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WTI - It's About Dollar Strength
- 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
- 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
- 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
- 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?
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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?
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- 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?
- 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?
- 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
- 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
- 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
- $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
- Adding To My Occidental Petroleum Position
- Kellogg Is Now Investing To Restore Growth