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In this installment of my analysis of recent purchases made by renowned institutions, I will analyze five purchases recently made by Goldman Sachs (GS) in the technology sector during Q4 2011. The companies selected for analysis are shown below.

  • Nokia (NOK)
  • Agilent Technologies (A)
  • Texas Instruments (TXN)
  • Autodesk (ADSK)
  • Acuity Brands (AYI)

In the article I will evaluate the fundamentals of these companies and perform relative valuation to determine the attractiveness of the companies at current levels. Some basic information about the companies is presented in the table that follows:

NOK

A

TXN

ADSK

AYI

Market Cap (Billion)

18.95

15.49

36.95

8.32

2.64

Stock Performance 5 Yr

-77%

40%

-1%

-2%

39%

Stock Performance 1 Yr

-40%

-5%

-11%

-10%

10%

Dividend Yield

5.2%

0.9%

2.1%

0.0%

0.8%

TXN is the biggest company in the group with a market capitalization of $37 billion, more than double the market capitalization of the second largest company - NOK. NOK reported a loss last year and the stock was down 40% in the period. Longer term, NOK is down 77%, easily the worst performer on the list. AYI has performed well over the last 5 years with the stock up 39% compared to the 25% return of the broader NASDAQ index. Agilent's shareholders enjoyed strong last year with the stock up 40%. The company has a market capitalization of $15.4 billion and offers a dividend yield of 1%. ADSK is the only non-dividend paying firm of the list.

Next, I observed the historical growth rates of revenue, income and book value, and the projected long term earnings growth rates. These are summarized in the table shown below:

Growth Rates

NOK

A

TXN

ADSK

AYI

Revenue

10 Year

3%

1%

5%

10%

-1%

5 Year

-5%

6%

-1%

4%

-6%

1 Year

-9%

22%

-2%

14%

10%

Income

10 Year

-

-

-

24%

7%

5 Year

-177%

-21%

-12%

0%

0%

1 Year

-163%

48%

-31%

35%

33%

EPS

10 Year

-

-

-

24%

7%

5 Year

-178%

-18%

-8%

0%

1%

1 Year

-162%

47%

-28%

36%

34%

Book Value

10 Year

1%

2%

4%

13%

6%

5 Year

2%

8%

5%

13%

8%

1 Year

-17%

33%

9%

21%

10%

Growth Projections

Next Year

-32%

12%

9%

-5%

-8%

Next 5 Year

3%

14%

7%

17%

15%

NOK had a poor last year with revenues declining by 9%. In fact, the revenues have declined at an annual rate of 5% during the last 5 years. TXN is the other firm on the list which reported a decline in revenues last year. ADSK, A and AYI reported significant growth in income last year with EPS increasing 36%, 47% and 34%, respectively. Going forwards, ADSK, AYI and A are projected to grow at a very similar pace ranging from 14% to 17%. NOK is expected to grow at a snail's pace of 3% per annum.

I also evaluated the return on invested capital and margins to compare the individual companies with their historical averages.

Averages

NOK

A

TXN

ADSK

AYI

Gross Margins

10 Year

35%

49%

47%

88%

41%

5 Year

32%

54%

51%

90%

40%

Last Year

29%

53%

49%

90%

41%

TTM

29%

53%

49%

90%

41%

Operating Margins

10 Year

11%

3%

19%

14%

8%

5 Year

6%

10%

24%

13%

11%

Last Year

-3%

16%

22%

16%

11%

TTM

-3%

16%

22%

16%

11%

ROIC

10 Year

21%

7%

18%

21%

9%

5 Year

16%

10%

21%

16%

11%

Last Year

-6%

15%

14%

16%

10%

TTM

-6%

17%

14%

16%

10%

With the exception of NOK, the other firms on the list have either maintained or improved their gross margins during the last 10 years. Analyzing the returns on invested capital, ADSK and A meet the minimum acceptable level above I generally consider a company worthy for investment (ROIC > 15%). TXN is on the borderline while AYI fails this test. NOK historically has returned 16% and will likely revert to these numbers once the company is able to steady its course and return to profitability.

Having developed a good idea about the fundamentals of the 5 companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples. The table below presents the valuation analysis results.

Valuation

NOK

A

TXN

ADSK

AYI

Next Yr Proj EPS

$0.37

$3.50

$2.40

$2.41

$3.96

EPS Growth Rate

3%

14%

7%

17%

15%

Future EPS (5 Yr)

$0.42

$5.13

$2.98

$3.90

$7.01

Expected P/E

17.7

15

15.9

25

17

Price 5 Yrs Out

$7.52

$76.90

$47.34

$97.42

$119.10

Unlevered Beta

1.87

1.23

2.11

1.77

1.23

Debt

5.321

2.181

5.592

0

0.353

Debt to Cap

28%

14%

15%

0%

13%

Current Tax Rate

35%

35%

35%

35%

35%

Levered Beta

2.21

1.34

2.32

1.77

1.34

Risk Free Rate

2%

2%

2%

2%

2%

Risk Premium

6.50%

6.50%

6.50%

6.50%

6.50%

Size Premium

-0.36%

0.62%

-0.36%

0.62%

1.54%

Cost of Equity

16.0%

11.3%

16.7%

14.1%

12.2%

Fair Value

$3.58

$44.93

$21.87

$50.32

$66.89

Current Price

$5.06

$44.55

$32.27

$36.81

$62.73

% Overvalued

29%

-1%

32%

-37%

-7%

As shown in the table above, ADSK is significantly undervalued and is an attractive investment candidate at current levels. The company is a play on engineering and construction markets. Additionally, AYI is modestly undervalued while TXN and NOK are grossly overvalued in my opinion. ADSK and A are my favored stocks on the list.

Source: Goldman Sachs' Tech Picks: 3 To Buy, 2 To Avoid