By Larry Gellar
It’s that time again: when hedge fund managers file with the SEC to report their holdings. George Soros is no exception with his lucrative Soros Fund Management. Let’s take a look at what he’s bought recently.
International Business Machines (NYSE:IBM) – Economic concerns have hurt IBM lately, as many analysts have called into question future demand for both computer hardware and software. Before that though, IBM was doing quite well. As far as company-specific headlines go, IBM was recently ranked #1 in market share for application management services. That’s certainly a testament to IBM’s quality, and now Hewlett-Packard (NYSE:HPQ) is trying to imitate IBM by getting rid of nearly all its consumer segments. This has led many investors to ask themselves which stock has more opportunity for price appreciation. In fact, compared to the industry as a whole, HPQ has rock-bottom value metrics, while IBM’s tend to be higher than average. For many, it is a battle of quality (IBM) vs. value (HPQ). In fact, IBM’s margins are also significantly higher than HPQ's; operating margin for IBM is 20.02% and gross margin is 46.36%. If we had to pick between the stocks, HPQ seems to be the wiser choice, but not because we love the company. IBM is simply too expensive now, though its cash flows have been quite solid – operating cash flow for 2011 has been $8.071 billion thus far.
VMware, Inc. (NYSE:VMW) – Like IBM, this stock has been hurt lately, perhaps unfairly. The company’s deals with Dell (NASDAQ:DELL) and Ubuntu are something shareholders across the country are betting on. In fact, VMware has seen some insider buying lately. A number of firms have upgraded VMware as well. Barclays noted that the company should see great growth with its vSphere 5 and that VMware is well positioned to take advantage of cloud computing in the future.
Price/earnings ratio is 60.49 for VMW, a far cry from Citrix Systems’ (NASDAQ:CTXS) 28.47 and Microsoft’s (NASDAQ:MSFT) 8.94. Price/earnings to growth is perhaps more reasonable at 1.80, but that’s still higher than those two other companies. VMware’s statement of cash flows is also worth mentioning. 2010 was quite terrible in this regard, with $857.5 million leaving the company. 2011 has been better though, with $162.08 million coming in even in the face of some stock repurchases. While VMware’s potential for growth can’t be doubted, it seems unlikely that the company deserves the multiples currently being seen. For its current price in the mid-70s, VMware, like IBM, seems a bit expensive. Note that VMW, CTXS, and MSFT all have a beta of roughly 1.
Agilent Technologies Inc. (NYSE:A) – This maker of electronics and biotechnology recently reported better than expected earnings. In fact, many divisions including electronics measurement, communications, life science, mass spec, and chemical analysis all performed quite well. Aerospace and defense business were less favorable, though, due to fiscal concerns in the U.S. Regardless, President and CEO Bill Sullivan was quick to note that overseas performance for that part of the company was still good. In fact, it’s worth mentioning that Agilent’s operations are quite geographically diverse, with business in the Americas, Europe, Japan, and Asia-Pacific. As far as competitors go, we like comparing Agilent to Danaher (NYSE:DHR), Teradyne (NYSE:TER), and Thermo Fisher Scientific (NYSE:TMO). These companies offer similar price/earnings ratios as Agilent, although Agilent’s price/earnings to growth ratio is somewhat lower. Also, Agilent’s gross margin is relatively high, 53.23% using data from the past 12 months. Cash flows have been favorable too -- $326 million came in for the 6 months ending April 30, and $170 million came in for the 12 months before that. Aside from the earnings report, the company also recently announced guidance for Q3, as well as 2011 overall. That guidance wasn’t particularly notable, except that Agilent’s own expectations for 2011 are somewhat higher than current analyst expectations.
Humana Inc. (NYSE:HUM) – This health insurance company hasn’t fared too poorly in the past week, even though the stock’s beta of 1.10 isn’t particularly defensive. The future of health care in America, particularly programs such as Medicare, Medicaid, and universal health care, is one factor that has been impacting this stock recently. Additionally, these programs will surely affect the stock in the months to come. In fact, Humana spent $180,000 lobbying the federal government last quarter. As far as value metrics go, HUM offers a somewhat higher price/earnings-to-growth ratio than competitors like Aetna (NYSE:AET), CIGNA (NYSE:CI), and UnitedHealthcare (NYSE:UNH). That number is 1.19 for HUM, and price-to-sales ratio for HUM is 0.34. Meanwhile, that price to sales ratio is actually lower than those 3 other companies. Gross margin of 20.80% and operating margin of 6.01% is also worth pointing out, as these are somewhat worse than the competition. Cash flows haven’t been great for 2011 either – $105.31 million has left the company this year so far. Note that much of that loss is coming from investing activities other than capital expenditures. Despite all this, some writers on Seeking Alpha still like the stock. Important points raised in that article are Humana being the second-largest provider of Medicare Advantage and high analyst targets.
Boeing Co. (NYSE:BA) – This stock has nosedived in the past few months, as many politicians have sought to cut spending for national defense. That doesn’t mean Boeing can’t sell to other countries, though, and an announcement was just made that the United Kingdom will buy 14 helicopters from the company. Boeing is also looking to dive deeper into the submarine market. This play, of course, comes as a result of defense companies looking to change their operations in the face of a U.S. budget crisis. At least one writer on Seeking Alpha likes this company, and that linked article certainly brings up some good points. The company’s airplane business is doing great, and even the defense aspect of the business shouldn’t be hurt that much when all is said and done.
Return on equity for BA is strong, and the dividends are nice too. As far as the competition goes, Boeing offers somewhat higher value metrics. Compared to Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC), price/earnings, price/earnings-to-growth, and price to sales are all highest for BA. BA also offers the weakest operating margin. Gross margin at 19.34% is relatively strong, however. Cash flows are also worth discussing. $3.856 billion left the company in 2010, and $309 million has left the company in 2011. Changes in working capital have played a large role in this.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.