Nothing but change is constant. Technology has changed the face of the world. Will the technology companies change? Will they go into oblivion? Will their stocks continue performing as they are doing today? To answer these questions, we will look into some companies that we believe will not fade with time.
Over the last few years AAPL has been churning out products as if it is reading the collective consumer mind. During the same period, Apple stock prices have grown exponentially. The stock has gone up from $70 to $391, at the rate of 46% compounded annually. During the same period its revenues have gone up by 27% annually from $19 billion to $65 billion.
Buying an Apple product is like a race to the moon, everybody wants to have one before the other person. This is evident from its earnings growth rate which has gone up by 58% on average during the last 5 years. Still, AAPL has a P/E of 15.50 which is low for an organization whose next 5 years earnings is estimated to increase at 19.20%.
Apple loves surprises. Over the last 5 quarters it has beaten analyst’s estimates by 20% on an average. Apple had $25 billion in cash during the last financial year, LT debt/Equity of zero and current ratio of 1.7.
Overall, with AAPL products more than accepted in the emerging markets and low P/E for an organization with very strong fundamentals and financial statements, investors would want to bite Apple before it becomes too expensive. We think news of rampant copying of Apple stores in China is a bullish sign.
Google has changed the way we communicate. From shopping for needles to writing research papers, Google has become an integral part of our lives. The company’s main source of revenue is online advertisement.
Over the last 5 years Google’s sales have increased by 36.72% annually. Google is trading at P/E 23.73 and a share price of $609.70. Should we still buy Google? Let’s look at the numbers. The average EPS for 2012 is estimated to be $37.13, which gives a stock price of above $760, indicating that the company is undervalued.
Again the company has increased its revenue by 22% annually over the last 5 years on average and its EPS at a rate of 34%. The company has very strong balance sheet with $43 billion in cash and debt/equity ratio of 0.08.
Overall the company is in a very strong financial position that puts competitors like Yahoo! (YHOO), Microsoft (MSFT) and Bidu (BIDU) (where it does compete) at a disadvantage. With huge cash reserves and a massive diversification plan through acquisitions and new products, Google will keep the investors happy.
Cisco is one company which is paying the price for its past, though its current fundamentals are stronger than on average has gone up by 7.35% over the last five years. During the same period its earnings have increased by 9% annually.
Cisco is trading at a price of $16.10 with a P/E of 12.50. With 2012 earnings expected to grow at 10%, P/E will be compressed further to 10.6, indicating that the price has to go to up to at least $20 to account for the estimated EPS growth. At current P/E, CSCO is trading at a discount of 20% to its peers. Also during the last 5 quarters CSCO has beaten analysts' estimates by an average of 7%.
Furthermore, CSCO during last quarter spent $1.8 billion to buy back shares at an average price of $20.8. Cisco has a very strong balance sheet. All its fundamental ratios like EBITDA, EV/EBITDA etc. are better then its competitors.
The company had a better ROA, ROE and ROIC then its competitors over the last 5 years as well as during the last financial year. The company is sitting on $40 billion in cash, both abroad and stateside, and it would not be surprising to see management deciding to increase its dividend growth rate. Competitors Juniper (JNPR) and Dell (DELL) will face a tough challenger in Cisco if they wish to make further inroads into its business.
Hewlett Packard (HPQ)
HPQ is in the business of providing hardware and software products and solutions to individuals as well as business enterprises. Over the last 5 years, HPQ has made several strategic acquisitions giving it a firm footprint in the networking business.
HPQ’s current share price of $35.57 at P/E of 8.72 is at rock bottom. HPQs earnings have grown on average by 20% over the last 5 years. Over the next 5 years its earnings is estimated to grow at 7% annually giving it an EPS of $7.02. With the efficient market theory this price should already be incorporated in the current price of HPQ.
However, HPQ should be trading at $51 at the estimated EPS, making HPQ underpriced by 40%. Not only P/E, but also P/S, P/BV, P/CF of HPQ are at rock bottom. HPQ has a cash and cash equivalent of $55 billion. This puts the company in a very strong position to meet its future commitment, continue its acquisition spree and raise dividends.
Overall, HPQ is a very undervalued company. A simple DCF model puts the price in the range of $55-$60. With sound balance sheet, strong fundamentals and cash reserves to make strategic acquisitions, HPQ is a strong buy.
Intel Corporation (INTC)
INTC is another technology giant which has the habit of beating analysts' estimates. Intel is in the business of manufacturing semiconductor chips. It is the world’s largest semi-conductor chip maker by revenue. During last 5 years its revenue has grown on average by 4.5%, compounded annually.
At the time of writing Intel is trading at $23.35 with P/E of 10.25. Over the last 5 years its earnings have gone up by 12.20% annually. INTC’s earnings are expected to grow higher at rate of 10.20% over the next 5 years. This will put the EPS at 3.11, which will bring the P/E down to 7.5. In other words, prices will have to go up to at least $33 over the coming couple of years to match Intel’s growth.
Furthermore, Intel being undervalued is evident from the fact that management spent $2 billion over the last quarter to buy back shares. Intel has very high investment returns with ROA and ROE at 18.6% and 25.7% respectively. These numbers outpace competitor Advanced Micro Devices (AMD).
To summarize, Intel is a very low risk, high return and highly undervalued company with buy rating written all over it.
Sirius XM Radio Inc (SIRI)
Sirius was written off. The company was declared finished. However, the management of Sirius had something else in mind. Like Ford (F), Sirius is one of the few organizations that have turned things around in a very short period of time. Over the last 5 years its revenue has grown from $637 million to $2.8 billion.
The bottom line of the organization has not been very good over last few years but it has more to do with the restructuring and one time charges that the organization had to go through rather than ineffective management. This is evident from the last 5 years average gross margin of 48% against its competitor Saga communication, which has a gross margin of 25% over comparable period.
A simple DCF model, with very conservative estimates, puts Sirius stock price in the range of $4-$5. This makes it undervalued by approximately 50%.
Furthermore, with the auto industry titans Toyota (TM), Ford and General Motors (GM) slowly getting back on their feet, Sirius is expected to grow its earnings at an annualized rate of 30% over the next 5 years. Also, with satellite radio penetration increasing and Sirius attempting to penetrate into the used vehicle market, the shares are bound to head up north in the near future.