using its vehicles as loss-leaders to issue more profitable car loans;
Uncompetitive vehicles. Compared to its toughest competitors -- like Toyota Motor Co. (NYSE: TM) -- GM's cars were poorly designed and built, took too long to manufacture at costs that were too high, and as a result, fewer people bought them, leaving GM with excess production capacity.
Ignoring competition. GM has been ignoring competition -- with a brief interruption (Saturn in the 1980s) -- for about 50 years. At its peak, in 1954, GM controlled 54% of the North American vehicle market. By 2008, that figure had tumbled to 19%.
Failure to innovate. Since GM was focused on profiting from finance, it did not really care that much about building better vehicles. GM's management failed to adapt GM to changes in customer needs, upstart competitors, and new technologies.
Managing in the bubble. GM managers got promoted by toeing the CEO's line and ignoring external changes. What looked stupid from the perspective of customer and competitors was smart for those bucking for promotions.

Meanwhile, Ford managed through the same competitive environment in much better shape. Under CEO Alan Mulally, formerly a Boeing (NYSE: BA) executive, Ford borrowed billions that gave it the cash to survive the Great Recession.

But beyond that, Mulally is a great problem-solver. According to Stan Sorscher, a former Boeing employee and current union official I interviewed for an August 2009 story, Mulally would invite people from all levels of the business to share information and work toward solutions that are in the best interests of Boeing.

And before its second quarter financial report on Wednesday, Ford was expected to report EPS of $0.45 per share with revenues seen rising 11.9% to $29.86 billion. Its actual results were a penny higher than expected -- $0.46 while Ford's revenues rose much faster than analysts had forecast -- 14.1%.

Ford is also enjoying the benefits of a successful negotiation with the United Auto Workers and credit rating upgrades. Due to Ford's free cash flow and automotive profits S&P raised its rating while Fitch did the same on Ford's strong financial performance and efforts to reduce debt. Moreover, in September, demand for Ford's fuel-efficient automobiles led to a strong sales report.

For its part, GM reported a great second quarter but its stock fell when it predicted a weaker second half. Specifically, its Q2 2011 net income of $2.52 billion was 90% above the year before and its EPS of $1.54 was 32 cents above the average estimate of 13 analysts surveyed by Bloomberg. GM's 19% sales increase to $39.4 billion was $3 billion higher than estimated.

But the most interesting part of this report was that GM customers are willing to pay higher prices. For example, GM's Cruze is selling for $4,200 more than the Chevrolet Cobalt car that it replaced; the new Buick LaCrosse is fetching $7,000 more than its predecessor and its Chevrolet Equinox sport-utility vehicle gets $3,800 more than it did in 2009.

Should you buy GM and Ford stock?

Ford: Solid growth, decent margins; hard-to-value stock. Ford sales were up 10.9% in the past 12 months to $131 billion while net income jumped 142% to $6.8 billion – yielding a 5.22% net profit margin. Its PEG is undefined (where a PEG of 1.0 is considered fairly priced) because at a P/E of 7.1 its earnings are expected to fall 5.71% to $1.77 in 2012. However, if it can continue its earnings growth at the pace of the last 12 months, the stock is screamingly cheap.
GM: Good sales growth, but falling profit and small margins; hard-to-value stock. Revenue for GM was up 29.6% in the past 12 months to $146 billion while net income dropped 95.5% to $7.9 billion – yielding a 4.77% net profit margin. Its PEG is also undefined on a P/E of 5.22 and earnings expected to decline 1.64% to $4.20 in 2012.

Analysts seem convinced that neither Ford nor GM can grow earnings in 2012. But if I was going to gamble, I would say that GM has a better chance of beating expectations based on its higher prices and cost controls.

Stock up at Staples, Not Office Depot

2011-10-25T04:55:00.000-07:00

There's no doubt that the U.S. economy is growing slowly -- the question for investors is whether that's a problem that hurts all office supply comapanies equally or whether some are better able to adapt than others.

A case in point is Office Depot (NYSE: ODP) -- report earnings Tuesday and they were to weaker than expected. The office supply retailer is not adapting well to the slow economy. Is Staples (NYSE: SPLS) better positioned?

Office Depot had a poor second quarter report and its third quarter was down from the year before and worse than expected. Specifically, Zacks expected EPS of 2 cents a share on revenue of $2.9 billion for the third quarter -- it earned 3 cents the year before.

But Tuesday, it reported no profit at all after adjustments. But it used one-time gains to report $101 million in profit on a 2% drop in sales that was aroung $100 million less than expected. Absent one-time items such as a $99 million reversal of "combined tax and interest accruals for uncertain tax positions" in the quarter, Office Depot adjusted EPS was 0.

In the second quarter, Office Depot lost 6 cents a share that was better than the year before's 9 cents a share loss and analysts' estimate 12 cents a share expectation.

But Office Depot missed revenue expectations of $2.73 billion by around $20 million and generated negative free cash flow of $85 million -- around $25 million worse than the year before.

Not surprisingly, Office Depot is responding by taking the usual restructuring steps. It's cutting costs, closing money-losing stores, taking more expensive items out of inventory and closing distribution facilties with operating slack.

But Staples has bucked this negative trend and traders are betting on a big rebound in its stock. For example, Bloomberg reports that its 2011 back-to-school sales were up over 2010 and it has been able to pass higher prices to customers, CEO Ron Sargent also told a September 2011 conference sponsored that he "expects more mergers and acquisitions in the industry."

Staples has been adding electronics and products that appeal to women. For example, Staples sells Amazon (NASDAQ: AMZN) Kindle digital readers and it partnered with Martha Stewart to offer home office items targeted at women who account for 60% of in-store customers.

And bullish bets on Staples stock are high -- the ratio of bets on a rise in the price, known as calls that give investors the right, but not the obligation to buy shares at a specific price and time -- to bets on the price falling (known as puts) is at 3.01. This is close to the highest level of bullishness on Staples since June 2003.

So should you buy Staples and avoid Office Depot? Yes. here's why:

Office Depot: Shrinking sales and losing money; very cheap stock. Revenues for Office Depot have dropped 4.2% to $11.5 billion in the past 12 months while net income has climbed 87% -- due to a smaller loss of $121 million. Meanwhile Its Price-Earnings-to-Growth (PEG) ratio is very inexpensive (where a PEG of 1.0 is considered fairly priced) at 0.02 on a forward P/E of 15.9 and expected earnings growth of 1,030% to $0.16 in 2012.
Staples: Slow sales growth and small margins; but fairly priced stock. Staples sales have inched up 1.1% to $25 billion in the past 12 months while net income has climbed 19.4% to $938 million, creating a slim 3.76% net profit margin. Its PEG of 1.02 is fairly priced on a P/E of 11.61 and expected earnings growth of 11.3% to $1.57 in 2012.

Staples is doing better in an industry that is suffering in the economic doldrums. And it looks like Office Depot is a sitting duck -- possibly resulting in its acquisition by Staples. If that happened, Office Depot's stock would rise. If not, it will keep dropping -- I am not sure those 2012 earnings growth numbers can be achieved -- while Staples could rise if the bulls are right.

Nvidia To Charge Up Your Portfolio, TI Not So Much

2011-10-24T04:28:00.000-07:00

Texas Instruments (TXN) is famous for its calculators but when it comes to sales growth, they're spitting out negative numbers. Fortunately for investors interested in chip stocks, Nvidia (NVDA) is growing like gangbusters. Is either company a good place to put your chips?

TI is expected to report a plunge in earnings later Monday. Analysts expect 57 cents a share in EPS, down 20% from the year before. Not only that but analysts are expecting TI's revenues to drop 11% in the quarter to $3.33 billion.

What's behind the drop appears to a problem with TI's business strategy. Unlike more successful companies, TI's CEO resorted to blaming external factors for the sales decline. When TI reported its second quarter results, CEO Rich Templeton cited “mixed macroeconomic and market signals.”

And Templeton claimed that demand was weak. As he said, “We note that production at some computing and consumer manufacturers appears lukewarm even though we’re heading into the back-to-school and holiday seasons.”

Furthermore, he argued that TI suffered from soft demand in PCs and digital televisions. The good news was that TI enjoyed sales gains in demand for its power management chips.

Of course there is no law that requires TI to continue to depend so heavily on slower growing markets. It could, instead, set its sites on faster growing markets as Nvidia does. When it reported its second quarter results, Nvidia's stock spiked 19% after executives said its revenues would rise between 4% and 6% faster in the third quarter compared to the second one.

Nvidia's second quarter guidance translated into higher-than-expected third quarter sales expectations. Specifically, Nvidia guided analysis several hundred million dollars higher to a range between $1.06 billion and $1.08 billion -- above analysts' average forecast of $1.05 billion.

Not only that, but Nvidia's earnings more than tripled in the second quarter. It reported non-GAAP earnings of $193.5 million -- 304% above the $48 it earned the year before.

Does this mean you should shun TI and but Nvidia? You might consider both. Here's why: TI's recent results make me wonder whether it can recover in 2012 -- if it does, the stock looks reasonably priced. But Nvidia's P/E seems to reflect investors' concerns that it may not be able to sustain its recent rapid growth. But even if its growth rate slows down in fiscal 2013, the stock still looks cheap.

Texas Instruments: Strong growth and margins; fairly priced stock. Despite the short term drops, TI's revenues were up a solid 34% to $14.12 billion in the past 12 months while net income was up 119% to $3.1 billion over the same period, which yielded a 22.2% net profit margin. Its PEG of 1.00 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 11.76 and expected earnings growth of 11.7% to $2.51 in 2012.
Nvidia: Decent growth, fair margins; inexpensive stock. Revenues for Nvidia were up 6.5% to $3.7 billion in the past 12 months while net income shot up 472% to $543 million, yielding a net profit margin of 14.65%. Its PEG of 0.91 (where a PEG of 1.0 is considered fairly priced) is incredibly cheap on a P/E of 15.91 and expected earnings growth of 17.5% to $1.18 in 2012.

TI's recent performance suggests that it may not be able to resume positive earnings growth in 2012. But if the forecast is right, its stock is fairly priced. Nvidia, by contrast, is growing much faster but analysts seem to think its growth will slow down in fiscal 2013. But even if it does, the stock is cheap at its current P/E.

Stock Shop at JC Penney, Pass On Wal-Mart

2011-10-21T03:49:00.000-07:00

JC Penney (NYSE: JCP) imported a handful of executives from winning marketers. Can they change its culture and boost earnings growth? Or is Wal-Mart (NYSE: WMT) a safer bet?

In June, JC Penney announced that Ron Johnson, Apple (NASDAQ: AAPL)’s senior vice president of retail would take over as CEO effective November 1. Behind that move was an effort by activist investors -- William Ackman of Pershing Square Capital Management and Steven Roth of Vornado Realty Trust -- who bought 26% and want new management to lift the stock price.

And earlier in October, Johnson announced that he was hiring Michael Francis from Target (NYSE: TGT) -- where he was chief marketing officer -- as president -- putting him in charge of merchandising, marketing and product development. Francis and Johnson worked together at Target until 2000, when Johnson left for Apple.

No doubt, JC Penney shareholders are hoping that new management can improve JC Penney's financial track record -- three straight annual sales declines before a 1.2% gain in its fiscal 2011.

Meanwhile, competitor Wal-Mart, keeps chugging along at a rate of growth that's too slow to excite shareholders who have held its stock in a trading range for the last 11 years after decades of explosive stock market growth.

In its most recent quarter, ending July 31, Wal-Mart reported a 5.7% profit increase to $3.8 billion, or $1.09 a share -- a penny better than expected. Its weak U.S. business overwhelmed its strong international performance.

In short, Wal-Mart has done little to get investors interested in its stock and absent an exit from the sluggish U.S. market and a doubling down in fast-growing markets like China, there is little hope that Wal-Mart's management can make such a huge company revert to its double-digit earnings growth path.

Can importing talent into JC Penney make it faster-growing company or will a bad business defeat talented management? Should you invest in JC Penney and buy Wal-Mart? Consider it. Here's why:

Walmart: Slow growth, small margins; expensive stock Walmart's revenues are up 3.4% to $432 billion in the past 12 months and net income is up 6.3% to $15.7 billion – producing a thin net profit margin of 3.8%. Its PEG of 1.38 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 12.81 and expected earnings growth of 9.3% to $4.90 in fiscal 2013.
JC Penney: Decent growth, small margins; cheap stock. JCP's sales are up a meager 1.2% to $17.74 billion in the past 12 months though net income is up 51.8% to $382 million – yielding a small net profit margin of 2.2%. Its PEG of 0.46 (where a PEG of 1.0 is considered fairly priced) is cheap on a P/E of 19.59 and expected earnings loss of 42.9% to $2.09 in 2013.

William Ackman had a failed effort to get an investment in Target to pay off. He appears to be tryung to vindicate himself with JC Penney. Wall Street seems to think that its earnings will grow fast int he first year after Johnson takes over -- but with its low PEG, many investors are taking a wait and see attitude. This could be a buying opportunity.

Meanwhile, Wal-Mart stock is a bit expensive and it looks like the stock has little chance of reviving unless the U.S. consumer comes back to life.

Post-Jobs Intel's a Better Bet Than Apple

2011-10-20T04:55:00.000-07:00

Wednesday CNBC featured a debate on whether investors should switch from Apple (NASDAQ: AAPL) -- its shares are up 24% in 2011 -- to Intel (NASDAQ: INTC) (+15%). The argument in favor of the switch is that Apple missed its numbers in the latest quarter while Intel steadily beats them. Is that a good enough reason to dump Apple and buy Intel?

Apple's Wednesday earnings report for its fourth quarter was Apple's first earnings miss in 26 quarters. The good news was that its profit of $6.62 billion was still 54% higher than the year before. Nevertheless, Apple's EPS of $7.05 was 26 cents a share below analysts' expectations, according to Bloomberg.

The cause of the earnings disappointment was a shortfall in iPhone sales. Apple sold 17.07 million iPhones -- it accounts for 39% of Apple's revenues -- about 17% less than the 20 million projected by analysts surveyed by Bloomberg. The explanation for this is that consumers were waiting for the iPhone 4S that was released after the September 24th close of the quarter.

But Apple softened the blow by announcing that its first quarter (ends in December) EPS will be an expectations-beating $9.30 on sales of about $37 billion.

Meanwhile, analysts treated Intel management with respect when it reported earnings that beat expectations by 7%. Specifically, Intel reported EPS of 65 cents that was four cents ahead of expectations; its net income of $3.5 billion was 17% above the year before; and its revenue of $14.3 billion was up 29% from the year before.

Not only did Intel beat, but its forecast for the current quarter of $14.7 billion is nearly $500 million higher than analysts expected.

But it's not all good news for the company. Intel controls 80% of the central processing unit chips that go into personal computers, but it has yet to gain traction among handheld devices. And a decline in so-called netbook PCs in favor of tablets is hurting Intel -- sales of its Atom chips that go into netbooks fell 32% in the quarter.

Nevertheless, Intel believes that when Microsoft (NASDAQ: MSFT) releases its Windows 8, PC sales will rise and boost Intel's business.

And it looks like those predicting the imminent demise of PCs may be off base. Gartner (NASDAQ: IT) predicted last month that 364 million PCs would be sold in 2011 and that number would grow 10.9% in 2012. Monday, Gartner predicted that tablet sales -- they're now a mere 15% of PC sales -- would rise from 20 million in 2010 to 900 million by 2016 -- a whopping 88.5% compound annual growth rate.

So does this mean you should sell your Apple shares and pile into Intel? It's hard to tell.

Apple: Strong growth and margins; fairly priced stock. Apple's revenues have climbed 66% to $108 billion in the past 12 months while net income has jumped 85% to $26 billion – yielding a healthy net profit margin of about 24%. Its PEG of 1.06 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 14.4 and expected earnings growth of 13.6% to $38.05 in fiscal 2013.
Intel: Big growth and healthy margins; expensive stock. Revenue for Intel has increased 24% to $51.6 billion while net income surged 162% to $12.8 billion – yielding a nearly 25% net profit margin. However, its PEG of 2.38 is quite expensive on a P/E of 10 and expected earnings growth of 4.2% to $2.51 in 2012.

Based on PEG, it looks like Apple would be less expensive compared to its earnings growth. But the earnings growth rates for both of these companies are so much slower than their recent performance that the potential for upside surprise is great. If Gartner is right that PCs will grow almost 11% in 2012, then Intel should grow at least that much. And with growth expectations so low, odds of beating them are strong.

I'd favor Intel over Apple.

IBM and VMWare Looking Expensive

2011-10-18T04:34:00.000-07:00

Monday, IBM (NYSE: IBM) reported better-than-expected earnings and raised its guidance for the rest of 2011. With deference to its former CEO, Lou Gerstner, his successor is proving that elephants still can dance. But a big technology company has trouble growing very fast -- perhaps you should consider VMWare (NASDAQ: VMW) instead.

IBM's earnings grew and it beat expectations. Its net income rose 7% to $3.84 billion and it reported a 15% increase in EPS to $3.28 a share -- six cents higher than expected.

Two big factors are driving IBM's growth -- emerging market demand and new products. Countries like China, India, Brazil and a few dozen other emerging nations contributed to 19% growth and now represent nearly a quarter of IBM sales.

Customers are also buying new products from IBM such as business analytics -- a tool that let companies find the needle in the haystack of corporate data to pinpoint sales opportunities and cut operating costs.

Meanwhile VMWare -- it provides so-called virtualization software that boosts the performance of corporate data storage systems and provides a way for corporations to operate in the so-called cloud -- is growing very rapidly. Tuesday after the market closed, VMWare reported a 146% rise in net income to $178 million while adjusted EPS of 53 cents beat by three cents the Thomson Reuters analysts' earnings projection for the quarter.

VMware's 32% revenue increase to $949 million is due to two factors: rising corporate IT spending and higher revenue per customer. Recently, for example, major VMWare customers have signed more early license renewals and bought more add-on products. And VMWare is boosting guidance for the fourth quarter -- to a range between $1.03 billion and $1.06 billion -- ahead of Wall Street's expected $1.03 billion.

Does this mean that you should invest in both IBM and VMWare? I'd be reluctant to invest in either company. How so?

IBM: growing and profitable; with pricey stock. Revenues for IBM have grown 4.3% in the last 12 months to $106 billion while net income has jumped 10.5% to $15.6 billion --- earning a substantial 14.7% net profit margin. In addition, its price/earnings to growth ratio of 1.48 (where a PEG of 1.0 is considered fairly priced) is expensive on a P/E of 15.2 and expected earnings growth of 10.3% to $14.76 in 2012.
VMWare: rapid growth, profitable; but expensive stock. VMWare 's revenues are up 41% in the last 12 months to $3.5 billion while net income jumped 81% to $643 million --- yielding a net profit margin of 18.4%. Its PEG is a pricey 1.92 on a P/E of 46 and expected earnings growth of 24% to $1.79 in 2012.

If forced to choose one of these stocks, I'd go with VMWare because based on its recent performance -- e.g., 81% earnings growth, there is a some chance that its 2012 earnings growth forecast could prove to be way too low. If VMWare keeps growing at that rate, its P/E will look low to investors.

IBM, on the other hand, is highly unlikely to be able to sustain earnings growth faster than the 15% that would be required to make its stock look reasonably priced. IBM's financial performance is impressive given its size.

Despite this, investors have driven up IBM 35% in the last year to VMWare's 18%. Thus a decision on whether to invest in either company depends more on what happens in the future than on what they've done in the past.

Invest in Wells Fargo, Pause on Citigroup

2011-10-17T05:40:00.000-07:00

Banking has not exactly been a great investment -- especially since September 2008 when Lehman Brothers kicked the bucket. In 2011, bank stocks have declined an average of 27%. As rumors of 100,000 Wall Street layoffs surface, Wells Fargo (NYSE: WFC) -- it's trying out a $3 a month debit card fee to boost revenue -- and Citigroup (NYSE: C) just reported earnings for the third quarter. But should you invest in either bank?

Prior to their scheduled reporting time of 8 AM Monday, the two banks were expected to report double digit earnings growth compared to the year before thanks largely to lower charges for bad loans. Analysts expected Wells Fargo to report an 18% rise in net income to $3.9 billion while analysts saw Citigroup as poised to report a 15% rise to $2.5 billion, according to Bloomberg.

In fact, both banks reported better than expected numbers. Thanks to improvements in its lending and deposit division and its absence from the volatile investment banking business, Wells Fargo earned a $200-million-higher-than-expected $4.1 billion profit in the third quarter profit. Its EPS of 72 cents a -share matched analysts’ estimates according to DealBook.

These numbers reflect the benefits to the banks of combining so-called commercial and investment banking. Commercial banking is the business of taking insured deposits and lending them to businesses and consumers. Investment banking uses overnight loans from other banks to finance corporate issuance of debt and equity and pay advisors who help companies with mergers.

Citigroup also beat expectations. Its 74% rise in net income, to $3.8 billion, was much better than expected. Moreover, its $1.23 EPS for the third quarter was 36% higher than the 81 cents a share analysts’ consensus, according to DealBook. But there may be less here than meets the eye – after all, about a third of Citigroup’s pre-tax operating profit came from a $2 billion paper gain – that weirdly reflects “a sharp increase in the perceived riskiness of its debt.” And that gain helped offset weak trading results and big mortgage losses.

In 2011, the investment banking business -- Citigroup is a big player here -- has been relatively quiet thanks to turbulence in the financial markets. By contrast, commercial banking has been growing, albeit slowly. For example, International Strategy & Investment Group reported that in the third quarter, loan growth inched up 1.2% among the top 25 U.S. banks due to a rise in commercial and residential loans while the deposits to fuel those loans climbed 6.8%.

Does this mean that you should avoid Citigroup and invest in Wells Fargo stock instead?

Wells Fargo: Shrinking, but still fairly profitable; very cheap stock. Revenues for Wells Fargo have dropped 6.2% in the last 12 months to $51 billion while net income has jumped 46% to $13.7 billion --- earning a fairly large 17.8% net profit margin. In addition, its price/earnings to growth ratio of 0.58 (where a PEG of 1.0 is considered fairly priced) is very cheap on a P/E of 10.34 and expected earnings growth of 17.8% to $3.30 in 2012.
Citigroup: Decent growth, profitable, and a cheap stock to boot. Citigroup's revenues are up 3.8% in the last 12 months to $74.9 billion while net income jumped 220% to $9.8 billion --- yielding a net profit margin of 13%. Its PEG is a very cheap 0.43 on a P/E of 8.79 and expected earnings growth of 20.4% to $4.61 in 2012.

Banking stocks are widely hated by investors. But if these earnings forecasts prove accurate, both stocks look like bargains. I’d favor Wells Fargo over Citigroup because I am not optimistic about a recovery in investment banking. But if you see such a recovery around the corner, both stocks look good.

Safeway, Whole Foods Not the Safest Routes to Riches

2011-10-14T04:38:00.000-07:00

Thursday Safeway (NYSE: SWY) -- operator of supermarket brands like Vons, Randalls, Tom Thumb, Genuardi's and Carrs -- reported a rise in earnings but expects weak results due to the moribund U.S. economy. This suggests that if you're shopping for supermarket equities, you might be better off buying in the premium aisle where the well-off shop. Does that mean you should invest in Whole Foods (NASDAQ: WFM) instead?

Despite the gloomy outlook, Safeway beat expectations. Safeway reported $130.2 million in net income, up 6% from the year before while its 38 cents a share EPS beat expectations by three cents. And Safeway revenues climbed 7.1% to $10.06 billion, 2% higher than analysts polled by Thomson Reuters had forecast.

Safeway CEO Steve Burd told Dow Jones Newswires that high income consumers are spending as much as ever but most shoppers remain very price conscious -- a trend that Burd expects will continue for the next year. Nevertheless, Burd noted that Safeway's same-store-sales rose 2% during the most recent six weeks.

Whole Foods is doing way better than Safeway. When it last reported earnings for its second quarter in July, Whole Foods reported a 35% jump in earnings and raised its forecast for the rest of 2011. Its $88.5 million in second quarter earnings were up 35%; its revenues climbed 11% to $2.4 billion and its EPS of 50 cents per share were three cents better than expected.

What's behind the better than industry average performance at Whole Foods? It has revamped its product line so people perceive its prices as being lower. While that move may have drawn consumer back to its stores, Whole Foods' affluent customers appear willing to pay the higher prices its is charging to hold its profit margins as its cost of goods sold goes up. Demand is so high that Whole Foods is adding to its 309 stores in the U.S., U.K. and Canada.

So does this mean you should shun Safeway stock and invest in Whole Foods? I'd avoid them both. Here's why:

Whole Foods: fast growing, decently profitable company; expensive stock. Whole Foods revenues increased 12.1% to $9.9 billion in the last year while its net income soared 102% to $325 million yielding a slim 3.3% net profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a pricey 2.17 with a P/E of 36.8 on earnings forecast to grow 17% to $2.25 in fiscal 2012.
Safeway : barely growing, thinly profitable company, pricey stock. Safeway revenues are up 0.5% in the last year to $42.8 billion and its net income soared 154% to $531 million while it earned a slimmer 1.2% net profit margin. And its PEG is an over-valued 1.35 on a P/E of 12.6 with earnings forecast to grow 9.3% to $1.85 in 2012.

Even if Whole Foods maintained a 35% earnings growth rate, it would still not be a bargain at its current P/E. And Safeway's slim margins and slow growth make it hard to like --even with single-digit P/E.

Occupy JPMorgan Chase, Skip Goldman Sachs

2011-10-13T05:11:00.000-07:00

The Occupy Wall Street idea -- living on the streets of cities large and small while carrying signs -- is going viral. Not only are the protesters fed up with Wall Street -- so are shareholders and employees who are either poised to lose their jobs or to get lousy bonuses. With JPMorgan Chase (NYSE: JPM) posting less-disappointing-than-expected earnings Thursday, is the house of Dimon a better investment than Goldman Sachs (NYSE: GS)?

JPMorgan reported a 4% drop in earnings for the third quarter of 2011 -- much better than the 10% drop analysts had expected. JPMorgan blamed that 10% predicted drop -- the biggest in more than two years -- on Europe’s credit crisis and the U.S. debt- ceiling debate that it believes spoiled optimism for an economic recovery, according to Bloomberg.

As OWS protesters visited his Park Avenue apartment, JPMorgan CEO was considering the business challenges facing the bank, including:

30% lower trading revenue compared to the second quarter of 2011;
50% less investment banking revenue due to a drop from $2 trillion in corporate bond issues in the first half of 2011 to $550 billion in the third quarter;
A 10% drop to $3.96 billion in third quarter earnings estimated by 18 analysts surveyed by Bloomberg.

However, Dimon announced a higher-than-expected profit of $4.26 billion, or $1.02 a share Thursday morning -- a dime a share above expectations. But JPMorgan revenue fell 11% to $24.4 billion as a result of a drop in corporate securities issuance, difficult trading conditions, narrower profit margins and the elimination of overdraft and other penalty fees, according to DealBook.

Meanwhile, Goldman Sachs -- scheduled to report its third quarter results next week -- has suffered from a drop in trading business and said in July that it would cut about 1,000 jobs after its second-quarter drop in trading revenue was bigger than analysts estimated. And Goldman's third quarter report is expected to be its worst quarterly results since 2008 in the depths of the financial crisis.

Does this mean you should buy JPMorgan and avoid Goldman Sachs? Yes. Here's why:

JPMorgan: shrinking, highly profitable company; cheap stock. JPMorgan revenues fell 3.9% to $62.3 billion in the last year while its net income soared 81% to $18.6 billion yielding a whopping 30% net profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a cheap 0.55 with a P/E of 7.1 on earnings forecast to grow 13% to $5.18 in 2012.
Goldman Sachs: shrinking, moderately profitable company, dirt cheap stock. Goldman Sachs revenues are down 11% in the last year to $44.2 billion and its net income tumbled 36.7% to $5.92 billion while it earned a slimmer 13.4% net profit margin. And its PEG is very inexpensive 0.10 on a P/E of 9.8 with earnings forecast to grow 103% to $14.76 in 2012.

JPMorgan's up and down swings are less pronounced than Goldman -- that depends so heavily on trading for its profits.

If you're looking for a less risky bet, JPMorgan is your stock. If you like to swing for the fences, it might be wise to wait until after Goldman stock drops even further so you can get the biggest return on a gamble on a possible 2012 rebound.

Allstate Can Insure Your Net Worth If Growth Spikes

2011-10-12T05:47:00.000-07:00

Progressive (NYSE: PGR) is a highly innovative insurance company -- for example, about a decade ago, it empowered claims adjusters to issue checks to policyholders at an accident scene. And its CEO, Peter Lewis, is famous, among other things, for being a supporter of legalizing marijuana.

And with its most recent earnings falling short of expectations, perhaps he should focus a bit more on business. Does this mean you would be better off investing in its more conservative peer, Allstate (NYSE: ALL)?

Progressive missed expectations by a mile in the previous quarter. Specifically, it reported EPS of $0.35 a share -- a whopping 12.5% below expectations.

And for the latest quarter, analysts were expecting Progressive to report bad news. But its actual report Wednesday morning was even worse than they had expected. Specifically analysts were looking for EPS of $0.29 a share on sales of $3.9 billion -- that expected EPS was 21.6% below its 2010 actual level while the revenue figure was $100 million higher than the year before.

But its actual earnings report was a bigger-than-expected 42% below 2010 on investment losses and higher catastrophe losses. Progressive reported a profit of $0.24 a share -- a nickel less than expected. And its net realized investment losses of $52.6 million compared unfavorably to its prior year's $26.9 million worth of investment gains.

The causes of Progressive's disappointing results were quite predictable. That's because in its most recent report before Wednesday -- an unusual monthly earnings report for August 2011 --Progressive's net income fell 66% on a one-two punch of a $35.7 million loss on securities -- over twice the loss in the previous year -- and a $37 million loss due mostly to Hurricane Irene.

Meanwhile, Allstate is taking some aggressive steps to broaden its service offerings. On October 7, it closed a $1 billion worth of acquisitions to acquire Esurance and Answer Financial from White Mountain Insurance.

Allstate expects this deal to broaden its appeal to different groups of customers -- self-directed business and consumer insurance buyers. How so? According to Allstate, "Esurance provides the business platform to serve the self-directed, brand-sensitive market segment. Answer Financial strengthens our offering to self-directed consumers who want a choice between insurance carriers."

Does this mean you should buy Allstate and avoid Progressive?

Progressive: barely growing, profitable company; somewhat over-priced stock. Progressive revenues inched up 2.7% to $15.4 billion in the last year while its net income rose 1% to $1.2 billion yielding a solid 7.8% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a slightly pricey 1.27 with a P/E of 10.3 on earnings forecast to grow 8.1% to $1.60 in 2012.
Allstate: shrinking, barely profitable company, dirt cheap stock. Allstate revenues are down 1.9% in the last year to $32.2 billion and its net income rose 8.7% to $562 million while it earned a slim 1.7% net profit margin. And its PEG is very inexpensive 0.08 on a P/E of 23.4 with earnings forecast to grow 292% to $3.70 in 2012.

Like insurance, investment is all about weighing risks and returns. And if you believe that Allstate can rebound so much in 2012, its stock is a screaming buy. Meanwhile, Progressive looks a bit pricey and an 8.1% growth rate would be much higher than its recent earnings growth record. I'd wait on buying its stock.

Take a Swig of Coke Stock on Next Market Swoon

2011-10-11T04:40:00.000-07:00

PepsiCo (NYSE: PEP) was expected to report double-digit revenue growth Wednesday morning. But is that good enough to justify an investment or would your portfolio prefer Coca Cola (NYSE: KO)?

Analysts were expecting Pepsi to report EPS of $1.30 per share on revenue of $17.28 billion -- 11.4% higher than the year before. Moreover, there is a hint that Pepsi will report slower growth in North America than in emerging markets.

That's because, according to SeekingAlpha, PepsiCo CFO Hugh Johnston recently told a Barclay’s Back to School Conference that emerging markets generate over 30% of its total revenue -- partially offsetting "losses in North America and Europe."

And there are certainly risks to PepsiCo's business that are worth considering. For example, its stock has fallen over the last few months due to investor concerns about the outlook for the global economy and emerging markets, a strong dollar that would make it less competitive in global markets, increased competition, and higher prices for corn -- a key ingredient in many of its products.

Coke also faces headwinds. Bloomberg cited one analyst that lowered earnings estimates on the company. For the third quarter, a JPMorgan analyst lowered his EPS estimate 3% from $1.03 to $1.00; for 2011, he reduced it 1.5% from $3.86 to $3.80 and for 2012, he cut 4% from $4.23 to $4.06. While the analyst thinks Coke's fundamentals and growth potential rank high with peers, he thinks that foreign exchange and interest income changes will hurt future earnings.

The JPMorgan analyst thinks that Coke stock has had too good of a rise. Coke has gained almost 40 percent since July 2010 and that it's now over-priced. He lowered his 2012 target for the stock from $80 to $76.

Should you avoid Pepsi and Coke?

Pepsi: growing, profitable company; over-priced stock. Pepsi revenues spiked 33.8% to $62.4 billion in the last year while its net income rose 6.3% to $6.3 billion yielding a wide 10.2% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is an over-valued 2.09 with a P/E of 15.7 on earnings forecast to grow 7.5% to $4.74 in 2012.
Coke: growing, profitable company, slightly over-priced stock. Coke revenues are up 13.3% in the last year to $32.2 billion and its net income spiked 73% to $12.5 billion while it earned a whopping 29.8% net profit margin. And its PEG is reasonable 1.28 on a P/E of 12.5 with earnings forecast to grow 9.8% to $4.23 in 2012.

Coke looks like a much better bet than Pepsi. However, given concerns about its upcoming earnings, I would be inclined to wait until another market crunch to pick up Coke stock at a lower price.

Kaiser Aluminum Can Help Construct Your Portfolio, Not Alcoa

2011-10-10T05:19:00.000-07:00

Alcoa (NYSE: AA) is generally the first big company to kick off the quarterly earnings season. And with expectations tepid for its third quarter report on Tuesday, should you invest in Alcoa or is Kaiser Aluminum (NASDAQ: KALU) a better bet on the sector?

Alcoa is expected to report a 28% plunge in its earning per share (EPS) from 2010's third quarter. This means that if Alcoa can do better than the 23 cents a share that 11 analysts on average are forecasting, Alcoa stock will pop after it announces its earnings -- especially if Alcoa raises its revenue and profit forecast.

Why is Alcoa profit expected to plunge? Concern about the slowing economy has slashed aluminum prices 19% this year. And Alcoa stock has fallen 46% since April -- more than twice the 22% plunge in the S&P 500's materials index, according to Bloomberg.

Meanwhile, analysts' estimates for Alcoa's third quarter have contracted 41% from 37 cents a share in July as bets on Alcoa's stock decline -- in the form of put options -- have increased in value. Alcoa put options priced 10% below the share price rose to 7.61 points above calls to buy the stock on Oct. 4 -- the biggest gap in the price relationship (called the skew) since April 2009, according to Bloomberg.

But news in the sector is not all bad. That's because despite a drop in its second quarter earnings, Kaiser Aluminum beat expectations substantially in that quarter. Specifically, Kaiser reported second quarter 2011 EPS of 63 cents a share that were down 11% from the year before although 18.8% better than expected.
The good news for Kaiser is what it perceived as demand from its aerospace customers. As Kaiser said in its second quarter 2011 earnings announcement, the company is benefiting from a "strong aerospace order book and [is] well positioned to meet the growing demand with previous investments in plate capacity and with the recently announced expansion of [its] Kaiser Alexco aerospace extrusion facility."
So should you shun Alcoa and buy Kaiser? You should consider doing just that. Here's why:

Kaiser: growing, barely profitable company; cheap stock. Kaiser revenues were up 9.3% to $1.2 billion in the last year while its net income fell 80% to $21 million yielding slim 1.8% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a cheap 0.92 with a P/E of 39.8 on earnings forecast to grow 43.1% to $3.41 in 2012.
Alcoa: growing, profitable company, fairly priced stock. Alcoa's revenues are up 14% in the last year to $23.5 billion and its net income rose 127% to $950 million while it earned decent 4% net profit margin. And its PEG is reasonable 0.95 on a P/E of 11.2 with earnings forecast to grow 11.8% to $1.19 in 2012.

Kaiser looks cheap and well-positioned to grow along with aerospace demand. Although I would like to see wider profit margins, the company has beaten expectations substantially in recent reports -- boding well for the stock if that trend persists.

Alcoa also looks good if the 2012 earnings forecast is right -- but the wide skew suggests that Wall Street knows some bad news.

Pour Yourself a Glass of Constellation Brands

2011-10-06T04:27:00.000-07:00

Should You Satisfy Your Thirst for Investment Profit With Constellation Brands (NYSE: STZ), Molson Coors (NYSE TAP), or Brown Forman (NYSE: BF.B)

Thursday morning, wine and spirits maker Constellation -- it sells brands such as Robert Mondavi, Svedka and Corona -- is poised to report 65 cents a share, up 51% from 2010. Constellation has spent the last five years cutting costs and selling brands that don't fit the "premium-category" wines priced from $5 to $20 a bottle where it wants to cement its lead. During that time it has reduced its debt from $5.3 billion to $3 billion and cut 5,100 employees to a slimmer payroll of 4,300.

Molson Coors does not look to be in such market-beatingly good shape. Its second quarter profit of $1.23, reported on August 2, fell 4.65% below analysts' expectations. And in the last month analysts cut their Molson Coors EPS projections for 2011 -- by 3 cents to $3.55 a share -- and by 7 cents $3.74 a share for 2012.

Brown Forman, maker of premium brands, such as Jack Daniel's, Finlandia, Southern Comfort and Canadian Mist, is doing much better. Brown Forman's adjusted EPS grew 7% in to 81 cents a share in the first quarter of fiscal 2012 on 12.8% revenue growth due to its strong performance in the international market.

So should you buy Brown Forman and avoid the other two? No -- avoid Brown Forman and Molson Coors and consider investing in Constellation. Here's why:

Constellation: shrinking, profitable company; fairly valued stock. Constellation revenues fell 1% to $3.2 billion in the last year while its net income popped 463% to $485 million yielding a very wide 15.1% profit margin. And its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is reasonable at 1.00 with a P/E of 6.8 on earnings forecast to grow 6.8% to $2.08 in fiscal 2013.
Molson Coors: growing, highly profitable company, over-priced stock. Molson Coors revenues are up 7.3% in the last year to $3.3 billion and its net income fell 8.4% to $675 million while it earned an impressive 20.3% net profit margin. But its PEG is an exorbitant 2.09 on a P/E of 11.1 with earnings forecast to grow 5.3% to $3.74 in 2012.
Brown Forman: growing, profitable company, over-priced priced stock. Brown Forman revenues are up 5.5% in the last year to $3.5 billion and its net income rose 27.5% to $578 million while it earned a solid 16.5% net profit margin. And its PEG is an over-valued 1.98 on a P/E of 17.8 with earnings forecast to grow 9% to $4.01 in fiscal 2013.

Constellation is the winner in this bunch. Its refocusing is producing profit growth that's likely to exceed its current low valuation. Molson Coors and Brown Forman are solid performers that investors love too much.

2011-10-05T04:28:00.000-07:00

Costco Wholesale (NYSE: COST) is on a roll and Wednesday it report a strong quarter -- but not as strong as expected. Would you be better off buying stock in Family Dollar (NYSE: FDO) or Target (NYSE: TGT)?

Costco missed the target Wall Street expected it to hit. Instead of posting Wall Street's expected 13% increase in fourth quarter profit on $27.6 billion in revenue, Costco fell short in reporting $1.08 a share, that was two cents less than expected and an 11% increase.

That's still a strong increase and it happened because with the economy weak, people are willing to pay its membership fee to get access to the bargains in its stores. And its growth has been helped by opening stores in the U.S. and internationally.

And Costco is not sitting still. It announced Wednesday that it would raise the fees it charges its members -- by $5 for U.S. individual and business members and Canada business members beginning November 1. This move is likely boost its revenues, unless people decide that the increase is too high leading to a drop in Costco's membership count.

Family Dollar reported an 8% increase in its fourth quarter profit reported September 28. Since consumers are looking for bargains, Family Dollar plans to open more stores than it closes in the next year. It will add between 450 and 500 new stores in its current fiscal year while closing up to 100 poorly performing locations. In the year ahead, it's looking for an 8% to 10% sales increase.

The key to Family Dollar's growth is that its selection appeals to people who are being stung by the weak economy. Its merchandise falls into four categories: consumables, home products, apparel and accessories, and seasonal and electronics. And it sells those products at prices ranging from ––under $1 to $10.

But it's not just the lowest-priced retailers that are doing well. Target had a strong second quarter report in August. Its profit of $704 million was 3.6% higher than the previous year whiles its sales rose 5.1%. And Target beat analysts' expectations of $0.97 a share by six cents.

So should you shun Costco for missing its numbers and buy Family Dollar and Target? No -- consider Family Dollar, shun the others. Here's why:

Costco: growing,barely profitable company; over-priced stock. Costco revenues were up 8.1% to $85 billion in the last year while its net income popped 20% to $1.4 billion yielding slim 1.6% profit margin. And its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a an over-valued 1.68 with a P/E of 25.6 on earnings forecast to grow 15.2.% to $3.82 in 2012.
Family Dollar: growing, profitable company, fairly priced stock. Family Dollars revenues are up 8.7% in the last year to $8.6 billion and its net income rose 8.5% to $388 million while it earned decent 4.5% net profit margin. And its PEG is reasonable 1.08 on a P/E of 16.5 on earnings forecast to grow 15.3% to $4.19 in 2012.
Target: slowly growing, profitable company, way over-priced priced stock. Target revenues are up 3.1% in the last year to $68 billion and its net income exploded 17.4% to $3 billion while it earned a solid 4.4% net profit margin. And its PEG is grossly over-valued 8.65 on a P/E of 22.5 on earnings forecast to grow 2.6% to $4.32 in fiscal 2013.

Family Dollar looks cheap and well-positioned to capitalize on continued economic weakness.

Yum, Chipotle, and Dominos Could Give Your Portfolio Indigestion

2011-10-04T04:27:00.000-07:00

Fast food companies are doing well -- thanks to global growth and popular store concepts. But we'll know just how well they're doing when YUM! Brands (NYSE: YUM) reports its results Tuesday after the market closes. But YUM is not the only one out there -- for example, there's Chipotle Mexican Grill (NYSE: CMG) and Dominos (NYSE: DPZ) – will any of these companies fatten your net worth?

Yum is a tale of two regions -- a slumping U.S. and a booming China and rest of the world. Yum operates 38,000 restaurants globally. Among the brands of the former PepsiCo (NYSE: PEP) restaurant division are Taco Bell, Pizza Hut, and KFC. But thanks to growth overseas, Yum is expected to report higher revenue and profit in its third-quarter report.

Almost 75% of Yum's operating profit comes from China and other foreign countries -- even though they account for a relatively meager 50% of its total restaurant count. But one of the downsides of the growth in China is the risk that inflation -- in the form of higher labor and commodity costs -- will take a bite out of Yum's profits.

Meanwhile, Yum's U.S. operations are flagging. In the second quarter, its operating profit there fell 28% in all three of its core brands. Its biggest problem has been with Taco Bell that accounts for 60% of its U.S. profit. And Yum blames a lawsuit regarding claims of insufficient beef in its tacos for a sales drop at Taco Bell.

FactSet-polled analysts expect Yum to report 82 cents a share of adjusted earnings on $3.08 billion in revenue -- that would be an EPS increase of 12.3% and a revenue rise of 73 cents per share on revenue of 7.1% compared to the third quarter of 2010.

Would that be enough to justify an investment in Yum? Should you buy Chipotle or Dominos instead? I would skip them all for now since they are too expensive when compared to their earnings growth. Here's my reasoning:

Yum: growing, profitable company; over-priced stock. Yum revenues were up 4.7% to $11.7 billion in the last year while its net income grew 8.1% to $1.2 billion yielding a solid 10.3% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a slightly over-valued 1.61 on a P/E of 19.5 on earnings forecast to grow 12.1% to $3.19 in 2012.
Chipotle: rapidly growing, highly profitable company; over-priced stock. Chipotle revenues are up 21% in the last year to $2 billion and its net income climbed 41% to $192 million while it earned a solid 9.6% net profit margin. And its PEG is a high 1.77 on a P/E of 48.4 on earnings forecast to grow 27.3% to $8.67 in 2012.
Dominos: growing, decently profitable company, pricey stock. Dominos revenues are up 11.9% in the last year to $1.6 billion and its net income exploded 10.2% to $93 million while it earned a slim 5.8% net profit margin. And its PEG is a high 2.05 with a P/E of 26.5 on earnings forecast to grow 12.9% to $1.83 in 2012.

The market is over-estimating the growth prospects for these fast food purveyors. They could give your portfolio indigestion.

Line Your Portfolio With Crocs, Wolverine Shares

2011-10-03T04:52:00.000-07:00

The U.S. economy may not be in the greatest shape but a pair of shoe companies are rocking and rolling. Monday Wolverine Worldwide (NYSE: WWW) announced an 18% profit increase and weeks ago Crocs (NYSE: CROX) launched a line of shoes with Tiger Woods' former golf coach. Should you invest in these two shoe makers?

As I wrote in July, after riding a wave of popularity a few years ago, Crocs hit the skids -- with its stock bottoming out in 2009. But since then, it has reinvented itself and is enjoying spectacular global demand growth.

Two weeks ago, Crocs announced a line of golf shoes designed by Tiger Woods' former golf coach, Hank Haney, who has coached hundreds of golfers for tournaments around the world. The new shoes for men and women will be launched next year and they're intended to be worn on and off the course. These Crocs shoes are probably destined to add to the company's revenue momentum.

But Crocs is not the only shoe company on a roll. Wolverine -- maker of casual shoes, rugged outdoor and work footwear -- boosted its sales and profit forecast and reported an 18% boost in its third-quarter profit. Thanks to growth in its outdoor, lifestyle and consumer direct businesses, Wolverine's revenues rose 13% to $362 million while its net income climbed to $34 million. Its 82 cents a share in earnings were seven cents ahead of expectations.

And Wolverine is confident about the future. It raised the lower end of its EPS forecast by six cents from a range between $2.40 and $2.50 to a higher range from $2.46 to $2.52 a share. The company also boosted its revenue expectations for 2011 to between $1.4 billion and $1.43 billion.

Does all this good shoe news mean it's time to buy these stocks? Maybe on Wolverine, yes on Crocs. Here's why:

Wolverine: rapidly growing, profitable company; somewhat over-priced stock. Wolverine revenues were up 13% to $1.35 billion in the last year while its net income popped 69% to $118 million yielding an 8.9% profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a slightly over-valued 1.22 on a P/E of 13.7 on earnings forecast to grow 11.2% to $2.77 in 2012. If Wolverine sustains its recent 18% growth; however, the stock is cheap.
Crocs: rapidly growing, highly profitable company, fairly priced stock. Crocs revenues are up 22% in the last year to $917 million and its net income exploded 259% to $105 million while it earned an impressive 11.6% net profit margin. And its PEG is reasonable 1.05 on a P/E of 20 on earnings forecast to grow 19% to $1.65 in 2012 after growing 82% in 2011.

Crocs has higher margins than Wolverine and its odds of beating growth forecasts look strong given its new products and its recent track record of beating expectations. But Wolverine could also provide upside surprise. Consider buying both -- taking advantage of Greece-driven dips to pick up the stocks at even lower prices.

Don't Bet Your Chips on Intel, Micron

2011-09-30T07:10:00.000-07:00

When it comes to semiconductors -- be wary of bets on PC memory -- so-called Dynamic Random Access Memory (DRAM) and bet on Flash -- used on the iPhone, iPad, and iPod -- instead. That does not mean that all PC chip bets are bad though. That's the takeaway from a look at semiconductor companies Micron Technology (NASDAQ: MU) and Intel (NASDAQ: INTC).

Late Thursday Micron reported an unexpected loss. In its report, Micron posted a $135 million loss of 14 cents a share for its fiscal fourth quarter. FactSet-polled analysts expected a penny a share of profit. Micron's 14% revenue drop to $2.14 billion from was slightly better than the expected $2.11 billion

The report is a mixture of bad news and good news. The bad news is that the revenues dropped due to Micron's dependence on DRAM -- where prices are dropping along with demand for PCs. The good news is that Micron has shifted its business mix in favor of the more profitable flash memory chips -- 41% of total sales. Its DRAM business is down to 36% of the total.

That's not to say that all bets on PC chips are off. Despite slowing PC sales, corporate PC demand has been stronger than many expected. And with its new PC Central Processing Unit (CPU) chip architecture -- dubbed Sandy Bridge. Intel's architecture combines "high-level graphics and CPUs integrated onto the same piece of silicon," according to eWeek.

That architecture has given Intel a phenomenal market share of 81.8% in the global processor market according to market research firm IHS iSuppli. And while the PC DRAM business features dropping prices, the CPU market remains a profit machine for the market king, Intel.

Despite slowing PC sales, corporate demand remains strong while consumer demand wanes. According to Matthew Wilkins, principal analyst for computer platforms research at IHS iSuppli, “Intel in the second quarter benefited from the combination of a recovery in PC demand and strong shipment growth for its new Sandy Bridge line of microprocessors. Strong corporate PC sales were particularly beneficial to Intel, as the enterprise computing segment has been outperforming the consumer market.”

Does this mean you should avoid Micron and buy Intel? I would avoid both but for different reasons:

Micron: hard to predict earnings. Micron's latest report is a reversal after very strong 12 month results. During the previous 12 months, Micron revenues soared 77% to $9.1 billion while net income of $644 million was up 198% -- yielding a modest 7.1% profit margin. The stock is very cheap -- based on a Price-earnings-to-Growth ratio of 0.15 (1.0 is fair value). Micron's P/E is 8.9 on earnings forecast to grow at 58% to $0.88 in fiscal 2013. The problem for this stock is that the latest quarterly report is so much worse than expected that it throws into question the sustainability of its longer-term performance and the reliability of its forecasts.
Intel: profitable, growing, expensive stock. Intel revenues are up 24% in the last year to $48 billion during which it posted a $12.3 billion profit, up 162% -- a whopping 25.6% net margin. The stock is expensive -- based on a Price-earnings-to-Growth ratio of 2.50. Intel's P/E is 10 on earnings forecast to grow at 4% to $2.45 in 2012. In its second quarter, Intel profit gained a mere 2% to $2.95 billion so despite its longer-term profit growth trends, its most recent results suggest that it may not be able to accelerate earnings growth.

While Intel is clearly a more solid company, neither looks like a great place to bet your investment chips.

Get to Know Cognizant, Accenture

2011-09-30T05:46:00.000-07:00

The business of writing software in India has been booming. But some of the biggest providers -- Accenture (NYSE: ACN), Cognizant Technology Solutions (NYSE: CTSH), and Computer Sciences Corp. (NYSE: CSC) -- are getting nervous. Is this is a sign of trouble in these stocks or is there an opportunity to buy?

Why does all this matter? For decades, big organizations have decided that their computer systems are important but they simply can't afford to put top programmers on their staff. As a result, they hire outside companies to build systems to solve problems like keeping track of inventory or selling their products online.

This industry is big and growing. According to Canadian researcher, XMG Global, the global outsourcing industry is forecast to end 2011 at $464 billion -- 9.2% larger than in 2010 -- it grew 13.9% last year. And the reason it's growing is simple -- companies need new computer systems, they have the budgets to build them but can't get the job done quickly and cheaply with their in-house staff.

But XMG believes that growth in the industry goes up in proportion to global economic growth. And now a feared slow down in global expansion is scaring some of the biggest outsources. For example, The top 20 IT companies in India account for over 60% of engineering job offers to students there, according to the Times of India.

And those big employers have made plenty of offers. So far in 2011, Indian outsourcers TCS hired 40,000 students, Infosys 30,000, Cognizant 28,000, Wipro 20,000 and HCL 8,000. They hired that many people based on two factors -- the number of big deals in their sales pipeline and the rate at which they expect programmers to quit or get fired.

But the attrition rate is falling as the number of job opportunities for experienced programmers dries up and the size of new deals is also declining. For example, in the last couple of quarters, the attrition rate has dropped from 25% to 15% and companies are no longer able to close deals bigger than $100 million.

As a result, students who received job offers do not yet know when they will start work. In India, students who are about to graduate regularly receive general offer letters that do not specify when they should report to work.

They later receive so-called appointment letters that tell them when to start. The Times of India reports that there are many who graduated in June but are nervously awaiting a letter -- perhaps in October or November -- that will tell them when they should start.

These delayed start dates are like the canary in the coal mine for the earnings prospects for the industry. But do they mean that you should avoid all of the stocks in the industry? Consider Cognizant and Accenture -- steer clear of CSC. Here's why:

Cognizant: booming, profitable, fairly priced stock. Cognizant revenues soared 40% to $5.3 billion in the last year and its net income of $826 billion was up 37.1% -- yielding a fat 15.6% profit margin. Although it has a slim profit margin, the stock is fairly priced -- based on a Price-earnings-to-Growth ratio of 1.13. Cognizant's P/E is 24.5 on earnings forecast to grow at 21.7% to $3.40 in fiscal 2012. Cognizant's second quarter earnings rose 20.8% from the year earlier quarter while revenue was up 34.4% to $1.49 billion.
Accenture: profitable, growing, moderately expensive stock. Walgreen revenues are up 18.4% in the last year to $27.4 billion during which it posted a $2.3 billion profit, up 27.9%. The stock is fairly expensive -- based on a Price-earnings-to-Growth ratio of 1.47 (1.0 is fair value). Accenture's P/E is 16 on earnings forecast to grow at 10.9% to $4.25 in fiscal 2013. In its fiscal fourth quarter -- reported Wednesday -- Accenture reported a 37% jump in earnings and a 23% revenue rise. If Accenture can continue this growth pace, its valuation looks low.
CSC: barely profitable, fairly priced stock. CSC revenues barely budged, up 0.8% to $16.2 billion in the last year and its net income was $750 million was down 13.2% and it has a slim 5% profit margin. The stock is fairly priced -- based on a Price-earnings-to-Growth ratio of 0.95. CSC's P/E is 5.8 on earnings forecast to grow at 6.1% to $4.66 in fiscal 2013.

Cognizant looks like the winner in this bunch due to its explosive growth and reasonable valuation. Accenture is also a strong player -- but not growing as fast (understandably given its size). CSC, despite its fair valuation, continues to be an also-ran. The concern for the first two is that those delayed appointment letters signal slower growth ahead.

Walgreen Can Cure What Ails Your Portfolio, CVS Not As Much

2011-09-27T16:57:00.000-07:00

Do drugstores offer investment value? It's a tough question because drug store have changed along with the health care market. While CVS Caremark (NYSE: CVS) has merged with a pharmacy benefit manager (PBM) -- a company that negotiates with health care product and service providers on behalf of corporate health plans, Walgreen's (NYSE: WAG) has remained pretty much the same -- except that like CVS it offers in-store medical care.

In 2006, CVS merged with Caremark, a PBM, in a $26.5 billion deal that finally closed in 2007. The idea was to create a $75 billion drug distributor whose greater scale would enable it to negotiate bigger volume discounts with the pharmaceutical companies. This deal was intended to lower corporate health care costs while achieving cost savings to help pay back the price premium.

Meanwhile, Walgreen has stuck closer to its knitting. In 2010, it spent $1.1 billion to expand its presence in New York City by acquiring Duane Reade. The deal more than doubled the number of pharmacies that Walgreen operates in the city.

Meanwhile, both CVS and Walgreens began in-store health clinics staffed by nurse practitioners in 2009. These clinics allow patients to obtain care for relatively minor health problems without an appointment. And after they are treated, they can buy their prescriptions in the stores.

But do these trends make CVS and Walgreens attractive investments? Here's my take:

Walgreen: profitable, growing, cheap stock. Walgreen revenues are up 6.4% in the last year to $71 billion during which it posted a $2.4 billion profit, up 4.2%. the stock is fairly priced -- based on a Price-earnings-to-Growth ratio of 1.02 (1.0 is fair value). Walgreen's P/E is 13.2 on earnings forecast to grow at 12.9% to $2.96 in fiscal 2012. Tuesday, Walgreen reported a 69% pop in net income but also terminated a $5.3 billion deal with Express Scripts (NYSE: ESRX) because Walgreen felt it was not getting paid enough to fill its prescriptions.
CVS: profitable, fairly priced stock. CVS revenues fell 2.3% to $101 billion in the last year and its net income of $3.4 billion was down 7.4%. Although it has a slim profit margin, the stock is fairly priced -- based on a Price-earnings-to-Growth ratio of 0.98 (1.0 is fair value). CVS's P/E is 14 on earnings forecast to grow at 14.3% to $3.18 in fiscal 2012. CVS's second quarter adjusted earnings of 65 cents beat expectations by a penny and were the same as the previous year.Thanks to contract wins in its PBM sector, its revenues there were up 23.2% but its margins remain tight.

I like Walgreen better than CVS because of its more rapid revenue and profit growth and its reasonable valuation.

Build Your Portfolio On NVR's Foundation -- Skip Toll Brothers, KB Home

2011-09-27T04:58:00.000-07:00

The housing market has been in the doldrums for years. And since they are still around, they are unpopular among investors. But are their stocks under-valued? More specifically, is there any value in home builders such as KB Home (NYSE: KBH), NVR (NYSE: NVR) and Toll Brothers (NYSE: TOL)

How bad is the housing market? Here are four indicators:

Millions of foreclosures. According to RealtyTrack more than 2.3 million houses have entered foreclosure since December 2007.
Dropping prices. According to S&P, house prices at the end of May were 33% below their July 2006 peak,
Breaking ground on new houses is at a low. According to the Commerce Department, housing starts dropped 5% in August, the most since April 2011, to a seasonally adjusted annual rate of 571,000 units, and
Housing sales are down from July 2011, lowest in six months. In August, sales of new single-family houses were down 2.3% to a seasonally adjusted annual rate of 295,000, according to the U.S. Census Bureau and the Department of Housing and Urban Development. The good news is that this is 6.1% percent above the August 2010 level.

With all this bad news, it's amazing that home builders are even adding to the supply. But all is not doom and gloom in this industry. Some are doing better than others. Here's my ranking of the three players I mentioned above:

NVR: profitable, cheap stock. NVR's revenues rose 11% to $2.7 billion in the last year and its net income of $156 million was up 7.2%. But the good news is that the stock is cheap -- based on a Price-earnings-to-Growth ratio of 0.65 (1.0 is fair value). NVR's P/E is 23.6 on earnings forecast to grow at 36.4% to $36.15 in 2012.
Toll Brothers: barely profitable, cheap stock. Toll Brothers' revenues fell 15% to $1.45 billion in the last year and its net income of $75 million was up 100%. Although it has a slim profit margin the stock is cheap -- based on a Price-earnings-to-Growth ratio of 0.48 (1.0 is fair value). NVR's P/E is 32 on earnings forecast to grow at 66.5% to $0.34 in fiscal 2012.
KB Home: unprofitable, high dividend yield. KB Home's revenues are down 13% in the last year to $1.3 billion during which it posted a $175 million loss. But the good news is that it has a high 4.23% dividend yield. And with 42% of its outstanding shares sold short, KB Home is the fifth most heavily shorted stock on the NYSE, according to Bloomberg. This suggests that KB Home's stock could drop which would raise its dividend yield -- if the company can keep paying a dividend.

If NVR achieves its expected 2012 profit growth, this solid company is looking awfully inexpensive. Toll Brothers has very slim profits and its contracting sales concern me. An KB Home's high short interest would scare me away from buying its shares.

Why Integrated Oil (Chevron) Is Up and Drillers Are Down

2011-09-23T04:56:00.000-07:00

When it comes to the stock market, not all oil companies are created equal. For instance, drillers like Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO) have fallen 18% and 14% respectively in 2011 while integrated energy colossus Chevron (NYSE: CVX) has only dropped 1%. Why?

The answer can be found by looking at what drives their profits. For example, offshore drillers operate platforms that float over oil deposits beneath the ocean floor. Companies like BP (NYSE: BP) pay offshore drillers a daily rate to drill in search of oil. The goal of companies that hire the offshore drillers is to find the oil and get it pumped out as fast as possible so they can minimize the day-rate they're paying.

Of course, BP and Transocean got into a bit of trouble back in 2010 when a Transocean offshore oil rig, the Deepwater Horizon, that BP had hired blew up. This led to a massive cleanup and a moratorium on drilling in the Gulf of Mexico. That moratorium on drilling cut way back on the number of rig-days that Transocean and its competitor, Diamond Offshore, got paid.

The financial results are not pretty. In 2010, Transocean's net income plunged 69% to $988 million thanks to the loss of that rigs income and the moratorium in the Gulf. And in the second quarter of 2011, Transocean's net income plunged 50% to $155 million while only 55% of its fleet was being used.

The numbers for Diamond Offshore are not that much better. Its net has fallen 31% in the last year while its revenues are down 9%. But in the second quarter of 2011, it reported higher profits of $267 million -- up 8%. The bad news, that spooked its stock, is that management forecast more rig downtime -- 1,004 days in 2011 and 869 days in 2012.

Chevron is a different story. It has many different ways to make money -- including the refining and marketing of oil. If Chevron can keep its cost of buying crude oil low enough and keep its refineries operating close to full capacity then it will likely make a big profit when it subtracts these costs from the price it gets from consumers at the pump.

That spread worked quite nicely for Chevron in the second quarter. Its profit spiked 43% to $7.7 billion on revenue that climbed 31% to $66.7 billion as higher oil and gasoline prices made up for a decline in oil production.

But that's all history. Should you buy any of these stocks? Consider Chevron but avoid the offshore drillers. Here's why:

Chevron: profitable company, expensive (?) stock. Chevron revenues are up 19% in the last year and it earns a solid 9.9% net profit margin. Yet its Price-earnings-to-growth ratio (PEG) is a high 3.95 -- 1.0 is fair value -- on a P/E of 7.9 on earnings forecast to grow 2% to $13.75 in fiscal 2012 after a 42% rise in 2011. If you think Chevron's 2012 earnings growth will be better, then the stock may be cheap.
Transocean: unprofitable company, expensive stock. Transocean revenues loses money: it has -1% net profit margin. And its PEG is undefined because it trades at a P/E of -129 but its earnings are forecast to rise 63% in 2012 to $5.75. If you like betting on a turnaround -- this could be one to consider.
Diamond Offshore: profitable company, over-priced stock. Diamond Offshore earns a whopping 29% net profit margin. And its PEG is undefined because it trades at a on a P/E of 8 on earnings forecast to tumble 20% in 2012 after a 10% decline in 2011.

If you had to bet on one of these, I'd go with Chevron. But if we have a recession coming up, then its earnings growth might be on the low end and that would make its stock over-priced. The offshore drillers look questionable unless demand for their services spikes.

Among Business Software Warriors Microsoft, Oracle, and Salesforce.com, Only Microsoft Will Boost Your Portfolio

2011-09-22T04:58:00.000-07:00

In the battle for a share of corporate software budgets, winning depends on confidence. That is, a company will only spend its money on software if it believes your company will be around for years to come.

That's why it is so impressive that Salesforce.com (NASDAQ: CRM) was ever able to break into the market. Facing competitors like Oracle (NASDAQ: ORCL) and Microsoft (NASDAQ: MSFT), what Salesforce.com accomplished as an upstart is a great lesson for others. But should any of these companies be in your portfolio?

The global market for business software is huge. Ovum expects it to rise 8.2% in 2011 to end the year at $267 billion. And it will keep growing at a 7.7% annual rate to hit $358 billion in 2015. What's driving that growth is "exploding volumes of data, increased enterprise mobility, the transition to cloud computing models, and the emerging markets."

And the leaders in selling it have big names. Microsoft remained the world's top software vendor according to Ovum, retaining 20% of the market. Oracle, IBM (IBM) and SAP followed in that order. But Microsoft is not innovating enough to gain significant market share.

But what does it take to win that business? If its fiscal first quarter earnings report is any indication, Oracle is winning big. Its CEO, Larry Ellison, has spent $40 billion since 2005 on acquisitions of corporate hardware and software companies and has created bundles of products that boost corporate IT productivity.

The result is rapid sales and profit growth. Its sales for the quarter ending August 31, were up 12% to $8.37 billion meeting expectations. And net income was up 36% to $1.84 billion -- $50 million more than Wall Street expected.

The rise was due to increased corporate spending on its database programs and applications that help run businesses -- many of which combine the hardware Oracle got from its $7.4 billion acquisition of Sun Microsystems, according to Bloomberg.

Oracle wins for two reasons:

Safety. Corporations see it as a safe choice so buying its products will not result in the head of corporate IT getting fired because the company goes out of business.
New products that boost productivity. Oracle is acquiring the products that companies need to handle their information management challenges and getting them all to work together.But should you invest in any of these corporate software winners? You should consider Microsoft, but avoid Oracle and Salesforce.com. Here's why:

It is remarkable that any small companies have been able to grab business from Oracle. But former Ellison protege, Mark Benioff, and founder and CEO of Salesforce.com did just that. Benioff is a great salesman who used the contacts he developed while selling Oracle products to see an opportunity to give business customers the best of both worlds.

It lets companies pay a monthly fee to rent customer relationship management (CRM) software from Salesforce.com. This lets companies get the benefits of innovation -- since Salesforce.com is continuously improving the product -- while avoiding the fixed costs of buying hardware and software on which to run that software.

Microsoft: profitable company, cheap stock. Microsoft revenues are up 12% in the last year and it earns a whopping 33% net profit margin. Yet its Price-earnings-to-growth ratio (PEG) is a low 0.78 -- 1.0 is fair value -- on a P/E of 9.7 on earnings forecast to grow 12.5% to $3.13 in fiscal 2013.
Oracle: profitable company, expensive stock. Oracle revenues are up 32.8% in the last year and it earns an impressive 25% net profit margin. Yet its PEG is a high 1.58 on a P/E of 17.1 on earnings forecast to grow 10.8% to $2.56 in fiscal 2013.
Salesforce.com: barely profitable company, very over-priced stock. Salesforce.com revenues are up 27% in the last year but it earns a slim 1.5% net profit margin. And its PEG is a grossly over-valued 3.37 on a P/E of 633 on earnings forecast to grow 188% to 0.57 in fiscal 2013 -- after its earnings plummet 70% in fiscal 2012.

What is most interesting is that investors seem to like Oracle's faster sales growth and solid profitability more than Microsoft's slower growth but higher margins. Meanwhile, Salesforce.com may be doing an admirable job of attracting customers but it does not seem able to make a profit in the bargain.

BBT's a Bank You Can Bank On. B of A and Cirigroup, not so much

2011-09-21T05:11:00.000-07:00

The U.S. government has invested hundreds of billions of dollars -- including the $750 billion Troubled Asset Recovery Program (TARP) -- to keep the world's biggest banks from failing -- some of those are based in the U.S. But if you're going to put your own money into bank stock, skip the ones that got bailed out -- like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) and consider a stake in a profitable regional bank like BB&T (NYSE: BBT).

Banking used to be such an easy business. Bankers would roll into the office at 10am, take a few meetings, and be out on the golf course by 2pm. In between, they'd make a business or home loan and feel blissfully confident that they would get a nice solid paycheck every two weeks -- and attend a delightful Christmas party at the end of the year.

But starting in the mid-1970s that cozy world crumbled -- leading to a raft of changes that has made banking a terrible business for everyone associated with it except for a handful of traders. Here are the three most significant ruptures in the banking industry structure:

Deregulation. In 1975, Washington allowed competitors to get into the stock brokerage business -- enabling discount brokers to take market share away from the so-called full-service brokerage houses like Merrill Lynch -- now a B of A subsidiary. Other deregulation let Savings & Loans (S&Ls), that had previously been bastions of safety, to speculate on interest rates. And in the 1990s, the rule that kept commercial (taking deposits and lending them out) and investment banking (issuing securities and advising on mergers) separate -- passed to keep another Great Depression from happening -- was repealed. All these changes ramped up the risks that bankers could take with government-guaranteed consumer deposits.
Securitization. The 1980s featured the emergence of securitization -- selling financial assets like mortgages, credit card receivables, and commercial loans into a trust and then issuing securities based on the cash flows the assets generated. Securitization turned lenders into factories that mass-produced loans because the investment banks that engaged in securitization had an insatiable appetite for ever-bigger portfolios to boost their revenues and banker bonuses. As the volume of loans rose, the quality plummetted. But since ratings agencies competed to AAA-rate those dodgy loan bundles, investor around the world were eager to buy them.
Technology. Up until the invention of the ATM, banks conducted business through buildings on streets in cities where their customers lived and worked. Those bank branches are much more expensive to own and operate than an ATM. And with the emergence of secure ways to pass information and money on the Internet, people can conduct many banking transactions without even leaving their home or office. This leaves banks in an uncomfortable position of operating plenty of stores when a more convenient and cost-effective delivery mechanism is available to them at the same time.

All these changes led banks to take bigger risks as they struggled not to lose market share and the resulting bonuses to their more aggressive peers. And about once a decade, those risks led to a financial crisis:

LDC loans. In the 1970s, there were big losses due to loans to so-called Lesser Developed Countries (LDCs);
Oil patch lending. In the early 1980s, there was another collapse due to too much lending for oil and gas exploration and oil-patch real estate;
LBOs. The 1980s ended with a collapse in loans for leveraged buyouts; and
Sub-prime securitization. We are still suffering the after-effects of the 2008 financial collapse that resulted from institutional investors who bought bundles of subprime-mortgage backed securities on margin.

Among the biggest perpetrators of the latest financial crisis remain two zombie banks -- B of A and Citigroup. I call them zombie banks because if they were to adjust the value of their bad loans to their true current value, those banks would end up with a negative net worth.

B of A has $222 billion in shareholders' equity and nearly $2 trillion in so-called Level 2 and Level 3 assets -- for which there is no way to value them in the market. That $2 trillion includes $1.4 trillion in so-called derivatives that Warren Buffett called financial weapons of mass destruction.

Since B of A's financial statements do not reflect the real-time value of those Level 2 and Level 3 assets, it is possible to think about scenarios of what they're really worth. And in one such scenario, a mere 11% drop in their value -- $222 billion divided by $2 trillion -- would wipe out B of A's net worth.

Surprisingly, not all banks are walking dead. BB&T, a North Carolina commercial bank with offices in North Carolina, Virginia, Florida, Georgia, Maryland, South Carolina, Alabama, Kentucky, West Virginia, Tennessee, Nevada, Texas, Washington D.C and Indiana, is doing well and it's stock is cheap.

The $15 billion (market capitalization) BB&T had $6.9 billion in sales and earned a nice 11.3% net profit margin. And it is screamingly cheap -- trading at a Price-Earnings to Growth ratio (1.0 is fair value) of 0.43 on a P/E of 16.3 and earnings forecast to grow 38% to $2.42 in 2012 (after 51% EPS growth expected for 2011). Citigroup has $176 billion in net worth but it has mysteriously avoided reporting for those Level 2 and Level 3 assets

BB&T stuck the traditional banking business and does it well. Most investors are too gloomy to notice this booming bank whose stock is selling at a discount.

Bristol Myers May Cure Your Portfolio Better Than Merck

2011-09-20T05:01:00.000-07:00

The pharmaceuticals industry has been in a state of turmoil for decades. But some companies are handling it better than others. For example, Bristol Myers Squibb (NYSE: BMY) stock is up 15% so far this year and Merck (MRK) has lost 10% of its value. Why the difference? Should you invest in either of these companies?

Prior to the 1980s, the drug industry was one of the most profitable in the world -- a typical pharmaceutical company could earn a five-year average return on equity of nearly 40%. The reasons for that high profitability were powerful:

Patented drugs. High R&D spending regularly yielded new drugs that a company would patent and then enjoy almost 20 years of unchallenged high profits with regular price increases
Marketing to doctors. Doctors prescribed drugs with a strong push from drug company sales and marketing people who gave the doctors free samples and took their families on vacations that included some "medical education."
Limited competition. Pharmaceutical companies were unchallenged by significant competition and hence they were able to operate in a way that maximized their shareholder returns without concern for price cutting.

But starting in the 1980s, all those profit enhancing industry forces collapsed -- sending the industry into a long period of greater turmoil with which it is still trying to cope. These changes have lowered the industry ROE to 22.2% -- below the S&P 500 average of 24.6%.

Here are the biggest profit reducing changes:

Rise of Pharmacy Benefit Managers (PBMs). Companies offering health care created PBMs to use their negotiating leverage to take away some of doctors' drug prescribing power. Now, if a patient who gets corporate health coverage has a medical problem, the PBM will usually only pay for the lowest priced drug that solves the problem.
Emergence of new competitors. Generic drug companies manufacture off-patent drugs at much lower costs than do the fully-integrated pharmaceuticals companies. Those generic manufacturers get the revenues when those PBMs require the prescription of a low priced drug. Moreover, biotechnology companies have come up with new approach es to drug development and their focus often gives them higher patented drug development success.
Rising cost of developing new patented drugs. In the 1980s, it used to cost $400 million to develop a new drug -- now it costs an average of $1.3 billion (although some believe that figure is massively inflated). Big pharmaceuticals companies are increasingly finding that they are unable to discover blockbuster new patented drugs to replace the ones that come off patent. As a result, they are spending more money than ever to try, but they frequently fail and end up trying to make up for it by acquiring a biotechnology company that is further along in the development process.

Merck was formerly considered the gold standard of the industry -- it attracted the top people and made the most money. But that began to fall apart in the 1980s thanks to the rise of Medco Health Solutions (MHS) -- a mail-order drug company and PBM that Merck acquired in 1993 as I wrote in my book, The Technology Leaders, to try to get back control of the prescribing process. That did not work and Merck spun off Medco in 2003.

Now Merck faces the prospect of being one of the companies that will suffer $135 billion lower revenues if President Obama's deficit reductino plan goes into effect. That's because the plan would require makers of brand name drugs to give a 23% rebate to the U.S. government for low-income Medicare beneficiaries who get a subsidy to pay for coverage, according to Bloomberg.

Meanwhile Bristol Myers has been working on new drug development and has achieved some success. Monday Jeffries published a report that Bristol Myers could be an acquisition target on the strength of two of its drugs -- a skin cancer treatment and a heart drug awaiting U.S. approval. Jeffries also raised its price targe from $27 to $35. Its skin cancer treatment Yervoy generated $95 million in second quarter sales -- beating sales expectations. And Jeffries raised expectations for its blood thinner Eliquis.

What does all this mean for investors? Should you buy or avoid Merck and Bristol Myers? Let's compare them based on valuation and recent earnings performance:

Valuation -- Bristol Myers. Bristol Myers (1.69) has a lower Price-Earnings-to-Growth (PEG) ratio -- 1.0 is considered fair value -- than Merck (3.86) -- calculated based on 2011 earnings growth. Specifically, Bristol Myers has a P/E of 15.9 on earnings forecast to fall 9.8% to $2.05 in 2012 but will enjoy a 9.4% earnings boost in 2011. Merck has a P/E of 34.7 on earnings forecast to grow 2.9% to $3.84 in fiscal 2012 with 9% growth in 2011.
Earnings reports -- Merck. Merck has met or exceeded expectations in all of the last five earnings reports while Bristol Myers has beaten expectations in only four of the last five earnings reports.

Given the headwinds facing the industry -- reflected in weak 2012 earnings expectations, neither of the two companies looks like a bargain. But if forced to choose, I would pick Bristol Myers because of its lower P/E and the possibility of a takeover.

99 Cents Only Stores Stock is No Bargain

2011-09-19T05:33:00.000-07:00

99 Cents Only Stores (NYSE: NDN) stock popped 9.4% on Friday. Is it still a bargain?

99 Cents claims that it sells merchandise at or below 99.99 cents per item. By April, it operated 285 retail stores -- 211 in California, 35 in Texas, 27 in Arizona, and 12 in Nevada. On Friday, news emerged that Apollo Management planned to bid $22 to $24 a share for 99 Cents.

Has news of this bid taken all the upside opportunity out of investing in 99 Cents? Here are two reasons to consider an investment:

Higher sales and profits and decent balance sheet. 99 Cents sales have grown at a 6.2% annual rate over the last five years from $1.1 billion (2007) to $1.4 billion (2011) and its net income has increased at a 64.9% annual rate from $10 million (2007) to $74 million (2011) -- yielding a solid 7% net margin. It has under $1 mllion in debt and its cash has grown at a 14.4% annual rate from $118 million (2007) to $202 million (2011).
99 Cents is earning more than its cost of capital – and it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, 99 Cents EVA momentum was 1%, based on 2010 revenue of $5.5 billion, and EVA that improved from 2010's $17 million to 2011's $25 million, using a 7% weighted average cost of capital.

Here are two reason to avoid it:

High valuation. 99 Cents trades at a Price-Earnings-to-Growth ratio of 1.65 (1.0 is considered fair value) — a P/E of 19.3 on earnings forecast to grow 11.7% to $1.26 in fiscal 2012 -- and is expected to grow 9.3% in fiscal 2012.
Mediocre earnings reports. 99 Cents has been able to beat analyst’s expectations in only two of its past five earnings reports and has missed expectations by over 7% in the last two reports.

If Apollo buys 99 Cents, the stock will rise another 5% to 10% from its current level. If not, it should plunge and stay in stock purgatory until it can accelerate its earnings growth.

No Stock Bargains at Dollar Tree, Wal-Mart

2011-09-19T04:54:00.000-07:00

Deutsche Bank recently started covering a slew of retail stocks -- it put a buy on Dollar Tree (NASDAQ:DLTR) and a sell on Wal-Mart (NYSE:WMT) -- expecting it to drop to $48. Should you follow Deutsche Bank's advice?

In its September 14 report, Deutsche Bank expressed concern that Wal-Mart was losing market share "at a faster pace than at any point in its history - a phenomenon that we're not convinced the company can fix," according to StreetInsider. And Deutsche Bank expressed concern about the following trends:

Falling same-store sales. Declining same-store sales for the last nine quarter suggests Wal-Mart's "low-price image" may be damaged;
Failure to adapt to consumer preference for convenience. "despite the consumer's emerging preference for convenience, Wal-Mart has been slow to adopt a smaller store strategy..."; and
Lower level of share buybacks. A new development as recently as this year, "acquisitions + inventory build + international = less buybacks."

By contrast, on September 15, Deutsche Bank set an $81 price target when it initiated coverage on Dollar Tree. Deutsche Bank admires its rapid growth in the number of customers in its stores. This so-called traffic grew at an average of 5.8 percent over the past 10 quarters—supporting 65% of the same store sales growth, according to StreetInsider.

The Deutsche Bank report also said that "while strong brand awareness and an attractive value proposition are key ingredients, Dollar Tree has augmented its tender offering along with food stamp acceptance. Looking ahead, given these traffic rates, we have greater confidence in the company’s ability to drive comps in 2H11 and 2012."

Is Deutsche Bank right? Should you buy Dollar Tree and sell Wal-Mart? When I wrote about Wal-Mart in August, I was negative on its stock because despite beating analysts' estimates, paying a decent dividend, and out-earning its cost of capital; the retailer was not growing earnings fast enough to justify its P/E. I still believe that -- Wal-Mart's Price-Earnings-to-Growth ratio (PEG) remains high -- 1.0 is fair value -- at 1.29 on a P/E of 12 with earnings growth of 9.3% to $4.89 in 2012.

But what about Dollar Tree? Here are three reasons in its favor

Great earnings reports. Dollar Tree has been able to beat analyst’s expectations in all of its past five earnings reports.
Higher sales and profits and decent balance sheet. Dollar Tree sales have grown at a 10.2% annual rate over the last five years from $4 billion (2007) to $5.9 billion (2011) and its net income has increased at a 19.9% annual rate from $192 million (2007) to $397 million (2011) -- yielding a solid 7% net margin. Its debt has remained constant at $250 million and its cash has grown at a 12.2% annual rate from $307 million (2007) to $486 million (2011).
Dollar Tree is earning more than its cost of capital – and it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Dollar Tree's EVA momentum was 2%, based on six month annualized 2010 revenue of $5.5 billion, and EVA that improved from six months annualized 2010's $162 million to six months annualized 2011's $254 million, using a 7% weighted average cost of capital.

Here is one reason to avoid it:

High valuation. Dollar Tree trades at a Price-Earnings-to-Growth ratio of 1.35 (1.0 is considered fair value) — a P/E of 21 on earnings forecast to grow 15.6% to $4.55 in 2012 -- but is expected to grow 21.8% in 2011.

Deutsche Bank is right on avoiding Wal-Mart and wrong on buying the over-priced Dollar Tree -- but if its stock price drops -- or analysts raise its 2012 growth forecast enough -- to get its PEG below 1.0, I would take a fresh look.

Lincoln National Can't Secure Your Net Worth

2011-09-16T05:40:00.000-07:00

Annuity vendor, Lincoln National (NYSE: LNC) enjoyed an 8.2% pop in Thursday trading. Is it too late to join the party?

It's hard to figure out why Lincoln National stock was up. But one clue is record options trading volume in puts (the right but not the obligation to sell shares at a set price and date) and calls (the right but not the obligation to buy shares at a set price and date) on Lincoln National. Thursday, a new 3-month trading record was established on both -- 2,256 call and 2,084 put contracts.

What does this mean? Savvy institutional investors are poised to profit from a big move in Lincoln National stock. And it looks like that bet is largely a bullish one. How so? According to Avafin, unusual put/call volume signals that big investors expect a big move in the stock. And the number of bullish call bets outweighed the number of bearish put bets -- specifically, there were 0.9 puts traded for each call contract yielding a 0.92 put/call ratio.

Does this mean you should buy Lincoln National stock? Here are three reasons to avoid it:

High valuation. Lincoln National trades at a Price-Earnings-to-Growth ratio of 2.50 (1.0 is considered fair value) — a P/E of 5.6 on earnings forecast to grow 2% to $4.18 in 2012 -- but is expected to grow 31% in 2011.
Fair earnings reports. Lincoln National has been able to beat analyst’s expectations in only three of its past five earnings reports.
Higher sales and decent balance sheet but declining profits. Lincoln National sales have grown at a 4% annual rate over the last five years from $8.9 billion (2006) to $10.4 billion (2010) and its net income has declined at a 7.5% annual rate from $1.3 billion (2006) to $951 million (2010) -- yielding a solid 9% net margin. Its debt has risen -- but its cash has soared at a much higher rate. Specifically, its long term debt rose at a 11.5% annual rate from $3.5 billion (2006) to $5.4 billion (2010) while its cash climbed at a 13.9% annual rate from $1.6 billion (2006) to $2.7 billion (2010).
Under-earning its cost of capital. Lincoln National is earning less than its cost of capital – but it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Lincoln National 's EVA momentum was 2%, based on six month annualized 2010 revenue of $10.3 billion, and EVA that improved from six months annualized 2010's -$417 million to six months annualized 2011's -$198 million, using a 7% weighted average cost of capital.

I am not sure why investors want to own this stock -- but it did hit a 52 week low on September 6 and if Lincoln National enjoys an upside earnings surprise when it reports its third quarter results, the stock could pop.

You Can Clean Up On a DaVita Buy

2011-09-16T04:37:00.000-07:00

Berkshire Hathaway (NYSE: BRK) CEO Warren Buffett's latest successor-in-training used to run a Peninsula Capital Advisors, a hedge fund. One of Peninsula's biggest investments, kidney dialysis center owner, DaVita (NYSE: DVA), caught my attention. Should you invest?

Like Apple's (NASDAQ: AAPL) Steve Jobs, Buffett is a business hero who shares a common feature with the rest of humanity -- he won't last forever. So Buffett has been hiring investment managers and giving them multi-billion dollar chunks of his portfolio to see how they do. His first was Todd Combs and now Buffett has hired Peninsula's manager, Ted Wechsler.

Wechsler won an anonymous bid to have lunch with Buffett in 2010 -- topping $2.6 million, according to Fortune. Peninsula put in a pretty good performance for its investors -- since its 2000 inception, it returned 1,236% -- far better than Berkshire B stock that gained a relatively small 146%. One of Wechsler's biggest bets as of earlier this year was DaVita.

But has Wechsler already taken full advantage of the profit opportunity in its stock? Here are three reasons to consider an investment:

Low valuation. DaVita trades at a Price-Earnings-to-Growth ratio of 0.71 — a P/E of 19.2 on earnings forecast to grow 27.1% to $6.13 in 2012.
Good earnings reports. DaVita has been able to beat analyst’s expectations in four of its past five earnings reports.
Higher sales and profits and decent balance sheet. DaVita sales have grown at a 6.9% annual rate over the last five years from $4.9 billion (2006) to $6.4 billion (2010) and its net income has increased at an 8.9% annual rate from $289 million (2006) to $406 million (2010) -- yielding a decent 6% net margin. Its debt has risen -- but its cash has soared at a much higher rate. Specifically, its long term debt rose at a 3.2% annual rate from $3.7 billion (2006) to $4.2 billion (2010) while its cash climbed at a 29.4% annual rate from $315 million (2006) to $883 million (2010).

One negative:

Out-earning its cost of capital. DaVita is earning more than its cost of capital – but it’s not progressing. How so? It’s producing no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, DaVita's EVA momentum was 0%, based on six month annualized 2010 revenue of $6.3 billion, and EVA that fell from six months annualized 2010's $110 million to six months annualized 2011's $121 million, using a 7% weighted average cost of capital.

DaVita looks like a solid investment given its financial strength and low valuation. And you didn't have to pay $2.6 million to learn about it.

Broadcom Can Accelerate Your Net Worth

2011-09-15T05:12:00.000-07:00

Chip maker, Broadcom (NASDAQ: BRCM), is near the top of Fortune's list of big fastest-growing companies -- and is its 84th fastest growing company. Does that mean you should own its shares?

Broadcom recently announced a big networking chip maker for which it paid a big premium. The new addition is mobile network chip-maker, Netlogic Microsystems. At for $3.7 billion, the deal is Broadcom's biggest and is priced 39% above its market value. Fortune reports that analysts agree that Broadcom should expand in this market.

Is Broadcom's strategic expansion a good enough reason to buy its stock? Here are three reasons to consider it:

Low valuation. Broadcom trades at a Price-Earnings-to-Growth ratio of 0.68 — a P/E of 19.5 on earnings forecast to grow 28.6% to $2.31 in 2012.
Great earnings reports. Broadcom has been able meet or beat analysts' expectations in all of its past five earnings reports.
Higher sales and profits and decent balance sheet. Broadcom sales have grown at a 16.4% annual rate over the last five years from $3.7 billion (2006) to $6.8 billion (2010) and its net income has increased at a 30.5% annual rate from $379 million (2006) to $1.1 billion (2010) -- yielding a solid 16% net margin. Its debt has risen -- but its cash remains solid. Specifically, its long term debt was $698 million in 2010 after previously being debt-free while its cash was unchanged over the five years at $2.7 billion.

One negative:

Out-earning its cost of capital but getting worse. Broadcom is earning more than its cost of capital – but it’s falling behind. How so? It’s producing negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Broadcom's EVA momentum was -3%, based on six months annualized 2010 revenue of $6.1 billion, and EVA that fell from six month annualized 2010's $222 million to six months annualized 2011's $60 million, using an 11% weighted average cost of capital.

It looks to me like the positives for Broadcom, outweigh its negative EVA momentum. If its 2012 EPS forecast is right, this fast-growing company is trading at a cheap price.

Newmont Mining Won't Dig Portfolio Gold

2011-09-15T04:27:00.000-07:00

Gold producer, Newmont Mining (NYSE: NEM), is near the top of Fortune's list of big fastest-growing companies. Is that a good enough reason to buy its stock?

A look at Newmont's latest earnings suggests that fast growth does not necessarily mean high profitability. While Newmont is digging for gold around the world -- Ghana, North America, South America and the Asia Pacific region -- it looks like its costs are rising faster than gold prices.

With an 11% rise in revenues and an 18% profit boost, you'd think all's well at Newmont. But due to a spike in Newmont's cost to product gold -- from $507 an ounce in 2010 to $588 this year -- Newmont missed analysts' expectations by 10 cents a share (10% below expectations).

Is this a temporary problem that could make the stock more attractively priced? Or should you avoid Newmont altogether?

Here are two reasons to consider buying its shares:

Low valuation. It trades at a Price-Earnings-to-Growth ratio of 0.80 (1.0 is fair value) — a P/E of 13.3 on earnings forecast to grow 16.6% to $5.63 in 2012.
Higher sales and profits and decent balance sheet. Newmont sales have grown at an 18% annual rate over the last five years from $4.9 billion (2006) to $9.5 billion (2010) and its net income has surged at a 42.2% annual rate from $563 million (2006) to $2.3 billion (2010) -- yielding a wide 24% net margin. Its debt has risen -- but its cash is up faster. Specifically, its long term debt rose at a 23.6% annual rate from $1.8 billion (2006) to $4.2 billion (2010) while its cash climbed at a 34.1% annual rate from $1.3 billion (2006) to $4.2 billion (2010).

Two negatives:

Unpredictable earnings reports. Newmont has been able beat analyst’s expectations in three of its past five earnings reports but when it misses, it misses big.
Out-earning its cost of capital but getting worse. Newmont is earning more than its cost of capital – but it’s getting worse. How so? It’s producing negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Newmont's EVA momentum was -3%, based on six month annualized 2010 revenue of $8.8 billion, and EVA that deteriorated from six months annualized 2010's $1.2 billion to six months annualized 2011's $964 million, using a 7% weighted average cost of capital.

What bothers me about Newmont is that it does not achieve economies of scale. It's getting much bigger, but its cost of producing gold is rising instead of falling. This means that it is not taking full advantage of the cost reduction opportunities that should go along with being bigger. The result is volatile results and an inability to generate positive EVA momentum.

Despite the low valuation, I would be wary of investing in this mining stock.

Don't Gamble on Wynn Resorts

2011-09-14T05:18:00.000-07:00

Wynn Resorts (NYSE: WYNN) enjoyed a 208% rise in its second quarter earnings -- an impressive performance. Should you place a bet on its stock?

What's interesting about Wynn is that its been able to grow revenues over 33 times faster than the U.S.'s 0.7% rate of economic growth. This casino operator’s earnings growth was driven by a 22.8% increase in revenues including a 22% rise in room rates.

But is this fast growth enough of a reason to buy its stock? Here are two reasons to consider it:

Decent earnings reports. Wynn has been able meet or beat analysts' expectations in three of its past five earnings reports and missed by a penny in the two others.
Out-earning its cost of capital and getting better. Wynn is earning more than its cost of capital – and it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Wynn 's EVA momentum was 12%, based on six month annualized 2010 revenue of $3.9 billion, and EVA that improved from six month annualized 2010's -$192 million to six month annualized 2011's $256 million, using a 12% weighted average cost of capital. Here are two reasons to pause:

Here are two reasons to avoid it:

Very high valuation. It trades at a Price-Earnings-to-Growth ratio of 3.85 — a P/E of 50 on earnings forecast to grow 13% to $6.19 in 2012 after a 161% rise in 2011.
Higher sales but plunging profits and more debt-laden balance sheet. Wynn sales have grown at a 31.6% annual rate over the last five years from $1.4 billion (2006) to $4.2 billion (2010) but its net income has plunged at a 29% annual rate from $629 million (2006) to $160 million (2010) -- yielding a thin 4% net margin. Its debt has risen -- but its cash is up faster. Specifically, its long term debt rose at an 8.4% annual rate from $2.4 billion (2006) to $3.3 billion (2010) while its cash climbed at a 13.3% annual rate from $789 million (2006) to $1.3 billion (2010).

If Wynn can keep up its rapid earnings growth over the longer run, then its current valuation will look cheap. But if earnings forecasts are accurate for 2012, this stock is very over-valued. Given its spotty record for beating expectations, I would consider buying Wynn at a lower price but avoid it for now.

At a Lower Price, Target Should Be in Your Sites

2011-09-14T04:39:00.000-07:00

Target (NYSE: TGT) suffered an outage of its web site on Tuesday. The bad news was a result of too much demand and not enough supply as consumers were desperate to get their hands on the latest product innovation from Target. Is that enough of a reason to buy its stock?

Italian luxury knitwear designer Missoni sells consumer goods for very high prices -- as much as $1,500. But Tuesday it launched a 400-piece line of Missoni for Target -- a collection of bikes, luggage, clothes and housewares. This so-called "cheap chic retailer" featured Target's zigzag patterns for between $2.99 for stationary and $599.99 for patio furniture — far less than Missoni's real products that range in price between $595 and $1,500.

Target understands something essential about its customers -- they aspire to own elite brands but can't afford them. The celebrity-industrial-complex creates a deep popular hunger for what consumer can't attain. And then Target lowers the drawbridge and lets them in through these specialty sales. Even if it does not make money on these items, it does bring in many new customers who may buy other -- higher margin goods.

But is Target's success with Missoni reason enough to buy its stock?

Great earnings reports. Target has been able meet or beat analysts' expectations in all of its past five earnings reports.
Higher sales and profits and decent balance sheet. Target sales have grown at a 4.4% annual rate over the last five years from $58.5 billion (2007) to $69.5 billion (2011) and its net income rose slightly at a 0.9% annual rate from $2.8 billion (2007) to $2.9 billion (2011). Its debt has risen -- but its cash is up more. Specifically, its long term debt rose at a 15.7% annual rate from $8.7 billion (2007) to $15.6 billion (2011) while its cash climbed at a 20.3% annual rate from $813 million (2007) to $1.7 billion (2011).
Out-earning its cost of capital and getting better. Target is earning more than its cost of capital – and it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Target 's EVA momentum was 1%, based on 2010 revenue of $65.4 billion, and EVA that improved from 2010's $2 billion to 2011's $2.4 billion, using a 7% weighted average cost of capital.

One negative:

Extremely high valuation. Target trades at a Price-Earnings-to-Growth ratio of 8.29 -- 1.0 is fair value – a forward P/E of 23.2 on earnings forecast to grow 2.8% to $4.33 in fiscal 2013.

For all Target's great stores, clever marketing, and solid financial performance, the stock price is way ahead of Target's earnings growth rate. Unless its price tumbles or its earnings growth spikes, Target stock is no value.

Cirrus Logic Will Make Sense of Your Net Worth

2011-09-13T05:11:00.000-07:00

Fortune is out with its list of eight fastest growing technology companies. Second on the list is Cirrus Logic (NASDAQ: CRUS) that enjoyed 340% three-year annualized Earnings Per Share (EPS) growth thanks largely to its audio controller chips that account for 70% of its revenues.

But does rapid EPS growth mean Cirrus Logic stock is a sensible investment? Here are three reasons to consider it:

Very low valuation. Cirrus Logic 's price-to-earnings-to-growth ratio of 0.25 (where a PEG of 1.0 is considered fairly priced) means its stock price is cheap. It currently has a P/E of 5.3, and its earnings per share are expected to grow 21.4% to $1.38 in fiscal 2013.
Increasing sales and profits -- and decent balance sheet. Cirrus Logic has been increasing sales and profits. Its revenue has increased at a 19.4% annual rate from $182 million (2007) to $370 million (2011) while its net income has soared at a 64.3% rate from $28 million (2007) to $204 million (2011) — yielding a whopping 55% net profit margin due in part to a big tax credit. Its cash has fallen but is has almost no debt -- a mere $288,000. Specifically, its cash fell at a 7.2% annual rate from $266 million (2007) to $197 million (2011).
Out-earning its cost of capital. Cirrus Logic is earning more than its cost of capital – and it’s making big progress. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Cirrus Logic 's EVA momentum was 16%, based on 2010 revenue of $221 million, and EVA that rose from 2010's $3 million to 2011's $39 million, using a 10% weighted average cost of capital. One reason not to invest:

One reason to avoid the stock:

Poor earnings reports. Cirrus Logic has only been able beat analysts' expectations in two out of its past five earnings reports.

Cirrus Logic stock is at a low PEG and its actual earnings growth has been very high. But its high margins depend to a large extent on tax credits and it does not always exceed earnings expectations -- something that makes investors nervous. Nevertheless, as long as demand for its audio controller chip continues to rise, Cirrus Logic could make sense for your portfolio.

Goodyear Could Put Your Portfolio on a Roll

2011-09-13T04:28:00.000-07:00

Second quarter 2011 S&P 500 earnings hit an all-time record of $25.44. One of the fastest growing earners of the lot was Goodyear Tire and Rubber (NYSE: GT) whose EPS popped 442%.

This tire-maker’s earnings growth was driven by more than just cost cutting -- after all, in the second quarter, it reported a 24% sales increase. Here are two reasons to consider investing:

Very low valuation. Goodyear trades at a Price-Earnings-to-Growth ratio of 0.10 -- 1.0 is fair value – a forward P/E of 4.6 on earnings forecast to grow 46% to $2.23 in 2012 and its price target of $22.17 is over twice its current price.
Great earnings reports. Goodyear has been able beat analyst’s expectations in all of its past five earnings reports.

Two negatives:

Flat sales and declining cash -- but lower losses and less debt-laden balance sheet. Goodyear sales have remained about the same at $18.8 billion over the last five years while its net loss has declined from -$373 million (2006) to -$216 million (2010). Its debt has fallen -- but its cash has declined faster. Specifically, its long term debt fell at a 10.2% annual rate from $6.6 billion (2006) to $4.3 billion (2010) while its cash dropped at a 15.4% annual rate from $3.9 billion (2006) to $2 billion (2010).
Under-earning its cost of capital but getting better. Goodyear is earning less than its cost of capital – but it’s getting better. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Goodyear's EVA momentum was 2%, based on first six months’ annualized 2010 revenue of $17.6 billion, and EVA that improved from first six months’ 2010 annualized -$822 million to first six months’ 2011 annualized -$385 million, using a 9% weighted average cost of capital.

Whether to invest in Goodyear is a difficult call. Based on past performance, it looks like this company is a financial mess. However, if future forecasts are accurate, the stock is trading at a huge discount to its value -- giving investors a margin of error. Thanks to its track record of beating quarterly expectations, I'd give the edge to Goodyear's bullish case.

Nucor Could Build Your Portfolio

2011-09-12T05:05:00.000-07:00

S&P recently published a report on second quarter 2011 earnings. It found eight companies that reported earnings growth that was higher than 200%. Among those was steel-maker, Nucor (NYSE: NUE), that reported second quarter earnings that rose 224%. That earnings growth was driven a 21% rise in average selling price per ton — although that’s expected to moderate.

Is this spectacular performance enough to make you invest in its stock? Here are three reasons to consider it:

Low valuation. Nucor trades at a Price-Earnings-to-Growth ratio of 0.59 -- 1.0 is fair value – a P/E of 22.4 on earnings forecast to grow 38% to $3.68 in 2012.
Decent earnings reports. Nucor has been able beat analyst’s expectations fairly consistently and has done so in four of its past five earnings reports.

Two negatives:

Increasing sales but plunging profits and more debt-laden balance sheet. Nucor has been increasing sales while profits declined. Its revenue has increased at a 1.7% annual rate from $14.8 billion (2006) to $15.8 billion (2010) while its net income dropped at a 47.8% rate from $1.8 billion (2006) to $134 million (2010) — yielding a very low1% net profit margin. Its debt has been rising faster than its cash. Specifically, its long term debt increased at a 47% annual rate from $922 million (2006) to $4.3 billion (2010) while its cash rose at a 3.3% annual rate from $2.2 billion (2006) to $2.5 billion (2010).
Under-earning its cost of capital but getting better. Nucor is earning less than its cost of capital – but it’s getting better. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Nucor's EVA momentum was 5%, based on first six months’ annualized 2010 revenue of $15.7 billion, and EVA that improved from first six months’ 2010 annualized -$2.1 million to first six months’ 2011 annualized -$1.4 million, using a 10% weighted average cost of capital.

The big question for investors is whether Nucor's turnaround in the second quarter will last. Since the company has already warned that price increases might slow down, it would be better to see what happens when it reports third quarter earnings before buying this stock.

Lockheed Martin Can Defend Your Net Worth

2011-09-12T04:20:00.000-07:00

Lockheed Martin (NYSE: LMT) has rapidly risen to the be one of the top dogs in the terrorism industrial complex (TIC) -- the industry of helping government stop terrorism. But can buying its stock protect your portfolio?

It's hard to figure how big the TIC is, but one source estimates that by 2014 the Department of Homeland Security (DHS) will spend $85 billion -- mostly on information technology -- to protect against terrorism.

As I wrote, one of TIC's biggest players is Lockheed whose stock is up 87% in the last decade. It has scaled the ranks of DHS contract winners in the last few years. In 2005 it ranked 13th on a list of the Top 20 DHS contractors. By 2009, Lockheed had climbed to second place on that list, thanks to its big IT support presence at DHS headquarters.

But is that enough of a reason to add Lockheed to your portfolio? Here are four reasons to consider doing so:

Low valuation. Lockheed's price-to-earnings-to-growth ratio of 0.59 (where a PEG of 1.0 is considered fairly priced) means its stock price is cheap. It currently has a P/E of 9.4, and its earnings per share are expected to grow 15.8% to $8.72 in 2012.
Decent earnings reports. Lockheed has been able beat analyst’s expectations fairly consistently and has done so in four of its past five earnings reports.
Increasing sales and profits -- and decent balance sheet. Lockheed has been increasing sales and profits. Its revenue has increased at a 3.7% annual rate from $39.6 billion (2006) to $45.8 billion (2010) while its net income has increased at a 1.9% rate from $2.5 billion (2006) to $2.7 billion (2010) — yielding a slim 6% net profit margin. Its cash has grown faster than its debt. Specifically, its cash rose at a 5% annual rate from $2.3 billion (2006) to $2.8 billion (2010) while its long term debt increased at a 3.3% annual rate from $4.4 billion (2006) to $5 billion (2010).
Out-earning its cost of capital. Lockheed is earning more than its cost of capital – but it’s making limited progress. How so? It’s producing no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Lockheed's EVA momentum was 0%, based on first six months’ annualized 2010 revenue of $43.2 billion, and EVA that rose from first six months’ 2010 annualized $546 million to first six months’ 2011 annualized $665 million, using an 8% weighted average cost of capital.

This company looks like a winner to me -- thanks to its low valuation and strong financial performance. But with the broader market plunging, it may pay to wait to pick this one up at an even lower price.

Ulta Can Color Your Portfolio Gold

2011-09-09T05:36:00.000-07:00

Ulta Salon, Cosmetics & Fragrance (NASDAQ: ULTA) is on an earnings tear. Its 415 hair salons in 42 states offer hair cuts, hair coloring and permanent texture. But after boffo earnings, it could also make you richer.

Ulta's second-quarter adjusted earnings of 38 cents a share were six cents ahead of estimates. Those earnigns were 82% higher than the year before on a 23% increase in sales.

And thanks to Ulta's strategy of adding male customers through new product launches and men's grooming boutiques inside most of its stores, Ulta is now forecasting higher earnings. For its third quarter, Ulta now expects to earn between 36 and 38 cents a share on revenue of between $400 million and $407 million. These estimates are higher than Thomson Reuters I/B/E/S expectations of 34 cents a share and $396 million.

Does all this good news mean that it's time to add Ulta to your portfolio?

Here are three reasons to consider an investment:

Great earnings reports. Ulta has been able beat analyst’s expectations in each of its past five earnings reports -- and by higher amounts in the last several quarters.
Increasing sales and profits and cash rich balance sheet. Ulta has been increasing sales and profits. Its revenue has increased at an 18.7% annual rate from $755 million (2007) to $1.5 billion (2011) while its net income has increased at a 32.6% rate from $23 million (2007) to $71 million (2011) — yielding a slim 5% net profit margin. It has no debt and its cash rose at a 130% annual rate from $4 million (2007) to $111 million (2011).
Out-earning its cost of capital. Ulta is earning more than its cost of capital – and it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Ulta's EVA momentum was 2%, based on first six months’ annualized 2010 revenue of $1.3 billion, and EVA that fell from first six months’ 2010 annualized $31 million to first six months’ 2011 annualized $61 million, using a 8% weighted average cost of capital.

One reason against:

Expensive stock. Ulta 's price-to-earnings-to-growth ratio of 1.83 (where a PEG of 1.0 is considered fairly priced) means its stock price is high. It currently has a P/E of 46, and its earnings per share are expected to grow 25.2% to $2.04 in fiscal year 2013.

Given how fast is growing, I would not be surprised if it could sustain its rapid earnings growth far above the forecast 25% rate. While I would probably want to wait for a market break to buy its shares at a lower price, Ulta appears to have what it takes to accelerate its earnings growth way above what I would expect in such a moribund economy.

Accenture Could Add To Your Net Worth

2011-09-09T04:49:00.000-07:00

Arthur Andersen went away in the wake of its client, Enron's, bankruptcy. But before that, its consulting unit, Andersen Consulting, was spun off. Once that Andersen name was tainted, Andersen Consulting became Accenture and it went public in July 2001. Since then, the stock has risen 248% to $52.17. Does it have further to rise?

Accenture has been hitting the cover off the ball when it comes to earnings. In June, Accenture reported third quarter 2011 EPS of 93 cents that beat the Zacks Consensus Estimate by four cents. Its earnings were 25% above those of the year before. Accenture's revenue of $6.72 billion was 20.6% higher than the year before and nearly $500 million more than Zacks Consensus Estimate.

And Accenture was optimistic about its future back in June. For its fiscal 2011, Accenture raised its revenue growth guidance to a range between 14% and 15% -- above its previous range between 11% and 14%. And Accenture boosted its EPS guidance to between $3.36 and $3.40 from an earlier guided range of $3.22 to $3.30. The new guidance is between 9 and 13 cents above the Zacks Consensus Estimate of $3.27.

Is all this good news enough to justify an investment in Accenture stock? Here are three reasons in favor:

Excellent earnings reports. Accenture has been able beat analyst’s expectations in all of its last five earnings reports.
Rising sales and profits and cash-rich balance sheet. Accenture sales and profits have both climbed. Its revenue rose at a 6.1% annual rate from $18.2 billion (2006) to $23.1 billion (2010) while its net income increased at a 16.6% rate from $973 million (2006) to $1.8 billion (2010) — yielding a solid 8% net profit margin. It has a mere $1 million in debt and its cash grew at a 9% annual rate from $3.4 billion (2006) to $4.8 billion (2007).
Out-earning its cost of capital. Accenture is earning more than its cost of capital – and it’s making progress. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of 2011, Accenture's EVA momentum was 1%, based on nine months annualized 2010 revenue of $23 billion, and EVA that improved from 2010's nine months annualized $2.4 billion to 2011's nine months annualized $1.7 billion, using a 10% weighted average cost of capital.

One reason against:

Fairly high valuation. Accenture's price-to-earnings-to-growth ratio of 1.39(where a PEG of 1.0 is considered fairly priced) means its stock price is fairly expensive. It currently has a P/E of 16.5, and its earnings per share are expected to grow 11.9% to $3.78 in fiscal 2012.

Accenture stock has come off its all-time high of $63.43 in July 2011. But to make it a screaming buy, it would need to drop further -- possibly below $40. Given the volatility in the market these days, it would be worth waiting to pick Accenture up at a lower price.

Smithfield Foods Will Nourish Your Net Worth

2011-09-08T05:18:00.000-07:00

The world's largest pig meat purveyor, Smithfield Foods (NYSE: SFD) reported strong earnings growth Thursday morning. Should this be a signal to buy its stock?

In its quarter ending July 31, Smithfield beat earnings expectations. It earned $82.1 million up 8% from the year before. It beat by a penny analysts' adjusted EPS expectations of 68 cents a share. And revenue rose 7% to $3.09 billion but was $50 million short of Wall Street expectations. Thanks to rising demand around the world, Smithfield boosted prices 8% which helped offset its rising pig food costs for corn and soybeans.

Is all this good news enough to make Smithfield part of your portfolio? Here are three reasons to consider it:

Good earnings reports. Smithfield has been able meet or beat analysts' expectations in five of its past six earnings reports.
Rising sales and profits and strengthening balance sheet. Smithfield's sales have decreased while its profits rose. Its revenue fell at a 6.7% annual rate from $9.4 billion (2007) to $12.2 billion (2011) while its net income has increased at a 32.9% rate from $521 million (2007) to $521 million (2011) — yielding a slim 4% net profit margin. Its debt has fallen while its cash has risen. Specifically, its long term debt fell at an 8.1% annual rate from $2.8 billion (2007) to $2 billion (2011) and its cash rose at a 59.4% annual rate from $58 million (2007) to $374 billion (2011).
Out-earning its cost of capital. Smithfield is earning more than its cost of capital – and it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Smithfield's EVA momentum was 6%, based on first 2010 revenue of $11.2 billion, and EVA that rose from 2010's -$404 million to 2011's $245 million, using a 7% weighted average cost of capital.

One reason against:

Somewhat high valuation. Smithfield's price-to-earnings-to-growth ratio of 1.42 (where a PEG of 1.0 is considered fairly priced) means its stock price is fairly high. It currently has a P/E of 7.1, and its earnings per share are expected to grow 5% to $2.61 in fiscal 2013.

Smithfield's ability to raise prices is a good sign for this company's earnings potential. However, much depends on whether its pig food costs rise faster or slower than Smithfield can increase prices. I would keep an eye on this stock and consider buying on a market drop -- given recent volatility, that could happen soon.

Walter Energy Will Warm Your Portfolio

2011-09-08T04:37:00.000-07:00

Stock in Alabama-based mettalurgical coal maker, Walter Energy (NYSE: WLT), popped 21% Wednesday. Is it too late to energize your portfolio by buying its stock?

Why the pop? An article in the Times speculated that Walter could be taken over by Anglo American, for $7.5 billion to be exact -- and that's $2.8 billion more than Walter's market value before the article came out. Nevertheless, after the stock's 21% rise, it still stands $2.1 billion below that rumored offer price.

This suggests that investors are far from certain that this rumor will turn into a deal. London-based investment bank Liberum Capital suggested a reason why Anglo won't make an offer for Walter -- Anglo would want to export its coal by sea and that's not feasible given the location of Walter's coal reserves, according to Bloomberg.

Should you invest in Walter's stock? Even if the deal does not go through, there are two reasons to consider investing:

Low valuation. Walter's price-to-earnings-to-growth ratio of 0.66 (where a PEG of 1.0 is considered fairly priced) means its stock price is cheap. It currently has a P/E of 12.1, and its earnings per share are expected to grow 18.3% to $12.29 in 2012.
Rising sales and profits and strengthening balance sheet. Walter's sales have decreased while its profits rose. Its revenue fell at a 5.3% annual rate from $1.3 billion (2006) to $1.6 billion (2010) while its net income has increased at a 25.7% rate from $156 million (2006) to $389 million (2010) — yielding a wide 24% net profit margin. Its debt has plunged while its cash has risen. Specifically, its long term debt fallen at a 47.2% annual rate from $2 billion (2006) to $155 million (2010) and its cash rose at a 23.2% annual rate from $127 million (2006) to $293 billion (2010).

Two reasons against:

Poor earnings reports. Walter has been able beat analysts' expectations only once in its past five earnings reports.
Under-earning its cost of capital. Walter is earning less than its cost of capital – and it’s getting worse. How so? It’s producing negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Walter's EVA momentum was a whopping -39%, based on first six months’ annualized 2010 revenue of $1.4 billion, and EVA that plunged slightly from first six months’ 2010 annualized $154 million to first six months’ 2011 annualized -$404 million, using a 12% weighted average cost of capital. This was due largely to a huge increase in Walter's assets from $1.7 billion to $7.2 billion in the wake of a big acquisition.

The reason companies are interested in Walter's met coal reserves is that floods in Australia have cut off part of the global supply -- thus raising prices. Walter's financial statements have become uglier as a result of its 2011 merger with Western Coal and it does not currently have a CEO.

But at its current low valuation, Walter stock is cheap. If it does become the target of a bidding war, the price will likely rise. If not, its earnings should justify a higher valuation.

Brinker International Is Nutrition For Your Portfolio

2011-09-07T05:32:00.000-07:00

Brinker International (NYSE: EAT) The parent of Chile's and Maggiano's restaurant chains is boosting its margins. And it just boosted its dividend by 14% to $0.16 a quarter. Can owning its shares fatten your bottom line?

Here are three reasons to consider owning Brinker:

Good earnings reports. Brinker has been able beat analyst’s expectations in four of its last five earnings reports.
Low valuation. Brinker's price-to-earnings-to-growth ratio of 0.83 (where a PEG of 1.0 is considered fairly priced) means its stock price is cheap. It currently has a P/E of 13.8, and its earnings per share are expected to grow 16.6% to $2.14 in fiscal 2013.
Out-earning its cost of capital. Brinker is earning more than its cost of capital – and it’s making progress. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Brinker's EVA momentum was 3%, based on 2010 revenue of $2.9 billion, and EVA that improved from 2010's -$32 million to 2011's $39 million, using an 11% weighted average cost of capital.

One reason against:

Declining sales and profits and fair balance sheet. Brinker sales and profits have decreased. Its revenue fell at an 8.5% annual rate from $4 billion (2007) to $2.8 billion (2011) while its net income declined at a 9.6% rate from $211 million (2006) to $141 million (2010) — yielding a slim 5% net profit margin. Its debt and cash have declined. Specifically, its long term debt fallen at a 12.6% annual rate from $863 million (2007) to $503 million (2011) and its cash got smaller at a 0.9% annual rate from $85 million (2007) to $82 million (2011).

Brinker has been shrinking but it seems to have reached a size at which it can out-earn its cost of capital while beating profit expectations. Its higher dividend yield and low valuation could make it a tasty addition to your portfolio.

Bartz Ouster Is No BooHoo For Yahoo Stock

2011-09-07T04:49:00.000-07:00

Yahoo (NASDAQ: YHOO) fired its CEO Carol Bartz on Tuesday. With the Wall Street Journal reporting that Yahoo is on the block, is now a good time to buy its shares?

Under Bartz's tenure (she joined in January 2009), Yahoo's stock price was flat and it lost market share. It closed at $12.91 on her last day in office and popped 6.3% after the announcement of her firing. According to eMarketer, Yahoo's 2011 display advertising revenue is expected to fall 13.1% after a 14.4% decline in 2010. Meanwhile, Facebook is expected to gain market share.

By replacing Bartz with Yahoo's CFO, Tim Morse, who had previous experience at GE Plastics, the board appears to be blundering twice in a row. That's because Bartz had no social networking or Internet advertising experience when she came into the Yahoo job and that lack of knowledge cost Yahoo market share.

To be fair, Morse is not a definite long-term replacement for Bartz. But unless he has turned himself into a social networking market leader since he started at Yahoo, he probably does not have the innovative talent needed to boost Yahoo's market share. However, if his primary role is to sell Yahoo to the highest bidder, the board may not need to replace Morse.

But what if nobody wants to acquire Yahoo? Should you still buy the stock? Here are two reasons to consider it:

Great earnings reports. Yahoo has been able beat analyst’s expectations consistently and has in all of its past five earnings reports.
Fair valuation. Yahoo's price-to-earnings-to-growth ratio of 1.20 (where a PEG of 1.0 is considered fairly priced) means its stock price is reasonable. It currently has a P/E of 14.7, and its earnings per share are expected to grow 12.2% to $0.84 in 2012.

Two reasons against:

Under-earning its cost of capital. Yahoo is earning less than its cost of capital – and it’s making no progress. How so? It’s producing no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, Yahoo's EVA momentum was 0%, based on first six months’ annualized 2010 revenue of $4.9 billion, and EVA that improved slightly from first six months’ 2010 annualized -$808 million to first six months’ 2011 annualized -$793 million, using a 10% weighted average cost of capital.
Declining sales but rising profits and cash-rich balance sheet. Yahoo sales have decreased while its profits rose. Its revenue fell at a 0.4% annual rate from $6.4 billion (2006) to $6.3 billion (2010) while its net income has increased at a 12.4% rate from $751 million (2006) to $1.2 billion (2010) — yielding a wide 19% net profit margin. Its debt has plunged while its cash has risen. Specifically, its long term debt fallen at a 34% annual rate from $750 million (2006) to $142 million (2010) and its cash rose at a 2.8% annual rate from $2.6 million (2006) to $2.9 billion (2010.

Bartz did a pretty good job of cutting Yahoo's costs but she outsourced innovation by forming partnerships -- such as its failed deal with Microsoft (NASDAQ:MSFT). Her biggest mistake was not selling Yahoo to Microsoft for $33 a share back in 2008.

Microsoft may be able to acquire the now more profitable Yahoo for, say, $20 -- much less than it offered three years ago. Meanwhile, if Yahoo can hire a new CEO who can innovate -- namely come up with new services that boost Yahoo's revenue growth, then the stock could rise on its own.

If you think either or both of these outcomes is possible, it may make sense to invest in Yahoo shares.

CVS is no Rx For Your Portfolio

2011-09-06T05:25:00.000-07:00

In August CVS Caremark (NYSE: CVS) announced that it would buy back $4 billion worth of its shares. Is this the catalyst you need to buy its shares?

Last month, CVS's second-quarter results beat analysts' estimates by a penny, This led Standard & Poor's Equity Research analyst Joseph Agnese to reiterate his Strong Buy rating on the stock. According to Barron's Agnese wrote: "With pharmacy benefit management retention rates trending in line with the prior year, we expect CVS to gain share through new business wins as it negotiates 2012 contracts."

Is this one of S&P's good calls or should you steer clear of CVS? Here are three reasons S&P might be right:

Decent earnings reports. CVS has been able beat analyst’s expectations fairly consistently and has done so in four of its past five earnings reports.
Fair valuation. CVS's price-to-earnings-to-growth ratio of 1.96 (where a PEG of 1.0 is considered fairly priced) means its stock price is not too high. It currently has a P/E of 14.3, and its earnings per share are expected to grow 14.1% to $3.17 in 2012.

Two reasons against:

Under-earning its cost of capital. CVS is earning less than its cost of capital – and it’s making no progress. How so? It’s producing no EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first half of 2011, CVS's EVA momentum was 0%, based on first six months’ annualized 2010 revenue of $95.5 billion, and EVA that fell from first six months’ 2010 annualized negative $84 million to first six months’ 2011 annualized negative $344 million, using a 7% weighted average cost of capital.
Increasing sales and profits -- but debt-laden balance sheet. CVS has been increasing sales and profits. Its revenue has increased at a 21.8% annual rate from $43.8 billion (2006) to $96.4 billion (2010) while its net income has increased at a 24.8% rate from $1.4 billion (2006) to $3.4 billion (2010) — yielding a slim 4% net profit margin. Its debt has grown faster than its cash. Specifically, its long term debt has risen at a 31.6% annual rate from $2.9 billion (2006) to $8.7 billion (2010) and its cash rose at a 27.4% annual rate from $531 million (2006) to $1.4 billion (2010)

CVS has used its borrowing capability to acquire -- most notably pharmacy-benefit manager, Caremark. But CVS has yet to demonstrate that it can achieve big enough efficiency boosts from the deal to justify its high capital costs. It may be that current CVS management lacks the operational expertise required to get there.

However, if CVS stock drops enough or its earnings growth is substantially higher than expected, then I'd consider buying the stock.

Don’t Slurp Your Campbell Soup

2011-09-06T04:50:00.000-07:00

In its most recent earnings report, Campbell's Soup (NYSE: CPB) suffered a 12% profit drop but will new management revive its fortunes?

My son's high school roommate was an heir to this soup dynasty's fortune. And it may be that the need to protect such heirs is affecting the way Campbell chooses its CEOs and allocates its capital.

A new CEO, Denise Morrison, took over on August 1. And in her first quarterly report as CEO, she announced a 12% drop in Campbell's fourth-quarter profit. But taking out restructuring charges, Campbell beat adjusted analyst EPS expectations of 38 cents a share by a nickel. Moreover, its revenue rose 6% to $1.61 billion thanks to higher prices and growth in its international and baking and snacking segments.

To protect its heirs, Campbell appears to have recognized that soup is not as popular as it used to be -- so it's diversified. That's a good thing for shareholders because Campbell's revenue from its soups and sauces business fell 8% -- including 9% drop in soup sales even as soup profits improved thanks to higher prices and fewer promotions. And its beverage sales -- it makes V8 -- fell 1% due to tougher competition.

The good news came from a different part of Campbell -- its global baking and snacking segment increased 17% thanks to higher sales of Pepperidge Farm products, cookies, crackers and frozen products. Its international business was up 12% due to rising demand in Europe, Canada and the Asia Pacific region. And Campbell enjoyed a 10% boost in revenue from its North American foodservice business that sells to restaurants and cafeterias.

To its credit, Campbell is making the right moves when it comes to cost cutting and innovation. It's slashing 770 jobs worldwide and closing its operations in Russia and a plant in Marshall, Mich. But its also investing in a $30 million Pepperidge Farm "innovation center" to create new bakery and snack products. And Campbell will look internationally for future growth, according to AP.

It sounds like Campbell's turnaround could pay off. But should you invest in it and is now the time? Here are four reasons to consider it:

Good earnings reports. Campbell has been able meet or beat analyst expectations fairly consistently and has done so in four of its past five earnings reports.
Increasing sales and profits and decent balance sheet. Campbell has been increasing sales and profits -- but slowly. Its revenue has increased at a 1% annual rate from $7.4 billion (2007) to $7.7 billion (2011) while its net income has increased at a 3.5% rate from $702 million (2007) to $805 million (2011) — yielding a solid 11% net profit margin. Its long term debt has grown much more slowly than its cash. Its debt rose at a 3.4% annual rate from $2.1 billion (2007) to $2.4 billion (2011) while its cash was up at a 61.6% annual rate from $71 million (2007) to $484 million (2011).
Good dividend yield -- Campbell pays a 3.7% yield.
Out-earning its cost of capital -- but it's losing ground. Campbell is earning more than its cost of capital – but it’s getting worse. How so? It’s producing negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Campbell's EVA momentum was -1%, based on 2010 revenue of $7.7 billion, and EVA that fell from first 2010's $663 million to 2011's $590 million, using a 6% weighted average cost of capital.

One reason against:

High valuation. Campbell's price-to-earnings-to-growth ratio of 1.82 (where a PEG of 1.0 is considered fairly priced) means its stock price is expensive. It currently has a P/E of 12.4, and its earnings per share are expected to grow 6.8% to $2.54 in fiscal 2013.

It looks to me like it's too early to bet on a turnaround at Campbell. Campbell will only be worth buying if its stock price plunges and it meets its 2013 EPS growth target or it maintains its current P/E but grows earnings far faster than 12%. There's no hurry to invest in Campbell.

National Grid Can Charge Your Portfolio

2011-09-02T04:35:00.000-07:00

National Grid (NYSE: NGG) has been in the news since Hurricane Irene -- 800,000 Massachusetts residents lost power on Sunday -- most of those being National Grid customers -- and tens of thousands in the state are still waiting to get back their electricity. Meanwhile, the CEO of its Massachusetts business left for vacation in Hawaii as Irene was heading up the east coast.

But this London-based utility holding company has more to it than just poor communication to customers and an achingly slow ability to restore power to customers -- for example, it sports a whopping 5.81% dividend yield. Is this enough of a reason to add it to your portfolio?

It's a good one, but here's one other:

Out-earning its cost of capital and improving. National Grid is earning more than its cost of capital – and it’s getting better. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, National Grid's EVA momentum was 5%, based on 2010 revenue of $14 billion, and EVA that rose from 2010's -$484 million to 2011's $270 million, using a 7% weighted average cost of capital.

Two reasons against:

Fairly high valuation. National Grid price-to-earnings-to-growth ratio of 1.30 (where a PEG of 1.0 is considered fairly priced) means its stock price is pretty expensive. It currently has a P/E of 4.3, and its earnings per share are expected to grow 3.3% $4.22 in fiscal 2013.
Increasing sales and profits but more debt-ridden balance sheet. National Grid has been increasing sales and profits. Its revenue has risen at a 12.9% compound annual rate from $8.8 billion (2007) to $14.3 billion (2011) while its net income has increased at a 12% annual rate from $1.4 billion (2007) to $2.2 billion (2011) — yielding a wide 15% net profit margin. But its debt has risen while its cash has been declining. Debt rose at an 8.3% annual rate from $14.7 billion (2007) to $20.2 billion (2011). Meanwhile, its cash fell at a 2.8% annual rate from $3.7 billion (2007) to $3.3 billion (2011).

Given its steady price rise in 2011 -- and continued rise through Irene -- and its high dividend yield, I think investors might consider buying shares in National Grid. That's the beauty of a its market dominance -- it can treat customers badly and still make a nice profit. Perhaps owning its shares can help offset their pain.

The Fresh Market Too Rich For My Blood

2011-09-01T04:41:00.000-07:00

Shares of North Carolina-based upscale grocery chain, The Fresh Market (NASDAQ: TFM) popped almost 11% Wednesday after a strong earnings report and a positive profit outlook. Should you add it to your portfolio?

Results for The Fresh Market's second quarter were ahead of expectations. Its net income of $10.5 million was 52% above the same quarter in 2010 and its EPS of $0.22 beat expectations by a penny. Meanwhile, its revenues were up 13.6% to $259.5 million.

Is this quarterly performance enough to get you to invest? No. But here is one reason to consider it:

Consistently good earnings reports. The Fresh Market has been able beat analysts’ expectations in each of its last three quarters.

Three reasons to hesitate:

Expensive stock. The Fresh Market ’s price-to-earnings-to-growth ratio of 4.32 (where a PEG of 1.0 is considered fairly priced) means its stock price is very expensive. It currently has a P/E of 80.4 and its earnings per share are expected to grow 18.6% to $1.24 in 2012.
Increasing sales and profits but cash poor balance sheet. The Fresh Market has been increasing sales and profits. Its revenue has grown at a 20.6% annual rate from $460 million (2006) to $974 million (2010) while its net income has increased at a 4.7% annual rate from $20 million (2006) to $24 million (2010) — yielding a slim 2% net profit margin. It's debt has fallen from $130 million (2008) to $82 million (2010) while its cash declined from $6 million (2008) to $4 million (2010).
Out-earning its cost of capital but getting worse. The Fresh Market is earning more than its cost of capital – but it’s getting worse. How so? It’s producing negative EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, The Fresh Market's EVA momentum was negative 2%, based on six months’ annualized 2010 revenue of $933 million, and EVA that fell from six months’ annualized 2010 $45 million to six months’ annualized 2011 $27 million, using a 10% weighted average cost of capital.

At its current valuation, The Fresh Market is way too rich for my blood and it needs to tighten its control of expenses and boost its return on capital. I doubt it could boost earnings growth enough to justify such a high P/E but I might consider it again if the price comes way down.

Joy Global Stock Will Put A Smile On Your Face

2011-08-31T05:37:00.000-07:00

Coal mining equipment maker Joy Global (NYSE: JOYG) just raised its financial outlook. Does this mean you should buy its shares?

Wednesday morning, Joy Global announced third quarter earnings that beat expectations and it raised guidance. Joy Global's third-quarter net income of $173 million was 45% more than the year before and it beat analysts' expectations by a penny when it reported adjusted EPS of $1.54 as its total net sales -- excluding a recently sold drilling unit -- grew 29% to $1.1 billion.

For 2011, Joy Global now expects 40 cents a share higher earnings of between $5.70 and $6.00 a share on higher revenue between $4.3 billion and $4.5 billion.

That sounds good -- but should you buy Joy Global stock? Here are four reasons why you might consider doing so:

Cheap stock. Joy Global ’s price-to-earnings-to-growth ratio of 0.69 (where a PEG of 1.0 is considered fairly priced) means its stock is cheap. It currently has a P/E of 16.5 and its earnings per share are expected to grow 23.8% to $7.12 in 2012.
Strong earnings reports. Joy Global has been able beat analysts’ expectations consistently and in all but one of its past five earnings reports.
Increasing sales and profits and cash rich balance sheet. Joy Global has been increasing sales but profits have fallen. Its revenue has grown at a 9.9% annual rate from $2.4 billion (2006) to $3.5 billion (2010) while its net income has increased at a 2.7% annual rate from $416 million (2006) to $462 million (2010) — yielding a wide 13% net profit margin. Its debt has risen but not as fast as its cash. Specifically, its debt rose at a 41.8% annual rate from has $98 million (2006) to $396 billion (2010) while its cash increased at an annual rate of 68.8% from $101 million (2006) to $819 million (2010).
Out-earning its cost of capital -- and improving. Joy Global is earning more than its cost of capital – and it’s improving. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, Joy Global's EVA momentum was 3%, based on first six months' annualized 2010 revenue of $3.3 billion, and EVA that rose from first six months' annualized 2010's $140 million to first six months' annualized 2011's $228 million, using a 12% weighted average cost of capital.

This company looks like it might be worth considering as a place to park your money.

Don't Dress Your Portfolio in PVH Shares

2011-08-31T04:49:00.000-07:00

You've probably never heard of PVH Corp. (NYSE: PVH) but you've probably heard of some of its brands. The former Phillips Van Heusen -- it changed its name in June 2011 probably because it gets most of its revenues from other brands -- owns Calvin Klein and IZOD and it licenses a slew of other clothing brands. But Tuesday it raised its forecast for sales and profits. Should you should invest in PVH shares?

PVH now believes that it will generate revenues and EPS for 2011 that are higher than Wall Street was expecting at the beginning of the week. Specifically, PVH expects revenues between $5.78 billion and $5.82 billion -- as much as $80 million more than analysts' $5.74 billion forecast. Moreover, PVH's 2011 EPS are now forecast to range from $5.00 to $5.12, as much as 14 cents more than Wall Street's forecast of $4.98.

That sounds good -- but is it enough to warrant an investment in PVH stock? Here's one reason why it might:

Strong earnings reports. PVH has been able beat analysts’ expectations consistently and in all of its past five earnings reports. In its most recent quarter, PVH's $1.07 beat expectations by 12.63%.

Three reasons to hesitate:

Expensive stock. PVH’s price-to-earnings-to-growth ratio of 2.24 (where a PEG of 1.0 is considered fairly priced) means its stock price is expensive. It currently has a P/E of 30 and its earnings per share are expected to grow 13.4% to $5.68 in FY 2013.
Increasing sales -- but declining profits and more debt-laden balance sheet. PVH has been increasing sales but profits have fallen. Its revenue has grown at a 21.7% annual rate from $2.1 billion (2007) to $4.6 billion (2011) while its net income has declined at a 23.2% annual rate from $155 million (2007) to $54 million (2011) — yielding a tiny 1% net profit margin. Its debt has risen far faster than its cash. Specifically, its debt rose at a 56.5% annual rate from has $400 million (2007) to $2.4 billion (2011) while its cash increased at an annual rate of 8.1% from $366 million (2007) to $499 million (2011).
Under-earning its cost of capital -- but improving. PVH is earning less than its cost of capital – but it’s improving. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, PVH's EVA momentum was 13%, based on first six months' annualized 2010 revenue of $3.4 billion, and EVA that rose from first six months' annualized 2010's negative $817 million to first six months' annualized 2011's negative $379 million, using a 12% weighted average cost of capital.

To get my investment nod, PVH would need to strengthen its balance sheet, tighten its costs, out-earn its cost of capital, and accelerate earnings growth. Changing its name does not help it deal with any of these challenges. But it does make me question whether management thinks it can pull off a fast one on shareholders.

Donaldson Could Clear the Air For Your Portfolio

2011-08-30T06:49:00.000-07:00

Air filter maker Donaldson Corp. (NYSE: DCI) reported better than expected results in the second quarter in Monday's report. Is this the signal you need to buy the stock?

Donaldson's earnings for the quarter ending July 31 (also the end of its fiscal 2011) were ahead of expectations. Its $65.8 million in quarterly profit were 29% above the previous year's net income and its $0.84 cents a share EPS beat expectations by a nickel.

Donaldson's sales also grew fast -- by 21% to $625.5 million -- $5.5 million more than Wall Street expected thanks to 26% growth in its engine-products segment, which includes aftermarket, aerospace and defense products.

And Donaldson remains optimistic. It's forecasting 7% to 15% sales growth for FY 2012 and EPS between $3.15 and $3.45 a share on sales of $2.45 billion to $2.6 billion, "bracketing the $3.21 a share on $2.52 billion in revenue currently expected by analysts polled by Thomson Reuters," according to MarketWatch.

Is this enough of a reason to invest in Donaldson? Probably not. But here are three reasons to consider it:

Strong earnings reports. Donaldson has been able beat analysts’ expectations consistently and in all of its past five earnings reports.
Increasing sales and profits and cash-rich balance sheet. Donaldson has been increasing sales and profits. Its revenue has grown at a 4.9% annual rate from $1.9 billion (2007) to $2.3 billion (2011) while its net income has increased at a 10.6% annual rate from $151 million (2006) to $226 million (2010) — yielding a solid 10% net profit margin. It has $206 million in long term debt and its cash rose at an annual rate of 49.3% from $55 million (2007) to $273 million (2011).
Out-earning its cost of capital and improving. Donaldson is earning more than its cost of capital – and it’s improving. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Donaldson EVA momentum was 2%, based on 2010 revenue of $1.9 billion, and EVA that rose from 2010's $49 million to 2011's $92 million, using an 11% weighted average cost of capital.

One reasons to hesitate:

Expensive stock. Donaldson’s price-to-earnings-to-growth ratio of 2.38 (where a PEG of 1.0 is considered fairly priced) means its stock price is expensive. It currently has a P/E of 20 and its earnings per share are expected to grow 8.4% to $3.51 in FY 2013.

If Donaldson sustains its most recent earnings growth rate of 29%, then the stock is quite cheap. But if analysts' estimates are accurate, I would wait for a market correction to pick up shares of Donaldson.

Dresser-Rand Could Drill an Investment Dry Hole

2011-08-30T05:31:00.000-07:00

Oil and natural gas exploration and production equipment maker, Dresser-Rand Group (NYSE: DRC), popped 13.6% yesterday after announcing it would purchase $150 million worth of its stock, or about 5%, while issuing bullish guidance. Is this a one-day fluke or is it a buy signal?

Dresser-Rand has not exactly been on a roll lately. After all, its second quarter 2011 earnings were down and way below expectations. For example, its $10.7 million in net income was 69% below 2010's second quarter and its EPS of $0.14 per share was a whopping $0.31 less than the average of 13 analysts polled by Thomson Reuters.

The good news for Dresser-Rand was that its total revenues for the quarter of $514.1 million were 19.2% higher than in 2010 but roughly $30 million below expectations. The increase was due to higher volumes reflecting the recovery in global energy infrastructure markets.

With all the flopping around in Dresser-Rand's numbers, should an investor buy or sell its stock? Here are two reasons to consider buying it:

Cheap stock. Dresser-Rand ’s price-to-earnings-to-growth ratio of 0.56 (where a PEG of 1.0 is considered fairly priced) means its stock price is pretty expensive. It currently has a P/E of 34.4 and its earnings per share are expected to grow 61% to $3.19 in 2012.
Increasing sales and profits and cash-rich balance sheet. Dresser-Rand has been increasing sales and profits. Its revenue has grown at a 7.5% annual rate from $1.5 billion (2006) to $2 billion (2010) while its net income has increased at a 16.4% annual rate from $79 million (2006) to $145 million (2010) — yielding a 7% net profit margin. It has $370 million in long term debt and its cash rose at an annual rate of 30% from $147 million (2006) to $421 million (2010).

Two reasons to hesitate:

Inconsistent earnings reports. Dresser-Rand has been able beat analysts’ expectations inconsistently and has done so in three of its past five earnings reports. And in the quarter ending June 2011, Dresser-Rand missed estimates by 70%. This big miss puts its credibility on thin ice.
Under-earning its cost of capital and doing worse. Dresser-Rand is earning less than its cost of capital – and it’s getting worse. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2010, Dresser-Rand’s EVA momentum was negative 8%, based on six months’ annualized 2010 revenue of $1.9 billion, and EVA that fell from six months’ annualized 2010 -$26 million to six months’ annualized 2011 -$179 million, using an 11% weighted average cost of capital.

If you believe management's bullish forecast, consider buying now. If you're skeptical, take a fresh look after the company reports third quarter results.

Oracle Predicts a Bright Future

2011-08-26T05:02:00.000-07:00

Business software and hardware maker, Oracle (NASDAQ: ORCL) has had a pretty good run since in 1986 IPO -- its stock is up about 40,000% from the split-adjusted $0.08 it traded at back then. Does it still have further to run?

One thing's for sure -- investors are increasing their bets that Oracle stock is going to fall. How so? As of August 15, Oracle stock ranked fourth on the list of top 50 increases in short interest on NASDAQ from the previous two weeks. Specifically, short interest in Oracle stock is up 57% to 34.6 million shares from the period ending July 29.

In its second quarter, Oracle beat expectations. It reported 75 cents a share -- four cents ahead of expectations. But its revenues of $10.8 billion only met expectations and its hardware sales -- from its purchase of Sun Microsystems -- fell 6%. Although those sales make up only about 10% of its total revenues, Oracle stock fell 6% in after-hours trading on the earnings announcement.

Is the rise in Oracle short-interest related to expected bad news on hardware sales when it reports its third quarter results next month? Does this mean you should avoid the stock?

Here are three reasons to consider buying it:

Good quarterly earnings. Oracle has been able to surpass analysts’ expectations in all of its last five earnings reports.
Oracle is out-earning its cost of capital and it's improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Oracle's EVA momentum was 4%, based on 2010 revenue of $26.8 billion, and EVA that rose from $2 billion in 2010 to $3.1 billion in in 2011, using a 10% weighted average cost of capital.
Increasing sales and profits and strong balance sheet. Oracle has been increasing sales and profits. Its $35.6 billion in revenues have risen at an average rate of 18.6% over the last five years while its net income of $8.5 billion has increased at the same annual rate -- yielding a tremendous 24% net profit margin. It has no debt and its cash rose at a 23.3% annual rate from $7 billion (2007) to $16.2 billion (2011) to during the period.

One reason to hesitate is that Oracle is a fairly expensive stock. Oracle's price to earnings to growth of 1.38 (where a PEG of 1.0 is considered fairly priced) means it is fairly expensive. It currently has a P/E of 15.5 and is expected to grow earnings 11.2% to $2.58 in fiscal 2013.

My hunch is that there is a good reason that Oracle's short interest has spiked so much. Thus I would be inclined to wait until the shorts have taken their profits -- at which point Oracle stock will be lower -- before buying.