Microsoft (MSFT), Google (GOOG), and UnitedHealth Group (UNH) release earnings on January 19. As much as I have been right about the undervaluation of these companies in the past, they continue to have favorable risk/reward. I would also like to introduce an emerging direct selling firm, Nu Vitality (OTCQB:NUVI), that is similarly rising. Value-creating trends in these technology and healthcare companies, after all, yield significant tailwinds for smaller firms seeking a platform to grow off of.
This tech giant began 2012 with solid momentum, as evidenced by broad segment-wide growth in the top-line. The consumer PC attach rate to Office has continued to grow while Office 365 represents a major catalyst with its cloud-based network. Windows 7 may have resulted in margin compression, but it was a step in the right direction from Vista. Going forward, Windows 8 will unlock synergistic value by integrating products throughout the cloud. Featuring an aesthetic Metro-like app motif, this operating system will be available on a variety of mediums to drive free cash flow and reinvigorate investor confidence.
Gartners recently issued fourth quarter preliminary results that indicated a global 1.4% y-o-y decline in unit shipments for PCs. While weakness in the domestic market was more or less anticipated, this was particularly disappointing to see in Asia given emerging market demand and aggressive pricing. With that said, the unstable economies in EMEA performed meaningfully above consensus. And, furthermore, Microsoft is well positioned to gain from Ultrabook's rightward shift in underlying demand.
Consensus estimates for Microsoft's EPS forecast that it will grow by 1.1% to $2.72 in 2012 and then by 11% and 10.9% more in the following two years. Assuming a multiple of 13x and 2013 EPS miss of 2.3%, the rough intrinsic value of the stock is $38.35, implying 35.7% upside. Modeling a 7.6% CAGR over the next three years for EPS and then discounting backwards by a WACC of 9% yield a fair value figure yet higher at $42.87.
Since I first presented my bullish case on Microsoft here, the stock has surged by more than 12.7%.
Google is another attractive technology company that is well positioned for transformative growth. The firm ended the fourth quarter with a modest 60 bps gain in explicit search share while Yahoo (YHOO) lost 100 bps in its own share. The two now have 65.7% and just under 15% of the market, respectively. Google experienced sequential acceleration in explicit query count, which was up 9.2%.
With an increasing amount of queries coming from mobile - upwards of 15% by some estimates - Google is approaching the case where Microsoft found itself in 14 years ago. More than 90% of the mobile search market is controlled by Google.
Consensus estimates for Google's EPS are that it will grow by 24.7% to $36.90 in 2011 and then by 19.2% and 17% more in the following two years. Assuming a multiple of 18.5x and a conservative 2012 EPS of $41.50, the stock has roughly 22.1% upside.
Since I first presented my bullish case on Google here, the stock has surged by more than 15.8%.
Trading attractively at a respective 11.7x and 11.1x past and forward earnings with minimal volatility, UnitedHealth Group is rated a "strong buy" on the Street for good reason. Although higher utilization rates and rebate obligations will cause margin erosion, the firm has solid liquidity and operational performance. Analysts have been overly bearish on ROIC forecasts - under-appreciating the company's gradual shift into less regulated higher-growth markets.
Consensus estimates for UnitedHealth Group's EPS are that it will grow by 8.8% to $4.58 in 2011 and then by 4.1% and 13.6% more in the following two years.
Since I first presented my bullish case on UnitedHealth Group here, the stock has surged by 13.7%.
Nu Vitality Labs
My above top picks have focused on companies that - in addition to establishing operations of synergistic value - have targeted markets with attractive structural growth opportunities and supportive cash flow drivers. Nu Vitality is one more company that is well positioned to appreciate in value with little downside.
And the market, fortunately, is just starting to pick up on its value. Tuesday trading boosted the firm's worth by 6.8% and early investors have, in my view, substantially more to gain. The company provides neutraceuticals and skin-care products while being operated by a management team that has previously grown sales into the hundreds of millions of dollars. As it continues to gain in value, greater market awareness will further expand the prospects.
The company has recently launched three new products addressing the weight loss and diet markets. This is a $60B market just in the United States alone. We can begin to make sense of the worth of market penetration by considering this unit's domestic terminal value.
If Nu Vitality captures just 0.04% of the US market and has a long-term growth rate of 1.5%, discounting backwards by a WACC of 9% yields a terminal value figure of $32.5M. Again, this is simply an assessment of domestic prospects for the three diet and weight loss products that have been backed by scientific research.
The company is also reaching out to Europe, Australia, and Asia. It even reminds me of Facebook with its focus on next-generation web platforms. Nu Vitality has an attractive ecommerce system with support from Pershing Processing. And it further employs a direct selling method that incentivizes independent distributors to increasingly drive volumes. With the firm off to a good start, investors, in my view, still have the opportunity to open a long position and reap substantial rewards.