Stocks That Trade At A Discount To Value - December Update

by: Margin of Safety Equity Research

This short article is a bimonthly news update of stocks for value investors that we follow in our “Margin of Safety Portfolio.” These are stocks identified to have a durable competitive advantage and, based upon our intrinsic valuation models and fundamental analysis, are trading at a discount to intrinsic value

Current trends and events

  • Microsoft signs a confidentiality agreement with Yahoo;
  • Technology companies launch more cloud services;
  • GE and HP partner with Microsoft;
  • Rio Tinto secured a uranium deal;
  • Transocean raises funds through new debt and share issue;
  • Abbot Laboratories has no intention to sell its pharmaceutical business;
  • Apollo Group diversifies geographically, entering into the Indian education market.


Reuters reports that Microsoft (NASDAQ:MSFT) signed a confidentiality agreement with Yahoo Inc, joining other private equity firms, which allows it to closely scrutinize Yahoo for a potential minority stake purchase of up to 20% and eventual acquisition. Microsoft opened a new global delivery centre in Bangalore, southern India to provide services to clients in more than 65 countries.

Hewlett-Packard (NYSE:HPQ) acquired Hiflex Software GmbH, a privately held software solutions provider specializing in web-to-print and management information systems solutions for printing services. The amount of the deal was not disclosed. According to an iSuppli report, HP is still ranked number one global personal-computer brand in Q3-2011. HP also advances on the cloud market by introducing new solutions for enterprises and service providers and partnering with Microsoft. HP launched its first product using the technology of the previously acquired Autonomy.

Cisco (NASDAQ:CSCO) continues introducing cloud solutions, this time with CloudVerse, a solutions system for building and managing cloud networks designed for enterprises and service providers. Cisco forecasts that global cloud data traffic will grow at a compound annual rate of 66% between 2010 and 2015, by which time more than a third of all data center traffic will be based in the cloud as users seek instant access and processing of their content at reduced cost. Cisco announced it is soon going to introduce a 4G version of the Cius tablet running on the Android operating system which it began selling in August 2011 to corporate customers.


GE Capital and GE Healthcare divisions of General Electric (NYSE:GE) announced an undisclosed investment in C8 MediSensors, which is a privately held developer of non-invasive glucose monitors for diabetics. According to the International Diabetes Federation, by 2030 approximately 552 million people, or about 1 in 10 adults worldwide, could have diabetes. GE will invest an additional $300 million in low-dose scanning technologies, which add up to more than $800 million invested during 15 years in radiation-dose management and image quality improvement. GE and Microsoft announced a 50/50 joint venture “aimed at helping healthcare organizations and professionals use real-time, system-wide intelligence to improve healthcare quality and the patient experience.” The joint venture is expected to be launched in the first half of 2012. GE signed a contract with Saudi Electricity Co. worth $300 million for extension of six power plants across Saudi Arabia. GE and Rolls Royce gave up the plan to build an alternate engine for Lockheed Martin Corp’s F-35 joint strike fighter, thus quitting on “$100 billion market.”

Applied Materials (NASDAQ:AMAT) introduced several new technologies: the Applied Producer® OnyxTM film treatment system technology which reduces power consumption in semiconductor chips; the Applied SEMVision G5 system which allows manufacturers to image and detect imperfections down to 1 nm pixel size for rapid chip production; and the Optiva CVD system for manufacturing BSI image sensors.

Rio Tinto Group (NYSE:RIO) anticipates continuous volatility in metal prices during 2012 amid the European debt crisis and uncertain economic outlook. Rio Tinto will invest an additional $2.7 billion to upgrade its aluminum smelter in Kitimat, British Columbia by 2014, to increase its production capacity by 48%. Rio Tinto announced securing control of uranium prospector Hathor Exploration Ltd in a deal worth $669 million, giving it access to high-grade uranium projects in Canada. Rio Tinto entered into a partnership with Chinese state-owned Chinalco for copper exploration and plans to expand into coal and potash.


Transocean (NYSE:RIG) sold $2.5 billion worth of senior unsecured notes, with the proceeds to be used to repay commercial paper and fund a portion of convertible note puts. Transocean also plans to sell 29.9 million shares at $42 per share, which should bring about $1.25 billion in cash.

Dow Jones reports that Lukoil and Royal Dutch Shell are negotiating with Exxon Mobil (NYSE:XOM) to buy out a 37.5% stake each in the development of West Qurna-1 oil field in Iraq, while the remaining 25% will still belong to Iraqi state-owned North Oil Company. Workers from Exxon’s Antwerp refinery postponed the scheduled strike and rejected the new labor conditions proposed by management. Exxon Mobil forecasts the global economy “to more than double in size between 2010 and 2040, and during that time energy demand will grow by more than 30%” driven by economic expansion and rising standards of living.


Merck (NYSE:MRK) chairman and former CEO Richard Clark retired on December 1, after serving the company for 40 years, being replaced by Kenneth C. Frazier. UK announced it will stop using GlaxoSmithKline’s cervical cancer vaccine Cervarix in favor of Merck’s Gardasil vaccine used against the sexually transmitted human papillomavirus which can cause cervical cancer. The global market for vaccines that protect against the papillomavirus is estimated at more than $1 billion. Merck announced it will invest $1.5 billion in a new Asian R&D headquarters in Beijing in the next five years.

Abbot Laboratories (NYSE:ABT) dismissed the intention to sell its pharmaceuticals business to another drug maker (the division should soon be separated). Another law office initiated an investigation over possible breaches of fiduciary duty and other violations by certain officers and directors in relation to the Depakote drug. Abbot received several FDA clearances for a new test to detect vitamin D levels and for supplemental blood test for Chagas disease.

UnitedHealth’s (NYSE:UNH) forecast its 2012 earnings to be in the range of $4.55 to $4.75 and confirmed full year 2011 guidance in the range of $4.52 to $4.57. Also, in 2012 the company expects to register $107 billion to $108 billion in revenues driven by the increase in Medicare and Medicaid memberships which should offset declines in some plans serving employers and individuals.


Lowe’s Companies (NYSE:LOW) forecast sales for fiscal year ending on February 3, 2012 to increase in the range of 2% to 3%, while the comparable-store sales should fall 1% during the year. The company expects to register EPS of $1.37 to $1.40, after a charge of 20 cents per share for the cost of closing stores and discontinuing projects.

Apollo Global, a subsidiary of Apollo Group (NASDAQ:APOL), will enter into a 50/50 joint venture with HT Media to launch a network of learning centers and on-line courses for Indian students and working people.

Disclosure: I am long HPQ, LOW, MRK, XOM, UNH, SYK, CSCO, RIG, RIO, GE.