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Rick Konrad, CFA

 
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  • Markel: Not The 'Baby Berkshire' People Claim It Is [View article]
    Tom Gaynor is a remarkably disciplined investor who, as someone else noted, is just getting started. What is Berkshire-like is the strong attention to the real business, the underwriting of insurance risks. Yes, there are other PC companies with equity portfolios. Someone mentioned RLI which is a great underwriter, bit IMHO not an investor that is going to compound returns like MKL. It's equity portfolio historically has been passive, S&P indexed. The focus on specialty lines is another strength that the great insurance companies share. Berky is a tough act to follow, but I also think that similar disciplines are shared by that small basket of guys who "get it". Namely MKL, Y, and maybe LUK. Thanks for posting your thoughts!
    Nov 10, 2014. 07:35 PM | 2 Likes Like |Link to Comment
  • Cirrus Logic: Upsetting The 'Apple' Cart [View article]
    Three questions:

    1) Are you posturing that $30.90 is your fair value estimate? Because of the near monopsony that CRUS has with AAPL, you suggest that $30.90 is not fair. What do you estimate fair value to be assuming the AAPL relationship holds?

    2) Your two years of consensus cash flows followed by nothing leaves out any liquidation value for remaining assets. Shouldn't these be included as a terminal value?

    3) I can find no growth estimates anywhere near the 19% you suggest. Most are near 10% or less. Why would you use the growth rate as your discount rate?
    Aug 29, 2013. 05:46 PM | 2 Likes Like |Link to Comment
  • Apple: Stop The Dividend [View article]
    Hi RN. I am certainly glad that you have commented to point out my "error."

    Rather than rely on third party views (even Reuters) of what is on the balance sheet, you might find it useful and even instructive to read the actual balance sheet yourself.

    Cash, cash equivalents, and short term marketable securities as per page 4 of the most recent 10-Q total $12,053 + $27,084=$$39.317 billion.

    This is what is available as "current assets".

    What you are referring to is "long term marketable securities" which includes about $34.3 billion in US Treasuries and agencies, $45.7 billion in corporate securities (which may include stocks), $5.6 billion in munis, and $14.7 billion in MBS, plus additional odds and sods which add up to $105.5 billion in long term securities.

    Long term marketable securities do not equate to cash.
    Jul 3, 2013. 12:17 PM | 3 Likes Like |Link to Comment
  • Apple: Stop The Dividend [View article]
    First of all, there is $39 billion in cash and sort-term investments on the balance sheet as of the last quarter.

    When is it advisable for a company to buy back its stock. As Buffett has said:
    "First, the company has available funds—cash plus sensible borrowing capacity—beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated".

    In other words, once a business has a strong balance sheet, then it should first take its excess cash/cash flow and reinvest in its own business—if (and only if) it can generate high rates of return on such investment. AAPL should, if it sees profitable opportunities in which to invest at decent incremental returns on capital, invest in its business.

    Should excess cash, beyond what is desirable to reinvest in the biz be returned to shareholders through dividends or buybacks?

    That depends on the price of the stock versus its intrinsic value. Buybacks per se create NO value...it all depends on the price of the stock and its relationship to the intrinsic value.

    Let's assume that AAPL could buyback the entire $60 billion allotted for repurchase at $420 per share, essentially today's price. This amounts to roughly 142.8 million shares. Yes, I understand that it is unlikely to do so without moving the price, but bear with the logic for a moment.

    As an initial assumption, let's also say the bulls have it right, and the stock is actually worth $700 again. Buying $700 in value for the current $420 makes a heck of a lot of sense. The logic is no different than if I were to offer you a new Mercedes worth $70K for $42K. Who would refuse? How much value is created in the Mercedes transaction? Simple $70K-$42K or $38K. Ergo, the purchase of $700 of value for $420 repeated by 142.8 million shares is about $40 billion in value that has been created.

    Now, as a second example assume the bears are correct and the value of AAPL is only $300 per share. Paying too much for an asset destroys value. Hence, if the buyback were carried out at the current $420, the end result would be a loss of value of ($420-$300) or $120 times 142.8 million shares or about $17 billion in value destroyed.

    As should be clear, value is created by repurchases at share prices that are below intrinsic value but value is destroyed when repurchases are made at prices which are over intrinsic value.

    This is not running the business to manipulate the share price. It is the opposite. It is creating value for existing shareholders by taking advantage of "Mr. Market," the ability of the capital markets to become despondent and misprice securities at times. It is not the company thatt has manipulated the stock price...it is the market that may have gotten the valuation wrong.

    Merely kicking cash out the door by paying a dividend does not create value. It may indicate that you may not have attractive reinvestment opportunities within the business. It may indicate that you have excess cash that is reducing your return on capital or equity.

    If you own what you believe to be an undervalued stock and management is not taking advantage of the undervaluation by buying back the stock, question your initial assertion of undervaluation. Secondly, you should question management's financial ability. If management continues to issue undervalued stock in M&A activities or secondary offerings, REALLY question your initial assertion.

    I like and own and continue to purchase AAPL in and around these prices. I have no idea whether it will see $350 or $500 first. I believe the intrinsic value is above $600. I am indifferent as to the dividend.

    Share buybacks create value if and only if we are exchanging cash at a price where we receive more value than we give up..i.e. if the stock is trading below intrinsic value. Dividends create no value since they merely sweep cash out the door.

    For a real education on share repurchases, M&A using stock as currency, and the creation of value read about Henry Singleton and Teledyne. For a more modern version, read about John Malone. Read some Berkshire annuals as well.

    Smart companies do not "make" the price...they "take" the price and design a strategy to advantage shareholders' value.
    Jul 3, 2013. 07:24 AM | 3 Likes Like |Link to Comment
  • Constellation Brands (STZ): Q1 EPS of $0.38 misses by $0.03. Revenue of $673M (+6% Y/Y) misses by $1.24M. (PR[View news story]
    N.B. Error ---STZ reported profit of $0.38 NOT a loss of $0.38 versus consensus of $0.41

    Miss was 3 cents due to lower operating margins
    Jul 2, 2013. 08:50 AM | 1 Like Like |Link to Comment
  • CYS: A Nice Yielding REIT, BUT... [View article]
    Interesting work Doug but management of CYS seems to disagree with your sense of the downside and the outlook for their firm. Their view is best expressed with the insider buying that has taken place here in the last three months. Just over $1 million has been spent on insider buying including the chairman/CEO with no insider sales. In recent conferences, management has viewed the environment very opportunistically. In fact, a number of other mREIT managers have stepped up to the plate to purchase stock in their companies, one of very few sectors where significant insider buying has been seen. I would warn that investors not get too bearish on this sector unless their view of the interest rate outlook is significantly worse than what you have outlined. Though there are other mREITs that I would consider expensive and vulnerable, I am less concerned here.
    Jun 8, 2013. 07:16 PM | 2 Likes Like |Link to Comment
  • Mortgage REIT Investors Should Ignore Regulatory Static From Washington [View article]
    Congratulations on an excellent article.

    Regulators are potentially barking up the wrong tree given the MREIT industry's portfolios with their moderate use of leverage relative to the banking industry. There is no question that this sector will play an important role in mortgage finance as GSEs and the Federal Reserve will eventually step aside. Reducing MREIT flexibility at this time would undoubtedly raise the cost of mortgages. Agency MREITs have been exemplary in their conservative stance on mortgage credit and their focus on prepayment stability given the prepayment risks that low interest rates have triggered.

    The greatest concern I have regarding MREITs is client education, understanding and disclosure. Declining interest rate margins between the yield on MBS and the cost of funds results in diminished profitability and inevitably reduced cash flows and dividend distributions. The quoted yield refers to trailing dividends, not necessarily future payments. These are not CDs with assured and guaranteed returns, but rather funds that require ongoing analysis and monitoring of their risk management. Funding costs for MREITs can vary and certainly some of them are more inclined or adept to use interest rate caps or swaps to manage risk. Earnings quality and revenue recognition vary as well as the portfolio focus on hybrid ARMs, 30 year or 15 Year Fixed, home equity conversion loans...I am only touching the surface of possibilities.

    Readers should know what they own and not be mesmerized by what could be an evaporating dividend and a temporarily high yield.

    As you point out, this is a fertile area for income oriented investors but it requires a bit of work to feel comfortable. Regulators would be foolish to shut it down or to restrain its flexibility in an industry that has come out of the housing crisis in far better shape than it was and deservedly has attracted more capital.

    Nice work, Corvette!
    Apr 24, 2013. 12:40 PM | Likes Like |Link to Comment
  • UNII And Earnings Trends: 95% Predictive For Closed-End Bond Fund Dividend Cuts [View article]
    An outstanding article John! I also view UNII as an important margin of safety when trying to determine the persistence of the dividend but it must be used in conjunction with earnings coverage. CEF investing is becoming more challenging in fixed income as investors chase yield and so many CEFs trade at substantial premia to NAV. The notion of paying a premium on underlying assets which are already richly priced is inherently dangerous.. Paying too much for a distribution cash flow stream that is about to be reduced is even worse. Throw in a potentially higher cost of leveraging those assets, and there is real potential for disaster. Your article highlights how important solid knowledge of the underlying structure of a CEF will keep investors on solid ground. Thanks for an excellent article and service!
    Mar 13, 2013. 09:38 AM | 3 Likes Like |Link to Comment
  • 3 Ways To Play The Tech Sector For Gains This Quarter [View article]
    You may have some errors in your analysis of Alcatel Lucent. Institutional ownership of ALU is not zero, according to Reuters, it is about 26% of the stock.

    Of greater concern is your comments regarding ALU's balance sheet. Based on the 6-K filed August 8th which showed the balance sheet as at June 30th, your numbers appear incorrect.

    Cash and equivalents translated into US dollars were $3.67 billion. Additional marketable securities, presumably "near-cash" were another $2.67 billion or $6.34 billion.

    Debt consisted of:
    Current portion of LT debt at $1.084 billion
    Total non-current liabilities at $14.312 billion

    Let's ignore the pension and retirement obligations for now of $7.920 billion. This leaves total long term debt of $6.392 billion and total debt of $7.476 billion.

    This analysis has also ignored accounts payable of $4.83 billion and receivables of $4 billion.

    With negative operating margins in the first half of this year, and cash USED by operations rather than provided of $533 million, this is a particularly risky choice in my view.

    One thing for sure, there is not sufficient cash to offset the debt. Worse yet, at the moment, the operations are not generating cash.
    Oct 2, 2012. 06:15 PM | Likes Like |Link to Comment
  • Buffett Erred In Buying IBM, Should Have Bought Xerox Or HP [View article]
    XRX is not your grandfather's XRX. The company made a transformational acquisition in the purchase of ACS. The company now derives the majority of revenues from services, which grew YOY at a 9% rate. I believe the stock is considerably undervalued.
    Jul 19, 2012. 02:21 PM | Likes Like |Link to Comment
  • Can Xerox Make A Comeback? [View article]
    I agree with much of your commentary but we need to clarify which margin you are specifying. For 2011, services and technology segments ran at identical 11.1% operating margins. Technology has a higher gross margin than services and I agree that over time, as tech gross margins fade, this represented a challenge for XRX; hence, the acquisition into services. Technology also has significantly higher S,G, and A expense, or in XRX-talk SAG.
    The business outsourcing/consulting of ACS is far from an IBM or Accenture type of high-level outsourcing. ACS' focus and niche is at the lower end of consulting margins. It can be successful by avoiding head on competition against the high end consulting players and sometime, XRX even wins some of those battles- witness the Texas state contract against IBM.
    The ACS acquisition was $6.4 billion, a hefty investment, but completed at 15 times earnings. By comparison, DELL purchased Perot Systems at about the same time, for 30 times earnings. Both XRX and DELL were attempting to get into more of a BPO/consultative/ recurring revenue business and away from selling "boxes".
    The ongoing investment impact has been profound. Working capital needs for XRX in 2002-2007 averaged around 26% of revenues. The last two years, with ACS as part of XRX, working capital to revenues has averaged less than 9% a significant drop in investment. Capital expenditure as a percentage of revenues has increased only slightly from an average of about 1.3% of revenues in the early 2000's to about 2.3% currently. From a capital intensity aspect, the acquisition has led to Xerox requiring far less capital in running the business.
    The services of ACS are sold across a broad array of solutions including IT, human capital management, finance and accounting, transaction processing, and payment services. Historically, ACS renewed some 92% of the contracts...a pretty good indicator of client satisfaction.
    The "vision" of XRX for the services side, I believe, is to focus more on the day-to-day needs addressed by business and technology outsourcing, not necessarily to chase after the highest margin consulting business. Achieving predictable results based on annuity-like recurring revenues streams is the goal, and what I believe will result in an improved valuation.

    I am long XRX
    May 25, 2012. 10:18 AM | 1 Like Like |Link to Comment
  • Can Xerox Make A Comeback? [View article]
    In all due respect, I think you are missing a very fundamental and transformational shift in Xerox strategy that has been taking place for some years.

    Though Xerox seems to be a "blast from the past" and sounds as reprehensible as former Nifty Fifty brethren like Kodak or Polaroid, the company has been radically transformed with by 2 fabulous females, Anne Mulcahy and Ursula Burns. Burns in particular has driven costs from the system and focused on generating recurring revenue streams. We view XRX as a free cash flow bargain, trading at about 11 times FCF with a low PE multiple relative to most technology names. About 80% of revenues is recurring, almost annuity like. The recent outlook disappointed the street, but we think there is significant upside to Xerox on its own merits as well as its 25% ownership of Fuji Xerox which by itself is worth $2.50 -$3.00 per share.

    Xerox is making good progress in its business process outsourcing following the purchase of Affiliated Computer Services. Though XRX is a well known brand to us as consumers, its strength lies in the B2B area. Though the copiers are well known, the outsourcing pursued by XRX is not well recognized. When you fill out an application for a new credit card, or file for a student loan,or go through an EZ-Pass lane or received a traffic ticket that was caught by the red light cameras, the processing of that transaction is often handled by Xerox. Of note, XRX recently displaced IBM in the state of Texas to consolidate 28 data centers into two large centers, an $848 million contract.

    Xerox has been ridiculed for failing to capitalize on many products which became hugely successful for others. This includes the graphical user interface, Ethernet, the mouse, handwriting recognition, full color printing etc. We think R&D will become more of a creator of value rather than a sideline business at Xerox. Last year, over 10,600 patents were awarded to XRX. The company has aligned its R&D investment portfolio with its growth initiatives, including accelerating color transition, enhancing customer value by building on services leadership, and by strengthening digital color printing business.

    The balance sheet is fine, particularly when you consider that the bulk of the debt is associated with the financing of leases, where XRX has had many years of experience in providing small to middle size businesses financing of office equipment. Of the $9.6 billion in debt, $6 billion is associated with financing of leases.

    As far as XRX needing to reach 10% earnings growth to be attractive, I suggest you look at XRX's current valuation and work backward to determine what kind of growth is embedded in its valuation. I think that based on a very conservative 12% discount rate, and assuming even zero growth rather than the 5.2% consensus forecast, the stock is some 30% undervalued.

    I am long XRX.
    May 23, 2012. 01:18 PM | 4 Likes Like |Link to Comment
  • Ford Looks Like A Buffett Special [View article]
    I rather doubt that Buffett would have an interest in Ford, as the company does not really have a sustainable competitive advantage versus its peers.

    Nevertheless, the company has truly done a remarkable job in managing its debt. Your article is not entirely correct in how the debt is allocated.

    From a consolidated reporting standpoint, there does appear to be considerable leverage. As the author correctly points out, the highest leverage applies to Ford Motor Credit, the financing arm. Like any quasi-bank, the loans (in this case auto loans and leases) are funded by a mix of floating rate notes, asset backed commercial paper, asset backed securities, and term debt. A portion of the cash on the balance sheet, about $12.3 billion is dedicated to this purpose. Managed leverage at Ford Credit was about 8:1.

    There is far less leverage employed in Ford's automotive manufacturing business, in fact at this point, NO net leverage. As of Q1, there is only about $12.6 billion in long term debt plus about $1.1 billion in debt due within a year, totaling $13.7 billion. This is offset by the remaining cash of $23 billion. Hence, the automotive manufacturing business actually has net cash of $9.3 billion.

    Whether or not you like the product line is not terribly meaningful in the analysis...the company generated pre-tax profits of $1.8 billion in the quarter from automotive plus another $450 from Ford Motor Credit. A year ago, the first quarter was all red ink, a loss of $294 million from manufacturing and another $250 million loss from financial services. Market share for the quarter was 15.2%, down from last year's Q1 of 16.0%. Europe and Asia Pacific losses hurt the overall profitability. North America showed very good operating margins of 11.5%.

    Obviously, Ford is not immune from the business cycle. If we return to a 10 million vehicle sales pace in this country, Ford will be a $7 stock. If we can maintain a 15.5 million sales pace, we can see the mid to high teens, in my view. If Europe starts earning money, we can see the sunny side of $20.

    Though this is the most economically sensitive stock I own, the vastly improved balance sheet, the cost reductions in North American manufacturing, and the reduced reliance on discount gimmicks are very encouraging that Ford will be a great long term holding and potentially a double from these levels, in my humble opinion. I do own the stock.
    May 10, 2012. 11:02 PM | 1 Like Like |Link to Comment
  • 4 Financial Preferreds For Big Income, 1 To Avoid [View article]
    Once again, a post that is unencumbered by fact and may be dangerous to your financial health.

    Is consistent thinking important to you?

    I see that Goldman Sachs preferred has been your go-to stock. But wasn't it just last week that you indicated that its purchase of a Turkish energy provider would affect the ability for the company to pay its preferreds??? Read your own post for last week as a reminder:
    "Goldman Sachs is making a quite substantial purchase for 13.3% of one of Turkey's main energy providers. For the moment the purchase, which is costing Goldman Sachs $268 million, will affect the company's ability to repay dividends for preferreds like its Series B (GS-B), so I wouldn't recommend purchase at the moment because this series is non-cumulative."
    http://seekingalpha.co...

    Your bearishness on Morgan Stanley preferreds has not served you well either. Let's separate facts from opinion. Here is how these MS preferreds have done YTD on a total return basis:

    MWR +16.29%
    MWG +16.03
    MWO +16.04%
    MSJ +14.30%
    MSZ +12.74%
    MSK +12.63%

    The S&P 500, by the way, was up 10.14% YTD.

    Wells Fargo as you explained so poignantly is one of your favorites based on , "a positive look at the market at large is indicative of an executive that is not expecting much to apologize for in the near future."

    By the way, the Wells Fargo J preferred is up YTD a whopping 4.73%.

    The Citicorp J preferred is favored because of its longer call date. Beware...this is a trust preferred that could be subject to early call under Dodd Frank. The specified call date may have no relevance whatsoever.

    There's a lot more digging required to understand the niceties of the preferred market than what you have demonstrated here.
    Apr 18, 2012. 10:39 PM | 2 Likes Like |Link to Comment
  • Johnson & Johnson Worst Days May Be Ahead Of It [View article]
    Great post! Risperdal could certainly be a major league headache and cash drain. J&J took product liability and litigation charges of $3.1 billion in the fourth quarter relating to Risperdal and the DePuy hip implant. We tend to glide over these charges, which are just an accounting entry at this point, not actual cash, but $3.1 billion is half of one year's free cash flow after dividends and capex.

    What about the pending acquisition of Synthes, a $21.3 billion buyout that still awaits European regulatory approval. The deal is comtemplated as being funded by 65% equity/ 35% cash.

    If JNJ decides to use incremental debt rather than overseas cash (call it almost $7 billion incremental) this would further weaken JNJ's debt ratios.

    The corporate world may be in the process of losing one of the last four AAA credits. Hardly the end of the world for the equity or the debt holder; nevertheless, tangible evidence of the drop in operational quality, and reputation.
    Apr 16, 2012. 02:54 PM | 2 Likes Like |Link to Comment
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