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I am a private investor building a value focused portfolio. While I do not work directly in investing, I do have a financial background and hold the CFA designation. The goal of Margin of Safety Investing is to share my investing journey as I review and analyze investing opportunities using a... More
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  • Abbott Laboratories (ABT) quick review - ABT could soon be interesting!

    Intro

    Abbott is currently trading at $50.5 and was added to the pipeline based on its wide-moat 5 star rating from Morningstar.

     1- Business Performance Risk

    Metric

    Status

    FCF / Sales

    Last twelve months (“LTM”): 23%, which is high compared to ABT’s 13-20% performance over the last 10 years

    ROE

    LTM: 27%, il line with the 20-30% performance over the last 10 years, except for 2 “bad years” with a performance of 12% and 18%.

    ROA

    LTM: 10.5%; historically ABT’s performance has varied within a 8-12% with a low year at 5%

    Revenue Growth

    Revenue growth on a 5 to 10 year basis has been fairly consitent at 8 to 9%.  Last year was lower but ABT’s last quarter is already counterbalancing this lower performace

    Cash distribution to shareholders

    ABT’s dividend yield is at 3.3% with a consistent payout of ~50%.  The company does very little buybacks and has been acquisitive in the past.

    ABT has been able to deliver consistent and interesting growth, FCF and ROE over the last 10 years. However the company’s ROA is lower than what I would be looking for. The difference between the ROE and ROA indicates that the company has a somewhat high level of debt compared to equity.

    The dividend yield is interesting but overall returns may not be that high if all we get is 3.3% dividend and a (conservative) 5-6% growth.

     

    2- Balance Sheet Risk

    Metric

    Status

    LT Debt / Equity

    LTM: 0.7x, on the higher end of last 10 years history of 0.2x to 0.5x. The company also carries a fair amount of short term debt which makes the total Debt/Equity ratio exceed 1.0x

    Current Ratio

    1.4x, in line with the histrorical range of 1.0x to 1.8x

    As revealed by our analysis of ROE vs. ROA earlier, ABT carries a large amount of debt (Total debt > Equity) which is probably too high for me. 

     

    3- Valuation Risk

    Metric

    Status

    Cash Return

    8.3%, making ABT potentially attractive on a cash basis

    P/E

    14.7x, which is higher than the industry overall and the S&P 500. but also significantly lower than ABT’s 5-year average of ~24x

    ABT’s valuation has been coming down in recent years and is still above the P/E of the market.  ABT’s P/E is higher than the industry but that can easily be explained by ABT’s better diversification and relatively lower “patent risk” vs. a number of its peears.

    On a cash basis, ABT appears attractive however we know that the company’s recent FCF/sales has been higher than usual by 20-30%, making a “normalized” cash return potentially much less attractive!

     

    Conclusion

    I will pass on ABT for now but will keep an active eye on it in my watchlist. The company has been generating good levels of cash flow and ROE over the last 10 years. However I am currently a bit concerned by the level of debt and the sustainability of the current high cash flow. To be comfortable with the stock and proceed to a more in-depth Company analysis, I would want ABT’s Total Debt/Equity to come under 1.0x and/or a confirmation that new FCF/sales level are sustained and/or a drop in price to ~$45 or below.

     



    Disclosure: No position
    Tags: ABT
    Sep 24 6:29 PM | Link | Comment!
  • Applied Material (AMAT) quick review - Not an investment for me!

     Intro

    Applied Materials currently trades at $10.6.  I placed it in the idea pipeline on the basis of Morningstar’s 5-star wide-moat rating.

     1- Business Performance Risk

    Metric

    Status

    FCF / Sales

    Last twelve months (“LTM”) was 15%, in line with historical performance over the last 10 years between 11% and 20% with a couple years, including 2009 at only 1-2%.

    ROE

    LTM: 8.5%, over the last 10 years ROE has varied between -4% and 22%, with an average in the single digits.

    ROA

    LTM: 6%. Historically ROA’s have been volatile going from -3% up to 17%!  The average is also in the single digits

    Revenue Growth

    Over the last 10 years AMAT is essentially flat, with very high fluctuations up and down.

    Cash distribution to shareholders

    AMAT initiated a dividend in 2005 and has increased its payments almost annually since then.   The current dividend yield is 2.4%, lower than the S&P 500 as a whole. AMAT also buys back a fair amount of share, with a reduction of about 20% in # of shares over the last 5-6 years

    AMAT is extremely volatile with revenues essentially flat over the last 10 years but with bumps of +80% and -30% year over year. This in turns is reflected in the company’s ROE’s, ROA’s and cash flow generation.  This type of cyclicality is a non-starter for me as I have no particular insight in evaluating the business cycle of AMAT.


    2- Balance Sheet Risk

    Metric

    Status

    LT Debt / Equity

    0.03x! AMAT carries almost no debt

    Current Ratio

    2.27x, which is conservative

    The company is very conservatively financed, which makes sense given its volatile nature.

     3- Valuation Risk

    Metric

    Status

    Cash Return

    10.1%, which is quite attractive!

    P/E

    23.5x, slightly lower than the industry and much higher than the S&P

    The valuation metrics for AMAT tell a dual story: the company appears to be highly valued on a P/E basis with a P/E >20x (which is too high for me) and yet has an attractive cash return of 10%.  However given the cyclicality of the business it is difficult to evaluate if the cash valuation can stay attractive longer term given.

    Conclusion

    I will pass on AMAT as the business is very cyclical.  While AMAT seems nicely managing cash returns (mix of dividends and buybacks) I would not be comfortable owning the company if the markets were to close for a long time. 

     



    Disclosure: No position
    Tags: AMAT
    Sep 24 6:27 PM | Link | 4 Comments
  • APOL quick review - A good investment candidate

     Intro

    Apollo’s stock is currently priced at $46. I put it into my ideas pipeline on the basis of its 5 stars wide-moat rating from Morningstar

     1- Business Performance Risk

    Metric

    Status

    FCF / Sales

    Last twelve months (“LTM”): 17% in line with historical performance over the last 10 years of between 14% and 22%

    ROE

    LTM: 50%. Historically APOL’s ROE has been between 30% and 60%, with the 5 last years between 50 and 60%

    ROA

    LTM: 22%, at the low end of historical performance, with ROA’s between 19% and 32%

    Revenue Growth

    Growth has been very high and consistent historically, with 10-year average growth of 20%+ with only 1 year over year growth below 10% over the last 10 years

    Cash distribution to shareholders

    APOL does not pay a dividend but has been a constant repurchaser of shares with about 20% share repurchased over the last 5 years.

    APOL is a very high cash and earnings business with FCF/sales level in excess of 15% almost every year and ROA’s well above 15%.  In addition the company has been growing fast and consistently.  The only downside is its lack of dividend; however management still returns money to investors via repurchases. 

    The company’s growth may slow down a bit in coming years, but even at a 10% rate, given its ROE the company would have 80% of earnings to pay a dividend or do buybacks (which they prefer given the concentrated ownership structure).  At the current P/E it means the company could buy more than 5% of its own stocks every year and increase its cash position!

     2- Balance Sheet Risk

    Metric

    Status

    LT Debt / Equity

    0.1x, very low as APOL carries very little debt. However note that the company carries a fair amount of other liabilities which we will need to review if we perform a Company Analysis of APOL.

    Current Ratio

    1.3x which is a bit aggressive but not problematic and is in line with APOL’s practices over the last 3-4 years

    APOL carries little debt and liquidity risk and appears conservatively financed. However we should look into the company’s other liabilities before investing into the company.

     3- Valuation Risk

    Metric

    Status

    Cash Return

    13.4%, which is quite attractive, the company could generate enough cash to buy itself entirely in 6 years at this price!

    P/E

    11.9x, below industry and S&P. Over the last 5 years APOL’s P/E averaged 21.5x

    Apollo’s valuation appears attractive with a high cash return and low P/E relative to its industry, market and history. This is in large part driven by the current regulatory scrutiny over the education industry. However such an attractive valuation may well give us a large enough margin of safety to be comfortable with an investment in Apollo.

     Conclusion

    Apollo appears to have a very strong business, conservative balance sheet and a low valuation which potentially offers enough margin of safety to become an interesting investment.

    I will perform a Company Analysis of APOL.




    Disclosure: Long APOL
    Tags: APOL
    Sep 24 6:24 PM | Link | Comment!
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