By David Sterman
In the past seven years, Home Depot (NYSE: HD) has bought back a whopping 600 million shares. That's really impressive until you realize many of the shares were bought back right when the stock was trading at a 52-week high.
Sadly, this example applies to many companies right now.
I've been looking at all of the companies that have announced buyback plans in the past two months, and most of the stocks in question are trading near their 52-week highs. Considering that the S&P 500 has more than doubled in the past three years, companies are conducting major buybacks because they have too much cash, and not because their shares are necessarily bargains.
However, I have found 10 companies with fresh recent buyback plans, all of which trade at least 20% from the 52-week high. In these instances, the companies are in a position to make their buyback dollars go a lot further. Take a look...
It's interesting to spot a pair of names in the for-profit education sector. This whole industry has been rife with crisis, as high student loan default rates led Congress to scrutinize lending practices more closely. This should create a healthier industry as schools become more focused on accepting the best candidates and better track their loan repayment performance.
The current stock buybacks at Capella Education (Nasdaq: CPLA) and Education Management (Nasdaq: EDMC) appear well-timed. Both firms have seen sharp drops in student enrollment, keeping their stocks out of favor. However, the cycle of negative year-over-year comparisons appears close to bottoming out, so both of these schools are expected to show enrollment gains starting in a quarter or two from now. For this reason, this is a perfect time to research these stocks.
Free cash flow = steady buybacks
Greeting -card company American Greetings (NYSE: AM) is the poster child for stock buybacks. The company has generated more than $100 million in free cash flow for seven of the past eight years, and since it's a largely mature enterprise, much of this cash has been used to repurchase company stock. In fact, shares outstanding have steadily fallen, from 82 million back in fiscal (February 2005) to a recent 39.5 million. The current stock buyback program could take that figure below 30 million.
To be sure, with minimal top-line growth, this is more of a value play, trading at less than eight times projected profit and around five times free cash flow. The free cash flow supports more than the buybacks: American Greetings sports a 3.9% dividend yield as well. Another key marker for value investors: The stock trades at a 21% discount to tangible book value.
Along with the buyback and the dividend, management is also spending more than $50 million a year to develop a strong set of online brands. Consumers may be buying fewer traditional greeting cards, but they are spending increasing amounts on online greetings, known as e-cards. These investments have led cash flow to slump in the most recent and current quarter, which is the key reason why shares fell to fresh lows when fiscal third-quarter results were released in mid-December.
Investors are wrestling with a growth target for this mature model, but it's still highly profitable. The company is seizing the opportunity to take its share count even lower while the stock remains out of favor.
Lear (NYSE: LEA)
This auto-parts supplier also sports a rock-solid balance sheet (with $1.1 billion in net cash) and produces robust cash flow. Lear's business has rebounded in tandem with the resurgent auto industry, so as industry volumes keep rising further in 2012 and 2013, Lear could see free cash flow approach the $500 million mark by 2013 or 2014.
Right now, analysts expect Lear to boost sales just 3% in 2012 (to $14.5 billion) and around 6% in 2013 (to around $15.4 billion). But this may prove to be too conservative a forecast, not only because the auto industry is expected to grow at a faster pace, but because Lear is also looking to take market share.
Merrill Lynch expects the major auto makers "to continue shifting toward fewer, well-capitalized partners in the supply base, which should favor strong companies like LEA." Merrill's $69 price target is roughly 50% above current levels. Lear may wish the stock to stay down in the near-term, though. If the company can complete the planned $700 million stock buyback at current prices, then the share count could fall by as much as 15%, helping to boost the stock in the future.
Risks to Consider: These companies appear to be buying shares at a discount, but if the market heads south in 2012, then current buyback activity will have looked premature.
Quickly falling share counts are a sure-fire way to boost earnings per share (EPS), even if net income is growing at a slower rate. Moreover, buybacks ensure a degree of downside support because these companies are in the market every day defending their stock and creating a degree of support. You could do well by riding their coattails.
Disclosure: David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.