Today I'm taking a closer look at five companies that have been in the headlines recently. I will share upside/downside catalysts and, in concert with the fundamentals, make a recommendation.
I'll begin with Electronic Arts (EA), which was recently touted for exceeding analysts' per share earnings expectations in the third quarter. In almost the same breath, Chief Financial Officer, Eric Brown, warned the 4th quarter was likely to be tough, projecting a downbeat fourth-quarter profit of about 10 cents to 20 cents a share, falling short of analysts' 4th quarter expectations of 29 cents.
Mid 2011, Electronic Arts acquired PopCap Games which should provide a clear pathway for Electronic Arts to penetrate the social media and mobile markets, markets in which PopCap has excelled. Electronic Arts is a developer, marketer, publisher and distributor of video game software and content across a variety of platforms. The company has a market cap of more than $6 billion and trades at about $19 per share. Losses negate the availability of a price/earnings ratio but the forward price/earnings ratio is 16.59. The price/earnings growth ratio is 1.29. Price to book is 2.56 and return on equity is -11.20%. Quarterly year-over-year revenue growth is up 13.30% but insufficient to bring quarterly year-over-year revenue growth into positive territory.
On the whole, the company is financially sound, reporting a debt equity ratio of 20.83 and a current ratio of 1.39. It will come as no surprise that Electronic Arts does not pay a dividend. I'm no gamer, so if you are interested in product-line details I'll refer you to this excellent article. Analysts are forecasting a median target of $25 and are evenly split between buy and hold. However, almost 50% of the analysts rating the stock a buy, rate it a strong buy. Given Electronic Arts recent PopCap acquisition, financial strength and attractive forward price/earnings ratio, I put myself in the 'strong buy' camp. A contrarian's view perhaps, but when the CFO downplays future earnings, something is afoot.
Frontier Communications Company (FTR) has a dearth of upside catalysts and a plethora of downside ones. This brief news item in the Wall Street Journal sums it up quite nicely. That said, Frontier's fundamentals tell the tale as well. With a market cap of about $4.5 billion and trading at around $4 and change per share it sports a 28.01 trailing twelve month price/earnings ratio that continues to climb as share prices fall. The price/earnings growth ratio is 1.59 and price to book is fractional at 0.91. Return on equity is shockingly weak at 3.15%. Quarterly year-over-year revenue and earnings growth are -8.00 and -29.70 respectively.
Frontier's financial strength and soundness issues are exacerbated by its double digit dividend yield of 17.30% which it cannot continue to support. The payout ratio has already reached a critical level. This, among other factors, is driving the abysmal debt/equity ratio of 171.56. The current ratio is showing pressure as well, reported at 0.83. The analysts have given the stock a median target of $6 and fully half of them rate the stock a hold. I rate it as a 'sell', believing one should cut their losses and bite the proverbial bullet now. This item suggests to me that Frontier is in well over its head.
Unless you live in a cave, you have undoubtedly heard a great deal about Research In Motion Limited (RIMM) with respect to its October 10th, 2011 service outage and the chain of events that followed the nearly 4 day disruption of service to its customers. The stock, currently trading at about $17, is some 73% off its 52 week high. The fact is, the stock has been trending down for about a year, long before this incident. Moreover, this outage was not a 'first' for Research In Motion. Clearly, the company's troubles run deeper.
The biggest problem BlackBerry faces is another fruit- Apple, Inc. (AAPL). The fundamentals tell the story. RIM has a market cap of around $9 billion; Apple's is approaching $429 billion. RIM's trailing twelve month price/earnings ratio is 3.97 to Apple's 13.08. RIM's price/earnings growth ratio is negative, while Apple's is 0.56. Apple's return on equity is twice that of RIM. Quarterly year-over-year revenue growth is -5.9 for RIM and 73.30 for Apple. It is the same with earnings; -70.90 for RIM and 117.60 for Apple. Surprisingly, neither RIM nor Apple has any debt and RIM actually looks better than Apple when comparing current ratios (RIMM at 2.02 and AAPL at 1.58).
That said, all the management changes Research in Motion undertakes is tantamount to rearranging the deck chairs on the Titanic. They cannot effectively compete against Apple's iPhone and iPad. As a result, my position on Research In Motion is, "Abandon ship"!
Dendreon Corporation (DNDN) is basking in the glow of two significant upside catalysts. The first in the form of an upgrade from Bank of America (BAC) and the second are rumors (I know! There are always rumors) of a possible takeover. Dendreon, currently trading at about $14, is a biotech firm and as such, defies conventional analysis. Dendreon has a market cap of around $2 billion and the fundamentals would give any value investor a migraine. Suffice it to say that Dendreon's future will be determined by the sales of Provenge, a therapeutic vaccine to treat prostate cancer, approved by the Federal Drug Administration back in 2010. Dendreon has appointed a new Chief Executive Officer, John Johnson, to drive sales of the drug. Provenge, however, is not a cure. Although it costs $93,000 for a course of treatment, it only extends the life of the patient by 3 or 4 months. Doctors have been reluctant to prescribe the vaccine fearing they may not be reimbursed or perhaps because they are unwilling to invest so much for so little return. These are hurdles the new CEO must overcome if Dendreon is to remain viable. Were I a gambler, I might consider investing in Dendreon on the hopes of a takeover, but I am not a gambler, so I will call this one a hold.
Applied Materials, Inc. (AMAT) in the technology sector is trading at about $13 per share with a market cap of nearly $17 billion. It's cheap at just 8.82 times trailing twelve month earnings and sports a so-so price/earnings growth ratio of 1.59. Price to book is an agreeable 1.90, as is the return on equity of 23.58%. Quarterly year-over-year revenue and earnings growth disappoints, reported at -25.40% and -2.80% respectively. In spite of this, Applied Materials has a sound financial position demonstrated by a debt/equity ratio of 22.13 and a current ratio of 3.71. The company also provides shareholders a dividend yielding 2.40% against a modest payout ratio of 21%.
An upside catalyst for Applied Materials was the January 17th 2012 upgrade to 'outperform' by the analysts at RBC Capital (RY) and they have targeted the stock at $15. In fairness, other analysts have drawn more pessimistic conclusions. My take-away is that the share price is not likely to turn down and absent any rise, will still produce income from the sustainable dividend. In short, I would rate Applied Materials a buy.