Chuck Carnevale - Seeking Alpha 'Chuck Carnevale' Tag RSS Syndication from SeekingAlpha.com SeekingAlpha.com http://seekingalpha.com/author/chuck-carnevale Research in Motion: Well Positioned to Take Advantage of the Smartphone Explosion http://seekingalpha.com/article/178929-research-in-motion-well-positioned-to-take-advantage-of-the-smartphone-explosion?source=feed 178929 The Best Smartphones

The debate regarding who makes the best Smartphone rages on. The Apple fans seem to be the most zealous, which is a real plus for Apple, Inc. (AAPL). However, the market for Smartphones, though large already, has the potential to become enormous.

]]> Fri, 18 Dec 2009 15:53:47 -0500 Chuck Carnevale Chuck Carnevale submits:

The Best Smartphones

The debate regarding who makes the best Smartphone rages on. The Apple fans seem to be the most zealous, which is a real plus for Apple, Inc. (AAPL). However, the market for Smartphones, though large already, has the potential to become enormous.


Complete Story »]]> RIMM AAPL Chuck Carnevale Rockwell Collins: Dividend Up Thanks to Resurgent Growth http://seekingalpha.com/article/178758-rockwell-collins-dividend-up-thanks-to-resurgent-growth?source=feed 178758 Background

Rockwell Collins (COL) was founded in 1933 as Collins Radio. For more than 75 years the company has been recognized for high quality state-of-the-art technology in communications equipment. In more modern times, its tradition of excellence has expanded into aviation electronics and mobile and airborne communication systems.

]]> Thu, 17 Dec 2009 16:51:10 -0500 Chuck Carnevale Chuck Carnevale submits:

Background

Rockwell Collins (COL) was founded in 1933 as Collins Radio. For more than 75 years the company has been recognized for high quality state-of-the-art technology in communications equipment. In more modern times, its tradition of excellence has expanded into aviation electronics and mobile and airborne communication systems.


Complete Story »]]> COL Chuck Carnevale Stryker: Prospering with Predictable Growth http://seekingalpha.com/article/177721-stryker-prospering-with-predictable-growth?source=feed 177721 Background

Stryker (SYK) based in Kalamazoo, Michigan has produced one of the most consistent strings of earnings growth since 1991 of any publicly traded company. Stryker is a leading manufacturer of medical devices, primarily in orthopedics. In 2008 Orthopedic implants for hip, knee, shoulder and spine, as well as trauma related products and bone cement made up 59% of sales. Their medical and surgical equipment unit represents the remaining 41%.

]]> Fri, 11 Dec 2009 04:57:28 -0500 Chuck Carnevale Chuck Carnevale submits:

Background

Stryker (SYK) based in Kalamazoo, Michigan has produced one of the most consistent strings of earnings growth since 1991 of any publicly traded company. Stryker is a leading manufacturer of medical devices, primarily in orthopedics. In 2008 Orthopedic implants for hip, knee, shoulder and spine, as well as trauma related products and bone cement made up 59% of sales. Their medical and surgical equipment unit represents the remaining 41%.


Complete Story »]]> SYK Chuck Carnevale The Principles of Dividend Investing http://seekingalpha.com/article/176988-the-principles-of-dividend-investing?source=feed 176988 This article was originally written in response to a request from Mick Weinsten, Editor-in-chief of Seeking Alpha, as preparation for a live panel discussion on dividend investing on 12/7/2009. We offer it here as a clarification and expansion of points we were trying to make as well as responses to questions.
1) What balance sheet factors do we look for in equity dividend investing? Does this change at different times, or according to market cycles?
When investing for dividends we start by screening for companies with a debt to equity ratio below 50%. Companies with healthy balance sheets and strong cash positions are most likely to pay and continue to pay their dividend. The balance sheet, however, is a static measurement of a company’s financial condition in present time. Therefore, we always analyze the balance sheet in conjunction with the income statement and statement of cash flows.
Our objective is to evaluate a company’s dynamic ability to cover its dividend; past, present and future.
At EDMP, Inc. we believe in investing with a total return objective. Ultimately, with dividend paying companies, we seek companies that we believe can grow earnings at a high average or above average rates. Our objective is to generate capital appreciation in conjunction with an increasing dividend income stream. In short, we feel our clients deserve a raise in pay each year from their dividend paying holdings. We call this Growth Yield.
Consequently, the rate of change, or velocity of earnings growth, is of great interest to us. Dividends are paid out of earnings, expressed as a payout ratio. Our research suggests that mature companies tend to maintain a consistent pay-out ratio over long periods of time. Therefore, the dividend growth rate also tends to correlate to the growth rate of earnings as well. The velocity of earnings growth allows us to calculate how much time it will take to double the dividend.
We designed our Fundamentals-at-a-Glance research tool to automatically analyze and calculate these important relationships and the results they generate.
In Figure 1 below we show the historical earnings correlated chart for Johnson & Johnson (JNJ) since 1991 which is as far back as our data allows. From this example you can see that Johnson & Johnson has consistently grown earnings at 12.6% per annum. The bottom of the graph lists dividends paid (yellow shading). Note that we only list every other year due to space constraints. The point is that dividend growth followed earnings growth. Detailed dividend figures are listed and highlighted in Figure 3. (Click charts to enlarge)
Fig. 1. JNJ Correlation of EPS Growth and Stock Price
Fig. 1. JNJ Correlation of EPS Growth and Stock Price
In Figure 2 we show Bristol-Myers Squibb Co., (BMY) as contrast. Note the higher current dividend yield of 5% as compared to JNJ’s 3.1%. Bristol-Myers Squibb’s less consistent earnings growth of 5% per annum, translates into a much slower rate of dividend increase (yellow shading). Detailed dividend figures are listed and highlighted in Figure 4.
Fig 2. BMY Correlation of EPS Growth and Stock Price
Fig 2 BMY Correlation of EPS Growth and Stock Price
Figures 3 & 4 below show the performance that correlates to Figures 1 & 2. Note how Johnson & Johnson starts out in 1991 with a 2.1% yield (Figure 3) compared to Bristol-Myers Squibb’s higher 3.6% starting yield (Figure 4). Also notice how Johnson & Johnson’s much faster growth ultimately generated not only a larger total period dividend income stream, but a significantly higher yield in the later years as well.
This illuminates the power of the growth yield concept. Most importantly, the total return differential, assuming dividends are spent not reinvested, is large as well. The faster growing Johnson & Johnson’s 12.1% total return is more than double Bristol-Myers Squibb’s 5.1%.
Fig. 3. JNJ Dividend and Price Performance
Fig. 3. JNJ Dividend and Price Performance
Fig. 4. BMY Dividend and Price Performance
Fig. 4. BMY Dividend and Price Performance
The quality of the earnings calculations we make are highly dependent on the balance sheet and the income statement and statement of cash flows. As the old Wall Street saying goes – earnings are optional, but cash is king. Therefore, we place great emphasis on cash flow per share exceeding earnings per share. This gives us confidence that the quality of the earnings, that dividends are being paid out of, are high. We apply these standards universally across all market conditions or cycles. In short, we are making decisions based on the return realities that the cash flows generate. No considerations as to what the market may or may not do are included.
2) How do we see the role of dividend investing within a broader portfolio-building strategy?
AT EDMP, Inc. we offer two primary investing strategies that will include dividend paying companies. The first is our Large-cap Growth Strategy. Under this strategy we have a total return objective of 15-20% per annum. If a company does not pay a dividend then it must grow earnings at a historical and forecast growth rate of 15% or higher. Dividend paying companies must possess an earnings growth of 8-12% or higher and offer a starting yield of at least 1.5% for earnings growth above 10%, and 2.5% or higher yield for growth between 8-10%.
From the combination of appreciation based on earnings growth, coupled with a growing dividend yield we expect to meet our 15-20% return objective over a market cycle (at least 3-5 years) from these above average dividend payers. Additionally they provide a source of income that can be used for buy-downs and tend to be more stable price-wise than pure growth stocks. We believe this provides balance, flexibility and a level of risk reduction to the portfolio without sacrificing return.
Our second strategy is our Growth and Income strategy. Under this approach we endeavor to blend higher growth with lower starting yields with slower growing higher starting yields. We feel this enables us to provide the client that needs current income the opportunity to enjoy a growing yield and moderate capital appreciation.
Current income needs are weighted against future growth. This will determine the precise blend of higher yield with lower growth to lower yielding higher growing companies. There is an unavoidable trade-off and inverse relationship between growth and income. The more growth you seek the lower yield you can expect. However, over long time periods a faster grower with yield can possibly generate more total income.
3) What particular opportunities do we see for dividend investors in the current market – i.e., what are our current highest conviction dividend investing picks?
We believe the current stock market environment has created a rare window of opportunity for the prudent investor seeking growth and income. Even as the stock market has recovered from recession-driven lows, many of our blue-chip companies have been mostly left behind. Consequently, they are currently trading at lower valuations than we have seen over the past two decades and, therefore, offer starting yields higher than normal.
Therefore, they offer an opportunity for higher than customary returns. First, there is the arbitrage that is possible from their return to historically normal valuations. This ranges from as little as a 10% gain by merely returning to normal levels, to as much as a 100% gain. The following three examples utilizing our Fundamentals-at-a-Glance research tool illustrates the arbitrage. With each example, notice how the respective company has rarely to never traded below their earnings justified value line (green line with white triangles).
Fig. 5. MCD Correlation of EPS Growth and Stock Price
Fig. 5. MCD Correlation of EPS Growth and Stock Price
Fig. 6. CLX Correlation of EPS Growth and Stock Price
Fig. 6. CLX Correlation of EPS Growth and Stock Price
Fig. 7. AFL Correlation of EPS Growth and Stock Price
Fig. 7. AFL Correlation of EPS Growth and Stock Price
In addition to this anomalous valuation, these companies have long histories of increasing their dividends at above average rates. Finally due to their lower-than-normal valuations, current yield is higher than normal as well. Additional companies that have these rare opportunities are:
  1. McCormick & Company Inc. (MKC)
  2. Proctor & Gamble (PG)
  3. Hudson City Bancorp, Inc. (HCBK)
  4. Kimberly Clark (KMB)
  5. Pfizer (PFE)
  6. Merck (MRK)
Although these are not the highest yielding dividend payers available, we believe they offer a unique blend of growth, increasing income and safety that is rarely found. These high-quality multi-national stalwarts offer a window of opportunity that could close very quickly. However, even under normal times, these companies have historically rewarded shareholders with above market returns.
Disclosure: Long AFL, CLX, HCBK, JNJ, KMB, MCD, PG at time of writing.
]]> Mon, 07 Dec 2009 18:10:53 -0500 Chuck Carnevale Chuck Carnevale submits:
This article was originally written in response to a request from Mick Weinsten, Editor-in-chief of Seeking Alpha, as preparation for a live panel discussion on dividend investing on 12/7/2009. We offer it here as a clarification and expansion of points we were trying to make as well as responses to questions.
1) What balance sheet factors do we look for in equity dividend investing? Does this change at different times, or according to market cycles?
When investing for dividends we start by screening for companies with a debt to equity ratio below 50%. Companies with healthy balance sheets and strong cash positions are most likely to pay and continue to pay their dividend. The balance sheet, however, is a static measurement of a company’s financial condition in present time. Therefore, we always analyze the balance sheet in conjunction with the income statement and statement of cash flows.
Our objective is to evaluate a company’s dynamic ability to cover its dividend; past, present and future.
At EDMP, Inc. we believe in investing with a total return objective. Ultimately, with dividend paying companies, we seek companies that we believe can grow earnings at a high average or above average rates. Our objective is to generate capital appreciation in conjunction with an increasing dividend income stream. In short, we feel our clients deserve a raise in pay each year from their dividend paying holdings. We call this Growth Yield.
Consequently, the rate of change, or velocity of earnings growth, is of great interest to us. Dividends are paid out of earnings, expressed as a payout ratio. Our research suggests that mature companies tend to maintain a consistent pay-out ratio over long periods of time. Therefore, the dividend growth rate also tends to correlate to the growth rate of earnings as well. The velocity of earnings growth allows us to calculate how much time it will take to double the dividend.
We designed our Fundamentals-at-a-Glance research tool to automatically analyze and calculate these important relationships and the results they generate.
In Figure 1 below we show the historical earnings correlated chart for Johnson & Johnson (JNJ) since 1991 which is as far back as our data allows. From this example you can see that Johnson & Johnson has consistently grown earnings at 12.6% per annum. The bottom of the graph lists dividends paid (yellow shading). Note that we only list every other year due to space constraints. The point is that dividend growth followed earnings growth. Detailed dividend figures are listed and highlighted in Figure 3. (Click charts to enlarge)
Fig. 1. JNJ Correlation of EPS Growth and Stock Price
Fig. 1. JNJ Correlation of EPS Growth and Stock Price
In Figure 2 we show Bristol-Myers Squibb Co., (BMY) as contrast. Note the higher current dividend yield of 5% as compared to JNJ’s 3.1%. Bristol-Myers Squibb’s less consistent earnings growth of 5% per annum, translates into a much slower rate of dividend increase (yellow shading). Detailed dividend figures are listed and highlighted in Figure 4.
Fig 2. BMY Correlation of EPS Growth and Stock Price
Fig 2 BMY Correlation of EPS Growth and Stock Price
Figures 3 & 4 below show the performance that correlates to Figures 1 & 2. Note how Johnson & Johnson starts out in 1991 with a 2.1% yield (Figure 3) compared to Bristol-Myers Squibb’s higher 3.6% starting yield (Figure 4). Also notice how Johnson & Johnson’s much faster growth ultimately generated not only a larger total period dividend income stream, but a significantly higher yield in the later years as well.
This illuminates the power of the growth yield concept. Most importantly, the total return differential, assuming dividends are spent not reinvested, is large as well. The faster growing Johnson & Johnson’s 12.1% total return is more than double Bristol-Myers Squibb’s 5.1%.
Fig. 3. JNJ Dividend and Price Performance
Fig. 3. JNJ Dividend and Price Performance
Fig. 4. BMY Dividend and Price Performance
Fig. 4. BMY Dividend and Price Performance
The quality of the earnings calculations we make are highly dependent on the balance sheet and the income statement and statement of cash flows. As the old Wall Street saying goes – earnings are optional, but cash is king. Therefore, we place great emphasis on cash flow per share exceeding earnings per share. This gives us confidence that the quality of the earnings, that dividends are being paid out of, are high. We apply these standards universally across all market conditions or cycles. In short, we are making decisions based on the return realities that the cash flows generate. No considerations as to what the market may or may not do are included.
2) How do we see the role of dividend investing within a broader portfolio-building strategy?
AT EDMP, Inc. we offer two primary investing strategies that will include dividend paying companies. The first is our Large-cap Growth Strategy. Under this strategy we have a total return objective of 15-20% per annum. If a company does not pay a dividend then it must grow earnings at a historical and forecast growth rate of 15% or higher. Dividend paying companies must possess an earnings growth of 8-12% or higher and offer a starting yield of at least 1.5% for earnings growth above 10%, and 2.5% or higher yield for growth between 8-10%.
From the combination of appreciation based on earnings growth, coupled with a growing dividend yield we expect to meet our 15-20% return objective over a market cycle (at least 3-5 years) from these above average dividend payers. Additionally they provide a source of income that can be used for buy-downs and tend to be more stable price-wise than pure growth stocks. We believe this provides balance, flexibility and a level of risk reduction to the portfolio without sacrificing return.
Our second strategy is our Growth and Income strategy. Under this approach we endeavor to blend higher growth with lower starting yields with slower growing higher starting yields. We feel this enables us to provide the client that needs current income the opportunity to enjoy a growing yield and moderate capital appreciation.
Current income needs are weighted against future growth. This will determine the precise blend of higher yield with lower growth to lower yielding higher growing companies. There is an unavoidable trade-off and inverse relationship between growth and income. The more growth you seek the lower yield you can expect. However, over long time periods a faster grower with yield can possibly generate more total income.
3) What particular opportunities do we see for dividend investors in the current market – i.e., what are our current highest conviction dividend investing picks?
We believe the current stock market environment has created a rare window of opportunity for the prudent investor seeking growth and income. Even as the stock market has recovered from recession-driven lows, many of our blue-chip companies have been mostly left behind. Consequently, they are currently trading at lower valuations than we have seen over the past two decades and, therefore, offer starting yields higher than normal.
Therefore, they offer an opportunity for higher than customary returns. First, there is the arbitrage that is possible from their return to historically normal valuations. This ranges from as little as a 10% gain by merely returning to normal levels, to as much as a 100% gain. The following three examples utilizing our Fundamentals-at-a-Glance research tool illustrates the arbitrage. With each example, notice how the respective company has rarely to never traded below their earnings justified value line (green line with white triangles).
Fig. 5. MCD Correlation of EPS Growth and Stock Price
Fig. 5. MCD Correlation of EPS Growth and Stock Price
Fig. 6. CLX Correlation of EPS Growth and Stock Price
Fig. 6. CLX Correlation of EPS Growth and Stock Price
Fig. 7. AFL Correlation of EPS Growth and Stock Price
Fig. 7. AFL Correlation of EPS Growth and Stock Price
In addition to this anomalous valuation, these companies have long histories of increasing their dividends at above average rates. Finally due to their lower-than-normal valuations, current yield is higher than normal as well. Additional companies that have these rare opportunities are:
  1. McCormick & Company Inc. (MKC)
  2. Proctor & Gamble (PG)
  3. Hudson City Bancorp, Inc. (HCBK)
  4. Kimberly Clark (KMB)
  5. Pfizer (PFE)
  6. Merck (MRK)
Although these are not the highest yielding dividend payers available, we believe they offer a unique blend of growth, increasing income and safety that is rarely found. These high-quality multi-national stalwarts offer a window of opportunity that could close very quickly. However, even under normal times, these companies have historically rewarded shareholders with above market returns.
Disclosure: Long AFL, CLX, HCBK, JNJ, KMB, MCD, PG at time of writing.

Complete Story »]]> JNJ BMY MKC PG HCBK KMB PFE MRK Chuck Carnevale Opportunities in Dividend Investing: A Seeking Alpha Expert Panel http://seekingalpha.com/article/176751-opportunities-in-dividend-investing-a-seeking-alpha-expert-panel?source=feed 176751 Today at 2pm ET we hosted here a live discussion on current opportunities in dividend investing. The panelists are three SA contributor portfolio managers who place particular emphasis on dividend-yielding stocks in their clients' portfolios. Here are the panelists, their credentials and some of their recent writing on dividend investing:

Chuck Carnevale is co-founder and chief investment officer at EDMP Investment Management of Lutz, Florida. Prior to EDMP, he was a partner in a 30-year-old established registered investment advisory in Tampa, Florida. He's also been a partner with a private NYSE member firm, the President of a NASD firm, and a Vice President of a major American Stock Exchange listed company.

]]> Sun, 06 Dec 2009 08:55:55 -0500 SA Editors Today at 2pm ET we hosted here a live discussion on current opportunities in dividend investing. The panelists are three SA contributor portfolio managers who place particular emphasis on dividend-yielding stocks in their clients' portfolios. Here are the panelists, their credentials and some of their recent writing on dividend investing:

Chuck Carnevale is co-founder and chief investment officer at EDMP Investment Management of Lutz, Florida. Prior to EDMP, he was a partner in a 30-year-old established registered investment advisory in Tampa, Florida. He's also been a partner with a private NYSE member firm, the President of a NASD firm, and a Vice President of a major American Stock Exchange listed company.


Complete Story »]]> PG JNJ HCBK EEP ENB SA Editors Rising Dividend Investing Chuck Carnevale 5 Food Stocks: Dividends and Growth Make a Tasty Combination http://seekingalpha.com/article/176266-5-food-stocks-dividends-and-growth-make-a-tasty-combination?source=feed 176266 People gotta eat. One thing that we all have in common is that we wake up hungry every day. Therefore, companies in the food business tend to be very stable and rather consistent long-term growers. Most pay dividends that grow with their earnings; some even grow earnings and dividends at above-average rates.

The stock market, on the other hand, is not always consistent, or for that matter, rational. Even though they possess the attributes mentioned above, below we report on five blue chip food related stocks that can be bought today at values (PE ratios) that are below S&P 500 Index levels. Better yet, they offer a higher blended yield than a ten-year Treasury bond. However, unlike the bond, the dividend grows each year, therefore, the yield increases over time. We call this growth yield.

]]> Thu, 03 Dec 2009 02:59:06 -0500 Chuck Carnevale Chuck Carnevale submits:

People gotta eat. One thing that we all have in common is that we wake up hungry every day. Therefore, companies in the food business tend to be very stable and rather consistent long-term growers. Most pay dividends that grow with their earnings; some even grow earnings and dividends at above-average rates.

The stock market, on the other hand, is not always consistent, or for that matter, rational. Even though they possess the attributes mentioned above, below we report on five blue chip food related stocks that can be bought today at values (PE ratios) that are below S&P 500 Index levels. Better yet, they offer a higher blended yield than a ten-year Treasury bond. However, unlike the bond, the dividend grows each year, therefore, the yield increases over time. We call this growth yield.


Complete Story »]]> KFT CAG MCD PEP SYY Chuck Carnevale Coach: Growth and Growth Yield at a Reasonable Price http://seekingalpha.com/article/175381-coach-growth-and-growth-yield-at-a-reasonable-price?source=feed 175381 Weathered the Storm

Coach (COH) has weathered the recession extremely well. Although fiscal 2009 ending June 30 was a down year, it was nevertheless their second most profitable year ever. So far fiscal 2010 promises a return to growth. Even though their profitability remained strong, Coach’s stock was pummeled from May of 2007 through February of 2009. Based on strong fundamentals, we felt the price drop was unjustified and overdone. On July 16, 2009 we posted an article stating our case (see article link here).

]]> Wed, 25 Nov 2009 16:24:24 -0500 Chuck Carnevale Chuck Carnevale submits:

Weathered the Storm

Coach (COH) has weathered the recession extremely well. Although fiscal 2009 ending June 30 was a down year, it was nevertheless their second most profitable year ever. So far fiscal 2010 promises a return to growth. Even though their profitability remained strong, Coach’s stock was pummeled from May of 2007 through February of 2009. Based on strong fundamentals, we felt the price drop was unjustified and overdone. On July 16, 2009 we posted an article stating our case (see article link here).


Complete Story »]]> COH Chuck Carnevale Why a Market Crash Doesn’t Matter http://seekingalpha.com/article/174714-why-a-market-crash-doesnt-matter?source=feed 174714 Market Generalities

When reading Seeking Alpha Friday, I couldn’t help noticing that the most popular article was: Why the Stock Market Should Crash, by Charles Hugh Smith. With all due respect to Mr. Smith, and all the other doomsayers out there, I frankly just don’t get it. In my opinion, fear is a negative emotion that causes more harm than good. My favorite acronym for FEAR is: False Evidence Appearing Real.

]]> Sun, 22 Nov 2009 09:36:09 -0500 Chuck Carnevale Chuck Carnevale submits:

Market Generalities

When reading Seeking Alpha Friday, I couldn’t help noticing that the most popular article was: Why the Stock Market Should Crash, by Charles Hugh Smith. With all due respect to Mr. Smith, and all the other doomsayers out there, I frankly just don’t get it. In my opinion, fear is a negative emotion that causes more harm than good. My favorite acronym for FEAR is: False Evidence Appearing Real.


Complete Story »]]> SPX NKE CTSH TEVA ESI COH GOOG PG ORCL SPY Chuck Carnevale L-3 Communications: Growing Dividend, Priced at a Bargain http://seekingalpha.com/article/174232-l-3-communications-growing-dividend-priced-at-a-bargain?source=feed 174232 Historical Norms

L-3 Communications (LLL), the sixth largest defense company in the United States remains undervalued in our view. Even though L-3’s fundamentals remain strong, the market seems to be ignoring this well positioned defense company. Currently trading at a mere 10.6 PE ratio its valued below most of its peers.

]]> Thu, 19 Nov 2009 06:00:30 -0500 Chuck Carnevale Chuck Carnevale submits:

Historical Norms

L-3 Communications (LLL), the sixth largest defense company in the United States remains undervalued in our view. Even though L-3’s fundamentals remain strong, the market seems to be ignoring this well positioned defense company. Currently trading at a mere 10.6 PE ratio its valued below most of its peers.


Complete Story »]]> LLL Chuck Carnevale Buffett and Gates at Columbia – The Markets Have Bottomed! http://seekingalpha.com/article/173318-buffett-and-gates-at-columbia-the-markets-have-bottomed?source=feed 173318 Warren Buffett told an audience of cheering Columbia University students last night that the worst of the financial global crisis is over. Moreover, he also said that stocks have bottomed out. His advice was not to pass on something attractive today. He was joined by Bill Gates, who agreed with his sentiments.
What struck me about watching the interview was the strong faith in our country and its future they both displayed. Both men acknowledged that mistakes can and will be made. However, they both are confident that the free enterprise system, we live under will survive and prosper. Neither man would forecast the short run. However, both held sensible and insightful positive long-term views.
I thought it might be entertaining to look at the companies both of these business giants started and control from the perspective of our earnings correlated Fundamentals-at-a-Glance research tool. Even more fun is to examine them first over 20 years, a real long run, then over the past 10 years, a shorter long run.
Figure 1 looks at Microsoft’s (MSFT) stock price correlated to earnings and its track record. Note how overvalued Microsoft got during the irrational exuberance tech bubble from 1995-1999. This clearly validates the importance of valuation.
Fig. 1. MSFT 20yr EPS Growth and Price Performance
Fig. 1. MSFT 20yr EPS Growth and Price Performance

Figure 2 looks at Berkshire Hathaway (BRK.A) over the same time frame. Note how flat and inconsistent both earnings and stock price were for the period 1997-2001. This clearly validates the importance of earnings.
Fig. 2. BRK.A 20yr EPS Growth and Price Performance
Fig. 2. BRK.A 20yr EPS Growth and Price Performance

Over the past 20 years, both companies generated substantial wealth for their owners. Bill Gates was the clear winner, although Warren’s numbers weren’t too shabby. The years since 2000 tell a different story. The value of Warren’s stake in Berkshire Hathaway doubled in value. However, due to excessive overvaluation, Mr. Gates saw the value of his Microsoft holdings cut in half.
Figure 3 shows Microsoft’s price correlated to its earnings since calendar year 2000 and performance.
Fig. 3. MSFT 11yr EPS Growth and Price Performance
Fig. 3. MSFT 11yr EPS Growth and Price Performance

Figure 4 shows Berkshire Hathaway’s stock price correlated to its earnings since calendar year 2000 and performance.
Fig. 4. BRK.A 11yr EPS Growth and Price Performance
Fig. 4. BRK.A 11yr EPS Growth and Price Performance

Conclusion

The skeptics will scoff that it’s easy for these men to be optimists because they are so rich. We say these guys are so rich because they are optimists. Many want to write our country and its future off. We believe they are greatly short-changing the power that our great nation possesses. In every adversity lies the seed of a greater or equivalent benefit. What we have recently experienced was, by any measure, horrible. However, as Warren Buffett indicated in his talk last night, it has hopefully made us all a little smarter. Bill Gates pointed to several industries that he felt would revolutionize our future in much the same way that Microsoft once did. Therefore, let’s move confidently in the direction of our futures.
Disclosure: No Holdings in the stocks mentioned at time of writing.
]]> Fri, 13 Nov 2009 17:31:35 -0500 Chuck Carnevale Chuck Carnevale submits:
Warren Buffett told an audience of cheering Columbia University students last night that the worst of the financial global crisis is over. Moreover, he also said that stocks have bottomed out. His advice was not to pass on something attractive today. He was joined by Bill Gates, who agreed with his sentiments.
What struck me about watching the interview was the strong faith in our country and its future they both displayed. Both men acknowledged that mistakes can and will be made. However, they both are confident that the free enterprise system, we live under will survive and prosper. Neither man would forecast the short run. However, both held sensible and insightful positive long-term views.
I thought it might be entertaining to look at the companies both of these business giants started and control from the perspective of our earnings correlated Fundamentals-at-a-Glance research tool. Even more fun is to examine them first over 20 years, a real long run, then over the past 10 years, a shorter long run.
Figure 1 looks at Microsoft’s (MSFT) stock price correlated to earnings and its track record. Note how overvalued Microsoft got during the irrational exuberance tech bubble from 1995-1999. This clearly validates the importance of valuation.
Fig. 1. MSFT 20yr EPS Growth and Price Performance
Fig. 1. MSFT 20yr EPS Growth and Price Performance

Figure 2 looks at Berkshire Hathaway (BRK.A) over the same time frame. Note how flat and inconsistent both earnings and stock price were for the period 1997-2001. This clearly validates the importance of earnings.
Fig. 2. BRK.A 20yr EPS Growth and Price Performance
Fig. 2. BRK.A 20yr EPS Growth and Price Performance

Over the past 20 years, both companies generated substantial wealth for their owners. Bill Gates was the clear winner, although Warren’s numbers weren’t too shabby. The years since 2000 tell a different story. The value of Warren’s stake in Berkshire Hathaway doubled in value. However, due to excessive overvaluation, Mr. Gates saw the value of his Microsoft holdings cut in half.
Figure 3 shows Microsoft’s price correlated to its earnings since calendar year 2000 and performance.
Fig. 3. MSFT 11yr EPS Growth and Price Performance
Fig. 3. MSFT 11yr EPS Growth and Price Performance

Figure 4 shows Berkshire Hathaway’s stock price correlated to its earnings since calendar year 2000 and performance.
Fig. 4. BRK.A 11yr EPS Growth and Price Performance
Fig. 4. BRK.A 11yr EPS Growth and Price Performance

Conclusion

The skeptics will scoff that it’s easy for these men to be optimists because they are so rich. We say these guys are so rich because they are optimists. Many want to write our country and its future off. We believe they are greatly short-changing the power that our great nation possesses. In every adversity lies the seed of a greater or equivalent benefit. What we have recently experienced was, by any measure, horrible. However, as Warren Buffett indicated in his talk last night, it has hopefully made us all a little smarter. Bill Gates pointed to several industries that he felt would revolutionize our future in much the same way that Microsoft once did. Therefore, let’s move confidently in the direction of our futures.
Disclosure: No Holdings in the stocks mentioned at time of writing.

Complete Story »]]> MSFT BRK.A Chuck Carnevale ITT Educational Services: Strong Earnings Growth at a Reasonable Price http://seekingalpha.com/article/172905-itt-educational-services-strong-earnings-growth-at-a-reasonable-price?source=feed 172905 Expanding Minds an Expanding Business

Thanks to the recession, more and more people nationwide are making the “smarter” move. They are going back to school, that is, in order to increase their value and attractiveness in a distressed workplace environment. This is proving to be a boom for ITT Educational Services, Inc. (ESI), one of the leading post secondary education providers in the country. ITT Educational Services, Inc. (ESI) is headquartered in Carmel, Indiana.

]]> Thu, 12 Nov 2009 03:15:01 -0500 Chuck Carnevale Chuck Carnevale submits:

Expanding Minds an Expanding Business

Thanks to the recession, more and more people nationwide are making the “smarter” move. They are going back to school, that is, in order to increase their value and attractiveness in a distressed workplace environment. This is proving to be a boom for ITT Educational Services, Inc. (ESI), one of the leading post secondary education providers in the country. ITT Educational Services, Inc. (ESI) is headquartered in Carmel, Indiana.


Complete Story »]]> ESI Chuck Carnevale United Technologies: Attractive Dividend and Peer Outperformance http://seekingalpha.com/article/172090-united-technologies-attractive-dividend-and-peer-outperformance?source=feed 172090 United Technologies (UTX) is a diversified global provider of high-technology products and services for building systems and aircraft. From an operating perspective, this stalwart blue-chip has weathered the recession better than other well-known peers. Although earnings and market price sagged in 2008, both are recovering quickly as the economy and stock market improves.

When viewed from the perspective of our Fundamentals-at-a-glance earnings and price correlated research tool, United Technologies’ operating excellence versus its peers’ is clearly evident. Figure 1 shows United Technologies’ stock price since 1996 overlaid on their earnings growth. As you can see, stock price tracked earnings very closely over the years. When the price (black line) rose above the earnings line (green line with white triangles) it always returned to the earnings justified price and vice-versa.

]]> Sun, 08 Nov 2009 10:11:12 -0500 Chuck Carnevale Chuck Carnevale submits:

United Technologies (UTX) is a diversified global provider of high-technology products and services for building systems and aircraft. From an operating perspective, this stalwart blue-chip has weathered the recession better than other well-known peers. Although earnings and market price sagged in 2008, both are recovering quickly as the economy and stock market improves.

When viewed from the perspective of our Fundamentals-at-a-glance earnings and price correlated research tool, United Technologies’ operating excellence versus its peers’ is clearly evident. Figure 1 shows United Technologies’ stock price since 1996 overlaid on their earnings growth. As you can see, stock price tracked earnings very closely over the years. When the price (black line) rose above the earnings line (green line with white triangles) it always returned to the earnings justified price and vice-versa.


Complete Story »]]> UTX GE HON Chuck Carnevale Riding the Rails: Why BNI Was Berkshire's Best Bet - And Vintage Buffett http://seekingalpha.com/article/170927-riding-the-rails-why-bni-was-berkshire-s-best-bet-and-vintage-buffett?source=feed 170927 The largest acquisition in Berkshire Hathaway history is, in our opinion, vintage Buffett. The Burlington Northern Santa Fe Corp. (BNI) press release spun it as follows:

“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. ”Conversely, America must grow and prosper for railroads to do well. Berkshire’s $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry.”

“Most important of all, however, it’s an all-in wager on the economic future of the United States,” said Mr. Buffett. “I love these bets.”

]]> Tue, 03 Nov 2009 15:15:31 -0500 Chuck Carnevale Chuck Carnevale submits:
The largest acquisition in Berkshire Hathaway history is, in our opinion, vintage Buffett. The Burlington Northern Santa Fe Corp. (BNI) press release spun it as follows:

“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” said Warren E. Buffett, Berkshire Hathaway chairman and chief executive officer. ”Conversely, America must grow and prosper for railroads to do well. Berkshire’s $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry.”

“Most important of all, however, it’s an all-in wager on the economic future of the United States,” said Mr. Buffett. “I love these bets.”


Complete Story »]]> BNI KSU CSX UNP NSC Chuck Carnevale Manitowoc: Cyclical Bottom, Building a Higher Future http://seekingalpha.com/article/169968-manitowoc-cyclical-bottom-building-a-higher-future?source=feed 169968 Historical Perspective
Manitowoc (MTW), as the dominant manufacturer of building cranes, has long been considered a cyclical company. In recent times, the company has been working to reduce the cyclicality of their business. They divested their legacy Manitowoc Marine business and greatly expanded their Manitowoc’s Foodservice business with the acquisition of Enodis. Originally they were only on the cold side of foodservice, offering ice machines, walk-in coolers, etc. With the purchase of Enodis, they have expanded to the hot side as well offering ovens, steamers, fryers, etc.
Consequently, since 2007, Manitowoc has morphed into a more balanced and hopefully less cyclical enterprise. In 2007, they were 83% cranes, 11% foodservice and 6% marine. Today they are transformed into 70% cranes and 30% foodservice. Unfortunately, this transformation occurred as the world entered the severe recession of 2008. In the short run, the recession was devastating to the company’s profits. However, the longer run may prove to be very rewarding to shareholders.
In the long run, earnings determine market price. Whether earnings go up, down or sideways, a company’s stock price will inevitably follow. Also, the rate of change of earnings, not the stock market, will be the driver of shareholder’s percentage results. Manitowoc’s historical 20-year earnings and price correlated graph offers stark evidence of this price and earnings thesis. Figure 1 below, shows how strongly Manitowoc’s stock price has correlated and followed its earnings results since 1991.
Fig. 1. MTW 20yr EPS Growth & Price Correlation
Fig. 1. MTW 20yr EPS Growth & Price Correlation
Figure 2 below shows how Manitowoc’s earnings growth of 12.2% per annum has translated into shareholder appreciation of 10.5% compounded. Clearly, shareholder returns correlated closely to operating results and were much stronger than the general market (S&P 500) return of 6.3% compounded. Add in dividends, and long-term shareholders were well rewarded.
Fig. 2. MTW 20yr Dividend & Price Performance
Fig. 2. MTW 20yr Dividend & Price Performance
MTW returns to shareholders since 2006 tell a dramatically different story. The correlation between earnings and market price is still intact, but with markedly different results. Also, once again, Manitowoc’s esults were driven specifically by their operating performance and not the general market (S&P 500). As Figure 3 depicts, Manitowoc’s performance of a minus 14% compounded loss since 2006 is significantly greater than the market (S&P 500) loss of minus 5.4% compounded.
Fig. 3. MTW 5yr EPS Growth & Price Performance
Fig. 3. MTW 5yr EPS Growth & Price Performance
The Present to Building the Future

Crane Segment
Today’s Manitowoc is a more diversified company operating in two diverse business segments. The crane segment builds, sells, leases and finances crawler cranes, tower cranes, rough terrain and all-terrain truck cranes and boom trucks and industrial cranes. Their Manitowoc brand is the world leader in high capacity lattice-boom crawler cranes. The Potain brand is the world leader in top-slewing and self-executing tower cranes. Finally, the Grove and National Crane brands are world leaders in mobile telescopic cranes and boom trucks.
As the economies of the world recover from the recession, the building and rebuilding of infrastructure worldwide is expected to rapidly resurge. Manitowoc’s end markets are heavy construction, energy, bridges and highways, infrastructure, commercial construction and high density residential. Manitowoc derives 42% of crane sales from the Americas, 46% from EMEA (Europe, Middle East and Africa) and 12% from Asia. They are especially well positioned in rural China. New cranes represent 90% of Manitowoc’s sales mix, and aftermarket support represents 10%.
Figures 4 through 6 are slides Manitowoc presented at the Deutsche Bank Leveraged Finance Conference on October 1, 2009, in Scottsdale, AZ. As the charts illustrate, Manitowoc’s crane business is well diversified across many attractive end markets.
Fig. 4. Manitowoc Presentation (slide 23)
Fig. 4. Manitowoc Presentation (slide 23)
Fig. 5. Manitowoc Presentation (slide 24)
Fig. 5. Manitowoc Presentation (slide 24)
Fig. 6. Manitowoc Presentation (slide 25)
Fig. 6. Manitowoc Presentation (slide 25)
Foodservice Segment
Manitowoc’s Foodservice segment, now 30% of sales offers both growth and stability to future earnings and cash flows. Although the Enodis acquisition arguably leveraged Manitowoc’s balance sheet at an inopportune time short term, the longer term benefits to the company and its shareholders are potentially large. Enhanced stability of earnings, a broader full service capability of both hot and cold-side equipment offer additive benefits.
The following four slides from the Deutsche Bank Leveraged Finance Conference on October 1, 2009 in Scottsdale, AZ highlight the foodservice opportunity.
Fig. 7. Manitowoc Presentation (slide 11)
Fig. 7. Manitowoc Presentation (slide 11)
Fig. 8. Manitowoc Presentation (slide 12)
Fig. 8. Manitowoc Presentation (slide 12)
Fig. 9. Manitowoc Presentation (slide 13)
Fig. 9. Manitowoc Presentation (slide 13)
Fig. 10. Manitowoc Presentation (slide 14)
Fig. 10. Manitowoc Presentation (slide 14)
Conclusion
Manitowoc reports earnings at the close of business today, 10/29/2009. As of the time of this writing, the market is positively anticipating the announcement as the stock is up approximately 11%. Yesterday, company directors approved a 2-cent regular quarterly dividend but announced the switching to an annual common stock cash dividend thereafter.
Whether tonight’s earnings report is good or bad is not the real story for Manitowoc. The true Manitowoc story lies in the future. Two or three years out, the possible values for this well run mid-cap company are intriguing, to say the least. For sure, there are issues to overcome; a leveraged balance sheet is a big one. On the other hand, Manitowoc offers industry leading brands in all areas of their business. Therefore, future growth potential off of distressed values is large, albeit risky. This opportunity is only available to the patient investor willing to hold for at least the next business cycle of 3 to five years.
Disclosure: Long MTW at time of writing.
]]> Thu, 29 Oct 2009 16:59:40 -0400 Chuck Carnevale Chuck Carnevale submits:
Historical Perspective
Manitowoc (MTW), as the dominant manufacturer of building cranes, has long been considered a cyclical company. In recent times, the company has been working to reduce the cyclicality of their business. They divested their legacy Manitowoc Marine business and greatly expanded their Manitowoc’s Foodservice business with the acquisition of Enodis. Originally they were only on the cold side of foodservice, offering ice machines, walk-in coolers, etc. With the purchase of Enodis, they have expanded to the hot side as well offering ovens, steamers, fryers, etc.
Consequently, since 2007, Manitowoc has morphed into a more balanced and hopefully less cyclical enterprise. In 2007, they were 83% cranes, 11% foodservice and 6% marine. Today they are transformed into 70% cranes and 30% foodservice. Unfortunately, this transformation occurred as the world entered the severe recession of 2008. In the short run, the recession was devastating to the company’s profits. However, the longer run may prove to be very rewarding to shareholders.
In the long run, earnings determine market price. Whether earnings go up, down or sideways, a company’s stock price will inevitably follow. Also, the rate of change of earnings, not the stock market, will be the driver of shareholder’s percentage results. Manitowoc’s historical 20-year earnings and price correlated graph offers stark evidence of this price and earnings thesis. Figure 1 below, shows how strongly Manitowoc’s stock price has correlated and followed its earnings results since 1991.
Fig. 1. MTW 20yr EPS Growth & Price Correlation
Fig. 1. MTW 20yr EPS Growth & Price Correlation
Figure 2 below shows how Manitowoc’s earnings growth of 12.2% per annum has translated into shareholder appreciation of 10.5% compounded. Clearly, shareholder returns correlated closely to operating results and were much stronger than the general market (S&P 500) return of 6.3% compounded. Add in dividends, and long-term shareholders were well rewarded.
Fig. 2. MTW 20yr Dividend & Price Performance
Fig. 2. MTW 20yr Dividend & Price Performance
MTW returns to shareholders since 2006 tell a dramatically different story. The correlation between earnings and market price is still intact, but with markedly different results. Also, once again, Manitowoc’s esults were driven specifically by their operating performance and not the general market (S&P 500). As Figure 3 depicts, Manitowoc’s performance of a minus 14% compounded loss since 2006 is significantly greater than the market (S&P 500) loss of minus 5.4% compounded.
Fig. 3. MTW 5yr EPS Growth & Price Performance
Fig. 3. MTW 5yr EPS Growth & Price Performance
The Present to Building the Future

Crane Segment
Today’s Manitowoc is a more diversified company operating in two diverse business segments. The crane segment builds, sells, leases and finances crawler cranes, tower cranes, rough terrain and all-terrain truck cranes and boom trucks and industrial cranes. Their Manitowoc brand is the world leader in high capacity lattice-boom crawler cranes. The Potain brand is the world leader in top-slewing and self-executing tower cranes. Finally, the Grove and National Crane brands are world leaders in mobile telescopic cranes and boom trucks.
As the economies of the world recover from the recession, the building and rebuilding of infrastructure worldwide is expected to rapidly resurge. Manitowoc’s end markets are heavy construction, energy, bridges and highways, infrastructure, commercial construction and high density residential. Manitowoc derives 42% of crane sales from the Americas, 46% from EMEA (Europe, Middle East and Africa) and 12% from Asia. They are especially well positioned in rural China. New cranes represent 90% of Manitowoc’s sales mix, and aftermarket support represents 10%.
Figures 4 through 6 are slides Manitowoc presented at the Deutsche Bank Leveraged Finance Conference on October 1, 2009, in Scottsdale, AZ. As the charts illustrate, Manitowoc’s crane business is well diversified across many attractive end markets.
Fig. 4. Manitowoc Presentation (slide 23)
Fig. 4. Manitowoc Presentation (slide 23)
Fig. 5. Manitowoc Presentation (slide 24)
Fig. 5. Manitowoc Presentation (slide 24)
Fig. 6. Manitowoc Presentation (slide 25)
Fig. 6. Manitowoc Presentation (slide 25)
Foodservice Segment
Manitowoc’s Foodservice segment, now 30% of sales offers both growth and stability to future earnings and cash flows. Although the Enodis acquisition arguably leveraged Manitowoc’s balance sheet at an inopportune time short term, the longer term benefits to the company and its shareholders are potentially large. Enhanced stability of earnings, a broader full service capability of both hot and cold-side equipment offer additive benefits.
The following four slides from the Deutsche Bank Leveraged Finance Conference on October 1, 2009 in Scottsdale, AZ highlight the foodservice opportunity.
Fig. 7. Manitowoc Presentation (slide 11)
Fig. 7. Manitowoc Presentation (slide 11)
Fig. 8. Manitowoc Presentation (slide 12)
Fig. 8. Manitowoc Presentation (slide 12)
Fig. 9. Manitowoc Presentation (slide 13)
Fig. 9. Manitowoc Presentation (slide 13)
Fig. 10. Manitowoc Presentation (slide 14)
Fig. 10. Manitowoc Presentation (slide 14)
Conclusion
Manitowoc reports earnings at the close of business today, 10/29/2009. As of the time of this writing, the market is positively anticipating the announcement as the stock is up approximately 11%. Yesterday, company directors approved a 2-cent regular quarterly dividend but announced the switching to an annual common stock cash dividend thereafter.
Whether tonight’s earnings report is good or bad is not the real story for Manitowoc. The true Manitowoc story lies in the future. Two or three years out, the possible values for this well run mid-cap company are intriguing, to say the least. For sure, there are issues to overcome; a leveraged balance sheet is a big one. On the other hand, Manitowoc offers industry leading brands in all areas of their business. Therefore, future growth potential off of distressed values is large, albeit risky. This opportunity is only available to the patient investor willing to hold for at least the next business cycle of 3 to five years.
Disclosure: Long MTW at time of writing.

Complete Story »]]> MTW Chuck Carnevale Redux: Future S&P Returns Could Be Extraordinary http://seekingalpha.com/article/169818-redux-future-s-p-returns-could-be-extraordinary?source=feed 169818 On June 18, 2009, we posted the article “Future S&P Returns Could be Extraordinary.” Although four plus months later hardly qualifies as the future, enough has changed to make it interesting to re-visit.
Figure one below reproduces our Graham Dodd adjusted earnings correlated graph dated June 15, 2009. As you can see, the S&P 500 was at 923.72, had a blended PE ratio of 17.3 and an earnings growth rate of 4.4%.
(click each figure to expand)
Fig. 1. S&P 500 20yr EPS & Price Correlation (Reproduced from June 18 Post)
Fig. 1. S&P 500 20yr EPS & Price Correlation (Reproduced from June 18 Post)
Figure two below depicts an updated Graham Dodd adjusted earnings correlated graph through October 27, 2009. We used a shorter time frame, 1996 to current, in order to provide more detail. Note that the 2009 earnings estimate has been reduced from $58 (Figure one) to $57.17 (Figure 2). Also we now have a consensus estimate for 2010 S&P 500 earnings of $71.00.
Fig. 2. S&P 500 15yr EPS & Price Correlation
Fig. 2. S&P 500 15yr EPS & Price Correlation
Since June 15, 2009 the S&P 500 blended PE ratio has expanded from 17.3 (the modern normal PE) to 19.1. This implies that at 1063.41 the S&P 500 value on 10/27/09 is slightly above its intrinsic value. On the other hand, applying the modern normal 17.4 PE ratio to the 2010 estimated $71.00 of earnings implies a year end 2010 intrinsic value of 1234.73.
Therefore, based on historical norms applied to consensus estimates the S&P 500 is moderately overvalued based on year end 2009 value, and offers attractive upside to year end 2010 value. Note that the 1234.73 intrinsic value listed above includes the S&P 500 PE ratio falling from its current 19.1 PE to its historical normal PE of 17.4, based on foreasted earnings.
Figure three below looks at the S&P 500 over the period 1996 to 2006. This is pre –the great recession and is offered to reflect the historical normal earnings growth for the S&P 500. This period includes the infamous “irrational exuberance” period 1996-2000 and the recession of 2001. Note the 9.4% (7-10 Hist.) more normal Earnings Growth rate.
Fig. 3. S&P 500 1996-2006 EPS & Price Correlation
Fig. 3. S&P 500 1996-2006 EPS & Price Correlation
Our final graph, figure 4 below, depicts a five year forecast for the S&P 500 earnings based on a more normal 8% growth rate following a return to near($85.91 EST. vs $87.72 2006 Actual ) 2006 S&P 500 reported earnings. This implies an S&P 500 value just north of 1900 by year end 2014. This is not our forecast, as we don’t forecast the stock market. This is merely a mathematical representation of an S&P 500 achieving normal growth & values from today’s levels.
Fig. 4. S&P 500 EPS Forecast
Fig. 4. S&P 500 EPS Forecast
CONCLUSION
The majority of the discussion in this article and its predecessor, dated June 18, 2009, is based on historical fact. The earnings correlated graphs are based on facts as reported and drawn with mathematical calculations based on those facts. They are not manipulated or altered. Consequently, we believe they tell a compelling and undeniable story to those willing to study them closely.
To us, they are what they are, and not really subject to debate. Of course this does not apply to the forecasting charts or the data points on the historical graphs marked with an E for estimate. That information is based on estimates and therefore open to debate.
Our point is straight forward. In our view, there is a profound perspective that is gleamed from the facts as they exist. For example, the irrational exuberant period of 1996 to 2000 clearly indicates aberrant overvaluation. Most importantly this overvaluation explains the majority of the S&P 500’s poor performance over the last 10-15 years.
In our view, the undeniable correlation between the rate of change of earnings growth and price is clearly evident. Most importantly, the past twenty years refutes the efficient market hypothesis. There are many years where the market was clearly inefficiently overpricing stocks.
On the other hand, and perhaps equally as important, the evidence supports the hypothesis of a market seeking efficiency. In other words, when values get out of wack, there will inevitably be a reversion to the mean.
Many will continue to obsess with short-term forecasts regarding how the so called market (S&P 500) may or may not behave in the near future. Also, many will continue to draw technical charts based on price volatility, while ignoring the more important fundamental principles.
There will continue to be doom and gloomers and wide eyed optimists as well, yet the world belongs to the pragmatists. As the venerable Warren Buffett so aptly put it in a recent interview, “the world works.” Let the market march on.

Full Disclosure: No index ownership at time of writing - We only buy individual equities.

]]> Thu, 29 Oct 2009 09:46:09 -0400 Chuck Carnevale Chuck Carnevale submits:
On June 18, 2009, we posted the article “Future S&P Returns Could be Extraordinary.” Although four plus months later hardly qualifies as the future, enough has changed to make it interesting to re-visit.
Figure one below reproduces our Graham Dodd adjusted earnings correlated graph dated June 15, 2009. As you can see, the S&P 500 was at 923.72, had a blended PE ratio of 17.3 and an earnings growth rate of 4.4%.
(click each figure to expand)
Fig. 1. S&P 500 20yr EPS & Price Correlation (Reproduced from June 18 Post)
Fig. 1. S&P 500 20yr EPS & Price Correlation (Reproduced from June 18 Post)
Figure two below depicts an updated Graham Dodd adjusted earnings correlated graph through October 27, 2009. We used a shorter time frame, 1996 to current, in order to provide more detail. Note that the 2009 earnings estimate has been reduced from $58 (Figure one) to $57.17 (Figure 2). Also we now have a consensus estimate for 2010 S&P 500 earnings of $71.00.
Fig. 2. S&P 500 15yr EPS & Price Correlation
Fig. 2. S&P 500 15yr EPS & Price Correlation
Since June 15, 2009 the S&P 500 blended PE ratio has expanded from 17.3 (the modern normal PE) to 19.1. This implies that at 1063.41 the S&P 500 value on 10/27/09 is slightly above its intrinsic value. On the other hand, applying the modern normal 17.4 PE ratio to the 2010 estimated $71.00 of earnings implies a year end 2010 intrinsic value of 1234.73.
Therefore, based on historical norms applied to consensus estimates the S&P 500 is moderately overvalued based on year end 2009 value, and offers attractive upside to year end 2010 value. Note that the 1234.73 intrinsic value listed above includes the S&P 500 PE ratio falling from its current 19.1 PE to its historical normal PE of 17.4, based on foreasted earnings.
Figure three below looks at the S&P 500 over the period 1996 to 2006. This is pre –the great recession and is offered to reflect the historical normal earnings growth for the S&P 500. This period includes the infamous “irrational exuberance” period 1996-2000 and the recession of 2001. Note the 9.4% (7-10 Hist.) more normal Earnings Growth rate.
Fig. 3. S&P 500 1996-2006 EPS & Price Correlation
Fig. 3. S&P 500 1996-2006 EPS & Price Correlation
Our final graph, figure 4 below, depicts a five year forecast for the S&P 500 earnings based on a more normal 8% growth rate following a return to near($85.91 EST. vs $87.72 2006 Actual ) 2006 S&P 500 reported earnings. This implies an S&P 500 value just north of 1900 by year end 2014. This is not our forecast, as we don’t forecast the stock market. This is merely a mathematical representation of an S&P 500 achieving normal growth & values from today’s levels.
Fig. 4. S&P 500 EPS Forecast
Fig. 4. S&P 500 EPS Forecast
CONCLUSION
The majority of the discussion in this article and its predecessor, dated June 18, 2009, is based on historical fact. The earnings correlated graphs are based on facts as reported and drawn with mathematical calculations based on those facts. They are not manipulated or altered. Consequently, we believe they tell a compelling and undeniable story to those willing to study them closely.
To us, they are what they are, and not really subject to debate. Of course this does not apply to the forecasting charts or the data points on the historical graphs marked with an E for estimate. That information is based on estimates and therefore open to debate.
Our point is straight forward. In our view, there is a profound perspective that is gleamed from the facts as they exist. For example, the irrational exuberant period of 1996 to 2000 clearly indicates aberrant overvaluation. Most importantly this overvaluation explains the majority of the S&P 500’s poor performance over the last 10-15 years.
In our view, the undeniable correlation between the rate of change of earnings growth and price is clearly evident. Most importantly, the past twenty years refutes the efficient market hypothesis. There are many years where the market was clearly inefficiently overpricing stocks.
On the other hand, and perhaps equally as important, the evidence supports the hypothesis of a market seeking efficiency. In other words, when values get out of wack, there will inevitably be a reversion to the mean.
Many will continue to obsess with short-term forecasts regarding how the so called market (S&P 500) may or may not behave in the near future. Also, many will continue to draw technical charts based on price volatility, while ignoring the more important fundamental principles.
There will continue to be doom and gloomers and wide eyed optimists as well, yet the world belongs to the pragmatists. As the venerable Warren Buffett so aptly put it in a recent interview, “the world works.” Let the market march on.

Full Disclosure: No index ownership at time of writing - We only buy individual equities.


Complete Story »]]> SPY IVV Chuck Carnevale Nike: Growing Earnings and Increasing Dividends http://seekingalpha.com/article/167695-nike-growing-earnings-and-increasing-dividends?source=feed 167695 Industry Leader
We like industry leading companies. You don’t become the top company in a competitive sector by accident or luck. It takes skill, ability, and a commitment to customers to get to the top, and even more so to stay there. Nike (NKE) clearly dominates the athletic footwear market worldwide. Their successful athletic equipment and apparel businesses further validate their business acumen and dedication to operational excellence.
Proven Record
We also like companies with proven track records of business success. Consistent, above average earnings growth is a rare achievement. In Figure 1 below we plot Nike’s earnings growth since calendar year 2000. The average company as measured by the S&P 500 only grew earnings at a compounded rate of 3%. Nike in contrast grew almost 4-1/2 times faster than average at 13.3% (See red circle, Figure 1). (click each figure to expand for readability)
Fig. 1. NKE 11yr Earnings Growth
Fig. 1. NKE 11yr Earnings Growth
Earnings increased from a $1.09/share in fiscal 2000 to $3.86 per share in fiscal 2009 (See orange shaded area, Figure 1). Although fiscal 2010 earnings are forecast to be slightly lower, it will still represent the company's second most profitable year ever. Quite a feat when you consider the depth of the worldwide recession. It shows that people love sports and so does Nike.
In Figure 2 we overlay monthly closing stock prices (black line) and show dividends paid out of earnings (light blue area). The stock price clearly fluctuates above and below the normal PE ratio line of 18 (blue line with *), as it tracks earnings over time.
Fig. 2. NKE 11yr Earnings History Correlated to Stock Price
Fig. 2. NKE 11yr Earnings History Correlated to Stock Price
When evaluating a company for potential investment we find it useful to calculate performance over whatever time frame we measure. We can also evaluate the effects of valuation, over or under, on long-term performance.
Figure 3 below reports the performance of Nike that correlates to the time frame depicted in Figure 2. Note that Nike started the period slightly overvalued and ended slightly undervalued. Therefore, the 10.5% compounded return from 12/31/1999 to 10/19/2009 is clearly driven by the rate of change of Nike’s earnings growth adjusted for valuation. Also, note that the S&P 500 generated a minus 2.9% compounded loss over the same period. Clearly, the stock market (S&P 500) had little to do with Nike’s returns to its shareholders. The dividend table in Figure 3 shows that Nike also has a history of increasing its dividend as its earnings grow.
Fig. 3. NKE 11yr Dividend and Stock Price Performance
Fig. 3. NKE 11yr Stock Price Performance
Forecast Growth
We believe that Nike can continue to grow earnings at between 10-15% per annum for years to come. This is in line with the 12.5% consensus estimate for five-year earnings growth by 19 leading analysts reporting to First Call as depicted in Figure 4. Also note that this implies that Nike is fairly valued at 17.5 times blended earnings, which is in line with its historical PE ratio of 18. The current dividend yield of 1.5%, and growing, is attractive considering today’s low interest rate environment. Most importantly, the dividend is well protected by a strong balance sheet and cash and short-term investments of $3.6 billion, and debt of only $545 million at quarter’s end. Their debt to capital ratio is only slightly north of 5%. (See purple circle, Figure 4).
Fig. 4. NKE 5yr Earnings Forecast
Fig. 4. NKE 5yr Earnings Forecast
Thesis for Growth
Nike recently restructured their businesses in order to achieve a goal of $23 billion of sales by 2011 versus approximately $19 billion of sales today. They slashed a cumbersome management infrastructure and sharpened their focus over six geographic divisions listed in descending order:
  1. North America = 42% Total Revenue
  2. Western Europe = 26% Total Revenue
  3. Emerging Markets = 10% Total Revenue
  4. Greater China = 10% Total Revenue
  5. Central & Eastern Europe = 7% Total Revenue
  6. Japan = 5% Total Revenue
We believe the biggest drivers of future growth will be China and the Emerging Markets. Although all six geographic regions should contribute to growth, as people all over the world love sports.
Nike enjoys dominant branding as the Nike “swoosh” logo and the “Just Do It” tag line are recognized icons in over 170 countries worldwide. Nike, Inc.’s brand portfolio consists of wholly-owned subsidiaries – Cole Haan, Converse, Inc., Hurley International LLC, Nike Golf and Umbro Ltd.
In addition to a strong portfolio of brands, Nike differentiates itself as one of the most innovative companies in its industry. The company's in-house research and development division employs experts in many areas. Nike’s people understand biomechanics, exercise physiology, chemistry, industrial design and engineering, which is demonstrated through its innovative product lines.
Also, many of the most recognized athletes on earth, like Michael Jordan and Tiger Woods, to name a few, serve on Nike’s advisory boards. Therefore, Nike connects with their customers at an extraordinary level.
Conclusion
Nike reduced inventories more than 10% in the first quarter of fiscal 2010. Therefore, lean inventories, and a consolidated supply chain makes them lean and mean. Add improving currency exchange against easy sales comparisons and the future earnings picture appears bright. Therefore, we believe Nike is a solid buy at a fair price for long-term oriented investors seeking a quality holding with a potentially growing dividend and attractive growth of capital. We would also add to positions given any market weakness as Nike would only become inexpensive at prices (or values) below today’s levels.
Disclosure: Long NKE at the time of writing.
]]> Tue, 20 Oct 2009 17:23:26 -0400 Chuck Carnevale Chuck Carnevale submits:
Industry Leader
We like industry leading companies. You don’t become the top company in a competitive sector by accident or luck. It takes skill, ability, and a commitment to customers to get to the top, and even more so to stay there. Nike (NKE) clearly dominates the athletic footwear market worldwide. Their successful athletic equipment and apparel businesses further validate their business acumen and dedication to operational excellence.
Proven Record
We also like companies with proven track records of business success. Consistent, above average earnings growth is a rare achievement. In Figure 1 below we plot Nike’s earnings growth since calendar year 2000. The average company as measured by the S&P 500 only grew earnings at a compounded rate of 3%. Nike in contrast grew almost 4-1/2 times faster than average at 13.3% (See red circle, Figure 1). (click each figure to expand for readability)
Fig. 1. NKE 11yr Earnings Growth
Fig. 1. NKE 11yr Earnings Growth
Earnings increased from a $1.09/share in fiscal 2000 to $3.86 per share in fiscal 2009 (See orange shaded area, Figure 1). Although fiscal 2010 earnings are forecast to be slightly lower, it will still represent the company's second most profitable year ever. Quite a feat when you consider the depth of the worldwide recession. It shows that people love sports and so does Nike.
In Figure 2 we overlay monthly closing stock prices (black line) and show dividends paid out of earnings (light blue area). The stock price clearly fluctuates above and below the normal PE ratio line of 18 (blue line with *), as it tracks earnings over time.
Fig. 2. NKE 11yr Earnings History Correlated to Stock Price
Fig. 2. NKE 11yr Earnings History Correlated to Stock Price
When evaluating a company for potential investment we find it useful to calculate performance over whatever time frame we measure. We can also evaluate the effects of valuation, over or under, on long-term performance.
Figure 3 below reports the performance of Nike that correlates to the time frame depicted in Figure 2. Note that Nike started the period slightly overvalued and ended slightly undervalued. Therefore, the 10.5% compounded return from 12/31/1999 to 10/19/2009 is clearly driven by the rate of change of Nike’s earnings growth adjusted for valuation. Also, note that the S&P 500 generated a minus 2.9% compounded loss over the same period. Clearly, the stock market (S&P 500) had little to do with Nike’s returns to its shareholders. The dividend table in Figure 3 shows that Nike also has a history of increasing its dividend as its earnings grow.
Fig. 3. NKE 11yr Dividend and Stock Price Performance
Fig. 3. NKE 11yr Stock Price Performance
Forecast Growth
We believe that Nike can continue to grow earnings at between 10-15% per annum for years to come. This is in line with the 12.5% consensus estimate for five-year earnings growth by 19 leading analysts reporting to First Call as depicted in Figure 4. Also note that this implies that Nike is fairly valued at 17.5 times blended earnings, which is in line with its historical PE ratio of 18. The current dividend yield of 1.5%, and growing, is attractive considering today’s low interest rate environment. Most importantly, the dividend is well protected by a strong balance sheet and cash and short-term investments of $3.6 billion, and debt of only $545 million at quarter’s end. Their debt to capital ratio is only slightly north of 5%. (See purple circle, Figure 4).
Fig. 4. NKE 5yr Earnings Forecast
Fig. 4. NKE 5yr Earnings Forecast
Thesis for Growth
Nike recently restructured their businesses in order to achieve a goal of $23 billion of sales by 2011 versus approximately $19 billion of sales today. They slashed a cumbersome management infrastructure and sharpened their focus over six geographic divisions listed in descending order:
  1. North America = 42% Total Revenue
  2. Western Europe = 26% Total Revenue
  3. Emerging Markets = 10% Total Revenue
  4. Greater China = 10% Total Revenue
  5. Central & Eastern Europe = 7% Total Revenue
  6. Japan = 5% Total Revenue
We believe the biggest drivers of future growth will be China and the Emerging Markets. Although all six geographic regions should contribute to growth, as people all over the world love sports.
Nike enjoys dominant branding as the Nike “swoosh” logo and the “Just Do It” tag line are recognized icons in over 170 countries worldwide. Nike, Inc.’s brand portfolio consists of wholly-owned subsidiaries – Cole Haan, Converse, Inc., Hurley International LLC, Nike Golf and Umbro Ltd.
In addition to a strong portfolio of brands, Nike differentiates itself as one of the most innovative companies in its industry. The company's in-house research and development division employs experts in many areas. Nike’s people understand biomechanics, exercise physiology, chemistry, industrial design and engineering, which is demonstrated through its innovative product lines.
Also, many of the most recognized athletes on earth, like Michael Jordan and Tiger Woods, to name a few, serve on Nike’s advisory boards. Therefore, Nike connects with their customers at an extraordinary level.
Conclusion
Nike reduced inventories more than 10% in the first quarter of fiscal 2010. Therefore, lean inventories, and a consolidated supply chain makes them lean and mean. Add improving currency exchange against easy sales comparisons and the future earnings picture appears bright. Therefore, we believe Nike is a solid buy at a fair price for long-term oriented investors seeking a quality holding with a potentially growing dividend and attractive growth of capital. We would also add to positions given any market weakness as Nike would only become inexpensive at prices (or values) below today’s levels.
Disclosure: Long NKE at the time of writing.

Complete Story »]]> NKE Chuck Carnevale eBay: Growth at the Right Bid http://seekingalpha.com/article/166681-ebay-growth-at-the-right-bid?source=feed 166681 eBay (EBAY) is a truly great American success story. According to eBay's March 2009 Three-Year Roadmap for Growth:

"We are positioning this company to compete and win across a range of profitable ecommerce platforms focused on connecting buyers and sellers across the platform of their choice."

Founded in San Jose, California on September 3, 1995, eBay has carved out a unique position in the retail space based on e-commerce. Earnings growth has averaged an incredible compounded 48% per year (See purple circle in Figure 1 below).
Fig. 1. EBAY 13yr EPS and Price Correlation
click to enlarge
Fig. 1. EBAY 13yr EPS and Price Correlation
In many ways, eBay (EBAY) has become a victim of its own success. eBay first set the bar high with its IPO on September 24, 1998. Within only a few months its stock value peaked at close to a thirty-fold increase and earnings were doubling almost every year and sometimes more than doubling. (See red arrow and red circle on Figure 1).
After eBay’s stock price peaked at just under $32 per split adjusted share in 2000, its value was almost cut in half throughout 2001-2002.
However, from the period 2001-2004 eBay established itself as a growth stock extraordinaire. Earnings grew by 80% during the recession of 2001 and averaged over 85% per year compounded through 2001-2004. Even though eBay’s (EBAY) shares started out overvalued with a PE ratio of roughly 135 times earnings (orange circle) at the beginning of 2001, shareholders enjoyed an incredible return of 48.6% per annum (See purple circle in Figure 2 below) for the four-year period. This exeplary performance occurred during one of the worst bear markets on record.
Fig. 2. EBAY 2001-2004 EPS History Plus Price Performance
Fig. 2. EBAY 2001-2004 EPS History Plus Price Performance
When contrasted to the performance of the S&P 500 over the same time frame, it’s clear that eBay’s results were astonishing. See Figure 3 below.
Fig. 3. S&P 500 2001-2004 EPS History Plus Price Performance
Fig. 3. S&P 500 2001-2004 EPS History Plus Price Performance
The point we are striving to make is that eBay (EBAY) created a new and unique category of retail selling that it had all to itself for the better part of a decade. Therefore, explosive growth was easily achieved. Common sense says that those glory growth days are forever gone, however, that does not mean that attractive above-average growth for eBay is over. In Figure 4 below, we plot the consensus five-year growth forecast of 18% (15-20% as we see it) for eBay by 20 leading analysts reporting to Zacks. This depicts what we mean by “growth at the right bid”. In other words, we see eBay as very attractively valued today based on realistic assumptions for achievable future growth.
Fig. 4. EBAY EPS 5yr Forecast
Fig. 4. EBAY EPS 5yr Forecast
The thesis for eBay’s (EBAY) growth is admittedly somewhat cloudy, but not without plenty of opportunity. Legitimate questions remain as their business model transitions from pure auction to a blend of auction and fixed pricing. Due to competition for auction from formidable competitors with cost advantages, developing a successful fixed business is important. After struggling for several quarters due to the recession, recent sales indications for their fixed-pricing business models appear promising.
The current desire to sell Skype is being challenged by its founders. Frankly, we are ambivalent towards the transaction. On the one hand eBay can focus more on core strategies sans Skype. While on the other hand, Skype offers strong growth potential in our view. Therefore, keeping Skype would not be all that bad, especially since eBay does not need the cash. eBay’s enormous free cash flow generation, strong cash hoard and healthy balance sheet puts them in the catbird seat. eBay enjoys the luxury of not needing to tap credit markets to fund its growth. See Figure 5 below which plots eBay’s free cash flow over earnings. (Orange shaded area with “F”).
Fig. 5. EBAY 13yr EPS with Free Cash Flow
Fig. 5. EBAY 13yr EPS with Free Cash Flow
We believe the real growth story today for eBay (EBAY) is PayPal. As online shopping continues to proliferate and expand worldwide, the need and world-wide potential for PayPal appears limitless. eBay certainly possesses the financial resources and we believe business acumen to exploit this opportunity.
At the end of the day, eBay (EBAY) is an extraordinary company with enormous resources at their disposal. This allows them to explore numerous avenues of future growth. Promising business lines such as StubHub, Kijiji, Shopping.com, Half.com, ProStores, Rent.com, and many others are merely scratching the surface of what’s possible for eBay. They may not all pan out as hoped, but odds are that enough will to generate the growth that validates today’s attractive valuation.
eBay (EBAY) is a fast growing company whose tentacles reach into 30 countries worldwide. Consequently, we believe eBay is a sound investment for prudent long-term investors seeking growth of capital. Although its future growth will likely not be as fast as its past, it should, in our view, remain an above-average grower currently selling at an attractive entry point.
Full Disclosure: Long EBAY at time of writing.
]]> Thu, 15 Oct 2009 08:56:13 -0400 Chuck Carnevale Chuck Carnevale submits:
eBay (EBAY) is a truly great American success story. According to eBay's March 2009 Three-Year Roadmap for Growth:

"We are positioning this company to compete and win across a range of profitable ecommerce platforms focused on connecting buyers and sellers across the platform of their choice."

Founded in San Jose, California on September 3, 1995, eBay has carved out a unique position in the retail space based on e-commerce. Earnings growth has averaged an incredible compounded 48% per year (See purple circle in Figure 1 below).
Fig. 1. EBAY 13yr EPS and Price Correlation
click to enlarge
Fig. 1. EBAY 13yr EPS and Price Correlation
In many ways, eBay (EBAY) has become a victim of its own success. eBay first set the bar high with its IPO on September 24, 1998. Within only a few months its stock value peaked at close to a thirty-fold increase and earnings were doubling almost every year and sometimes more than doubling. (See red arrow and red circle on Figure 1).
After eBay’s stock price peaked at just under $32 per split adjusted share in 2000, its value was almost cut in half throughout 2001-2002.
However, from the period 2001-2004 eBay established itself as a growth stock extraordinaire. Earnings grew by 80% during the recession of 2001 and averaged over 85% per year compounded through 2001-2004. Even though eBay’s (EBAY) shares started out overvalued with a PE ratio of roughly 135 times earnings (orange circle) at the beginning of 2001, shareholders enjoyed an incredible return of 48.6% per annum (See purple circle in Figure 2 below) for the four-year period. This exeplary performance occurred during one of the worst bear markets on record.
Fig. 2. EBAY 2001-2004 EPS History Plus Price Performance
Fig. 2. EBAY 2001-2004 EPS History Plus Price Performance
When contrasted to the performance of the S&P 500 over the same time frame, it’s clear that eBay’s results were astonishing. See Figure 3 below.
Fig. 3. S&P 500 2001-2004 EPS History Plus Price Performance
Fig. 3. S&P 500 2001-2004 EPS History Plus Price Performance
The point we are striving to make is that eBay (EBAY) created a new and unique category of retail selling that it had all to itself for the better part of a decade. Therefore, explosive growth was easily achieved. Common sense says that those glory growth days are forever gone, however, that does not mean that attractive above-average growth for eBay is over. In Figure 4 below, we plot the consensus five-year growth forecast of 18% (15-20% as we see it) for eBay by 20 leading analysts reporting to Zacks. This depicts what we mean by “growth at the right bid”. In other words, we see eBay as very attractively valued today based on realistic assumptions for achievable future growth.
Fig. 4. EBAY EPS 5yr Forecast
Fig. 4. EBAY EPS 5yr Forecast
The thesis for eBay’s (EBAY) growth is admittedly somewhat cloudy, but not without plenty of opportunity. Legitimate questions remain as their business model transitions from pure auction to a blend of auction and fixed pricing. Due to competition for auction from formidable competitors with cost advantages, developing a successful fixed business is important. After struggling for several quarters due to the recession, recent sales indications for their fixed-pricing business models appear promising.
The current desire to sell Skype is being challenged by its founders. Frankly, we are ambivalent towards the transaction. On the one hand eBay can focus more on core strategies sans Skype. While on the other hand, Skype offers strong growth potential in our view. Therefore, keeping Skype would not be all that bad, especially since eBay does not need the cash. eBay’s enormous free cash flow generation, strong cash hoard and healthy balance sheet puts them in the catbird seat. eBay enjoys the luxury of not needing to tap credit markets to fund its growth. See Figure 5 below which plots eBay’s free cash flow over earnings. (Orange shaded area with “F”).
Fig. 5. EBAY 13yr EPS with Free Cash Flow
Fig. 5. EBAY 13yr EPS with Free Cash Flow
We believe the real growth story today for eBay (EBAY) is PayPal. As online shopping continues to proliferate and expand worldwide, the need and world-wide potential for PayPal appears limitless. eBay certainly possesses the financial resources and we believe business acumen to exploit this opportunity.
At the end of the day, eBay (EBAY) is an extraordinary company with enormous resources at their disposal. This allows them to explore numerous avenues of future growth. Promising business lines such as StubHub, Kijiji, Shopping.com, Half.com, ProStores, Rent.com, and many others are merely scratching the surface of what’s possible for eBay. They may not all pan out as hoped, but odds are that enough will to generate the growth that validates today’s attractive valuation.
eBay (EBAY) is a fast growing company whose tentacles reach into 30 countries worldwide. Consequently, we believe eBay is a sound investment for prudent long-term investors seeking growth of capital. Although its future growth will likely not be as fast as its past, it should, in our view, remain an above-average grower currently selling at an attractive entry point.
Full Disclosure: Long EBAY at time of writing.

Complete Story »]]> EBAY Chuck Carnevale Google: 'Wave' of the Future? http://seekingalpha.com/article/165445-google-wave-of-the-future?source=feed 165445 Historical Valuation

Since going public just over five years ago, Google (GOOG) has grown to over a $120 billion dollar market cap powerhouse. Today Google trades at what is historically a very low valuation. In Figure 1 below we plot Google’s earnings per share growth since its public debut (i.e. green line with white triangles). With earnings compounding at almost 73% per year, Google has typically commanded a normal P/E ratio of almost 56 times earnings (i.e. blue line with asterisks). Therefore, at a blended P/E ratio of 24.6, it currently trades at more than a 50% discount to its normal value.

]]> Thu, 08 Oct 2009 04:42:55 -0400 Chuck Carnevale Chuck Carnevale submits:

Historical Valuation

Since going public just over five years ago, Google (GOOG) has grown to over a $120 billion dollar market cap powerhouse. Today Google trades at what is historically a very low valuation. In Figure 1 below we plot Google’s earnings per share growth since its public debut (i.e. green line with white triangles). With earnings compounding at almost 73% per year, Google has typically commanded a normal P/E ratio of almost 56 times earnings (i.e. blue line with asterisks). Therefore, at a blended P/E ratio of 24.6, it currently trades at more than a 50% discount to its normal value.


Complete Story »]]> GOOG Chuck Carnevale Johnson & Johnson: Well Positioned for Growth http://seekingalpha.com/article/164353-johnson-johnson-well-positioned-for-growth?source=feed 164353 A Knocking Opportunity Answered
We believe Johnson & Johnson (JNJ) is making all the right moves, and at the right time. Its healthy balance sheet, cash horde and consistent cash flow generation has empowered the company to exploit significant opportunities created by the worldwide recession. Through numerous small strategic acquisitions and opportunistic partnerships, Johnson & Johnson is beefing up its already strong pharmaceutical segment.
Expanding Pharmaceutical Segment
Representing appropriately 39% of revenues, the pharmaceutical segment is J&J's largest and perhaps most important business unit. Generic competition sales have recently slowed growth considerably, but Johnson & Johnson is aggressively meeting the challenge. With an already promising pipeline of numerous compounds in high growth markets and many in late stages of development, the company is well positioned to mitigate the generic threat to future growth. Furthermore, its recent acquisitions and alliances should greatly enhance their biopharma pipeline into major growth areas. For example, the recent deal with Elans’ Alzheimer’s program gives J&J access to the third largest market relative to cost of treatment behind only cardiovascular disease and cancer. A recent deal with Crucell NV brings monoclonal antibodies and vaccines, both very attractive growth markets.

Growing Medical Devices and Diagnostic Segment

Johnson & Johnson’s diversified businesses are all poised to exploit the demographic opportunities of the world’s aging population. The Medical Devices and Diagnostic Segment is the second largest of their three business segments and represents 36% of revenues. This segment is expected to grow even faster than Pharmaceuticals. Despite strong competition, Johnson & Johnson is firmly established with highly regarded offerings in minimally invasive surgical products, wound care, orthopedics, diagnostics and both bare metal and drug eluting stents.
Consumer Products: Strong Brands in Demand
The company's consumer products segment represents 25% of sales and has been a stalwart through these trying economic times. From baby lotion to Band-Aids to Neutrogena skin care, Listerine mouth wash, Visine eye care and an endless list of leading brands, Johnson & Johnson consumer products follow us throughout our lives. Even in a recession, people want and need to feel good. It’s safe to say that Johnson & Johnson consumer products have been used by people throughout every corner of the world.
High Dividend, Stable Business Model, Low Valuation
To call Johnson & Johnson a diversified company is a gross understatement. The company operates over 250 companies around the world. They are known as a highly innovative company that spent almost 12% of 2008 sales on Research & Development. Committed to internal growth, Johnson & Johnson also pursues strategic acquisitions and normally engage in a strong share buyback program. They have recently slowed down these buybacks, however, in favor of attractive acquisition deals. Nevertheless, the company remains committed to the program long term. It currently offers a very attractive dividend yield with a legacy and commitment of raising it. Last but not least, Johnson & Johnson currently is priced at a historically low valuation.
Historical Valuation at a Glance
In Figure 1 below, we examine how Johnson & Johnson has been historically valued by the market. We chose this period because the period from 1995 to the spring of 2000 has been dubbed the infamous “irrational exuberance” period. Notice how the monthly closing stock price was above the earnings justified value line (green line with white triangles). By the beginning of 2006 (red arrow) Johnson & Johnson’s stock price came to its value driven PE ratio of 16.3. This valuation calculation is a modified version of Ben Graham’s formula for value. Most importantly, the price stayed at this level until September of 2008 before prices fell, for the first and only time since 1995, below the value line.
Fig. 1. JNJ 16yr EPS and Price Correlation
Fig. 1. JNJ 16yr EPS and Price Correlation

There are other important historical facts to be gleaned from Figure 1. On the graph, the green line with white triangles represents PE ratio of 16.3. Therefore, the current blended PE ratio of 13.5 and dividend yield of 3.1% (purple circle) indicate a lower than normal valuation. Debt at only 16% of capital testifies to the strength of their balance sheet.
The Importance of Valuation
Notice in Figure 1 that Johnson & Johnson’s stock price (black line) was touching the value line (green line white triangles) at the beginning of the period. The five year period of 1995 through 1999 represents the “irrational exuberance period” of overvalued stock values. From the high and low prices listed at the top of the chart you can see that overvaluation led to flat pricing and poor returns from 1999 to 2009 (orange arrows), even though earnings were strong.
Performance Based on Earnings and Valuation
In Figure 2 below, we illustrate the performance that Johnson & Johnson generated for shareholders based on Figure 1. Capital appreciation was slightly less than the compounded rate of earnings growth as stock prices started in value in 1995 and ended undervalued in 2009.
Fig. 2. JNJ 16yr Price Performance with Dividends
Fig. 2. JNJ 16yr Price Performance with Dividends
Overvaluation Hurts Shareholder Returns
In Figure 3, we illustrate how overvaluation can impact performance even when operating results are strong. At the beginning of calendar year 2000, Johnson & Johnson was overvalued with a PE ratio of approximately 27 against a Graham Dodd modified value PE of 16.6.
Fig. 3. JNJ 11yr EPS and Price Correlation
Fig. 3. JNJ 11yr EPS and Price Correlation
In Figure 4, we show how performance was impacted by overvaluation. Note that the dividend yield at the beginnings of 2000 was only 1.3% versus today’s yield of over 3%. This low starting dividend yield indicates a high starting valuation. Even though dividends grew each year, the company's contribution was less than normal due to high valuation. Capital appreciation was also hurt.
Fig. 4. JNJ 11yr Price Performance with Dividends
Fig. 4. JNJ 11yr Price Performance with Dividends
Today’s Low Valuation Means?
In conclusion, Johnson & Johnson is a blue chip stalwart that trades at a discount to its historical valuation. Therefore its dividend today is higher than you would normally acquire it at, and its growth is expected to continue at an 8-10% rate. If high valuation caused returns to be lower than operating results warranted in the past, then what will current low valuation means to future returns? We believe they should be enhanced. Moreover, a lower valuation implies lower risk as well. We believe Johnson & Johnson represents a very attractive, high quality investment for prudent long-term investors.

Disclosure: Long JNJ at time of writing.
]]> Thu, 01 Oct 2009 15:26:59 -0400 Chuck Carnevale Chuck Carnevale submits:
A Knocking Opportunity Answered
We believe Johnson & Johnson (JNJ) is making all the right moves, and at the right time. Its healthy balance sheet, cash horde and consistent cash flow generation has empowered the company to exploit significant opportunities created by the worldwide recession. Through numerous small strategic acquisitions and opportunistic partnerships, Johnson & Johnson is beefing up its already strong pharmaceutical segment.
Expanding Pharmaceutical Segment
Representing appropriately 39% of revenues, the pharmaceutical segment is J&J's largest and perhaps most important business unit. Generic competition sales have recently slowed growth considerably, but Johnson & Johnson is aggressively meeting the challenge. With an already promising pipeline of numerous compounds in high growth markets and many in late stages of development, the company is well positioned to mitigate the generic threat to future growth. Furthermore, its recent acquisitions and alliances should greatly enhance their biopharma pipeline into major growth areas. For example, the recent deal with Elans’ Alzheimer’s program gives J&J access to the third largest market relative to cost of treatment behind only cardiovascular disease and cancer. A recent deal with Crucell NV brings monoclonal antibodies and vaccines, both very attractive growth markets.

Growing Medical Devices and Diagnostic Segment

Johnson & Johnson’s diversified businesses are all poised to exploit the demographic opportunities of the world’s aging population. The Medical Devices and Diagnostic Segment is the second largest of their three business segments and represents 36% of revenues. This segment is expected to grow even faster than Pharmaceuticals. Despite strong competition, Johnson & Johnson is firmly established with highly regarded offerings in minimally invasive surgical products, wound care, orthopedics, diagnostics and both bare metal and drug eluting stents.
Consumer Products: Strong Brands in Demand
The company's consumer products segment represents 25% of sales and has been a stalwart through these trying economic times. From baby lotion to Band-Aids to Neutrogena skin care, Listerine mouth wash, Visine eye care and an endless list of leading brands, Johnson & Johnson consumer products follow us throughout our lives. Even in a recession, people want and need to feel good. It’s safe to say that Johnson & Johnson consumer products have been used by people throughout every corner of the world.
High Dividend, Stable Business Model, Low Valuation
To call Johnson & Johnson a diversified company is a gross understatement. The company operates over 250 companies around the world. They are known as a highly innovative company that spent almost 12% of 2008 sales on Research & Development. Committed to internal growth, Johnson & Johnson also pursues strategic acquisitions and normally engage in a strong share buyback program. They have recently slowed down these buybacks, however, in favor of attractive acquisition deals. Nevertheless, the company remains committed to the program long term. It currently offers a very attractive dividend yield with a legacy and commitment of raising it. Last but not least, Johnson & Johnson currently is priced at a historically low valuation.
Historical Valuation at a Glance
In Figure 1 below, we examine how Johnson & Johnson has been historically valued by the market. We chose this period because the period from 1995 to the spring of 2000 has been dubbed the infamous “irrational exuberance” period. Notice how the monthly closing stock price was above the earnings justified value line (green line with white triangles). By the beginning of 2006 (red arrow) Johnson & Johnson’s stock price came to its value driven PE ratio of 16.3. This valuation calculation is a modified version of Ben Graham’s formula for value. Most importantly, the price stayed at this level until September of 2008 before prices fell, for the first and only time since 1995, below the value line.
Fig. 1. JNJ 16yr EPS and Price Correlation
Fig. 1. JNJ 16yr EPS and Price Correlation

There are other important historical facts to be gleaned from Figure 1. On the graph, the green line with white triangles represents PE ratio of 16.3. Therefore, the current blended PE ratio of 13.5 and dividend yield of 3.1% (purple circle) indicate a lower than normal valuation. Debt at only 16% of capital testifies to the strength of their balance sheet.
The Importance of Valuation
Notice in Figure 1 that Johnson & Johnson’s stock price (black line) was touching the value line (green line white triangles) at the beginning of the period. The five year period of 1995 through 1999 represents the “irrational exuberance period” of overvalued stock values. From the high and low prices listed at the top of the chart you can see that overvaluation led to flat pricing and poor returns from 1999 to 2009 (orange arrows), even though earnings were strong.
Performance Based on Earnings and Valuation
In Figure 2 below, we illustrate the performance that Johnson & Johnson generated for shareholders based on Figure 1. Capital appreciation was slightly less than the compounded rate of earnings growth as stock prices started in value in 1995 and ended undervalued in 2009.
Fig. 2. JNJ 16yr Price Performance with Dividends
Fig. 2. JNJ 16yr Price Performance with Dividends
Overvaluation Hurts Shareholder Returns
In Figure 3, we illustrate how overvaluation can impact performance even when operating results are strong. At the beginning of calendar year 2000, Johnson & Johnson was overvalued with a PE ratio of approximately 27 against a Graham Dodd modified value PE of 16.6.
Fig. 3. JNJ 11yr EPS and Price Correlation
Fig. 3. JNJ 11yr EPS and Price Correlation
In Figure 4, we show how performance was impacted by overvaluation. Note that the dividend yield at the beginnings of 2000 was only 1.3% versus today’s yield of over 3%. This low starting dividend yield indicates a high starting valuation. Even though dividends grew each year, the company's contribution was less than normal due to high valuation. Capital appreciation was also hurt.
Fig. 4. JNJ 11yr Price Performance with Dividends
Fig. 4. JNJ 11yr Price Performance with Dividends
Today’s Low Valuation Means?
In conclusion, Johnson & Johnson is a blue chip stalwart that trades at a discount to its historical valuation. Therefore its dividend today is higher than you would normally acquire it at, and its growth is expected to continue at an 8-10% rate. If high valuation caused returns to be lower than operating results warranted in the past, then what will current low valuation means to future returns? We believe they should be enhanced. Moreover, a lower valuation implies lower risk as well. We believe Johnson & Johnson represents a very attractive, high quality investment for prudent long-term investors.

Disclosure: Long JNJ at time of writing.

Complete Story »]]> JNJ Chuck Carnevale We Like Walgreen but Market Prices Cannot Be Trusted http://seekingalpha.com/article/164054-we-like-walgreen-but-market-prices-cannot-be-trusted?source=feed 164054 Even after almost 40 years in this business, I still don’t get the peculiar illogic of Wall Street. Last week, the market trounced Research in Motion (RIMM), a stock we hold in client portfolios, on what we felt was a very strong quarter. Even weirder, this is a very healthy company in a fast growing industry with huge potential for growth.

We lamented that the market value of an established business like Research In Motion could not have changed in intrinsic value by as much as it did in a single day. On that day, the market was against us, so our comments could have been viewed as sour grapes.

]]> Wed, 30 Sep 2009 07:05:11 -0400 Chuck Carnevale Chuck Carnevale submits:

Even after almost 40 years in this business, I still don’t get the peculiar illogic of Wall Street. Last week, the market trounced Research in Motion (RIMM), a stock we hold in client portfolios, on what we felt was a very strong quarter. Even weirder, this is a very healthy company in a fast growing industry with huge potential for growth.

We lamented that the market value of an established business like Research In Motion could not have changed in intrinsic value by as much as it did in a single day. On that day, the market was against us, so our comments could have been viewed as sour grapes.


Complete Story »]]> WAG RIMM Chuck Carnevale