by Kramer Winingham
Billionaire Steve Cohen, manager and founder of SAC Capital, recently announced some new stock picks. Although SAC Capital generally focuses on shorter-term investments, we’ll look at how these picks fit with our value investment framework:
Yum! Brands, Inc. (YUM)
Yum! Brands is the world’s largest restaurant chain with nearly 38,000 restaurants operating in more than 110 countries. Yum! Brands restaurants operate under the following names: KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W. Yum! Brands has delivered investors a great performance for over a decade, so why invest now?
As demonstrated by McDonald’s' (MCD) outstanding performance over the last fifty years, fast-food chains can continue to grow if people like their food. Yum! Brands doesn’t have McDonald’s' competitive advantages noted by net profit margin, 10.4% versus 20.6% for McDonald’s. However, Yum! Brands does have a better profit margin than other chain restaurants-- 5.3% for Cheesecake Factory (CAKE), 6.4% for Darden Restaurants (DRI), and 3.6% for P.F. Chang’s China Bistro (PFCB). Yum! Brands is more highly leveraged than industry standards which allows the company to return 72.15% on equity. Yum! Brands also recently raised guidance estimates and raised the dividend yield to 2.1%. The company’s shares trade for 18.9 times forward earnings, which is a little high for value investors, however the company’s track record for performance may make it worth it.
Apple Inc. (AAPL)
Apple markets various devices and services under its iPhone, iPad and iTunes brands. Coming off a record year of earnings that propelled the company ahead of Exxon Mobil (XOM) as the world’s biggest company, one would think Apple would be extremely overvalued. Trading at 14.5 times earnings, this is just not so, considering Apple has been able to grow earnings 57.8% annually over the last five years. The company’s innovation has obviously been legendary, still listed as a competitor to Dell Computers (DELL); Apple competes in a far larger market now than PC manufacturing.
The big question with Apple is-- what is the company going to do without Steve Jobs? It’s been almost a month since he resigned. Nothing terrible has happened yet, is it safe? At 14.5 times forward earnings, future expectations aren’t terribly optimistic considering earnings have doubled since last year. Even without further innovation, Apple’s future looks bright. The company’s outstanding product mix is beginning to reach a monopoly on users’ entertainment and computing needs. The true genius behind the iPad is not just that it is really cool, but that it is the most convenient way to consume all of the company’s iTunes media offerings.
While Steve Cohen is probably looking for a short-term trade as Apple will recover from the dip relating to Steve Jobs’ resignation, value investors should consider the strength of Apple’s business model for a longer term investment. No dividend, but the growth prospects are excellent considering the valuation.
Amazon.com, Inc. (AMZN)
Amazon.com operates Amazon.com and other websites that sell books, electronics and household goods. Steve Cohen’s interest in Amazon most likely has to do with a general bullishness about tech stocks rather than any specific liking for Amazon’s valuation. Amazon’s shares trade at 121.5 times forward earnings, which raises a major red flag for value investors. One would hate to be involved with Amazon when this valuation unwinds. If Amazon’s shares traded for the same valuation as Apple-- 14.5 times forward earnings-- Amazon’s share price would be under $47 instead of the nearly $240 it currently trades at. Value investors should avoid Amazon no matter how much they love the company’s excellent business model. The company’s earnings are simply too expensive.
eBay Inc. (EBAY)
eBay is a marketplace for the sale of goods and services online. eBay is a direct competitor of Amazon’s, however the company’s shares trade at a much more reasonable multiple. eBay shares trade at only 20.5 times forward earnings compared to the 121.5 times for Amazon shares. Interestingly enough, eBay generates more income than Amazon, despite having less than half the market cap, $43 billion for eBay and $108 billion for Amazon. Net earnings for eBay were $1.8 billion last year, much larger than the $1.0 billion Amazon earned last year. eBay is also trading at a lower multiple of forward earnings than these other online companies: InterActiveCorp (IACI), Blue Nile Inc (NILE), and Liberty Media (LINTA). To play online retailers, eBay should be the most attractive option for value minded investors.
Hess Corp. (HESS)
Hess Corp is an integrated energy operation. Coming off three consecutive earnings misses, Hess Corp. shares have been pretty beat up. Currently trading at 8.7 times forward earnings, Hess Corp. should look pretty attractive to value investors. However, the company doesn’t offer a dividend and competitors are trading at even lower valuations. Competitors Tesoro Corp. (TSO), Marathon Oil Corp. (MRO) and Valero Energy Corp. (VLO) are trading for 5.4, 6.4 and 5.6 times forward earnings, respectively. Hess Corp. does have a better net profit margin than the competitors mentioned above. Hess Corp’s recent earnings misses may just be related to overzealous analyst estimates rather than anything related to the business model. Hopefully this is the case. Now might present a good entry point if this company peaks your interest the way it did for Steve Cohen.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.