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A leading Business Consultancy company with strong interests in holistic business analytics. We conduct business research for companies and therefore feel that can understand market in an integrative manner. Our analysts are all highly qualified and therefore make us feel confident on the... More
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  • Risk Is Going Down. Buy UBS For Long.
    Our Thesis

    It isn't long ago in history when negative news about UBS caused much unrest among investors. The company was found involved in string of scandals including heavy losses on US mortgages during the financial crisis, losses incurred by the rogue London trader Kweku Adoboli, and UBS involvement in Libor-rigging. The most notorious of all scandals was the US mortgage crisis which UBS faced because of recessionary trend in the past decade. It entered into a deal with FHFA to sell mortgage backed securities to housing agencies during the US property bubble in the past decade. However, later on the underlying investment mortgages went quite bad and as a result, many borrowers were unable to pay their loan off.

    Finally, the negativity attached to the string of scandals (especially the US mortgage one) seems over. UBS now seems to be on a sound path of organic development. Because of the following reasons, we are bullish on UBS and expect a total gain of 14% on investment.

    Firstly we are quite optimistic about UBS because of company's agreement with US housing agencies to settle the claims on the mortgage investments sold between 2004 and 2007. This deal relates to the residential mortgage- backed securities sold by company during period of US property boost as mentioned above. Unluckily the mortgages behind investments went bad as many borrowers defaulted on their loans. FHFA accused UBS of mis-representing the mortgages and pretending them to be of better quality than they really were. But finally, UBS has done settlement with FHFA to pay them 865m francs in this quarter and cover the litigation.

    Secondly, with the announcement of second quarter earnings, we observe a significant improvement in financial performance of company. Although for the previous quarter, UBS had a very low net profit margin of 9.54% compared to competitors average of 15%, the reported earnings in this quarter jumped to 690m francs from 425m francs. This also beats the analyst's expectations of 560m francs giving greater room to optimism about UBS.

    Company

    Industry

    Net Profit Margin

    Operating Profit Margin

    ROA

    ROE

    Revenue Growth

    gs

    financial

    0.2223

    0.3569

    0.008

    0.1012

    0.014

    jpm

    financial

    0.2597

    0.3957

    0.0103

    0.1218

    0.146

    ms

    financial

    0.0411

    0.1743

    0.0024

    0.0263

    0.178

    ubs

    financial

    0.0954

    0.0692

    0.0018

    0.0423

    0.21

           

    Industry average

     

    0.154625

    0.249025

    0.0056

    0.0729

    0.137

    Thirdly, we feel that the profitability of UBS will rise in the coming quarters. This is because of the serious cost cutting measures being adopted by the management. In the very first step of cost cutting, company has fired 100 employees and aims at firing 10000 more employees in the near future.

    Fourthly, we appreciate company's new more conservative credit policy. The scandals it faced in the past were mainly because of the risk associated to customers. But now the company aims at learning from the mistakes and tightening the lending policies for coming future. This will be done by restricting loans to the small and risky customers and increasing relationship with long term less risky customers.

    From a relative perspective, we strongly feel that UBS can generate greater capital and total gains. Because of its higher Q2 earnings, we set a forward EPS of $1.43. Based on a historical EPS of 15.56x and forward EPS of $1.43, we set a target price $22.25. This will generate a total gain of 14% to the investors. This 14% return is greater than the competitors' average of 10% and at par with the Globenum's average of 14.21%.

     

     

    Company

    Industry

    Price to Sales

    EV/EBITDA

    PEG

    Forward P/E

    P/E (for price calculation)

    EPS (Forward Estimate)

    Price Estimate

    Current Price

    Dividend Yield

    Estimated Capital Gain

    Estimated Total Gain

    (NYSE:GS)

    financial

    2.12

    (blank)

    1.95

    10.51

    10.78

    15.68

    169.0304

    165.62

    0.012

    0.020176

    0.032176252

    (NYSE:JPM)

    financial

    2.27

     

    1.46

    9.24

    9.52

    6.08

    57.8816

    56.54

    0.028

    0.023178

    0.05117835

    (NYSE:MS)

    financial

    1.98

    (blank)

    1.27

    10.74

    13.46

    2.57

    34.5922

    27.71

    0.008

    0.198952

    0.206952365

    (NYSE:UBS)

    financial

    2.44

    (blank)

    (blank)

    13.03

    15.56

    1.43

    22.2508

    19.37

    0.009

    0.12947

    0.138469502

    Industry average

     

    2.2025

    #DIV/0!

    1.56

    10.88

    12.33

    6.44

    70.93875

    67.31

    0.01425

    0.092944

    0.107194117

    In recapitulation, we strongly feel that UBS seems on a fast track to generate returns for investors and is a good stock to keep for the long run. The risks associated to its credit policies of UBS also seem to be low given the new credit policies and deals. We have a buy rating for the stock.

    **Globenum Average refers to the average estimates for different financial parameters like P/E, EV/EBITDA, PEG, P/S, Capital Gain, Total Gain, Dividend Yield, Current ratio, Net Margin, Operating Margin, Debt ratio etc which we have developed for analytical purposes. We manage these averages for the stocks of wide range of companies belonging to different sectors. We have a fairly well managed and up to date database for this. These average values are mostly used as benchmarks during the research analytics and reporting.

    Tags: UBS, GS, JPM, MS
    Jul 26 12:05 PM | Link | Comment!
  • Revenue Decline Seems Priced In. KO Is Not A Sell.

    Coca-Cola Company (NYSE:KO) has been an investor's delight for years. The famous "New York bridge mode" business example fits well with KO. This simple beverage business grew as an international giant over year's providing decent returns.

    However, KO has been facing a period of serious struggle with its revenue growth and earnings. Management has been putting blame on the bad weather in Asia and other regions with the CEO said "We continue to see further [unrest] in Europe slowing economic conditions across markets like Asia and Latin and social unrest in South East Europe, Middle East and Brazil.

    On top of this we were faced with unusually widespread wet and cold weather conditions across the multiple regions, including North America and across Northern Europe and India all of which impacted the entire industry." Contributing to the downfall of KO is the failure of the company to meet the analyst's revenue growth estimates by $0.22billion. Moreover, KO has been facing serious law suits in New York and California for misleading benefits of their Vitamin water and Soft drinks.

    We realize that although all these news certainly serve as a point of concern for investors, all these concerns are already priced in and therefore, the current market price has absorbed the after socks of the news. Therefore, we have a buy and hold rating because of the following reasons.

    Financials

    Financially, Coca-Cola has outperformed when it comes to net profit margin with a margin of 18.19% compared to the industry average of 12.35%. However, this performance is not as good as in the same period of the prior year. The main reason behind the decline this year is negative revenue growth which might keep the company in trouble for the next quarters of this year as well owing to the news of destruction of orange crops. (click to enlarge)

    Source: YCHARTS

      

    KO

    DPS

    NSRGY

    PEP

    Average

    Financial analysis

    Net Profit Margin

    18.19%

    10.53%

    11.49%

    9.33%

    12.385%

     

    Operating Profit Margin

    23.25%

    18.24%

    15.64%

    14.19%

    17.830%

     

    ROA

    8.08%

    7.77%

    7.51%

    7.78%

    7.785%

     

    ROE

    26.59%

    28.14%

    18.30%

    27.15%

    25.045%

     

    Revenue Growth

    -0.90%

    1.33%

    12.80%

    1.20%

    3.608%

     

    Debt to Equity

    106.78

    124.92

    44.46

    130.88

    101.76

     

    Current Ratio

    1.01

    1.06

    0.91

    1.11

    1.0225

    Operating profit margin for KO is still higher than the industry average of 12.3%. This shows that the company has been out-performing in the industry despite downfall in its revenue growth and earning's performance. This indicates that the concerns about the drop in revenue are relative as the entire industry seems facing these. With a Return on assets of 8.08% and a return on equity of 26.59%, Coca-Cola Company seems to provide a safe shelter to its investors in the future as well.

    However, we feel that company financial strategy is more aggressive than it key competitors. The debt to equity proportion of 106.78 is higher than the industry average of 101.76. This puts some concerns as the revenue is falling which might put liquidity pressure. Holistically, the financial performance of KO is satisfactory except for the negative trend in revenue growth which has some concerns for the analysts.

    Relative Valuation

      

    Coca Cola COmpany

    Dr Pepper Snapple (NYSE:DPS)

    Nestl (OTCPK:NSRGY)

    Pepsico (NYSE:PEP)

    Average

    Relative Valuation

    Price to Sales

    3.79

    1.63

    2.16

    2.04

    2.405

     

    EV/EBITDA

    15.17

    9.35

    12.61

    12.73

    12.465

     

    PEG

    2.45

    2.04

    4.3

    2.33

    2.78

     

    P/E (forward estimate)

    19.3

    15

    19

    18.5

    17.95

     

    EPS (Forward Estimate)

    2.28

    3.32

    4.04

    4.77

    3.6025

     

    Price Estimate

    $44.00

    49.8

    76.76

    88.245

     
     

    Current Price

    40.81

    47.91

    67.03

    86.8

     
     

    Capital Gain

    7.26%

    3.80%

    12.68%

    1.64%

    6.342%

     

    Dividend Yield

    2.70%

    3.20%

     

    2.70%

    2.867%

     

    Estimated Total Gain

    10.0%

    7.00%

    12.68%

    4.34%

    8.492%

    To suggest any action for the investors, we rely more on the future of the company rather than its past performance. KO is currently trading at a price of $40.81 with a forward P/E ratio of 19.3, PEG ratio of 2.45 and forward EPS 2.28. Based on a forward EPS of 2.28 and a P/E of 19.3x, we suggest a target price of $44. With this price, we expect a capital gain of 7.26% and a total gain of 10% for the investors as illustrated in the table above. The capital as well as total gain of Coca-Cola Company leaves us quite optimistic for the investors as it is higher than the industry average of 8.49%. The growth of earning per share of KO has been in line with the analyst's estimates of $0.63 which leaves us positive about the company.

    Conclusion

    The price of the company has shown a very stable trend with minor fluctuation between $39 and $42 since the third quarter of 2012. Although in this quarter, price has shown some drop yet the overall trend as per technical analytics seems bullish.

    (click to enlarge)

    Source: YCHARTS

    Although the negative news a point of deep concern for investors, the news seems priced in and therefore, we forecast a good return for the investors of the company and hence have a bullish stance on the stock.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: DPS, PEP, KO, long-ideas
    Jul 20 2:40 AM | Link | Comment!
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