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Efsinvestment.com website offers simple do-it-yourself type of investment ideas. You can download excel files that can easily calculate the Fair Value of a stock, along with O-Metrix score and Margin of Safety. Investment philosophy is to first determine the maximum loss, and invest... More
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  • 4 High-Tech Companies with Ultra-Conservative Balance Sheets 0 comments
    May 13, 2011 11:19 AM | about stocks: AAPL, GOOG, MSFT, IBM, BAC

    Millard Brown recently released the list of Top 100 Most Valuable Global Brands. Millard Brown is a global research and consulting company that helps its customers “to quantify the intangible in financial terms”. The clients, in turn, can objectively estimate the value of their brands and optimize their marketing budget. I like objective brand value estimations, because it gives us an opportunity to compare these estimates with the companies’ own projections on intangible assets. A cross-check of the list with firms’ balance sheets reveals 4 High-Tech companies with ultra-conservative balance sheets:

    Apple (AAPL) finally claimed the first spot with 84% brand value increase, last year. Apple’s brand value is estimated at $153.3 billion. Apple has the highest brand value, and the most conservative balance sheet in the list. The financial statements show goodwill of $741 million, and intangible assets of $342 million. I like companies with conservative balance sheets. Apple gets another thumbs-up in the balance sheet.

    When we look at the current valuations, Apple has a P/E ratio of 16.55, and a forward P/E ratio of 12.18. The PEG value stands at 0.81, ROA and ROE ratios are, 25.73% and 38.78%, respectively. Almost all analysts are bullish on Apple with an average price target of $449. If the analyst estimates of 20% EPS growth hold, Apple will enjoy a net income of $50 billion by 2015. With a P/E ratio of 14, this implies a market capital of $700 billion in the next 5 years. Apple is a center of innovation, and stocks tend to go wildly up, as soon as a new product hits the market. It would be a good idea to buy Apple shares before iPhone5 gives a boost to the stock again.

    Google (GOOG), the fallen emperor, moved down to #2 with a brand value of $111 billion. While the goodwill and intangible estimates are not as conservative as Apple, they are still a fraction of Millard Brown’s estimates. With a market capital of $172.48 billion, Google has a trailing P/E ratio of 20.57, and a forward P/E ratio of 13.40.

    Similar to Apple, analysts are also extremely bullish on Google with an average target price of $708, implying 40% upside potential from the current value of $529.  In the last few weeks, the stocks were beaten enough. The current price of $534 is almost $100 below the $630 resistance. There is a temporary bearish sentiment on Google shares due to the recent law suits. In the first bullish move, the next short-term target will be $560.

    IBM (IBM) has a brand value of $100.8 billion, whereas the balance sheet shows a conservative goodwill estimate of $25.13 billion and intangibles worth $3.49 billion. Since IBM is a relatively older company with literally thousands of patents and inventions, it is normal to have a fair estimate of goodwill.

    The forward P/E ratio of 11.65 implies an undervalued company. The stocks are moving in a long-term upward trend, since September 2010. Analysts also have positive expectations about IBM, with an average target price of $179. The company is doing well, and the stocks are continuing the upside momentum. It could be a good buy in the first major correction.

    Microsoft (MSFT) is the 5th company in this list, with a brand value estimate of $78.2 billion. The conservative goodwill estimate of $12.39 billion is a good indicator in the balance sheet.

    Microsoft supports a market capital of $213.86 billion. Trailing P/E ratio is 10.06, while the forward P/E ratio is 9.16.  Shareholders enjoyed a dividend yield of 2.52% dividend. I am not sure whether the acquisition of Skype will bring any future profits to Microsoft, but you will never know. The current price of $25 is 20% below the average analyst price target of $32.79. Microsoft pays solid dividends, and net profit margin of 31.76% is a dream for many high-tech companies. Currently, shares are trading at very strong support levels. I expect the stock to bounce back near $30 in soon future.

    Note that while – at least theoretically - sum of goodwill and intangibles is almost synonymous as brand value; in practice, the accounting rules might be different. Consider Bank of America (BAC) as an example. Bank of America’s balance sheet shows a goodwill estimate of $73.86 billion. This high value reflects the premium price, Bank of America paid for its past acquisitions. However, due to this inflated goodwill estimate Bank of America has a P/B ratio of 0.6. The discrepancy in goodwill and intangible asset estimates should be another reason to thoroughly check the financial statements before making any investment decisions. For a detailed explanation of brand value, with an application of America’s most inflated balance sheets, click here.



    Disclosure: I am long MSFT.

    Additional disclosure: I might initiate a long position in Google within the next 72 hours.
    Themes: Quick Picks and Lists Stocks: AAPL, GOOG, MSFT, IBM, BAC
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