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Tom Armistead  

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  • WTI - It's About Dollar Strength
    Wed, Mar. 18 CRC, CRR, CVEO 17 Comments

    Summary

    • Efforts to explain oil prices by reference to production, consumption and inventory have generated considerable confusion and controversy.
    • When coupled with CPI, the trade weighted dollar index shows considerable explanatory power with regard to the price of oil.
    • Central bank policy can be counted on to provide stress on exchange rates, which will affect oil prices.
    • Policies that inhibit the exchange between oil and dollars complicate the situation.
  • IBM: Transition Developing Favorably
    Mon, Mar. 16 IBM 34 Comments

    Summary

    • The company has succeeded in becoming a major factor in the markets addressed by its strategic imperatives.
    • Management has articulated a reasonable plan to develop the imperatives at a pace that will compensate for the gradual erosion of its other businesses and restore topline growth.
    • Risk/reward is favorable at the current share price.
    • Two years is a reasonable holding period to determine whether the transition will succeed.
  • CF Holdings: Betting On Expansion
    Wed, Mar. 4 CF 19 Comments

    Summary

    • CF Industries enjoys competitive advantages due to low cost natural gas and favorable plant locations.
    • Shares are cheap based on PE multiples, and price appreciation has been strong, driven by buybacks.
    • When the current 25% expansion is completed, new revenues can be expected to drive increased earnings.
  • Civeo Corp. Is Attractive As A Speculative Value Play
    Mon, Mar. 2 CVEO 8 Comments

    Summary

    • Shares are down 83% since the company was spun off from Oil States International.
    • Pro forma historical earnings are available, and provide a basis for estimating normalized earnings in the event crude oil and metallurgical coal prices recover.
    • A plausible case can be made for a share price increase greater than 100% over the next two to four years.
    • The capital structure (debt) was put in place when oil prices were substantially higher than at present.
    • There is headline risk from as reported earnings, which may include write-downs.
  • Caterpillar: Tax Avoidance Or Tax Evasion?
    Wed, Feb. 25 CAT 15 Comments

    Summary

    • Caterpillar's 10-K discloses a dispute with the IRS over $1 billion of taxes for the 2007-2009 years.
    • Because the company has reported income on the same basis in subsequent years, the amount can be extrapolated to $2.7 billion.
    • Litigation by a whistle-blower alleges tax and securities fraud.
    • Investors should incorporate this information into their valuation process, which will require them to form an opinion on the validity of the company's tax positions.
  • Coach: Transformation Developing Favorably
    Thu, Feb. 19 COH 3 Comments

    Summary

    • Management is on schedule completing the actions required by the transformation plan.
    • Financial analysis focuses on revenue and inventory, comparing current trajectory to an estimated recovery scenario.
    • Coach is on target to meet the recovery scenario, and I continue to expect share price appreciation consistent with a $48 target price.
    • The business is seasonal, as are share prices, which could be in a holding pattern for the next 5 or 6 months.
  • IBM Investor Briefing: What Lies Ahead
    Fri, Feb. 13 IBM 64 Comments

    Summary

    • IBM will hold an Investor Briefing on Thursday, February 26.
    • CFO Martin Schroeter has provided a broad outline of what will be presented.
    • If the details support Schroeter's outline, the stock will rise as the market digests the information.
  • PepsiCo: Very Fully Valued
    Thu, Feb. 12 PEP 21 Comments

    Summary

    • As a stable dividend growth company, PepsiCo is rightfully popular with investors.
    • Growth in servings, which is the relevant underlying metric, has slowed in recent years.
    • High incentive contra revenue suggests low pricing power: snacks and non-alcoholic beverages are somewhat commoditized.
    • Priced at 22 times five year average EPS, there is little room for P/E expansion, and considerable room for contraction.
  • Pfizer's Acquisition Of Hospira Looks Good
    Mon, Feb. 9 PFE 19 Comments

    Summary

    • Market response has been favorable.
    • The acquisition meets simple tests for financial reasonableness.
    • Hospira's pipeline is promising, an important consideration for Pfizer, which faces a patent cliff on Celebrex and has seriously reduced R&D spending since 2010.
    • A $17 billion acquisition makes more sense from a capital allocation point of view than the previously announced buyback authorization of $11 billion.
  • Why Carbo Ceramics Is Worth $55 Per Share
    Tue, Feb. 3 CRR 8 Comments

    Summary

    • While world oil supply and demand have a pattern of stable upward growth over time, oil prices fluctuate dramatically, driven by speculation, manipulation and media hype.
    • The instability has been exacerbated by the misallocation of capital, due to excessive amounts of capital chasing returns under conditions of artificially suppressed interest rates.
    • Working within this context, seven year average EPS provide an appropriate basis for valuing Carbo Ceramics.
    • The strength of the balance sheet needs to be included in the valuation.
  • Why P&C Insurance Companies Have Outperformed The S&P 500
    Wed, Jan. 21 ACE, BRK.A, CB 37 Comments

    Summary

    • For the past 5, 10 and 15 years, P&C (Property and Casualty) Insurance companies have generated an average 4.5% alpha.
    • Trading at a ten year average P/E of 13.5, much of the outperformance can be attributed to chronic undervaluation.
    • Possible causes of the undervaluation observed include unfair stigma as financials, as well as generous spreads between perceived and modeled catastrophe risk.
    • Right size positions in these stocks have the potential to improve diversification, provide growing dividend income, and increase capital appreciation.
  • IBM's Mainframe Refresh May Enhance Growth
    Wed, Jan. 14 IBM 106 Comments

    Summary

    • IBM's mainframe - system z - revenue is cyclical, peaking after periodic upgrades, then tailing off.
    • The company has just introduced the z13, touting it as the most powerful and secure system ever built.
    • A review of the prior cycle provides insight into the current possibilities.
    • If results parallel the previous cycle, IBM may resume growth.
  • 2014 Review And Plan For 2015
    Wed, Jan. 7 ALTR, CB, CRC 26 Comments

    Summary

    • A four part review, focused on issues that may be useful or interesting to readers.
    • 1) Buy and hold performance of starting portfolio picks, discussion of major wins and losses, and thoughts on portfolio construction.
    • 2) An analysis of articles written, with performance from the date of publication, in the context of my stated objectives as a stock blogger.
    • 3) A brief discussion of possible market trajectory, and the implications for strategy and tactics.
    • 4) A longish discussion of the Synthetic Dividend Growth Portfolio, in the context of stated objectives and expected market conditions.
  • Why I Expect WTI To Go Back To $100
    Dec. 4, 2014 USO 159 Comments

    Summary

    • Days of Supply Outstanding, consisting of estimated global storage divided by daily consumption, is predictive of future oil prices.
    • The current spot price of WTI is an outlier comparable to $140 in 2008, but in the opposite direction.
    • Severe discrepancies have corrected within one or two quarters in the past.
  • Server Acceleration: Altera FPGAs Vs. Nvidia GPUs
    Dec. 2, 2014 ALTR 17 Comments

    Summary

    • Server acceleration is a rapidly developing profit opportunity.
    • Both GPUs and FPGAs are capable of performing this function.
    • Altera, using FPGAs, and Nvidia, using GPUs, are best positioned to compete for this business.
    • Competition will be on performance, ease of use and power consumption.
    • If Altera succeeds in garnering a substantial share of this market, there is considerable upside from recent prices in the $37 area.
  • Buybacks: Thoughts On The Analysis Of This Important Use Of Capital
    Nov. 25, 2014 ADT, CB, HPQ 10 Comments

    Summary

    • The analysis of buybacks is a contentious area, frequently reflecting personal preferences or deliberate spin rather than financially rational considerations.
    • A systematic review of the available information will often provide a basis for sound decision-making when buybacks are a major use of capital.
    • This article provides a listing of items to consider, together with examples and anecdotal evidence.
  • Is Pfizer Spending Enough On R&D?
    Nov. 19, 2014 PFE 14 Comments

    Summary

    • Past actions and recent events suggest Pfizer may have trimmed more than it should have on R&D expense.
    • The thought process involved in making the cuts and structuring R&D by segments appears well thought out.
    • The recent agreement with Merck highlights and quantifies the opportunity cost of failure to invest in R&D ahead of the competition.
    • The board has identified $11 billion as excess capital, available to buy back shares. Some of it might be better spent on R&D.
    • The company's future prospects are dependent on establishing a proper balance between financial engineering and the creation of value by innovation.
  • Coca-Cola Has Growth, Margin And Capital Deployment Problems
    Nov. 11, 2014 KO 33 Comments

    Summary

    • Growth in unit case and concentrate volume has slowed from an average of 4.5% to 1.8% over the past two years. This is the measure of consumer demand.
    • Demand creation expense, when considered as a percentage of revenue, has decreased over the past ten years, while net income as a percentage of revenue has also declined.
    • Corrective action is underway: however, this appears inadequate and will take time. Success is not assured.
    • The company owns or licenses over 500 brands, and has not undertaken a strategy of culling the brands and focusing on winners.
    • Buyback activity is excessive at current price levels and takes capital away from more productive uses.
  • Analytics Will Moderate The P&C Insurance Cycle
    Nov. 2, 2014 CB, ACE, TRV 12 Comments

    Summary

    • The largest and best-run P&C insurance companies use sophisticated analytics to accurately predict future loss costs and current premium requirements.
    • Analytics has substantially improved the capacity to maintain pricing discipline.
    • While the P&C cycle will not go away, it can be expected to moderate.
    • Because results are more predictable, insurance companies that combine good analytics with sound investment strategies should command higher P/E multiples.
  • IBM: Taking A Hard Look At R&D
    Editors' Pick • Oct. 22, 2014 IBM 76 Comments

    Summary

    • If IBM is anything more than a cash cow/buyback machine, R&D is where the value lies.
    • With a $6 billion budget, there is a lot of money being spent.
    • IBM's Director of Research has written a book on the New Era of Cognitive Computing, worth reading for perspective on IBM's long-term strategy.
    • The sale of the microelectronics business was a justifiable business decision, and doesn't detract from the potential value inherent in the company's focus on innovation.
    • The R&D spend is being targeted at relevant areas, with a good mix of short-term and long-term priorities. Growth may follow in due course.
  • Altera: Why I Added To My Position
    Oct. 8, 2014 ALTR 9 Comments

    Summary

    • The market for PLDs (Programmable Logic Devices) is a duopoly.
    • Xilinx, the leader by market share, tanked on Q1 2015 earnings and guidance.
    • Days later, Altera reported fine results for Q2 2014, and excellent progress on long-term market share gains.
    • Negativity from Xilinx's results has created a buying opportunity in Altera.
  • Coach: Why I'm Holding
    Sep. 26, 2014 COH 39 Comments

    Summary

    • Coach's well-known troubles necessitate a turnaround or transformation.
    • Management is aware of the problems, has a plan, and the resources to execute it.
    • Based on a review of the company's published plan, and the financial resources required, it is realistic.
    • A workmanlike job on the turnaround would produce fine gains from the current share price.
  • Procter & Gamble: More Than Just A Bond Substitute
    Sep. 22, 2014 PG 18 Comments

    Summary

    • P&G has been disparaged as a high-priced bond substitute, implying that capital appreciation is unlikely.
    • An analysis based on historical PE5 (five year average earnings) suggests the company is fairly priced.
    • The company has ample resources with which to drive growth, in the form of advertising spend and R&D budget.
    • Expense reduction and supply chain consolidation have been ongoing, and much of it paid from current expenses.
    • Current plans to divest non-core brands and focus on key products will result in a leaner, stronger and faster growing company.
  • Valuation Based On Sum Of Outputs Produces Serious Alpha
    Aug. 29, 2014 ALTR, BAX, COH 8 Comments

    Summary

    • For investment purposes, a company's output may be defined as cash it deploys in order to grow the business or reward shareholders.
    • R&D, capex, advertising, dividends, buybacks and acquisitions meet this definition.
    • Using per share amounts and assigning a multiple to each output, the results can be summed to produce a valuation.
    • Back-testing validates the resulting metric as a stock selection criterion.
  • Wal-Mart: Where Is The Company Investing?
    Aug. 19, 2014 WMT 8 Comments

    Summary

    • Capex is ongoing but has decreased as the company more fully penetrates its markets.
    • Investing in price creates a headwind for margins, but also creates an intangible asset of brand strength.
    • Investing in staffing and leadership may improve comps over time.
    • Wal-Mart is a buy at current prices: moderate growth can be expected due to well thought out investments in capex, price and staffing.
  • Aflac: What's The Story With Risk Management?
    Aug. 4, 2014 AFL 14 Comments

    Summary

    • In the wake of the financial crisis, Aflac realized over $4 billion of capital losses.
    • The company has since hired an executive with excellent credentials in fixed income.
    • His compensation has rapidly increased to a comparable level with other key management.
    • Turnover and changed reporting relationships suggest tension around risk management.
  • Chubb: Valuing Income From A High-Quality Bond Portfolio
    Jul. 15, 2014 CB 15 Comments

    Summary

    • 57% of Chubb's net income is derived from the float invested in high-quality bonds.
    • 8% is derived from capital gains.
    • 36% is derived from underwriting profit.
    • When net income is evaluated according to source, intrinsic value exceeds current market price.
  • Shiller's CAPE Data Suggest S&P 3,500 In 5 Years
    Jul. 6, 2014 SPY 37 Comments

    Summary

    • CAPE on the S&P 500 has historically had a paradoxical relation to 10 year Treasury Yields.
    • When the 10 year yields less than 5%, CAPE increases as the yield rises.
    • When the 10 year yields more than 5%, CAPE decreases as the yield rises.
    • When the 10 year hits 5%, the most likely CAPE is 33, implying a substantial increase in the index.
  • Exxon Mobil: A View Of The Company's Economic Characteristics
    Mar. 18, 2014 XOM 27 Comments

    Summary

    • $34.6 billion of deferred tax liabilities is a low-cost, non-perilous source of leverage.
    • $30 billion of equity company investments.
    • $14 billion of income from equity affiliates.
    • ROCE (return on capital employed) of 17% for 2013, consistently higher than peers.
    • Cost of debt is 48 bps above 10 year treasuries: cost of equity is irrelevant.
  • McDonald's: Business Model, Valuation And Minimum Wage Legislation
    Feb. 26, 2014 MCD 97 Comments
  • Adding To My Occidental Petroleum Position
    Feb. 24, 2014 OXY 12 Comments
  • Kellogg Is Now Investing To Restore Growth
    Feb. 13, 2014 K 10 Comments