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.
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!
Is There Still Hope For Teva Investors? [View article]
Your revenue figures are erroneous. Perhaps downloading the Excel spreadsheet of financials provided by the company would steer you toward the actual revenues: http://bit.ly/Z0wY5K
The growth rate of 2.9% that you seem to have derived from Yahoo is also not consistent with others. Reuters has a consensus mean of 6.87%.
The message of yesterday's Investors Day was focus. A focus on CNS drugs for neurodegenerative diseases and potential patent extensions for Copaxone and Copaxone combinations. A more concentrated focus on R&D. A focus on high value generics rather than also rans by finding advantage in first to market or more highly complicated molecules. A focus on NTEs (New Therepeutic Entities) which are novel formulations or combinations of existing molecules as well as reduced dosing frequency drugs through varied pharmakinetics...argues for lower development risks and lower regulatory risks as well as better pricing. Finally, a focus on reduced costs...through manufacturing in cheaper locales, centralized procurement, and shared service centers.
The time line is longer than Wall Street had hoped for, though the transparency has improved significantly from TEVA's history.
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.
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.
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.
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 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.
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:
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.
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.
3 Healthcare Picks With Sustainable Dividends [View article]
Hi Brad
Just FYI, there remain only 4 AAA rated credits in corporate America. JNJ is certainly one of them, as is Microsoft, Exxon and Automatic Data.
Berkshire was downgraded in August 2011 to a AA+. GE in May of 2009 was taken down to a AA+. Pfizer lost its AAA in August 2009 as it leveraged itself up to purchase Wyeth. Moody's and Fitch rate Pfizer as a single-A credit A-1 and A+ respectively.
I share your enthusiasm for ABT and TEVA, but I can no longer consider JNJ as having the quality of the others, whatever the credit ratings agencies may think.
Too many recalls of non-prescription drugs involving factories in Pennsylvania and Puerto Rico, quality issues at DePuy Orthopaedocs in hip replacement devices, and alleged payments of kickbacks to drug distribution companies seem to be eroding the value of the most important intangible asset that a company should maintain- its reputation.
Bill Weldon, the CEO who will be retiring by the end of this month, will have the pain of his parting alleviated with a retirement package of $143 million. BTW, the head of the compensation committee at JNJ??...none other than the infamous Chuck Prince, formerly of Citigroup known more for his silly quote “As long as the music is playing, you’ve got to get up and dance,” adding, “We’re still dancing.” as leveraged lending took Citi over the abyss. As chairman of the comp committee at JNJ, Bill presides over a comp committee that has already paid Mr. Weldon some $140 million for his "service" over the last five years, a period when JNJ's reputational standing has deteriorated in my opinion.
I agree that the dividend here is sustainable, but I suspect that there will be higher dividend growth at ABT and TEVA.
2 Financial Preferreds To Consider, 3 To Avoid [View article]
Hi Orange
1. If the company has missed a dividend on a cumulative preferred, it is a deferred dividend. Generally, a company would find it best to pay off deferred dividends as soon as it is able.
2. The preferred is the priority. Common has to take a back seat. Many situations like this. Citigroup did not pay a dividend between Jan 2009 and May 2011, but kept paying the preferred dividends.
Bristol-Myers Squibb Is A 'Market-Perform' For Now [View article]
You are right about Plavix. The patent expires mid May.
I think all Street estimates incorporate Plavix sales plummeting from $7 billion last year to maybe around $2-$2.5 billion this year...they sold $1.76 billion in the first quarter so these targets are hardly stretch goals for Plavix. Avapro, another almost $1 billion sales drug hits patent expiry this year.
Nobody expects BMY to grow earnings this year. Consensus is $1.97 obviously down from last year's $2.28. The real issue is whether the pipeline of new drugs will carry BMY through. BMY has some very strong niche drugs that should help to restore revenue and earnings growth beyond 2012.
There is a strong arsenal of new products such as Sprycel, a drug for chronic myeloid leukemia, Yervoy, the first drug to extend the life of late stage multiple myeloma patients; Orencia, a drug for treating moderate to severe rheumatoid arthritis....these three have potential of between $1.0 - $1.5 billion in sales this year and next. Onglyza is another exciting type 2 diabetes treatment.
Ultimately, BMY may well not be long for this world as an independent company. BMY has a market cap of $55 billion and enterprise value of $51 billion (adding debt subtracting cash).
Compare that to JNJ at $175 billion , Pfizer at $166,, Roche at $150, Merck at $116, Glaxosmithkline at $116, Sanofi at $100.
BMY and LLY despite being large companies are relatively small compared to these goliaths. I believe that BMY's excellent product pipeline would be very appealing to these larger companies. As Gabelli refers to it, corporate lovemaking may increase in this space. There are many cost and revenue synergies that can develop from this.
With a 4.17% yield along the way, you can afford to wait for good things to happen.
2 Financial Preferreds To Consider, 3 To Avoid [View article]
No problem Mike.
If the preferred carries a cumulative dividend and dividends are deferred, when the company resumes its payments,the accumulated dividends are paid in chronological order. Let's say a company has missed paying 4 dividends on its preferred but now has the resources to resume payments at the time that the fifth dividend is due. Let's also suppose that it can only afford to pay 3 dividend payments at this time. The cumulative feature still operates. The first three dividends are paid, and there are 2 dividends that are now outstanding. Another quarter passes, and the company pays the 2 deferred dividends plus the currently due quarterly dividend. Hence, the company has caught up on the deferred dividends and is current with its dividend payments.
Bristol-Myers Squibb Is A 'Market-Perform' For Now [View article]
Hi Jacob
I'm a little surprised by your comments that are very favorable to BMY's pipeline with which I concur, versus your view that the stock will perform in-line with the market.
You may want to have another look at the total return of BMY which combines both its capital gains as well as growth in the dividend. Your comment that " The company hasn't delivered much capital appreciation to investors in the medium to long term. In the last 3 years, the capital appreciation was a handsome 60%, however in the last 5 years capital appreciation rate is only 16%" does not reflect properly the return to the BMY shareholder.
Using Yahoo Finance data, let's have a look at the returns of BMY versus other large cap pharma as well as KO and PEP over the last 3 and 5 year periods.
5 YR 3 YR ABT 21.73% 49.19% BAX 18.68% 25.47% BMY 51.30% 86.87% JNJ 21.55% 39.11% LLY -10.09% 42.75% MRK 3.22% 69.22% PFE 5.83% 84.30% KO 68.23% 76.51% PEP 17.11% 38.74%
As you can see, BMY total return was second only to KO's for the 5 year period. On a 3 year basis, BMY had the highest total return.
The company has actually been quite generous relative to its peers in terms of dividend payout as a percentage of free cash flow. Unlike others, it has returned capital through shareholders primarily through dividends with less reliance on share buybacks.
BMY's dividend represents about 50% of free cash flow to shareholders, just behind KO and PEP at 65% and 56%.
Finally, as far as BMY's performance relative to the market over the last 3 and 5 years, on a total return basis, BMY out-performed the S&P on a total return basis for both periods.
For three years, the S&P is up 59.39% as compared to BMY's 86.87%. For five years, the S&P is down 5.46% versus BMY's 51.3% total return.
If your premise that the past is prologue, BMY's future may well be better than you expect.
Mortgage REIT Investors Should Ignore Regulatory Static From Washington [View 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!
UNII And Earnings Trends: 95% Predictive For Closed-End Bond Fund Dividend Cuts [View article]
Is There Still Hope For Teva Investors? [View article]
http://bit.ly/Z0wY5K
The growth rate of 2.9% that you seem to have derived from Yahoo is also not consistent with others. Reuters has a consensus mean of 6.87%.
The message of yesterday's Investors Day was focus. A focus on CNS drugs for neurodegenerative diseases and potential patent extensions for Copaxone and Copaxone combinations. A more concentrated focus on R&D. A focus on high value generics rather than also rans by finding advantage in first to market or more highly complicated molecules. A focus on NTEs (New Therepeutic Entities) which are novel formulations or combinations of existing molecules as well as reduced dosing frequency drugs through varied pharmakinetics...argues for lower development risks and lower regulatory risks as well as better pricing. Finally, a focus on reduced costs...through manufacturing in cheaper locales, centralized procurement, and shared service centers.
The time line is longer than Wall Street had hoped for, though the transparency has improved significantly from TEVA's history.
I have taken advantage of today's weakness.
3 Ways To Play The Tech Sector For Gains This Quarter [View article]
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.
Buffett Erred In Buying IBM, Should Have Bought Xerox Or HP [View article]
Can Xerox Make A Comeback? [View article]
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
Can Xerox Make A Comeback? [View article]
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.
Ford Looks Like A Buffett Special [View article]
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.
4 Financial Preferreds For Big Income, 1 To Avoid [View article]
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.
Johnson & Johnson Worst Days May Be Ahead Of It [View article]
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.
3 Healthcare Picks With Sustainable Dividends [View article]
Just FYI, there remain only 4 AAA rated credits in corporate America. JNJ is certainly one of them, as is Microsoft, Exxon and Automatic Data.
Berkshire was downgraded in August 2011 to a AA+. GE in May of 2009 was taken down to a AA+. Pfizer lost its AAA in August 2009 as it leveraged itself up to purchase Wyeth. Moody's and Fitch rate Pfizer as a single-A credit A-1 and A+ respectively.
I share your enthusiasm for ABT and TEVA, but I can no longer consider JNJ as having the quality of the others, whatever the credit ratings agencies may think.
Too many recalls of non-prescription drugs involving factories in Pennsylvania and Puerto Rico, quality issues at DePuy Orthopaedocs in hip replacement devices, and alleged payments of kickbacks to drug distribution companies seem to be eroding the value of the most important intangible asset that a company should maintain- its reputation.
Bill Weldon, the CEO who will be retiring by the end of this month, will have the pain of his parting alleviated with a retirement package of $143 million. BTW, the head of the compensation committee at JNJ??...none other than the infamous Chuck Prince, formerly of Citigroup known more for his silly quote “As long as the music is playing, you’ve got to get up and dance,” adding, “We’re still dancing.” as leveraged lending took Citi over the abyss. As chairman of the comp committee at JNJ, Bill presides over a comp committee that has already paid Mr. Weldon some $140 million for his "service" over the last five years, a period when JNJ's reputational standing has deteriorated in my opinion.
I agree that the dividend here is sustainable, but I suspect that there will be higher dividend growth at ABT and TEVA.
2 Financial Preferreds To Consider, 3 To Avoid [View article]
1. If the company has missed a dividend on a cumulative preferred, it is a deferred dividend. Generally, a company would find it best to pay off deferred dividends as soon as it is able.
2. The preferred is the priority. Common has to take a back seat. Many situations like this. Citigroup did not pay a dividend between Jan 2009 and May 2011, but kept paying the preferred dividends.
Bristol-Myers Squibb Is A 'Market-Perform' For Now [View article]
I think all Street estimates incorporate Plavix sales plummeting from $7 billion last year to maybe around $2-$2.5 billion this year...they sold $1.76 billion in the first quarter so these targets are hardly stretch goals for Plavix. Avapro, another almost $1 billion sales drug hits patent expiry this year.
Nobody expects BMY to grow earnings this year. Consensus is $1.97 obviously down from last year's $2.28. The real issue is whether the pipeline of new drugs will carry BMY through. BMY has some very strong niche drugs that should help to restore revenue and earnings growth beyond 2012.
There is a strong arsenal of new products such as Sprycel, a drug for chronic myeloid leukemia, Yervoy, the first drug to extend the life of late stage multiple myeloma patients; Orencia, a drug for treating moderate to severe rheumatoid arthritis....these three have potential of between $1.0 - $1.5 billion in sales this year and next. Onglyza is another exciting type 2 diabetes treatment.
Ultimately, BMY may well not be long for this world as an independent company. BMY has a market cap of $55 billion and enterprise value of $51 billion (adding debt subtracting cash).
Compare that to JNJ at $175 billion , Pfizer at $166,, Roche at $150, Merck at $116, Glaxosmithkline at $116, Sanofi at $100.
BMY and LLY despite being large companies are relatively small compared to these goliaths. I believe that BMY's excellent product pipeline would be very appealing to these larger companies. As Gabelli refers to it, corporate lovemaking may increase in this space. There are many cost and revenue synergies that can develop from this.
With a 4.17% yield along the way, you can afford to wait for good things to happen.
2 Financial Preferreds To Consider, 3 To Avoid [View article]
If the preferred carries a cumulative dividend and dividends are deferred, when the company resumes its payments,the accumulated dividends are paid in chronological order. Let's say a company has missed paying 4 dividends on its preferred but now has the resources to resume payments at the time that the fifth dividend is due. Let's also suppose that it can only afford to pay 3 dividend payments at this time. The cumulative feature still operates. The first three dividends are paid, and there are 2 dividends that are now outstanding. Another quarter passes, and the company pays the 2 deferred dividends plus the currently due quarterly dividend. Hence, the company has caught up on the deferred dividends and is current with its dividend payments.
Bristol-Myers Squibb Is A 'Market-Perform' For Now [View article]
I'm a little surprised by your comments that are very favorable to BMY's pipeline with which I concur, versus your view that the stock will perform in-line with the market.
You may want to have another look at the total return of BMY which combines both its capital gains as well as growth in the dividend. Your comment that " The company hasn't delivered much capital appreciation to investors in the medium to long term. In the last 3 years, the capital appreciation was a handsome 60%, however in the last 5 years capital appreciation rate is only 16%" does not reflect properly the return to the BMY shareholder.
Using Yahoo Finance data, let's have a look at the returns of BMY versus other large cap pharma as well as KO and PEP over the last 3 and 5 year periods.
5 YR 3 YR
ABT 21.73% 49.19%
BAX 18.68% 25.47%
BMY 51.30% 86.87%
JNJ 21.55% 39.11%
LLY -10.09% 42.75%
MRK 3.22% 69.22%
PFE 5.83% 84.30%
KO 68.23% 76.51%
PEP 17.11% 38.74%
As you can see, BMY total return was second only to KO's for the 5 year period. On a 3 year basis, BMY had the highest total return.
The company has actually been quite generous relative to its peers in terms of dividend payout as a percentage of free cash flow. Unlike others, it has returned capital through shareholders primarily through dividends with less reliance on share buybacks.
BMY's dividend represents about 50% of free cash flow to shareholders, just behind KO and PEP at 65% and 56%.
Finally, as far as BMY's performance relative to the market over the last 3 and 5 years, on a total return basis, BMY out-performed the S&P on a total return basis for both periods.
For three years, the S&P is up 59.39% as compared to BMY's 86.87%. For five years, the S&P is down 5.46% versus BMY's 51.3% total return.
If your premise that the past is prologue, BMY's future may well be better than you expect.