By Roger Choudhury
The Burlington Northern Santa Fe deal was genius. Warren Buffett thought big, and paid $26 billion. It has paid handsome rewards. Now, Buffett has $38 billion at his disposal. Here are some undervalued companies that he may consider buying:
Hewlett-Packard (HPQ) brought in $127.15 billion in revenues in the 12 month period ending in January 31, 2011. ROIC [return on invested capital] is 10.88%, taking out accounts payable, employee compensation and benefits, and other accrued liabilities from total assets to determine invested capital. The EBIT and profit margins were 9% and 24.1%, respectively. Ending in October, profit margins in 2010, 2009, 2008, 2007, and 2006 were 23.76%, 23.59%, 24.4%, 24.36%, and 24.25%. The respective EBIT margins were 8.7%, 8.2%, 8.85%, 8.8%, and 7.85%. In FY 2010, EPS was $3.69. The GAAP diluted EPS was $3.93 for the trailing 12 months, which sets the current P/E as 11.1. The company raised full year EPS guidance to $4.46 to $4.54. The forward P/E is 9.6 to 9.78. Also, the 30 day put/call ratio is 0.7.
HP's market cap stands at $94.8 billion. HPQ is down 10.3% since its earnings announcement in February 22.
Gilead Sciences (GILD) made $7.94 billion in net sales and $2.9 billion in profits in 2010. These are respective increases of 13.3% and 10%. In 2009, the same figures were 31.4% and 31.06%, respectively. EPS was at $3.31, which implies a P/E of 11.7. The 30 day put/call ratio is 0.7.
On February 22, the company announced that it would acquire Calistoga Pharmaceuticals for $375 million. Calistoga has a portfolio of proprietary compounds that selectively target isoforms of phosphoinositide-3 kinase (PI3K). This pathway has demonstrated to be a central signaling pathway for cellular proliferation, survival and trafficking. Calistoga’s lead product candidate is CAL-101, which is a first-in-class specific inhibitor of the PI3K delta isoform. PI3K delta is preferentially expressed in leukocytes involved in a variety of inflammatory and autoimmune diseases and hematological cancers. CAL-101 is in Phase II studies as a single agent in patients with refractory indolent non-Hodgkin's lymphoma (iNHL), and in combination with rituximab in treatment-naïve elderly patients with chronic lymphocytic leukemia (CLL). Also, Calistoga’s product development pipeline includes other selective PI3K inhibitors that are in preclinical development, and may have application in both oncology and inflammatory diseases.
Year-to-date, GILD is up 7.5%. Its market cap is $31 billion.
Merck (MRK) produced an EPS of $3.42 in 2010, which implies a P/E of 9.5. In 2011, Merck is targeting full year non-GAAP EPS in the range of $3.64 to $3.76, which would be an increase of 6.4% to 9.9%. The 30-day put/call ratio is 0.8. MRK is also currently yielding 4.7%.
The company acquired SmartCells, a privately held company developing a glucose responsive insulin formulation potentially for the treatment of type 1 and type 2 diabetes.
Share price is down 3.7% since February 3, when the earnings announcement came out. Merck's market cap is over $100 billion.
SK Telecom (SKM) made 12.46 trillion KRW ($11.1 billion) in operating revenues in 2010, which is an increase of 2.9%, after rising 3.6% in 2009. The EBT margin was 14.5% in 2010, and 13.69% in 2009. Basic EPS is $1.96, which implies a P/E of 8.9. The 30-day put/call ratio is 0.5.
The company is headquartered in Seoul, South Korea. It is a pioneer in the mobile industry, having been the first to launch and commercialize CDMA, 3G CDMA, 3.5G HSDPA among other mobile services, and is now leading the way in 4G and beyond. The company has over 50% market share.
Since the earnings announcement on January 25, SKM is up 0.29%. Its market cap is over $11 billion.
Forest Labs (FRX) made $4.33 billion in revenues through December 2010, which is up 4.1% from the same period in 2009. The EBT margin is 23.44%. The current ratio is 5.29. With an EPS of $2.53, the P/E is 12.8. The company expects that EPS for FY 2011 will be in the range of $4.20 to $4.30. EPS was $2.25 for FY 2010. Also, the put/call ratio is 0.3.
The company is an international pharmaceutical manufacturer and marketer. It has a well-established central nervous system and cardiovascular franchises and innovations in anti-infective medicine. Shares are up 3% since January 18, when earnings were released. Its market cap is $9.2 billion.
Raytheon (RTN) made $25.1 billion in revenues and $1.84 billion in profits in 2010. These are respectively an increase of 1.2% and a decrease of 4.9%. In 2009, those figures were 7.37% and 15.73%, respectively. Also, the EBT margin was 9.66% in 2010. EPS is $4.88, implying a P/E of 10.4. The company gives guidance of $4.83 to $4.98 for EPS in 2011. Moreover, the 30-day put/call ratio is 1.1.
Raytheon acquired Applied Signal Technology on January 31 for $490 million. This is the company’s largest acquisition in CEO Swanson’s tenure with the company. This is Raytheon’s fourth acquisition in fourteen months.
The return on invested capital was a meager 12.29% in 2010. Since the earnings announcement on January 27, RTN is down 0.7%.
Lockheed Martin (LMT) grew 1.36% in revenues to $45.8 billion in 2010. The EBT margin was 8.35% in 2010, and 9.48% in 2009. ROIC was 17.9% in 2010. The company also posted an EPS of $7.94 in 2010, which would be a P/E of 9.9. However, the company expects EPS to drop to $6.70 to $7.00. The 30-day put/call ratio is a contrasting 0.2.
Teledyne Technologies (TDY) announced that it has teamed with Lockheed Martin and Raytheon to pursue the Missile Defense Agency’s Objective Simulation Framework contract. This latter would provide a modular, reconfigurable system that joins digital and hardware in the loop representations to evaluate fielded and conceptual Ballistic Missile Defense System architectures against potential threats in realistic environments. The contract offers a highly flexible mechanism to modernize, deploy and sustain the Missile Defense Agency’s Modeling and Simulation. The contract is expected to be awarded in July 2011.
LMT is up 0.9% since the earnings release on January 27. Its market cap is $27.5 billion.
Eli Lilly (LLY) made $23 billion in revenues and $5.07 billion in profits in 2010, which are increases of 5.68% and 17.1%, respectively. In 2009, that was an increase of 7.15% in revenues, and $6.4 billion turn-around in profits from negative territory. The EBT margin was 28.28% in 2010, and 24.5% in 2009. EPS came in at $4.58, which implies a P/E of 7.54. However, guidance sets EPS range at $4.15 to $4.30. Yet, the put/call ratio is 0.4.
On February 11, The company announced that Sue Mahony, currently Senior VP of Human Resources and Diversity, has been named Senior VP and President of Lilly Oncology. Mahony joined Lilly more than 10 years ago after a decade in sales and marketing roles in the United Kingdom and Europe in oncology and hematology and cardiovascular medicine for Amgen, Bristol-Myers Squibb, and Schering-Plough. She was named general manager of Lilly Canada in 2008 after roles in global marketing and new product development, including a leadership role in the development of Cymbalta. Being promoted into Mahony's former role is Steve Fry, currently VP of Human Resources for two of Lilly's business areas, bio-medicines and emerging markets.
Share price is down 1.1% since January 27, which was the day of earnings release. Its market cap is $39.9 billion.
Northrop Grumman (NOC) brought in $34.75 billion in revenues in 2010. This was an increase of 2.97%, after falling 0.39% in 2009. EBT margin improved from 6.71% in 2009 to 7.47%. EPS jumped from $5.21 to $6.82, which implies a P/E of 9.7. The 2011 guidance is $6.40 to $6.60 (excluding shipbuilding). In 2010, shipbuilding contributed ~$0.50 to EPS. The 30-day put/call ratio is 1.7.
Share price is down 6.2% since the earnings release on February 9. Market cap stands at $19.3 billion.
Lender Processing Services (LPS) made $2.45 billion in processing and services revenues and $302.3 million in profits in 2010. These were respective increases of 3.6% and 9%. The EBT margin was 19.8%. EPS rose 12.5% to $3.23, which implies a P/E of 10.5. The company expects EPS to be in the range of $3.74 to $3.81.
The company is a leading provider of integrated technology, data and analytics to the mortgage and real estate industries. Approximately 50 percent of all U.S. mortgages by dollar volume are serviced using LPS’ Mortgage Servicing Package
Shares go ex-dividend on March 1. The current yield is 1.1%. Share price is also up 7.1% since the earnings release on February 3.
Warren Buffett owns shares worth $5.2 billion of American Express (AXP), $11.8 billion of Coca-Cola (KO), $4.3 billion of Procter & Gamble (PG), and $3.5 billion of Wells Fargo (WFC). He also holds preferred shares of Goldman Sachs (GS), General Electric (GE), and Dow Chemical (DOW).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.