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I am an amateur investor who writes quantitative trading models (hence my username) which deal mostly with larger safer companies and return over 15% a year. I invest partly based on my models. I also do qualitative analysis and make some investments based on that as well. If you are interested... More
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  • A Dominant Company With Excellent Growth At A Decent Price

    Business

    As we all know Visa issues credit and debit cards and handles transactions. Since we all know the main business here are some of the finer breakdowns:

    First, worldwide market share:

     photo 5b190cb1-3c42-404e-8d76-f03750712e1a_zps1b32334d.jpg
    Clearly Visa is the dominant presence worldwide--and their edge is not eroding. Lately they have been issuing more cards and growing more quickly than MA, their only true competition.

     

     

     Change (US)Change (Rest of the World)Change (Total)
    Consumer credit11%15%14%
    Consumer debit1%26%6%
    Commercial and other10%12%11%
    Total Nominal Payments Volume5%17%10%
    Cash volume7%13%12%
    Total Nominal Volume6%15%11%

    Clearly, they are growing the world over, especially overseas. Thankfully not too much of their revenue, or growth, is coming from Europe, as the chart below shows.

     2012 Operating Revenue2011 Op RevChange
    US$ 5,720.00$ 5,135.0011%
    Rest of World$ 4,478.00$ 3,846.0016%
    Visa Europe$ 223.00$ 207.008%
    Total$ 10,421.00$ 9,188.0013%

    One potential cause for short term concern is that Asia Pacific countries make up about 3/5 of 'Rest of the World' revenue. With a slowing Chinese economy there is cause for concern. In the past this has been a fast growing segment for the business and rose about 13% this past quarter (vs. a year earlier). Whether that will continue is questionable and depends quite a bit on whether China can follow the government's economic plan for 7.5% growth this year (and not sink considerably lower, which preliminary indications suggest may be happening). This may pose a short term threat, but long term economics dictate that China will continue growing (for more on this check out the BRIC Report from Goldman Sachs). As such I am not worried and will not consider it a reason to stay away from investing in the company.

    Key Ratios

    • 10 Year FCF growth: 52% since their first year reporting data 2008
    • Return on Equity is 18% and has averaged about 12.5% ROE over the past 5 years
    • $0.00 Total Debt
    • 62% Operating margin

    Overall Quality/Moat of the Business

    Everyone has heard of Visa, and the name carries weight. Further, there is only one company that can pose a serious threat to the company's growth: MasterCard, and Visa has been soundly thumping MasterCard in nearly every metric relevant to the industry. Thus, there do not appear to be any major threats to the company. Further, they have solid return on equity (although not incredible) with spectacular margins, plenty of free cash flow and no debt. So far all signs point to a quality business.

    Valuation

    For the full year 2013 Visa says they are expecting "low double digit growth", substantially under the 21% that analysts expect on average. So far it appears that the analysts have been more correct than management. Regardless, nearly everyone is expecting outstanding long term growth for the business, with the average of analysts predictions for annual growth over the next five years coming in at a 19%. While this is a high figure it is in line with the company's past growth and, in my opinion, represents a realilistic expectation. Further, the company is quickly reducing the number of shares outstanding so growth per share will likely be higher than the 19% listed above.

    In determining the intrinsic value of a business I like to use two metrics: owner earnings and discounted free cash flow.

    Owner Earnings

    For the calculation of owner earnings I ignore changes in working capital as these reductions are used to repurchase shares and buy bonds, thus you are getting an equivalent amount of value from this and these changes do not affect the overall amount of cash the company can produce. Given this owner earnings are about $13.5 a share, which works out to about 1/13.5 of the current price. 13.5x owners earnings is a higher multiple than I would like to pay, but for a company of Visa's quality I consider it worth it. I am happy to pay a bit more for an outstanding company with a realilistic high growth potential. I do not place much weight on this number for a growth company like Visa, however, as the fair value should reflect the expected growth of the company.

    DCF Valuation

    Past growth has been exceptional, although number lately were skewed downward due to accounting on a $4B lawsuit. While 19% growth is expected over the next 5 years, and I believe that it could continue for the next 10, if not longer, I like to lower my earnings expectations a bit for DCF analysis. So, for calculations I used a 15% growth rate for the next decade, and 6% thereafter. Based on this, the exclusion of changes in working capital (since it has no impact on the earnings power of the underlying business), and a discount rate of 12% the fair value of the company is about $220/share.

    Given the exceptional nature of Visa's position in the credit card/debit card industry, their long term historical growth, and good potential for future growth I would be happy to pay 13.5x owners earnings or 18x current FCF. I believe the fair value of the company is somewhere between $210-$250. At this level I consider Visa a moderately good buy.

    Disclosure: I am long V in my personal account and one account I manage for another individual

    Disclosure: I am long V.

    Aug 01 3:22 PM | Link | Comment!
  • Terra Nitrogen (TNH) - Analysis And Thoughts
    (source: dividend.com)

    In a market that has run up as much as our current one it is difficult to find good investment opportunities; well priced dividend stocks are even more difficult to come across as they need to represent a good value and represent a safety net against increases in the federal funds rate. TNH is one of the best priced dividend stocks that I know of, and one my personal holdings. Below is my analysis of the company.

    Business

    Its really simple. They make and sell two products that have a whole bunch of nitrogen in them. The products are anhydrous ammonia (ammonia) and urea ammonium nitrate solutions (NYSE:UAN), both of which are made at a plant in Oklahoma. Numerical Breakdowns of Revenues are as follows

    Product2012 Revenues2011 Revenues2010 Revenues
    Ammonia$204.3$182.4$123.7
    UAN$571.2$613.8$377.3

    There was a tiny bit of nitric acid sold but it was under 1% of revenues every year so I am ignoring it.

    Total tons of each product produced followed an identical trend: low in 2010, highest in 2011 and slightly reduced in 2012. the changes, however, are not huge (on the order of 0.5% a year or so.

    Their products are sold exclusively to their parent company's affiliate, CF Industries. This is CF's MO. This adds some risk, however CF Industries is a large ($10B), very stable company and This makes TNH's revenues reasonably safe, in the author's opinion. Additionally, before 2011 TNH was very successful selling their products to more than just their parent company, so if something happened to their buyer the business would not be substantially hurt. When analyzing this it is important to remember that their product is a commodity which means that buyers simply care about price, and will buy whatever has the best price they can find.

    Growth

    They have two stable products and production for the moment is not going much of anywhere. So, assuming they don't any trouble selling their products, their income will be purely a function of the price of UAN and Ammonia and their inputs (primarily natural gas).

    Over the past few years natural gas has tanked and crop (and thus fertilizer) prices have gone up substantially. This has put TNH in a sweet spot that has allowed revenues to grow substantially. Since 2005 revenues have risen a tidy 71% (from $455.52 Mil to $780.10 Mil). This followed about 30 years of falling food prices and this sort of growth is probably not replicable.

    Neither is the collapse in natural gas prices, which fell from about $7 to $3.77 now. That sort of fall is not replicable, both because natural gas' supply boost has already been factored in and because it is pretty hard for something priced at $3.77 to fall $4.23.

    What can we expect from the future? Based on the most recent annual energy outlook for natural gas from the EIA the price is expected to remain at around $4 for the next decade or so, increasing slowly. Futures based projected prices for agricultural products from the USDA shows very slight declines in price across the board for corn, soybeans and wheat.

    Over the long run, supply-demand fundamentals dictate that both commodities will rise in price. For natural gas it may take some time due to the abundance of shale gas now available thanks to new technology, however we do have a limited supply of gas and an ever increasing demand for what is seen as a green fuel and a cheap, clean alternative to coal and oil in power generation across the US. Further the recent development of LNG terminals will boost international demand for domestic gas, raising the overall price. As this graphic will indicate our natural gas price is exceptionally low compared to the rest of the world so we will see some upward movement due to the balancing of prices from exports.

    Agriculture will go up for one very simple reason: the addition of more people. The world population is growing. I think most people have read, or read about, the UN global population projections so I am not going to bother linking/quoting them. We also know that basically all the good quality arable land in the world is currently in agricultural production (some marginal land is still available to be used, however it is unlikely that this can boost food production significantly compared to population increases).

    For a long term forecast of natural gas see the EIA link. For agriculture, good luck. If you find a quality report with any sort of accurate, intelligent predictions for the next decade or beyond, let me know.

    What Is a Reasonable Value for the Company?

    According to YCharts, dividend yield on TNH has been steady around 8% for the past few years. (see chart here). As per the above there is no reason for the dividend to change significantly going forward. This measure suggests the company is pretty fairly valued.

    As far as growth goes the company absolutely has the ability to grow. They have a disgustingly high return on invested capital and return on assets (its about 360% now). They have no debt and every ability to grow. The only thing holding them back is management, and of course CF Industries. The management is horrendous at working to create additional shareholder value and would do well to make significant moves. They claim that they have $75m of CAPEX planned, however the majority of that is focused on increasing storage capacity and maintenance of systems, etc. The only truly growth oriented spending is to increase the size of the rail yard and their plant. That isn't exactly impressive. I think we can expect to see the company grow at a very slow pace going forward.

    So far I see no reason for valuation to differ from the present value significantly.

    Does Anyone See Something Different?

    No analysts cover the company, so I will look to private investors for this. An article written on June 20 at SeekingAlpha goes into great detail about how the company is, in essence, owned by CF Industries. I did not mention this much as, while CF Industries owns and controls the company, and takes a lot of the profits, this is unlikely to change and laws in place state that if it does CF Industries must pay investors a fair price for the purchase of their shares. I don't see it as having a reasonable chance of affecting the stock price so I have largely ignored this fact. The author also assumes a 10% growth rate going forward, however I cannot agree with his assumption that increased storage capacity & efficiency in spending in rail lines is sufficient to drive significant growth.

    Over at Motley Fool CAPS a couple highly ranked members have posted that they think demand for fertilizer will rise and the price is undervalued. I can't see any evidence of this.

    What This Means

    So, TNH is stuck in a zone where its major input and market are moving in similar directions at a similar time, for the foreseeable future. Should these conditions continue to hold we will need to know the magnitude and time of long term agricultural prices movements. Without this we can simply state that both products are moving in tandem and until more evidence becomes available (or TNH actually decides to grow in a serious way) it appears that TNH will be stuck in the same general price range.

    Bought at the current price you would get a 7.7% dividend (based on TTM dividend payments). I am not especially excited about the company but I see it as a potential source of a fairly safe return, for the time being, with some potential upside that others see (although I do not).

    Recommendation Meter

    <----------------x----------->

    Sell Hold Buy

    Disclosure: I am long TNH.

    Jul 03 8:31 AM | Link | Comment!
  • Dividend Stocks: A Brief Outlook

    The site mentioned below is a quantitative trading model site I run. The blow was originally published there.

    If you have looked at my site you will notice that the majority of my models are built around dividend picks. That is because this is what I grew up investing in and what I know the best, thus what I can model for the best. That said, I am a bit worried that some time in the next few years a bear environment for dividend companies will start.

    My argument is as follows:

    The federal funds rate is currently at the zero bound. Interest rates can't go lower, and at some point, probably when the economy gets some sort of strength back, the funds rate will have to go up. When the funds rate goes up so will the interest rates on bonds. (I am not going to go into detail on this relationship. Its pretty interesting though. Google it if you are not aware of how the funds rate works).

    Most dividend investors buy those stocks to earn a yield. When the yields on bonds start to rise the risk-reward relationship will start to favor more and more bonds, leading to greater demand for bonds and lower demand for dividend stocks. Although the increase in demand for bonds will put upward pressure on bond prices (and thus downward pressure on their yields) the tie with the funds rate is strong enough to preserve higher interest rates.

    With preserved higher interest rates and lower demand for dividend stocks, the price of dividend stocks will fall until the yields have an attractive premium versus bonds once again. Where this point is, is probably company specific and difficult to predict for the market as a whole. I would, however, be surprised if, at a funds rate of ~4% most utilities yielded 5.5-6% instead of the 4-4.5% on many of the better companies we see today. I suspect pipelines and trusts will probably yield around 6-7% again and many similar yield figures of the past will return.

    So, when will the federal reserve start raising the funds rate? I would guess when GDP growth is a solid 3-4% a year and inflation is starting to kick in. I say this because inflation and solid GDP growth are signs of a strong economy. Without a strong economy if the funds rate is raised it will damage an already weak lending market that we can ill afford to have go sour again and will generate downward pressure on investment needed to spur growth.

    So, when will the economy turn around? No one knows for sure, but I will go over the major market indicators and the macro situation in my next post. My goal with the next blog is to create a guesstimate for timing and the market.

    Tags: ED, SO, JNJ, dividend, bear
    Jun 01 2:31 PM | Link | Comment!
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