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I work as a consultant in the heavy machinery industry. My articles cover heavy machinery, mining and transportation industries. All my articles are written by me and they only reflect my views and opinions. I try to only invest in companies with a market cap of at least $50 billion with... More
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  • Can GM Match Ford's Dividend Increase?

    Last week, Ford (NYSE:F) raised its dividend by 20%, and now, all eyes are on GM (NYSE:GM) to see whether the company will match Ford's move. Ford's new dividend of 15 cents per share per quarter amounts to 60 cents per share per year, and this gives the company a rich forward yield of 4.0%. GM's newly instituted dividend consists of 30 cent payments per quarter and it yields about 3.4% per year. Now we shall look at whether GM can afford to increase its dividends significantly and catch up to Ford's yield.

    Last quarter, GM reported 86 cents per share in net income, which brought the company's 9-month net income to $1.06. This was well below the company's normalized earnings, mostly due to some one-time expenses such as the company's large number of recalls. In the first nine months of this year, GM generated $6.90 billion from its operations, and the company should generate anywhere between $9 and $10 billion of cash flow from its operations annually in a typical year. Since the car industry is a capital intensive industry, GM tends to spend a large amount of this cash in capital expenditures.

    GM Cash from Operations (NYSE:TTM) data by YCharts

    GM ended last quarter with $18.06 billion in cash and cash equivalents, $9.57 billion in marketable securities and $1.38 billion in restricted cash and marketable securities. Together, these liquid assets make up almost half of the company's market cap.

    GM Cash and Short Term Investments (Quarterly) data by YCharts

    On the debt-side, most of the company's debt belongs to its financial arm, which is responsible for issuing loans to car buyers or leasers. Only $578 million of the company's short-term debt belongs to the GM Automotive segment while $12.81 billion of this debt belongs to the GM Financial segment. As for the long-term debt, $6.75 billion belongs to the GM Automotive segment and $20.97 billion belongs to the GM Financial segment. As you can see, GM's automotive segment's debt is minimal while the company is cash rich.

    In the first 9 months of last year, GM took a charge of $2.7 billion for the recalls and took another charge of $400 million for the faulty ignition switch case. Hopefully these are one-time events and GM's expected forward earnings will not reflect much of these charges. In a good quarter, GM should earn anywhere between 75 cents and $1 per share per quarter. Given the current health of the company's balance sheet, its strong ability to generate cash flow and forward earnings potential, the company can easily support a higher, possibly much higher dividend.

    Similar to Ford, GM also has to make some future payments for its pension commitments. The company's balance sheet shows $18.11 billion in pension liabilities in addition to $5.82 billion retirement benefits other than pensions. Over time, as GM makes more payments towards its existing pension programs and many pension programs start converting into 401k programs, the weight of this item on the company's balance sheet will start dropping.

    Recently, GM bought back 156 million preferred shares back from UAW Retiree Medical Benefits Trust and the Canadian government. These shares had a dividend yield of 9% and GM was spending roughly $350 million per year on these dividends. Even though the company had to issue debt in order to achieve the buyback, this should free-up some money for a dividend increase for the ordinary shares.

    I am actually a big fan of dividend increases coupled with share repurchases because each share repurchase reduces the amount of outstanding shares, and this allows the next dividend payment per share to be higher even if the total pay does not increase. Since GM's cash makes up half of the company's market cap, the company could easily repurchase about 10-15% of its outstanding shares without feeling any pain.

    GM's current quarterly dividend payments of 30 cents per share represent a payout ratio of 30% on the company's expected quarterly earnings. Since GM is in a capital-intensive industry, it makes sense for the company to keep some money in the bank but this is still a low ratio, especially considering the health of the company's balance sheet.

    I would be very surprised if GM did not raise its dividend payments in similar fashion to Ford in the coming months. Even with all the recall drama that is going on, the company can easily afford a dividend raise in addition to a good-sized stock repurchase. Besides, the political pressures that kept the company from issuing a dividend and a repurchase for the last few years has eased off big time and the company has much more maneuver room as the government does not have as much to say about GM's future anymore.

    If the company can stay out of trouble (such as more recalls in massive numbers) this year, it should be able to earn a little more than $4 per share, even if revenues stay flat. As I mentioned in a previous article, with a single-digit forward P/E and an ex-cash forward P/E of 5, the company's valuation looks compellingly cheap, but it may still have to prove to investors that it can stay out of trouble and meet analyst expectations.

    Tags: F, GM, long-ideas
    Jan 12 8:44 AM | Link | Comment!
  • Here Is Why Shorts Are Wrong About The Mannkind/Sanofi Partnership

    Ever since the partnership between Mannkind (NASDAQ:MNKD) and Sanofi (NYSE:SNY) has been announced, the shares of Mannkind have been on a relentless sell-off mode. Part of the reason for this sell-off is a big misunderstanding regarding the very nature of the partnership. When shorts and skeptics talk about how Mannkind got a really bad deal out of this partnership, they often make statements like "Sanofi practically controls everything around Afrezza, and Sanofi will determine how much resource will be allocated to the marketing of this drug; therefore, Mannkind already lost by giving all the control to Sanofi."

    Shorts and skeptics are trying to create an illusion where Afrezza is pretty much owned by Sanofi and that there is a big chance that Sanofi will just bury this drug alive before it cannibalizes its existing drugs. The fact is quite different because Sanofi doesn't have the full control of Afrezza and Mannkind still gets as much say about the drug's marketing efforts as Sanofi does. We do not know some of the exact details about the partnership but we were informed by Hakan Edstrom that there will be a "joint alliance committee" with 8 members and half of the members will represent Mannkind while the other half will represent Sanofi. This committee will make budgeting decisions regarding Afrezza and Sanofi will not be able to "strangle" Afrezza by restricting funds to it. In Hakan Edstrom's words: "We have a joint alliance committee which basically has four membership from each group that are meeting on the regular basis, discussing the investment in the brand, the budgets for the brands and a deviations we want to do extra investment and so on so forth. And it's a very clear kind of designated group in regards to what we want to do and how we can get it together and that's also discussions will be in regards of strategic investments in going into new marketplaces as in terms of label expansions studies."

    This is one of the most overlooked facts about the partnership between Mannkind and Sanofi. Many people simply assume that Sanofi will take the wheel and make all kinds of decisions around Afrezza when the fact is complete opposite. Mannkind will have as much say as Sanofi in determining Afrezza's fate. During the same conference, Matthew Pfeffer also made clear that Sanofi will not have the full control over Afrezza (parentheses were added by me for clarity): "…they (Sanofi) don't control it (the budget of Afrezza's marketing efforts) either. It's controlled by the joint advisory committee and we have the core representation. So we will agree mutually what we are going to do and how we are going to do it and we will all be setting budgets for ourselves and we will all be responsible for meeting those budgets and they will and we will too."

    Ever since the partnership has been announced, shorts have been scaring off investors by saying that Sanofi will not commit enough resources to the Afrezza project, and that this will cause the project to fail. The existence of a committee with equal representation from the both companies actually becomes a solid insurance policy for Mannkind. According to Alfred Mann, if one of the companies decides to change their budgeting plan drastically from what was agreed upon, the two companies will get together and agree on a new budget: "if that (the budgeting) would change dramatically then, of course, it would be a situation for the companies to get together and determine whether that is an intelligent investment going forward."

    In simpler terms, Sanofi can't just make changes in Afrezza's budgeting without getting agreement from Mannkind. Al Mann is a smart man and he has done many business deals in his life. Out of the nearly 20 major business deals done by him, there are very few, if any, where he did not come ahead at the end of the day. I am sure Al Mann knows how to build partnerships better than short sellers do, and it is clear that he always adds "insurance policies" within every business deal he makes in order to ensure that his investment will be protected.

    The analysts aren't helping the situation

    The analysts that are covering Mannkind look pretty confused about the company's prospects, and this leads to further confusions among investors. Currently the average analyst price target for Mannkind is $10, with some price targets going as high as $16. This is very well, but the same analysts also believe that Mannkind will generate between $3.4 million and $222.65 million in revenues for 2015 with the average estimate being $67.73 million. On one side, the analysts think that Mannkind has at least 80% upside, on the other side, the same analysts think that Afrezza won't sell much. This is caused by the fact that Mannkind doesn't share its revenue projections (yet) and analysts don't really know what to expect.

    The current share price also reflects this confusion, but this may turn into something good since the analysts have given Mannkind such a low goal to beat that when the company outperforms their estimates by a large margin, the share price will reflect new and better estimates. Currently Mannkind is priced for almost-certain failure and if the company beats this lowball goal of surviving, shorts will be pretty much out of arguments. Remember that the same shorts also claimed that Mannkind wouldn't get an FDA approval or find a suitable big pharmaceutical partner. The last bullet shorts have is the possibility of weak sales for Afrezza and they won't have anything else to say once the product start selling much better than the analyst forecasts.

    Institutional ownership might be climbing

    As of June 30th, institutions held 90 million shares of Mannkind, which represents 22% of the outstanding shares and close to 40% of the float after accounting for the shares held by insiders. The numbers for the last quarter ending September 30th will be announced soon, and many people expect a rise in the company's institutional ownership. If this value rose significantly for the last quarter, as we will find out in a matter of days, many investors who sold due to the weakness might be coming back to initiate a new position.


    In conclusion, Mannkind has more control in financing decisions regarding Afrezza than shorts make it seem to be. Furthermore, the analysts covering this company seem to be confused about its potential evidenced by the discrepancies in the revenue estimates and price targets. Since Mannkind doesn't (yet) share its revenue projections with the investors and analysts, many analysts are giving it very low estimates, and the company should be able to beat these lowball estimates easily. Unfortunately, the current share price reflects these lowball estimates but it won't be long before we have more visibility on the company's revenues, as the sales will start rolling in soon enough. I would also pay attention to institutional ownership figures for the last quarter, which are due within a couple weeks. A sharp rise in institutional ownership might easily reverse investors' mood about this company.

    Tags: SNY, MNKD, long-ideas
    Oct 13 8:51 AM | Link | Comment!
  • How Well Should You Know A Company Before Investing In It?

    Investing is a lot more profitable and a lot safer when you know what you are doing. This includes getting to know a company before investing in it. Many people don't like this idea because it entails doing sufficient amount of homework. This also confuses some investors because they don't know just how much they should know about a company before investing in it. Do you need to know the secret formula of Coca-Cola (NYSE:KO) to be able to invest in it? Do you need to know how chemicals work and interact with each other before putting your money in a biotech? These are interesting questions.

    Not all companies are created equal

    Before we even start getting to know a company, let me make two points. First, not all companies are created equal. As much as investors are concerned, there are two types of companies. We have companies that are very relevant in our everyday lives, they are well-known and well-established, and many of us use their products on daily basis. Everybody knows what these companies do and everyone is familiar with these companies one way or another. Some of these examples are Starbucks (NASDAQ:SBUX), Coca-Cola , GM (NYSE:GM), Microsoft (NASDAQ:MSFT), Procter & Gamble (NYSE:PG), Wal-Mart (NYSE:WMT) and Johnson & Johnson (NYSE:JNJ). Then there are companies most people are not familiar with, and it will take more research to get to know them. In fact, there are many times there is not even sufficient amount of reliable material about these companies. Making this distinction is very important.

    It all starts with the business model

    My second point is that all companies have a business model. In most basic terms, a company's business model outlines or summarizes how the company expects to make money. Most companies with tangible products (e.g., cars, toys, food, drinks, and medicine) have business models that are easier to understand. Companies that engage in complex financial activities (e.g., financial institutions and mREITs) tend to have more complex business models. The first step of learning about a company is to learn its business model. Learning a company's business model usually takes minimal research, between 10 minutes to a few hours depending on how well-known the company is and how complex their business model is. At this point, you don't have to know anything about specifics of a company's products or services. For example, you don't have to know about different flavors of Starbucks coffees at this point.

    Once you learn a company's business model, you will learn a few things about the company. You will learn what the company produces, how it markets and sells those products/services, whether its business model makes sense in terms of achieving profitability and growth. This basic research will save you a lot of money in the long term; however, many people failed to conduct this basic research during the internet bubble of 1999.

    You can learn about a company's business plan by going to their "Investor Relations" web page or seeing their latest annual reports. If a company does not have an Investor Relations page, I would be very cautious about investing in it.

    The story doesn't end here

    Learning about a company's business model is a good start but it's not the end of the story. There is still plenty to learn. If a company's business model makes sense and fits your investment goals, the next step is to move to specifics. In this stage, you will look at the overall industry, the competitive environment, whether the company is able to differentiate itself from the competition in the market. If we are looking at a well-established company, we might want to know about whether their dominant status will be well-maintained or be threatened by newcomers. If we are looking at a newcomer, we might want to look at whether the products and services they offer can disrupt the market and change its very dynamics.

    Let's look at a few examples at this stage. In most basic terms, Coca-Cola's business model is to produce, distribute, market and sell many different types of beverages across the world. We all know that Coca-Cola has a pretty dominant position in the beverage market and the question is whether the company can keep its position as a dominant beverage producer, distributor and marketer. The current environment for Coca-Cola looks interesting because consumers are shifting away from carbonated beverages where Coca-Cola is very strong. Then we ask ourselves another question: how is Coca-Cola reacting to this changing environment to protect its position as the world leader? It turns out that the company is not just sitting there and waiting. Coca-Cola is constantly launching new types of products in many different markets in order to capture the consumers that are shifting away from carbonated beverages. The company's product line even includes bottled water. This is a good move by Coca-Cola.

    We can also look at a newcomer as an example. Tesla Motors (NASDAQ:TSLA) produces and sells long-range high-end electric cars and the company is planning to expand its business by selling batteries to other entities and selling cheaper cars. As a newcomer, Tesla's business model requires a better understanding and this might require additional research. Since Tesla's main goal is to disrupt the existing car industry, we need to find out whether the other car companies are doing anything to stop that from happening. It turns out that many car companies are launching new products and more fuel-efficient alternatives to their existing fleets; however, Tesla continues to remain the only car company that has a viable long-range for the time being. Major car companies earn a large chunk of their income from car parts and maintenance and they don't want to lose this money by selling electric cars with long-range which will require minimal maintenance or part replacements. This allows Tesla Motors to achieve its goals while other car companies are too worried about cannibalizing their existing products.

    The examples above show us the big picture about these companies and the competitive environment in their industry. While we made a good progress in getting to know a company, the research still doesn't end here though. There is plenty of more work to do.

    How about some numbers?

    By the time we learn about a company's business model and the environment surrounding its industry, we still know nothing about its financial health. At this stage, we are taking a look at whether a company is actually doing what it said it was going to do in its business model: make money. We will look at long-term revenue trends, margins, health of the balance sheet, and debt load among other things. At this stage, we have to be mindful that not all companies are created equal. Well-established companies with dominant market positions like Coca-Cola, Wal-Mart and Microsoft will have much better margins and healthier balance sheets than newcomers like Tesla. This does not mean one is better investment than the other. Sometimes, companies have to reinvest their operating income for future growth and their financials will not look as strong, as a result of this. Investors should be able to differentiate whether a company is reinvesting its profits for future growth or it is simply not profitable.

    For example, in the last fiscal year, Microsoft generated $77.84 billion in revenues, $57.60 billion in gross profits (73.99% gross margin), $26.55 billion in operating profits (34.10% in operating margin) and $21.86 billion in net income (28.08% profit margin). These are very strong numbers and the company is obviously very profitable. The company had $76.77 billion in cash and short term investments in addition to $10.84 billion in long term investments as opposed to a very manageable debt of $15.60 billion. We are looking at massive profitability and a very healthy balance sheet. If we look at the last 10 years, we see that the company's success was not limited to the last year. Microsoft's revenue and profit growth has been pretty steady over the years and this gives us confidence about the company's future as well. We can't expect this kind of profitability from a start-up company though.

    How about fundamentals?

    Until now, I didn't even talk about the fundamentals yet. If a company does not have a viable business model or if it conducts business in a highly-competitive environment where its revenues are shrinking year-after-year, you probably shouldn't even look at its fundamentals. While fundamentals are great, you should only invest your time in studying a company's fundamentals if everything else about the company makes sense. For example, a couple years ago, you could have looked at RadioShack (NYSE:RSH) or BlackBerry (NASDAQ:BBRY) and would have taught that they have strong fundamentals, as both companies were trading near their book values with single-digit P/Es. If you invested in one of those companies, you'd have lost a lot of money in the process. If a company does not have a viable business plan which makes sense in its competitive environment, the "good fundamentals" will become "bad fundamentals" in a matter of a few years.

    Remember, price is what you pay and value is what you get. Presenting revenue and profit figures will not have much value unless they are being compared to a company's current value. A company that generates $10 billion in net profits but is worth $400 billion is not same as another company that generates $10 billion in net profits but is worth $100 billion. This is the major difference between financials of a company and fundamental valuation of a company.

    How much specific information do I need about the company's products?

    Now comes the toughest part of getting to know a company. In this stage, you want to have an idea about the company's current and near-future products to see if they will continue serving the company as we move forward. This can take a lot of actual work as well as guesswork. Also, the amount and kind of research to be done in this stage will depend on the company's industry. For example, if you are looking at a biotech company with a new product in its pipeline, you should conduct plenty of research about this new product. You don't have to necessarily know the chemical compound of a product, but you should at least know whether there is any market for a product, and whether this product offers something competition does not. If there is no market for a biotech product or if the existing competition already offers a similar (by similar I mean both the product itself and its utility or performance) product, then it makes little sense to buy shares of that company.

    For technology companies, you don't necessarily need to know the technical specifics of all of Company A's chips. You should have a general sense of whether Apple's (NASDAQ:AAPL) new phone will generate consumer demand compared to Samsung's new phone; however, this does not mean that you need to know all technical aspects of these phones. If people had to know every technical aspect of a company they are investing in, everyone would invest in only one industry, since you can only be an expert in one industry. This would kill the whole idea of diversification.

    Companies like Procter & Gamble or Johnson & Johnson have a huge portfolio of products and it is nearly impossible to study all of these products. If you attempted to study every aspect of every product these companies have, you would be retired by the time you decide whether one or two of these companies make a good investment. This is why it is ok to have a general sense of a product. Besides, if you diversify your portfolio sufficiently, one bad apple should not be able to do much damage in your portfolio.

    Disclosure: The author is long MSFT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Jun 11 8:18 AM | Link | Comment!
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