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ubinpokharel
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Individual Investor...... looking for and investing in companies that i can hold....well...forever.... Avid follower of value investing gurus and their investment ideas....
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  • Intel: An “Unusual” Value Stock
            Technology Stocks and “value picks” usually don’t go together.  Heads were scratched and eyebrows were raised (including mine) when, years ago Bill Miller, the legendary value fund manager picked Dell & Amazon in his portfolio as value stocks. It seems strange that stocks in a sector where innovation occurs faster than “ speed of light” and where products life cycle are “ here today, gone tomorrow” would find any place in a classic “Buy & Hold” value investors portfolio. I was very skeptical about this sector myself from a long term perspective. Then, I found “Intel”

     

    Company Introduction:

                    Intel (NASDAQ:INTC) is the world’s largest manufacturer of semiconductor chip, based on revenues. It also designs and manufactures other computing and communications components (chipsets, and motherboards). However the bulk of Intel’s revenue, which was 43 billion in 2010, comes from the sale of microprocessors. It has nearly 80% market share in this field and it is nearly 7 times bigger than its arch rival (NASDAQ:AMD).  Intel’s flagship products include “Core” range of processors for the PC, “Xeon” & “Itanium” range of processors for the Servers and “Atom” range of processors for netbooks, tablets and Smartphone.

    Business Metrics:

    As we can see from the tables below , Intel has been consistently able to increase its sales (5% CAGR)  , Net profit( 25% CAGR) , Cash flow from operations ( 7% CAGR) , Earning Per share (26% CAGR)   & book value per share (5% CAGR)  over the last decade , with only exceptions being in the year 2006 , and 2008/09 when the worldwide economy was battling recessionary environment.

                                                                   

    (Billions)

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    Sales

    26K

    26K

    30K

    34K

    38K

    35K

    38K

    37K

    35K

    43K

    NPAT

    1.2K

    3.1K

    5.6K

    7.5K

    8.6K

    5K

    6.9K

    5.2K

    4.3K

    11.4K

    CFFO

    8.6K

    9.1K

    11.5K

    13.1K

    14.8K

    10.6K

    12.6K

    10.9K

    11.1K

    16.6K

    (Intel’s 10 Year Sales, NPAT, CFFO, Data Taken from Morningstar& Rounded to nearest value)

     

     

                                   

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    EPS

    0.19

    0.46

    0.85

    1.16

    1.40

    0.86

    1.18

    0.92

    0.77

    2.01

    BV/S

    5.21

    5.25

    5.72

    5.94

    5.86

    6.25

    7.20

    6.80

    7.39

    8.68

                                                                   

        (Intel’s 10 Year EPS, BV/S, Data Taken from Morningstar)

     

    The key metric to note, and this is what interested me in Intel, was a consistent rise in its dividend from the year 2004 onwards (see table below). Intel has always been paying dividends from 1993 and raised it dividends till 2001, albeit tiny percentage points, then stopped the increase from 2001-2003, and then embarked the raise again from 2004. The fact that Intel did not cut its dividend in the recession periods of 2008/09, and actually increased its dividend convinced me that Intel and its dividends are here to stay and it can be a potential dividend growth stock. This is further strengthened  by the management note in its recent annual report stating future dividend growth will roughly be in line with EPS growth rates and up to 40% of FCF will be distributed in future as dividends to shareholders.   It has a castle like balance sheet, with wonderful returns ratios (ROIC 15%, ROE 15% & ROA 12%) and virtually no debt (4%) with industry leading Profit Margins.

                                                                                   

     

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    Dividends

    0.08

    0.08

    0.08

    0.16

    0.32

    0.40

    0.45

    0.54

    0.56

    0.63

    (Intel’s 10 Year Dividend Growth 2001-2010, Data Taken from Morningstar)

     

    Using my 3-way  valuation system (http://valueubids.blogspot.com/2011/09/stock-valuation-how-to-value-stock.html)  , I derived an enterprise  value / intrinsic value of Intel of more than $ 30 dollars a share , which makes it an  excellent buy at $ 21.50 with sufficient margin of safety. This buy price represents a dividend yield of more than 4% and with a Dividend growth rate of more than 20% , Intel is a strong buy as a value and a dividend growth stock , even with a recent run up in price.

     

    Tailwind Thesis (Why Invest in Intel)

    1.       Excellent company at great price ( with margin of safety)

    2.       Great Dividend growth story

    3.       Although PC sales have saturated in the developed markets, sales are on the rise in developing markets (17% CAGR in last decade) and Intel derives 85% of its sales from Outside US.

    4.       Computers are becoming more personal again in developed markets “ One Computer per Person”  & “ More devices per user” due to rise in social networking , online gaming , online videos ,which will keep sales robust in the developed markets.

    5.       Rise of “Cloud Computing” where Intel’s server segment is active and which is Intel’s most lucrative sector in terms of operating margins.

    6.       Explosion of Netbooks, tablets, and smartphones, where Intel, although not a market leader, is a significant player.

    7.       Our entry into “electronics age”, where everything and anything is digitized, and this process require “Artificial brains/Processors”. Intel is a market leader and innovation trendsetter in making “artificial brains” across various electronic devices.

    8.       New products developments, like the “sandy bridge” chips, which are faster and less power hungry, and a massive spend on R&D, to ensure Intel remains market leader for foreseeable future.

    9.       To provide a technology “diversification” in your value “buy & hold” portfolio.

     

    Headwind Thesis (Why Intel might be risky investment)

    1.       After all it is a tech stock, where products become obsolete within a blink of an eye. However, with Intel’s massive R&D (15% of sales), we can expect Intel to hang on for a longer period compared to other tech stocks.  It, much like IBM, plans to “morph” itself into a total computing company in the future, which anticipates trends and executes them faster compared to others.

     

    2.       Cyclicality of the stock. However, with a dividend yield on cost of more than 4% and Growth rate of more than 20%, price volatility should not bother long term investors.

    3.       With the world’s obsession for tablets and smartphones, Intel’s main threat in the future comes from its inability to snatch market share away from the leader in this sector (ARM holdings). However , seeing Intel fend off AMD in the past with such ease , we cannot rule out Intel being market leader with its “ATOM” line of processors for tablets and smartphones in the future

     

    Disclosure: I have “Intel Inside” my portfolio.

     

     

     

     

     

    Sep 10 9:57 AM | Link | Comment!
  • The "Sleep Well" Portfolio

             Stock Market volatility is back again. Markets and investors  who were artificially euphoric due to fed’s intention of printing money were given rude awakening with the market’s gut wrenching drops of more than 400 points for days last month wiping away billions of dollars in process. Investors, with 2008 still fresh in their minds, yanked billions out of stock market into money markets funds and U.S treasuries, driving down the yields to historic lows. Doom Sayers were back in business, popping all over the place making ridiculous predictions about anything and everything they could talk about. Speculators poured into gold funds causing it to reach record highs. Among all this doom and gloom, investors have lost a lot of confidence in stock markets again and it will take time for them to get back. We can never predict the course of market in the short term, there might be severe volatility ahead, which might cause even more pessimism. But all this “End of the World” prediction should never hide the fact made so famous by Benjamin Graham, “Stock Markets are voting machines in short term and weighing machines in long term”. Investors who are long term should be drooling over this pessimism, as this provides an excellent opportunity to own great businesses with proven track records at discounts. As Warren Buffett regularly points out, “Be Greedy when others are fearful”, this is the time to be greedy about these solid stocks and owning them for a long time. These stocks should form a core of everyone’s “Sleep Well” portfolio, which allows them the proven benefit of investing in stocks for a long term and also helps them ride difficult times like these, when pessimism is the only thing in everyone’s mind.

     

                    In this article “Sleep Well” portfolio, I have decided to outline 10 stocks that should help investors accumulate wealth over time, in times difficult or rosy. These 10 companies are iconic American brands that have stood the test of time, wars, recessions, inflations and oil scares. Not only they provide capital appreciation over time, these companies are also serious dividend payers with track record of constantly increasing dividends over time. These companies are certainly not the darlings of a lot of investors, neither are they glamorous in any regards. These are boring stocks, stocks that seems too “cold” for a lot of people, yet these companies represent significant opportunity of accumulating wealth in the long run. These companies are also an excellent and “safe” way of playing the international/ Emerging Markets story because a significant proportion of sales for all 10 companies comes from international markets. Rather than going hoo...la over some micro cap Chinese or Brazilian stocks, owning these stocks provides a wonderful opportunity to participate in these countries with the “safety” of these iconic stocks.

                   

     

     

    1.      Coca-Cola (NYSE:KO): 

    Coca -Cola might well be the most famous brand in the world. It is the largest beverage company in the world whose products are marketed in more than 200 countries world wide generating more than 35 Billion in 2010 sales. Key figures for Coke include:

     

    ·         10 Years Sales Growth Rate = 5.5%

    ·         10 Years Earnings Per Share (NYSEARCA:EPS) Growth Rate = 11%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 13.30

    ·         Price/ Book Value ( As of 08/09/2011) = 4.4

    ·         Dividend Yield = 2.71%

    ·         Consistent Increase in Dividend Payment for 48 Years

    ·         10 Years Dividend Growth Rate = 9.5%

    ·         Dividend Payout Ratio = 55%

    ·         International Sales = 75% of Total Sales.

     

    2.      Johnson & Johnson (NYSE:JNJ):

    Johnsons & Johnsons ranks as the world’s largest and most diversified health care company that is composed of three segments: consumer, pharmaceutical & Medical devices. It is among a handful of companies that still command an AAA rating due to its rock solid balance sheet comprising of 61 billion in 2010 sales. Key figures for Johnson & Johnson include:

     

    ·         10 Years Sales Growth Rate = 9.5%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 12.5%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 15.60

    ·         Price/ Book Value ( As of 08/09/2011) = 2.9

    ·         Dividend Yield = 3.58%

    ·         Consistent Increase in Dividend Payment for 48 Years

    ·         10 Years Dividend Growth Rate = 14%

    ·         Dividend Payout Ratio = 44%

    ·         International Sales = 53% of Total Sales.

     

    3.       Proctor & Gamble (NYSE:PG):

    Proctor & Gamble is the world’s largest producer of personal and household products which are used by more than 4 billions people world wide. It has 23 iconic brands that generate more than billion dollars and further 20 brands generating half a billion in sales which totaled 79 billion in 2010. Key figures for Proctor & Gamble include:

     

    ·         10 Years Sales Growth Rate = 6.5%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 10%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 16.0

    ·         Price/ Book Value ( As of 08/09/2011) = 2.5

    ·         Dividend Yield = 3.40%

    ·         Consistent Increase in Dividend Payment for 54 Years

    ·         10 Years Dividend Growth Rate = 11%

    ·         Dividend Payout Ratio = 50%

    ·         International Sales = 60% of Total Sales.

     

    4.       Abbott Labs (NYSE:ABT):

    Abbott Labs, like JNJ, is a diversified health care company comprising of pharmaceutical, nutritional and diagnostic segments. It is the largest company in the nutritional products market and is the second largest company worldwide for diagnostic products accounting for 35 billion in 2010 sales. Key figures for Abbott Labs include:

     

    ·         10 Years Sales Growth Rate = 8%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 11.50%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 15.60

    ·         Price/ Book Value ( As of 08/09/2011) = 3.0

    ·         Dividend Yield = 3.81%

    ·         Consistent Increase in Dividend Payment for 38 Years

    ·         10 Years Dividend Growth Rate = 9%

    ·         Dividend Payout Ratio = 43%

    ·         International Sales = 60% of Total Sales.

     

    5.      Wal-Mart (NYSE:WMT):

    Wal-Mart is the largest retailer in the world operating around 2800 centers in US and 4100 centers around the world accounting for 420 billion in 2010 sales. Wal-mart accounts for more than 50% of grocery sales in the US and has leading retail position in some of the fastest growing economies of the world. Key figures for Wal-mart include:

     

    ·         10 Years Sales Growth Rate = 11.5%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 12%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 11.80

    ·         Price/ Book Value ( As of 08/09/2011) = 2.6

    ·         Dividend Yield = 2.84%

    ·         Consistent Increase in Dividend Payment for 37 Years

    ·         10 Years Dividend Growth Rate = 18.5%

    ·         Dividend Payout Ratio = 28%

    ·         International Sales = 25% of Total Sales.

     

    6.      McDonald’s (NYSE:MCD): 

    McDonald’s is the largest fast food chain in the world operating more than 32,000 restaurants worldwide in 117 countries. It serves burgers and fries to more than 64 million customers per day. Aggressively expanding in key emerging markets like China & India. Key figures for McDonald’s include:

     

    ·         10 Years Sales Growth Rate = 5.5%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 13.8%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 17.90

    ·         Price/ Book Value ( As of 08/09/2011) = 6.1

    ·         Dividend Yield = 2.75%

    ·         Consistent Increase in Dividend Payment for 34 Years

    ·         10 Years Dividend Growth Rate = 25%

    ·         Dividend Payout Ratio = 49%

    ·         International Sales = 66% of Total Sales.

     

    7.      PepsiCo (NYSE:PEP):

    PepsiCo is a global snacks and beverage powerhouse holding #1 position in savory snacks and #2 position in beverages in more than 200 countries, it operates. 51% of 2010 sales from beverages, rest from the snacks segment. Holds 19 “billion dollar brands”. Aggressively expanding its “good for you/healthy snacks” portfolio.  Key figures for PepsiCo include:

     

    ·         10 Years Sales Growth Rate = 8%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 10%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 15.60

    ·         Price/ Book Value ( As of 08/09/2011) = 4.0

    ·         Dividend Yield = 3.36%

    ·         Consistent Increase in Dividend Payment for 39 Years

    ·         10 Years Dividend Growth Rate = 12.5%

    ·         Dividend Payout Ratio = 52%

    ·         International Sales = 47% of Total Sales.

     

    8.      Kimberly-Clark (NYSE:KMB):

    Kimberly-Clark is a global “personal hygiene” company that claims to “make products essential for better life”. Its products, mainly paper based, are sold in more than 150 countries where it warrants #1or #2 market share. Aggressively pushing operations and sales in key emerging markets like Russia, China & Latin America. Key figures for Kimberly-Clark include:

     

    ·         10 Years Sales Growth Rate = 3%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 4%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 16.10

    ·         Price/ Book Value ( As of 08/09/2011) = 4.8

    ·         Dividend Yield = 4.11%

    ·         Consistent Increase in Dividend Payment for 39 Years

    ·         10 Years Dividend Growth Rate = 9%

    ·         Dividend Payout Ratio = 56%

    ·         International Sales = 48% of Total Sales.

     

    9.      Intel (NASDAQ:INTC):

    Intel is the world’s largest computer chip maker with a virtual monopoly (>80% market share) in this segment. Aggressively pushing its “ATOM” line of processors to gain a foothold in the tablets market. Riding on the strong sales of PC’s in emerging markets and rise of “Cloud Computing”. Key figures for Intel include:

     

    ·         10 Years Sales Growth Rate = 5%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 26%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 9.10

    ·         Price/ Book Value ( As of 08/09/2011) = 2.1

    ·         Dividend Yield = 4.22%

    ·         Consistent Increase in Dividend Payment for 8 Years

    ·         8 Years Dividend Growth Rate = 23%

    ·         Dividend Payout Ratio = 30%

    ·         International Sales = 85% of Total Sales.

     

    10.   3M (NYSE:MMM):

    3M is a diversified scientific conglomerate which has a portfolio of > 55,000 products and operates in > 65 countries. Strong products foothold includes industrial and transport, healthcare, display & graphics & consumer products. Key figures for 3M include:

     

    ·         10 Years Sales Growth Rate = 5%

    ·         10 Years Earnings Per Share (EPS) Growth Rate = 12%

    ·         Price /Earnings Ratio ( As of 08/09/2011) = 13.50

    ·         Price/ Book Value ( As of 08/09/2011) = 3.2

    ·         Dividend Yield = 2.78%

    ·         Consistent Increase in Dividend Payment for 53 Years

    ·         10 Years Dividend Growth Rate = 6%

    ·         Dividend Payout Ratio = 36%

    ·         International Sales = 65% of Total Sales.

     

     

    As mentioned earlier, these iconic American companies’ makes for a sound investments in times “thick & thin” that allows investors to “Sleep well” every night if made a core part of one’s portfolio.  Extreme fear , as evident in the stock market now has hammered the prices of some of these stocks to very attractive valuations, which if held for a long run will reward investors handsomely as well as letting them “ sleep well” when the whole world around them keeps falling over and over.

     

    Disclosure: I am Long ABT, WMT, and INTC

     

     

     

     



     

     

     

     

     

     

     

    Sep 10 9:45 AM | Link | Comment!
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