Investment Underground took a look into stocks with low current price-earnings ratios in George Soros' portfolio. This is what we found:
US Airways (LCC): Soros holds 14,000 shares and reduced his stake by 60% recently. This airline should be able to grow revenue in the mid-single digits and cost-cutting at US Airways should produce margins of 4-5% over the next few years. Again, fuel costs, already above 20% of expenses, will likely compress margins and deplete the impact of cost-cutting measures. The expansion in Europe, South America and Asia continues to spread the costs thin. Also, 90% of company workers are unionized and will create a substantial burden on the company’s ability to return any cash to shareholders. Shares are worth $8 apiece, using a 12% discount rate.
Oshkosh Corp (OSK): Soros holds 6600 shares. This is a new buy. Oshkosh creates heavy duty tactical trucks for the DOD and various armor and body carriages for vehicles. Oshkosh has considerable military exposure which may not turn out so profitably in the midst of spending cuts. The company has a current and forward PE of 8 4.5 and 9, respectively. We think buyers should wait for news-related weakness before entering a position.
Assured Guaranty (AGO): Soros holds 66,500 shares. This is a new buy. AGO is the only long-standing financial guaranty company writing new business today. The company guarantees public finance, global infrastructure, and structured finance transactions. It also has a reinsurance arm. The company has $617.1 billion in net par insured.
In 2010, the company grew revenues by 50.74% to $1.40 billion, after posting +68.04% in 2009. GAAP EPS also shot up by 286.67% to $2.90, after dropping 2.60% in 2009. The EBT margin improved to 45.35% from 14.30%. In 2011, the Street expects non-GAAP EPS to be between $3.11 (-10.8%) and $3.85 (+10.3%). In 2010, non-GAAP EPS was $3.49. The next earnings release is on May 9, when analysts expect to see between $0.69 (+46.8%) and $0.93 (+97.8%). In comparison, Q1 2010 produced $0.47. AGO shares trade with a price to sales multiple of 2.0. In 2005 and 2006, those multiples were 6.4 and 6.2, respectively. The company also has a debt to equity ratio of 0.28. Here is the latest company presentation.
JA Solar (JASO): Soros holds 500,000 shares. This is a new buy. JA made 3.85 billion RMB ($584.2 million) in revenues and 783.3 million RMB ($118.6 million) in profits. These are 137% and 476.5% respective increases from 2009. The EBT margin is 22.8% in 2010, but -3.19% in 2009. In 2010, ROIC is 12.39%, after a poor -1.92% in 2009. EPS is $0.59, which is a P/E multiple of 12.4.
The company currently expects total cell and module shipments to exceed 2.2GW in 2011, representing an increase of ~50% versus 2010. Module shipments are expected to be ~500MW to 600MW. As of February 22, sales contracts for 2011 delivery, amount to more than 2 GW, representing approximately 90% of the company's expected shipments for 2011. JA Solar is one of the world's largest manufacturers of high-performance solar cells and solar power products. In addition, according to reports published by SolarBuzz and IMS Research in December 2010, JA Solar ranked first globally in terms of solar cells produced and shipped in Q3 2010.
Leucadia National (LUK): Soros holds 28,600 shares, increasing his stake by 10% in the latest quarter. Ian Cumming and Joseph Steinberg are not getting any younger and Leucadia is even more dependent on their business-picking prowess than Berkshire depends on Buffett and Munger. However, the two have cobbled together some very unique, valuable assets that the market continues to discount in the wake of the 2008 financial crisis. The company's large stakes in Americredit (ACF), Jeffries (JEF) and Cresud (CRESY) have been great picks at great prices. Leucadia's large position in Fortescue and other mining operations have profited the firm handsomely on the back of rising copper and iron ore prices.
Rensola (SOL): Soros holds 375,000 shares, increasing his stake by 3000%. grew revenues by 136.2% to $1.2 billion, and profits soared to $169 million in 2010. GAAP EPS came in at $1.94, after posting -$0.98 in 2009. Also, the EBT margin was a healthy 18.99%.
In 2011, analysts expect non-GAAP EPS to be between $1.30 and $2.71. In 2010, non-GAAP EPS was $1.93. The next earnings release is on May 9, with the Street expecting between $0.52 and $0.64. In comparison, Q1 2010 produced $0.14.
The company’s price to sales per share ratio is 0.8, whereas competitors have much higher multiples: First Solar (FSLR) with 5.4, Trina Solar (TSL) with 1.7, LDK Solar (LDK) with 1.1, and Yingli Green Energy (YGE) with 1.4. ReneSola also has a debt to equity ratio of 0.37.
The company expects to ship between 400-450 megawatts to new and existing customers in 2011. In comparison, the company shipped 291.1 megawatts in 2010. Year-to-date, SOL shares are +20.7%. We also wrote about ReneSola in “9 Great Stocks Trading Under $10.”
United Continental (UAL): Soros holds 788,000 shares. This is a new buy. United overpaid for Continental Airlines, and the company will face a tough job continuing to integrate the airline over the next few years. Competitors, both established and new, as well as significant fuel price increases, will hamper this company. Although UAL can grow revenues with higher ticket prices, it hasn’t been able to narrow the cost differential that exists with the low-cost airlines like Southwest (LUV). We can expect mid-margin expansion due to synergies developing, albeit at half the $1 billion figure offered by management. We value shares at $23 apiece, using a 12% discount rate.
Delta Airlines (DAL): Soros holds 14.7 million shares, quadrupling his stake in the latest full quarter. Delta should be able to grow revenues at a 7% clip and keep margins around 6%. The monster of fuel prices will hamper any real growth for the company, along with its high debt load and large number of ancient, fuel-inefficient aircraft. Periodic battles for market share with other established and newer players in the industry will keep a lid on Delta. We value shares at $10 apiece, using a 12% discount rate.
SeaGate Technology (STX): Soros holds 81,400 shares. Seagate is a new buy. Seagate is up lately, following positive news out of Goldman (GS) on the company. This data storage company has an earnings call scheduled April 19, 2011, when it is expected to beat estimates. A relatively stable business for technology, Seagate has gone private in at least one LBO, and that is not likely to be the last. Return on equity is a fierce 47% and could head higher, and operating margins run at 12.5%. We think shares are a buy.
British Petroleum PLC (BP): Soros holds 9,100 shares. This is a new buy. Provider of fuel, energy, and heartfelt apologies, BP hopes only two of those three commodities will be necessary in the future. New CEO Bob Dundley--who took over for Tony Hayward less than three months after the July 15 Macondo spill--is moving quickly to reinvent BP’s safety culture and rebuild its reputation, but with significant damage already done, his efforts could take years before regulatory confidence returns. On the financial side of things, challenges continue to present themselves. Already tasked with funding oil cleanup and the settlement of a $20 billion claims fund for post-bill investigations and government-assigned responsibilities, management must now secure funding for future spill-related costs and claims by selling $25-$30 billion in assets. Potential legal penalties and regulatory fines may add to the bill. And if that weren’t bad enough, BP’s pending deal with Russian oil company, Rosneft, has recently run into some notable opposition, forcing BP to look at alternatives. Still, short interest remains low at 0.18%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.