By Premo Sewnunan
We took a look at the most recent SEC filing from magic formula guru Joel Greenblatt. Here is our two part analysis of ten of the companies he's dumping now:
Microsoft (MSFT): Makes up 0.96% of the portfolio. Sold 137,476 at an average price of $27 per share in the first quarter of 2011.
The common stock currently sells for $24.72 valuing the company at 9.8 times current earnings with a dividend yield of 2.5%, and 3.8 times book value. On a valuation basis, Microsoft is cheaper than rivals, Apple (OTC:APPL), Google (GOOG) and Oracle (ORCL).
In comparison, Apple is valued at 14.7 times its current earnings and 5.3 times book value. Google is valued at 20 times its current earnings and 3.7 times book value. Oracle is valued at 13.7 its current earnings and 3.6 times book value. Revenue and earnings for the final quarter of its fiscal year (ended June 30th) was $17.4 billion and $0.69 a share, respectively, versus estimates of $17.3 billion and $0.60 a share, driven by demand from large corporations.
There is broad acceptance of Windows 7, with most corporations either in the process of upgrading or having plans to do so. The business division posted very strong results, due to the popularity of Office 2010 and the uptake by large corporations. The Xbox/Kinect duo remains popular powering the entertainment and devices division to another good performance.
As mentioned, demand from businesses is good, reflecting the current refresh cycle. However, consumers continue to reach for new form factors, as is evident of the success of tablets and smartphones. Operationally, the company should continue to generate tremendous cash flow, facilitating further share buybacks and dividend increases.
Garmin (GRMN): Makes up 0.52% of the portfolio. Sold 94,411 at an average price of $32.54 a share in the first quarter.
At a current market price of $32.10, Garmin is valued at 11.9 times current earnings, 2.1 times book value and a 4.9% dividend yield. This compares favorably to rivals, Trimble Navigation (TRMB), 22.4 times current earnings, 3 times book value, no dividend and KVH Industries (KVHI), 253.2 times current earnings ,1.5 times book value and no dividend.
Garmin is experiencing fierce competition in the form of smartphones in the personal navigation arena. To offset this, Garmin is looking at other ways to bolster revenues. The current growth driver is partnering with the OEM market, which includes automobile, aviation and marine original equipment manufacturers.
The balance sheet is strong with over $1.2 billion in cash and no debt. This is helpful for various growth opportunities such as acquisitions. A 4.9% dividend yield will appeal to income investors
GT Advanced Technologies, formerly GT Solar (GTAT, formerly SOLR): Makes up 1.13% of the portfolio. At the time of writing, specific details of the recent sale were not available. The common stock is currently selling at $11.46, valuing the company at 8.5 times current earnings and 6.4 times book value. Competitor, Applied Materials (AMAT), 9.7 times current earnings and 2 times book value.
Prospects are bright in the alternative energy arena. The company is benefiting on the rising demand for its solar panel manufacturing equipment from solar panel manufacturers. Prices and sales have picked up drastically in the last twelve months. The LED industry is expanding rapidly as the use of LED’s in appliances like TV’s grows. GT is poised to be a big player in this market as it is a low cost, high quality producer of the main substance used in the manufacture of LED’s.
Long term prospects are encouraging. GT has a substantial presence in China where emissions are slated to reduce significantly in the future. Also, with cheap silicone prices and low cost barriers to entry, solar panel manufacturers have to reduce prices and upgrade to more efficient manufacturing technology to remain competitive, hence driving demand for the company’s products.
Career Education (CECO): Makes up 0.86% of the portfolio. Sold 183,855 shares at an average price of $22.25 in the first quarter of 2011.
On the valuation front, the stock currently trades at $15.62. This values the company at 5.5 times current earnings with a price to book ratio of 1.4. CECO compares favorably against rivals DeVry (DV), 10 times current earnings and 2.4 times price to book and Apollo Group (APOL), 8.7 times price to earnings and 4.6 times price to book.
Although second quarter results were lackluster, results for six months ended June 30th was marginally better, owing to a solid first quarter where earnings per share jumped 36%. The weak economic environment, increased competition and double digit decline in new student enrollments are likely to lead to weak full year results.
One positive is the softer regulations from the Department of Education on its gainful employment rule. When announced in June, the regulations were not as tough as originally anticipated. This removed the cloud of uncertainty that hung over the industry recently.
Forest Laboratories (FRX): Makes up 0.64% of the portfolio. Sold 99,758 shares at an average price of $32.16 in the first quarter of 2011.
The stock currently trades at $33.43, valuing Forest Labs at 7.7 times current earnings and 1.8 times book value. Against its competitors, Mylan Inc (MYL), 10.8 times current earnings ,2.2 times book value and Valeant Pharmaceuticals (VRX), 30.4 times current earnings and 2.7 times book value, Forest Labs is cheap.
Although the company posted 7% increase in revenues due to demand from its key products, uncertainty still persists with its main seller, Lexapro is set to expire in March 2012. This drug accounts for 55% of total sales.
The $1.3 billion acquisition of Clinic Data mainly for its Viibryd product might help in offsetting some losses when Lexapro comes off patent. On a positive note, its strong balance sheet will help in future deals.
With a number of patents expiring in the coming years, generic drug manufacturers will be keen to merge with other companies to bolster their product lines with products have longer patent lives and products in the late stages of development.
Forest Labs might become a takeover target. Before the recent sell off amid the broader market decline, much of the 25% advance in the stock price between April and July was fueled by speculation of a takeover.
click here for part 2.