It has been an interesting earnings season so far to say the least. Companies that have reported so far have beat earnings estimates nearly 70% of the time, but have only bested expectations on the revenue side by a little over 40% so far. Revenues are actually on track to be slightly negative Y/Y for the quarter. This is the first time this has occurred since the second quarter of 2009.
One sector that seems like a perennial disappointer this quarter is Consumer Staples. Unilever (UL), Procter & Gamble (PG) and Clorox (CLX) have missed on revenue expectations and offered punk guidance. PG and CLX also seem to have decent currency hits within their reports this quarter. I am avoiding the sector after its large run up over the first part of the year. I think paying 15-18x forward earnings for a sector that is barely growing and susceptible to currency swings seems rich.
One area I am adding to on dips like yesterday is Technology. I like the long term prospects of the sector, the industry has underperformed the overall market this year, stocks in this space mostly have great balance sheets & seem to be increasing dividends/buybacks. Valuations are also extremely reasonable. Here are two cheap, cash rich tech equities I like here.
Avago Technologies (AVGO) engages in the design, development, and supply of analog semiconductor devices with a focus on III-V-based products. Its product portfolio is comprised of RF amplifiers, RF filters, RF front-end modules, and other communication products.
4 reasons AVGO is a good value at under $32 a share:
- The company has over $1B in net cash on its balance sheet (~15% of market capitalization).
- Avago is a play on the rollout of LTE through its bulk acoustic regulator product line (parses wireless spectrum). Revenues are only expected to be up slightly in FY2013 before resuming double digit growth in FY2014. The stock sports a very reasonable five year projected PEG (1.17).
- The stock yields 2.4%, the company just announced a 20mm share repurchase program (~9% of float at current prices) and AVGO sells at around 11x forward earnings.
- The company is selling in the bottom third of its historical valuation range based on P/E, P/CF, P/B and P/S. The 18 analysts that cover the shares have a median price target of $42 a share on AVGO, $10 above its current share price.
NetApp (NTAP) designs and manufacturers networked storage solutions. The company provides enterprise storage and data management software, and hardware products and services.
4 reasons NTAP has upside from under $34 a share:
- The company has a fortress balance sheet with over $4B of net cash on its balance sheet (~1/3 of current market capitalization)
- NetApp has grown operating cash flow by some 50% over the past two completed fiscal years. NTAP is priced at 8x operating cash flow (Just over 5x accounting for its cash balance).
- The company has beat earnings estimates for five straight quarters and consensus earnings estimates for both FY2013 and FY2014 have ticked up over the past three months.
- NTAP is selling near the bottom of its five year valuation range based on P/B and P/CF. The stock sells for a little over 13x forward earnings. This is very reasonable given the company has grown revenues and earnings north of a 15% CAGR over the last five years.