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A child can ask questions that a wise man cannot answer. Author Unknown

Two great companies in the tech sector are going to be examined in detail and pitted against each other in the hopes of finding a champion. Additional data has also been provided on three other plays for investors who might be looking for other ideas. At the end of the article we will offer our opinion as to which one we think is better.

Reasons to be bullish on SINA Corp (NASDAQ:SINA):

  • A decent free cash flow of $95.7 million.
  • Sales increased from $359 million in 2009 to $483 in 2011.
  • It has 5 year sales growth rate of 17.5%.
  • An excellent long term debt to equity ratio of 0.00.
  • A good quarterly revenue growth rate of 21%.
  • A high beta of 1.77 which makes it a good candidate for covered writes. Selling covered calls can open a second stream of income.
  • Gross profits increased from $219 million in 2009 to $234 million in 2011.
  • Institutions hold a lofty stake of 86.3%.
  • It has a projected EPS growth for the next 3-5 years of 22.9%.
  • A good five-year debt/total cap average of 0.16.
  • An excellent current and quick ratio of 4.12 respectively.
  • A good cash ratio of 3.56.
  • A decent free cash flow yield of 8%.
  • Cash flow from operating activities increased from $114 million in 2009 to $116.5 million in 2011.
  • $100K invested for 10 years would have grown to $943K.

Sohu.com Inc. (NASDAQ:SOHU), is a Chinese online media, search, gaming, community and mobile service group. It businesses operate in several segments: Online advertising, online games, wireless business, etc. The online advertising and online games are its core businesses. We like Sohu for several reasons:

Reasons to be bullish on Sohu.Com Inc :

  • It has a good 5 year ROE average of 24.93%.
  • It has a five year sales growth rate of 44.79%.
  • Sales have increased by 65% from $515 million in 2009 to $852 million in 2011.
  • Annual EPS before NRI has skyrocketed from 90 cents in 2007 to $4.62 in 2011.
  • It has a good free cash flow yield of 9.62%.
  • Net income has increased from $148 million in 2009 to $163 million in 2011.
  • It has a positive levered free cash flow of $93.06 million.
  • EBITDA has increased from $228 million in 2009 to $373 million in 2011.
  • Projected EPS growth rate for the next 3-5 years is 18.57%.
  • Insiders have a decent-sized stake in the company; percentage held by insiders is 21.05%.
  • Gross profits have increased from $391 million in 2009 to $615 million in 2011.
  • Cash flow from operating activities increased from $235 million in 2009 to $370 million in 2011.
  • A very good Debt/Total Cap 5 Year Average of 0.22.
  • A good quick and current ratio of 2.93 and 2.93 respectively.
  • An excellent cash ratio of 2.67.
  • Cash flow per share has surged from $4.32 in 2009 to $7.55 in 2011.
  • It sports a strong quarterly revenue growth rate of 42%.
  • It has a high beta of 2.04 which makes it a good candidate for covered writes.
  • $100K invested for 10 years would have grown to $4.16 million.

Many key ratios will be covered in this article and investors would do well to get a handle on some of the more important ones which are dealt with below.

Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making. This situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest - Data Storage Wars: Bet On EMC, The Decisive Champ.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditures, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share is $5, then the company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article - Standoff: Emerson Electric Vs. ABB ... Which One Pevails.

Company: Sina Corp

Free Cash Flow = 95.7 million

Basic Key ratios

  1. Percentage Held by Insiders = 7.4

Growth

  1. Net Income ($mil) 12/2011 = -302
  2. Net Income ($mil) 12/2010 = -19
  3. Net Income ($mil) 12/2009 = 412
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = -1482.13
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 109.28
  1. Cash Flow ($/share) 12/2011 = 0.69
  2. Cash Flow ($/share) 12/2010 = 1.92
  3. Cash Flow ($/share) 12/2009 = 0.93
  1. Sales ($mil) 12/2011 = 483
  2. Sales ($mil) 12/2010 = 403
  3. Sales ($mil) 12/2009 = 359
  1. Annual EPS before NRI 12/2007 = 1
  2. Annual EPS before NRI 12/2008 = 1.46
  3. Annual EPS before NRI 12/2009 = 0.61
  4. Annual EPS before NRI 12/2010 = 1.52
  5. Annual EPS before NRI 12/2011 = 0.69

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -22.9
  2. Next 3-5 Year Estimate EPS Growth rate = 27.46
  3. EPS Growth Quarterly(1)/Q(-3) = 168.29
  1. ROE 5 Year Average 06/2011 = 9.92
  2. Return on Investment 06/2011 = 3.63
  3. Debt/Total Cap 5 Year Average 06/2011 = 0.16
  4. Current Ratio 06/2011 = 4.12
  5. Current Ratio 5 Year Average = 3.86
  6. Quick Ratio = 4.12
  7. Cash Ratio = 3.56
  8. Interest Coverage Quarterly = N/A

Valuation

  1. Book Value Quarterly = 15.99
  2. Price/ Book = 3.51
  3. Price/ Cash Flow = -9.30
  4. Price/ Sales = 7.55
  5. Price/free cash flow= 38.10

Company: Sohu.Com Inc

Levered Free Cash Flow = 93.06 million

Basic Key ratios

  1. Percentage Held by Insiders = 21.05
  2. Market Cap ($mil) = 2052

Growth

  1. Net Income ($mil) 12/2011 = 163
  2. Net Income ($mil) 12/2010 = 149
  3. Net Income ($mil) 12/2009 = 148
  1. EBITDA ($mil) 12/2011 = 373
  2. EBITDA ($mil) 12/2010 = 261
  3. EBITDA ($mil) 12/2009 = 228
  1. Cash Flow ($/share) 12/2011 = 7.55
  2. Cash Flow ($/share) 12/2010 = 4.61
  3. Cash Flow ($/share) 12/2009 = 4.32
  1. Sales ($mil) 12/2011 = 852
  2. Sales ($mil) 12/2010 = 613
  3. Sales ($mil) 12/2009 = 515
  1. Annual EPS before NRI 12/2007 = 0.9
  2. Annual EPS before NRI 12/2008 = 3.96
  3. Annual EPS before NRI 12/2009 = 3.57
  4. Annual EPS before NRI 12/2010 = 3.62
  5. Annual EPS before NRI 12/2011 = 4.62

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -36.91
  2. Next 3-5 Year Estimate EPS Growth rate = 18.57
  3. EPS Growth Quarterly(1)/Q(-3) = -119.63
  1. ROE 5 Year Average 06/2011 = 24.93
  2. Return on Investment 06/2011 = 16.42
  3. Debt/Total Cap 5 Year Average 06/2011 = 0.22
  1. Current Ratio 06/2011 = 2.93
  2. Current Ratio 5 Year Average = 3.19
  3. Quick Ratio = 2.93
  4. Cash Ratio = 2.67
  5. Interest Coverage Quarterly = N/A

Valuation

  1. Book Value Quarterly = 26.48
  2. Price/ Book = 2.04
  3. Price/ Cash Flow = 6.90
  4. Price/ Sales = 2.41
  5. Price/free cash flow= 31.00

For investors looking for other ideas some data has been provided on three additional companies to get you started.

Company: Akamai Tech (NASDAQ:AKAM)

Levered Free Cash Flow = 259.33M

  1. Net Income ($mil) 12/2011 = 201
  2. Net Income ($mil) 12/2010 = 171
  3. Net Income ($mil) 12/2009 = 146
  1. EBITDA ($mil) 12/2011 = 475
  2. EBITDA ($mil) 12/2010 = 408
  3. EBITDA ($mil) 12/2009 = 363
  1. Cash Flow ($/share) 12/2011 = 2.16
  2. Cash Flow ($/share) 12/2010 = 1.85
  3. Cash Flow ($/share) 12/2009 = 2.2
  1. Sales ($mil) 12/2011 = 1159
  2. Sales ($mil) 12/2010 = 1024
  3. Sales ($mil) 12/2009 = 860

  1. Annual EPS before NRI 12/2007 = 1.07
  2. Annual EPS before NRI 12/2008 = 1.34
  3. Annual EPS before NRI 12/2009 = 1.35
  4. Annual EPS before NRI 12/2010 = 1.01
  5. Annual EPS before NRI 12/2011 = 1.17
  6. Current Ratio = 7.10
  7. Quick Ratio = 7.60
  8. Long term debt/equity ratio= 0.00
  9. 5 year sales average= 20.34%

Company: Rackspace Hosting (NYSE:RAX)

Levered Free Cash Flow = 49.04M

  1. Net Income ($mil) 12/2011 = 76
  2. Net Income ($mil) 12/2010 = 46
  3. Net Income ($mil) 12/2009 = 30
  1. EBITDA ($mil) 12/2011 = 318
  2. EBITDA ($mil) 12/2010 = 235
  3. EBITDA ($mil) 12/2009 = 181
  1. Cash Flow ($/share) 12/2011 = 2.07
  2. Cash Flow ($/share) 12/2010 = 1.6
  3. Cash Flow ($/share) 12/2009 = 1.27
  1. Sales ($mil) 12/2011 = 1025
  2. Sales ($mil) 12/2010 = 781
  3. Sales ($mil) 12/2009 = 629

  1. Annual EPS before NRI 12/2008 = 0.19
  2. Annual EPS before NRI 12/2009 = 0.24
  3. Annual EPS before NRI 12/2010 = 0.35
  4. Annual EPS before NRI 12/2011 = 0.55
  1. Current Ratio = 1.00
  2. Quick Ratio = 1.10
  3. Long term debt/equity ratio= 0.12
  4. 5 year sales average= 33.3%

Company: Youku.Com (NYSE:YOKU)

Levered Free Cash Flow = -66.16M

  1. Net Income ($mil) 12/2011 = -27
  2. Net Income ($mil) 12/2010 = -31
  3. Net Income ($mil) 12/2009 = -27
  1. EBITDA ($mil) 12/2011 = 7
  2. EBITDA ($mil) 12/2010 = -23
  3. Cash Flow ($/share) 12/2011 = 0.08
  1. Sales ($mil) 12/2011 = 143
  2. Sales ($mil) 12/2010 = 59
  3. Sales ($mil) 12/2009 = 22

  1. Annual EPS before NRI 12/2009 = -1.3
  2. Annual EPS before NRI 12/2010 = -0.94
  3. Annual EPS before NRI 12/2011 = -0.25
  4. Current Ratio = 8.90
  5. Quick Ratio = 9.00
  6. Long term debt/equity ratio= 0.00
  7. 5 year sales average= N/A

Conclusion

While both companies are good, SOHU in our opinion is a much better play for the following reasons:

  • EBITDA has continued to trend upwards for the past three years as opposed to SINA where the EBITDA dropped from $400 million in 2009 to $52.7 million in 2011.
  • Cash flow per share has continued to trend upwards as opposed to SINA where cash flow per share has dropped from $.93 in 2009 to $0.69 in 2011.
  • Annual EPS before NRI has also continued to trend upwards as opposed to SINA where it dropped from $1.00 in 2007 to $0.67 in 2011.
  • A free cash flow yield of 9.62% Vs 8% for SINA.
  • 5 year sales growth of 44% Vs 17.5% for SINA.
  • 5 year ROE average of 24.9% Vs 9.9% for SINA.
  • A quarterly revenue growth rate of 42% Vs 21% for SINA.
  • Percentage held by insiders is 21.5% Vs 8.5% for SINA.
  • $100K invested for 10 years would have grown to $4.16 million as opposed to $943K for SINA.

Disclaimer

This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.

Source: SINA Vs. SOHU: Is There A Clear Winner?

Additional disclosure: EPS, Price, EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings estimate and growth tables sourced from dailyfinance.com.