Investing is all about financing a project with as little capital as possible to receive the most capital back as quickly as possible. Some companies appear better-poised to return capital to investors than others.
Some firms which are selling assets are trading at lower price multiple than firms which are tapping the markets for more capital. The former are attractive buy candidates, while the latter are not.
Companies Selling Debt
According to the Markit iTraxx Crossover Index, the credit ratings of 50 companies have been raised 14 basis points within four consecutive days in the UK. Legal & General Group Head of Credit Strategy Ben Bennett stated during an interview, "We've had an amazing run of spread compression and it's only natural that credit takes a bit of a breather. There is still good demand for new issuance, particularly rare names or deals that provide more yield."
Two of the world's biggest companies, Nokia (NOK) and Pepsico (PEP) are selling bonds in Europe. Nokia, which is facing deteriorating sales and market share, has planned to bolster funds by selling convertible bonds in the new European market and thus prevent debt maturity failure. Many other local and international companies are also inclined to sell bonds in Euros to secure their respective financial positions. The increasing stock ratings of high-yield credit companies entice investments in the European market from many multinational businesses.
This sale will provide about $978 million for Nokia with debt maturities in 2017. Nokia could probably use the money since it suffered a $1.27 billion loss in the third-quarter on reduced smartphone sales. The sales have declined from four million units sold in the second quarter to 2.9 million units in the third quarter. The sluggish sales are hoped to be the result of customers waiting for the debut of the new Lumina smartphone line.
Analysts are skeptical about Nokia's ability to overturn the losses with the introduction of its new windows-based Lumia smartphone. Nokia CEO Stephen Elop said, "A number of operators around the world are increasingly frustrated with the two strong ecosystems in their shops today. As they see a full portfolio of products with Lumia from Nokia, this will represent for them a credible third alternative." Nokia plans to diversify its customer base with a wide array of Lumia smartphone models covering different price points.
Nokia also plans to lay-off one third of its workers when it transitions away from its Symbian operating system. Even with this restructuring, Nokia will continue to see stiff competition from its rivals who outsource the manufacture of their smartphones from China.
Though the Pepsico story does not seem to require a cash infusion, Pepsi's results have not been fabulous. It reported a 5% drop in net income year-over-year for the third quarter. Despite a 3% increase in prices, Pepsico's American beverage sales in the third quarter dropped by 5.3%. This is not a soft-drink growth story.
So what's the problem? If these companies raise debt to lower their weighted cost of capital and pay out equity-holders with the proceeds there wouldn't be a problem. That would be acceptable in a low-rate environment. However, these proceeds of debt issuance will probably be used by Pepsico to grow its operations and by Nokia to stave off financial obligations.
Spin-offs to Raise Cash
I want cash cows. I want companies that can grow projects and then dispose of them when they mature for net cash payouts. Attractive stocks have management which is determined to return capital to shareholders.
Investors usually benefit from companies splitting up because the total market value of the separate parts is more than the original combined firm. However, managers tend to resist the carving up of their fiefdoms. This misalignment of interests should make investors skeptical of hypothetical sum-of-parts plays. Instead, investors should search for management teams which are accepting of spin-offs or which have announced spin-off deals to the public.
ING Group (ING) announced it will be selling its Malaysian insurance unit for $1.67 billion to AIA Group. Tucker said that AIA is so strong now that it can grow while simultaneously acquiring new assets calling it the acquisition "excellent strategic fit."
Abbott Laboratories (ABT) and its partner Reata Pharmaceuticals will be forced to review their options after the trial of bardoxolone methyl, a drug for kidney failure met a dead end. The planned spin-off may sell for lower-than-anticipated valuations.
Bardoxolene methyl was meant to better the functioning of damaged kidneys, a multi-billion dollar opportunity to serve millions of people with some form of chronic kidney disease. This setback makes AbbVie, Abbott's planned spin-off pharmaceuticals business, less attractive. Sanford C. Bernstein analyst Derrick Sung observed, "This is obviously disappointing news for Abbott as investor excitement around Abbott's late stage pipeline had been growing in anticipation of the split off of the AbbVie branded pharmaceuticals business."
Another ding to AbbVie's potential value came from a recent announcement that AbbVie would be subject to increased taxes to repatriate funds.
The valuation multiples of these companies reveal that ING and Safeway are particularly attractive:
Investors looking to capitalize on recent corporate moves should consider ING and Safeway as buy candidates. On a price-to-book basis ING is cheaper than the other companies on this list. Similarly, on a price-to-sales basis, Safeway is much more attractive than any other company on this list. Both ING and Safeway are improving their balance sheets, while Nokia and Pepsico are leveraging them.
Abbott Labs trades at richer multiples than the other firms on this list and may find its spin-off has become less attractive based on its drug development setback. Thus, it is less attractive as a buy candidate than ING or Safeway.