Advance America Cash Advance Centers Inc (AEA)
Forward P/E: 4.94
Return on Assets: 13.56%
The company operates a chain of 2,553 cash advance stores in the United States, United Kingdom and Canada. The company trades at significant discounts to the broad stock market because of concerns that regulatory changes will jeopardize its business. Despite the industry's reputation for victimizing the poor and uneducated, the company's average customer profile is fairly typical of Americans according to the 2010 US census. In 2010, the average customer was 47 years old, had a median household income of $48,964 and 90% had high school diplomas.
From 2008 to 2010, the trend has clearly been toward smaller loans, but fees have remained nearly constant. During that period, average principal amount of each line of credit outstanding declined from $672 to $241 while average the charge to customers for providing a cash advance remained constant at $55. This clearly illustrates the amazing pricing power of these cash advance centers.
While we believe that the regulatory threat from the Consumer Financial Protection Bureau headed by Elizabeth Warren is real, the pricing power also demonstrates that the demand is real. It is hard to imagine the industry going away, but margins should decline. Investors may want to take a closer look but wait for additional regulatory clarity before acting.
AFLAC Inc (AFL)
Forward P/E: 8.01
Return on Assets: 2.52%
The life insurer has successfully grown revenues every year between 2006 and 2010. In the most recent year, Aflac reported $20.73 billion of revenues, a 13.58% increase from 2009 levels. The insurer's stock price has been under significant pressure recently because of its huge exposure to Japan. In 2010, the company's Japan segment had $15.98 billion of revenues, which amounts to 77% of Aflac's total revenues. Investors should pay close attention to the company's first earnings report since the tragedy in Japan. Further weakness may provide investors with an opportunity to buy a strong franchise at a reasonable price, but after a strong rally from the March 2009 lows, investors can afford to be patient.
Dr Pepper Snapple Group (DPS)
Forward P/E: 13.15
Return on Assets: 7.27%
Dr Pepper Snapple is the popular maker of Dr Pepper, Sunkist, Yoo-hoo, Canada Dry, Crush, Snapple and Hawaiian Punch. The company has had a rocky stock price since 2008, opening at $25, trading as low as $12 and now trading at nearly $39.
The company had 2010 revenues of $5.636 billion. Despite minimal revenue growth over the last few years, the company has tremendous value as a takeover candidate. About 77% of the company's beverage volumes are either the #1 or #2 brand in their respective category. Despite this dominance, the company has only a minimal international reach. In 2010, 89% of sales were from the US, 4% were from Canada and the balance came from Mexico or the Caribbean. Investors should consider buying this stock on stock weakness.
Flextronics International (FLEX)
Forward P/E: 7.08
Return on Assets: 3.69%
The Singapore based electronics designer and manufacturer has experienced severe headwinds in recent years. Despite being in the tough, competitive technology industry, the company has competitive advantages. In 2010, it reduced its top ten customer concentration from 55% of sales to 47%. Top customers include Research in Motion (RIMM), Oracle (ORCL), Xerox (XRX), Alcatel-Lucent (ALU) and Cisco (CSCO). The company also enjoys benefits from significant scale after purchasing $19 billion of raw materials during fiscal 2010.
From 2009 to 2010, revenues declined 22% to $24.1 billion largely because of decreased demand and market share. The company may post strong earnings, but investors should differentiate between revenue growth and margin expansion. According to the most recent earnings call, the company expects gross margins of 9% for the quarter compared with 5% in fiscal 2010 and around 4% for 2009 and 2008. With the competitive industry dynamics and rapidly rising materials costs, it's unclear if gross margin improvement can persist, but with the company trading at such cheap valuations, investors should take a closer look. Flextronics has had years of strong free cash flow generation because maintenance capital expenditures is much lower than depreciation.
Forward P/E: 22.39
Return on Assets: 1.12%
The parent company of internet properties, DogPile.com, WebCrawler.com, WebFetch.com and MetaCrawler.com continues to look for ways to grow revenues. In 2010, more than 80% of the company's revenues were derived from customer agreements with Yahoo! (YHOO) and Google (GOOG), whereby search generated through InfoSpace properties would move through Google and Yahoo algorithms.
The company has not been content to sit on its roughly $250 million of excess liquidity. In May 2010, the company purchased an e-commerce business from Mercantila, Inc. These assets contributed $32.49 million to the company's revenues. InfoSpace's venture into e-commerce is a risky proposition. While it's good that management continues to grow the operations, shareholders may be better served with a large scale return of excess capital. InfoSpace is a cheap company, but investors should wait on the sideline until management provides more clarity about the company's future.
Sealed Air (SEE)
Forward P/E: 12.79
Return on Assets: 6.31%
The packaging materials company generates 60% of sales from food packaging, 30% from industrial processes and about 10% from medical sources. Sealed Air is expected to improve earnings in the coming years. Because of strong revenue growth, earnings and cash flows, the company is interesting as a stand alone investment with speculative upside as a buyout candidate.
Revenues increased 5.8% to $4.49 billion from 2009 to 2010, but they are still 7.28% below 2008's peak levels. A large part of the company's improving earnings have come from improved margins. We think Sealed Air is a good investment opportunity, but investors should continue to pay close attention to margins and whether they are outpacing revenue growth.
Whirlpool Corporation (WHR)
Forward P/E: 9.11
Return on Assets: 4.16%
The home appliance maker has a valuable portfolio of brand names that include: Whirlpool, KitchenAid, Maytag, Polar and Magic Chef. The company had revenues of $18.366 billion in 2010. Despite a 7.4% increase from 2009, the company's revenues have been relatively flat during the last few years as a result of a weak housing market and economy. Investors should pay close attention the company's global revenue growth. In 2010, only 53% of revenue was from North America. The main driver of global growth was South America, which jumped from 19% of revenue in 2008 to 25% in 2010.
The company is a great brand name with secular global growth opportunities as well as possible upside domestically once the housing market recovers, but in the near term, input material cost inflation is a real risk. In 2011, management expects inflation to cost the company $250 to $300 million. Considering that the appliance manufacturer had net income of $611 million in 2010, inflation could have serious implications for future profits.
Forward P/E: 15.12
Return on Assets: 20.74%
The weight management company is a highly profitable operation, but it has faced dual headwinds because of tremendous success at its competitor Jenny Craig as well as diminished demand because of a weak economy. Because of a distressed stock price, the company offers risk and significant potential upside. Still, the business is extremely sensitive to consumer whims and as such this is a difficult company for investors to follow.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FLEX, WHR over the next 72 hours.
Advance America Cash Advance Centers Inc (AEA)