On Monday, September 23rd, the Dow will look a little different. Goldman Sachs, Nike, and Visa will be replacing Alcoa, Bank of America, and Hewlett-Packard. In this article, I will be discussing which of these new components you should be looking at as possible long term buys. In determining this, I will be looking at each company's financials, stock price movement and current valuation, dividends/earnings, and future outlooks.
|Profit Margin Quarterly||22.42%|
|Return on Assets||0.91%|
|Return on Equity||12.36%|
|Return on Invested Capital||3.05%|
|Revenue Per Share Quarterly||17.10|
|Revenue Quarterly Growth (YOY)||29.95%|
As you can see in the chart below, GS has recently struggled to find any significant trend in positive revenue growth in the past several years.
Stock Price and Valuation
GS closed Thursday at $163.35, $6.34 shy of its 52-week high and $51.45 higher than its 52 week low. It is trading above both its 50-day moving average and 200-day moving average.
GS currently has a PE ratio of 9.92x and a price to book value of 1.04x with earnings per share of $16.46.
For its latest quarter, GS reported earnings per share of $3.70 which was significantly higher than both the estimate of $2.81 and the same period last year value of $1.78 per share. While GS's five year earnings growth rate remains negative, the company appears to be headed in the right direction. This year's earnings growth has been positive and GS has beat earnings estimates in its last seven quarterly reports.
GS currently pays a $.50 quarterly dividend that yields 1.22%. GS isn't a dividend growth stock but it has raised its dividend substantially the past couple of years from $0.35 in 2011 to its current rate. With a payout ratio well below 30%, GS's dividend should be safe.
GS is a solid company with a successful future IMO. It appears poised to continue seeing increased revenues from debt underwriting, which helps offset revenue struggles in other areas. The company has a great management team that has been able to maintain strong capital and liquidity levels during tough economic times.
At it's current price and valuation, I think GS is a solid buy. Looking at the chart below, you can see that GS stock price has done pretty well when its PE ratio has remained low. When the PE ratio gets around 15x, the stock price has had problems. But with a PE ratio under 10x, I feel that the downside risk associated with GS's price is small compared to the upside potential.
GS has gained nearly 30% YTD, and I feel that as the economy continues its recovery, GS stock will continue to appreciate in price. At its current valuation, I consider GS a buy for long term investors but would pause a bit as soon as I saw any significant increases in its PE ratio.
|Profit Margin Quarterly||9.97%|
|Return on Assets||15.74%|
|Return on Equity||23.77%|
|Return on Invested Capital||19.81%|
|Revenue Per Share Quarterly||7.31|
|Revenue Quarterly Growth (YOY)||7.39%|
NKE has a very strong history of increased revenues and profit, with only a few short term stalls.
Stock Price and Valuation
NKE closed Thursday at $68.08, $0.82 shy of its 52-week high and $23.26 higher than its 52-week low. NKE is trading above both its 50-day moving average and its 200-day moving average.
Nike has a current price to earnings value of 24.90x and a price to book value of 5.39x, with earnings per share of $2.71.
For its last quarter, NKE reported earnings per share of $0.76, a $0.02 beat on estimates. This was the 8th time NKE has beat earnings estimates in its last 9 quarters. The company continues to show a strong ability to post solid earnings growth.
Nike currently pays a $0.21 quarterly dividend, yielding 1.24%. The dividend is safe and NKE has a solid history of growing its dividend.
Just like Goldman Sachs, I feel that Nike's future is positive. The company has done an extremely great job of increasing revenues and earnings over large periods of time and I don't see any reason why this won't continue. The main difference between NKE and GS is their current valuations. While GS is currently on the low end of its historical PE value, NKE is on the high end of its historical PE value. Because of this I think it would be wise to wait for a better entry position before adding shares of Nike to your portfolio. At its current price I consider the stock a Hold.
|Profit Margin Quarterly||40.82%|
|Return on Assets||14.73%|
|Return on Equity||20.14%|
|Return on Invested Capital||20.18%|
|Revenue Per Share Quarterly||4.61|
|Revenue Quarterly Growth (YOY)||17.00%|
For several years, Visa has been able to increase both its revenue and profit on steady basis.
Stock Price and Valuation
Visa closed Thursday at $185.06, $10.94 shy of its 52-week high and $52.68 higher than its 52-week low. V is trading higher than both its 50-day moving average and 200-day moving average.
V has a current price to earnings value of 22.95x and a price to book value of $5.50 with earnings per share of $8.21.
Visa reported earnings per share of $1.88 for its latest quarter. This was $0.09 higher than estimates and $0.32 higher than the same period last year. From 2008 through 2011, Visa's earnings increased yearly, but the company saw a significant decrease in earnings last year. This year, V is back on the right track posting significant earnings increases in both of its last two quarters.
Visa currently pays a $0.33 quarterly dividend that yields less than 1%. While the yield remains low, V has significantly been growing its dividend having seen growth of over 200% over the past five years. With a payout ratio well under 50%, Visa's dividend has plenty of room to continue growing.
From 2009 to now, Visa has gained over 240% (including reinvested dividends). There is no reason IMO to assume that similar returns will not be seen in the next five to ten years. Through the company's commitment to returning shareholder value (through dividend growth and share buybacks), its ability to maintain strong revenue, profit, and earnings growth, and its attractive debt and liquidity levels, I feel that V will be a strong stock for long term holders. At it's current price, I consider V a buy.
While new may not necessarily always mean better, in this instance, I think the argument has some merit. I feel that all three of the new Dow components are solid stocks for long term investors to own in their portfolios. I think that GS and V are currently fairly priced and consider them both to be Buys.
While I think Nike is a strong company, I feel that it is overvalued at the moment compared to its historical price. I think better entry positions will become available in the near future at which long term investors could buy. But at the current price, I consider NKE more of a hold. As always, I urge individual investors perform their own research before making any investment decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.