December Update: 'Margin Of Safety' Stocks That Trade At A Discount To Value

by: Margin of Safety Equity Research

This short article is an update of stocks 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 substantial discount to intrinsic value.

Current trends and events

  • New strategic partnerships at Microsoft;
  • HP’s webOS will go open source;
  • GE has provided guidance for 2012;
  • Transocean and Chevron sued for oil spill in Brazil;
  • Paychex released upbeat results.


Microsoft (NASDAQ:MSFT) will partner with MasterCard (NYSE:MA) to deliver technology and payment services to small businesses under Microsoft’s Office 365 project. In a move to gain market share on the mobile phone market, Microsoft appointed a new head of mobile phone software group. Microsoft agreed to sell online shopping guide Ciao to for an undisclosed amount. Nissan (OTCPK:NSANF) and Microsoft entered into a strategic partnership to develop a dealer management system. Nokia said the software glitch that drains Lumia 800 battery life should be solved in early 2012 with a planned software update. Lumia 800 operates on Microsoft's Windows Phone operating system. New information emerged in press on a consortium between private equity group Silver Lake, Microsoft and venture capital firm Andreessen Horowitz over the bid for a minority stake in Yahoo (NASDAQ:YHOO).

Hewlett-Packard (NYSE:HPQ) was named a leader in the IDC MarketScape: Worldwide Managed Print Services 2011 Hardcopy Vendor Analysis Study. HP was selected along with other 21 vendors to provide telecommunications infrastructure services and products to federal agency sponsored buildings. The contract has a $5 billion ceiling and extends for over three years. HP announced it will make the webOS technology available under an open source license. HP also announced it may return to “consumer tablet market in 2013 but it will not be making any more smart phones.” HP adopted a new severance policy for executive officers leaving the company after November 1, 2011 after facing criticism over significant remunerations received by the last two CEOs.


General Electric (NYSE:GE) forecasts 5% revenue growth and double-digit EPS growth in 2012 at most of its units driven by strong demand in the United States and Asia, while preparing for unstable development in Europe. GE Energy partnered with France-based EDF to develop a new generation of combined cycle gas turbine costing nearly €400 million a piece with production to begin in 2015. GE Healthcare entered into a strategic partnership with M+W Group, an engineering, construction and project management company, to aid emerging countries to become self-sufficient in manufacturing vital biopharmaceuticals such as vaccines, insulin and biosimilars.

Nucor (NYSE:NUE) provided guidance for Q4-2011, expecting EPS to be in the range of $0.22 to $0.27, which represents an improvement over the Q4-2010 loss of $0.04 and a decrease compared to $0.57 registered during Q3-2010. The deterioration is due to increased competitive pricing pressure and volatile raw material costs.

Rio Tinto (NYSE:RIO) extended its offer to the remaining shareholders of Canadian uranium producer Hathor Exploration to sell their shares until January 6, 2012 for $4.54. As of December 22, Rio owned 87.26% of Hathor. The Australian coal haulage firm QR National signed a 10-year contract with Rio Tinto to produce 3 million tons of coal per year.


Brazilian federal prosecutors sued Chevron (NYSE:CVX) and Transocean (NYSE:RIG) for $10.6 billion related to an oil spill near Rio de Janeiro. The prosecutors also seek to suspend operations of both companies in Brazil, which could impact ten of Transocean’s offshore drilling rigs operating in the country. Another indictment related to the oil spill was initiated by the Brazilian federal police against several Chevron and Transocean officials “for environmental crimes and withholding information in an investigation.”

Exxon Mobil (NYSE:XOM) is reportedly considering buying Gulf Keystone Petroleum Ltd. (OTCQX:GFKSY), a British oil exploration company, in a deal worth $10.9 billion. However Gulf Keystone is quoted to have said that it was “not in discussions with regard to a sale of the company.” Gulf Keystone is focused on exploring oil in Kurdistan, which is believed to hold around 40 billion barrels of oil. Rosgeologia, the Russian state holding company for geological exploration, is in talks with several foreign companies, including Exxon, regarding mineral resource exploration in Russia. The possibility of a strike on the Exxon Mobil Corp’s (XOM) refinery in Antwerp, Belgium still persists as remuneration disputes have not been resolved. Imperial Oil, 70% owned by Exxon, plans to invest $9 billion to expand its 71%-owned Kearl Oil Sands Project, which should add 110,000 barrels of oil output per day by late 2015.


Merck (NYSE:MRK) will buy rights to develop and sell Mochida Pharmaceutical Co’s (OTC:MCPMF) experimental medicine to treat Type-2 diabetes. The amount of the deal was not disclosed. The FDA approved Merck’s expanded label for HIV drug Isentress to be used with other antiretroviral drugs in children and adolescents.

Abbot Laboratories (NYSE:ABT) partnered with Reata Pharmaceuticals to develop and market second-generation oral antioxidant inflammation modulators for which the companies will equally share costs and profits, except rheumatoid arthritis and some other autoimmune diseases in which Abbott will share 70% of costs and profits. Abbot will also pay Reata $400 million to gain access to its drug technology.

UnitedHealth (NYSE:UNH) scored 72 out of 100 on the 2011 American Customer Satisfaction Index, up from 65 in 2010, which is good news for the company given the rising health premiums. UNH’s rivals WellPoint and Aetna scored 74 and 68, respectively.


Paychex (NASDAQ:PAYX) reported Q2-FY12 results with revenues increasing by 7% year-on-year to $545.7 million and EPS growing by 5% to $0.39. The company registered revenue growth in both payroll processing and human resources businesses, however it reported slower sales to new clients. For full fiscal 2012 the company expects to register 5% to 7% sales growth in the payroll service business and 12% to 15% sales growth in human resource services.

Disclosure: I am long MSFT, HPQ, GE, RIO, RIG, XOM, MRK, UNH.

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