By Douglas Ehrman
Continued from part 1
Nokia Corp. (NOK) – With a dividend yield of 8.2%, NOK is a great buy, even with no expectations about the stock’s performance. When one considers that U.S. treasuries are currently paying around 2%, the idea that the world’s largest cell phone maker will pay 4 times the yield seems nearly unbelievable. The company has been plagued by concerns that it has failed to keep pace as the world has made the shift towards smartphones, and this concern was compounded when several false starts, left the company scrambling. Despite stumbling around the development of its own operating system, the company is partnering with Microsoft (MSFT), around the development of the Windows phone. While the financial metrics for NOK are not as favorable as they are for competitors like LM Ericson Telephone (ERIC), with a trailing price-to-earnings ratio of 13.9, NOK is in line with the industry and well positioned. Even if the company takes time to rebuild and rebrand, with the current dividend yield, it is a great income play alone.
Cisco Systems, Inc. (CSCO) – After stagnating to the great disappoint of many investors, John Chambers, CEO of CSCO, announced an implemented a sweeping strategic shift focused on streamlining the company. A recent report has Chambers announcing the company’s intention to take aim at rivals Juniper (JNPR) and Hewlett Packard (HPQ). Another competitor to keep an eye on is Alcatel-Lucent (ALU). In terms of financial metrics, CSCO stakes up well against the group, and while it is first in only operating margin, this metric is particularly important in such a competitive business: CSCO’s operating margin is 20%, where JNPR’s is 17.8%, HPQ’s is 10.2% and ALU’s is 4.2%. On a value basis, CSCO has a trailing price-to-earnings ratio of 14.2, relative to 19.7 for JNPR, 5.5 for HPQ and 15.3 for ALU. When growth is introduced, things normalize a bit, with HPQ still leading the pack with a price-to-earnings over growth (PEG) ratio of 0.6; the price-to-earnings over growth (PEG) ratio for CSCO is 1.01, for JNPR is 0.98 and for ALU is 1.06. Despite not being the leader, with the superior operating margin CSCO is the buy. The catalyst for this stock is the strong, and clearly refocused, leadership of an experienced and skilled CEO.
General Electric Co. (GE) – GE is often hard to place neatly into any specific peer group because it so deeply ingrained in both the manufacturing business and the finance business. It does not quite compare to banks, because it has significant hard assets and real sales. It doesn’t really compare to other manufacturers because it generates significant revenue from the finance arm. While it might be classified as a conglomerate, this is where most “unclassifiable” companies get stuck, so that is of little help. As an income play, the stock offers a dividend yield of 3.9 percent, giving it nearly twice the yield of U.S. treasuries, as discussed above. On this basis alone, given the steady history of the firm, it is a reasonable buy as an income play. As compared to manufacturing rivals Phillips Electronics (PHG) and Siemens (SI), the stock looks like a solid value. Where PHG has no price-to-earnings ratio as a result of negative earnings, GE trades at a trailing price-to earnings ratio of 12.7, relative to 14 for SI. GE also carries an operating margin of 11.5% relative to 7.9% for PHG and 9.9% for SI. Overall, when the income play and the financial metrics are combined, at current levels GE is a good buy.