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IBM – Take Advantage of the Sell-Off after Good Earnings

October 16th, 2009 4 comments

After yesterday’s close, IBM reported Q3 EPS of $2.40 versus $2.05 and said it expects to have full year results of at least $9.85 /share – up from 2008’s $8.93. You’d think that would have been received well but instead, the shares dropped by $6.34 (-4.95%) today to close at $121.64. 

2009 will be the sixth consecutive year of improved EPS and Zacks sees another record on tap for 2010. They match the consensus view of about $10.75 /share in 2010. That puts IBM’s multiple at< 12.4x this year’s and about 11.3x next year’s expectation.  

ibm-logo
Here are IBM’s per share numbers from the past few years as reported by Value Line: 

Year Sales C/F EPS Div. Avg. P/E Avg. Yield
2002 47.14 6.53 3.95 0.59 21.4x 0.7%
2003 52.60 7.27 4.34 0.63 19.6x 0.7%
2004 58.52 8.24 5.05 0.70 18.0x 0.8%
2005 57.90 8.71 5.22 0.78 16.1x 0.9%
2006 60.69 9.56 6.06 1.10 13.9x 1.3%
2007 71.31 11.28 7.18 1.50 14.8x 1.4%
2008 77.39 13.28 8.93 1.90 12.3x 1.7%

While it’s unlikely that IBM will bounce back to the high teens multiples of 2002-2004 it does seem logical that 14x earnings might be the new normal as the economy gradually recovers. That would put my one-year target at about $150 /share. Standard and Poors sees things similarly with their 12-month goal of $147. 

IBM gets S & P’s top, 5-star ranking and garners Value Line’s A++ financial strength rating along with 95th and 100th percentile marks for ‘stock price stability’ and ‘earnings predictability’(with 100th being best). 

The dividend has been increased in each year since 1995 and the well covered $0.55 quarterly payout is now a 1.81% current yield. 

The bottom line: After today’s drop IBM shares look to be 20 – 25% undervalued.  

Here’s a way to play that can provide an even better return with a built in margin of safety that straight share ownership can’t offer. Read more…

Clean up with ABM Industries – ABM $20.15

October 15th, 2009 1 comment

ABM Industries Incorporated (ABM) is the largest publically traded facility services contractor in the United States. ABM and its subsidiaries provide janitorial, parking, security and engineering services for commercial, industrial, institutional and retail facilities in cities throughout the United States. About 5% of revenues come from Canadian operations. The Company operates through four segments: Janitorial, Parking, Security and Engineering.

abm-image

 
ABM stands for American Building Maintenance. When A/C, elevator, janitorial and other services are needed in office buildings they cannot generally be deferred. This makes ABM a very predictable business. Their long-term sales and earnings have grown nicely, as have book value and dividends.
 
ABM was recently awarded a three-year contract to be exclusive provider of facilities services for both the Staples Center in Los Angeles (home of the Lakers) as well as the 7,100 seat Nokia Theater, Los Angeles.
 
Here are ABM’s (split-adjusted) per share numbers from continuing operations as reported by Value Line. FYs end October 31st.
 
FY
Sales
C/F
EPS
Div.
B/V
Avg. P/E
2001
39.98
1.46
0.90
0.33
7.40
17.6x
2002
43.49
1.23
0.92
0.36
7.67
17.6x
2003
46.78
1.06
0.73
0.38
9.18
20.4x
2004
49.61
1.13
0.84
0.40
9.08
21.7x
2005
52.73
1.33
0.91
0.42
9.70
21.4x
2006
55.78
1.42
0.97
0.44
11.13
19.1x
2007
58.35
1.40
0.99
0.48
12.46
24.7x
2008
71.10
1.66
1.10
0.50
12.64
19.3x
2009*
67.92
1.97
1.32
0.52
13.22
15.1x
*FY 2009 data includes Q4 estimates from Zacks
 
Zacks sees EPS for the year just wrapping up and for FY 2010 as $1.32 and $1.49 respectively. With ABM shares now at $20.15 ABM’s trailing multiple is about 15.3x and their forward P/E is approximately 13.5x. That’s the lowest valuation for these shares since January of 2000. Buyers back then saw their shares climb from $9.60 to $19.10 over the next seventeen months.
 
A rebound to about 17x forward earnings would bring these shares back to north of $25 by late next year. That’s about 25% above today’s quote.
 
The dividend is now $0.13 quarterly for a 2.58% current yield and it has been increased each year since 1995.
 
Between the appreciation potential and yield I’d expect a 12-month total return of
20% - 30%. That’s pretty good for a low Beta, somewhat conservative stock.
 
By April I expect that this stock can be at least $22.50. Is that reasonable?
I think so. ABM hit peak prices of $24, $31.20, $27.50 and $23.32 in calendar 2006-2007-2008 and already this year. Earnings through the first three quarters of this FY were $0.88 versus $0.74 or plus 18.9% even in a crap economy.          
 
For those who are option savvy, I’d think about this short-term buy/write:

Read more…

Jacobs Engineering Group – Taking a Constructive Long-Term View

October 14th, 2009 No comments

JEC:NYSE — Oct. 14, 2009 - $44.60 

52-week range: $26.00 (Nov. 20, 2008) - $54.71 (Jan. 6, 2009)   jec-logo
 

Jacobs Engineering Group provides engineering, procurement, construction, and maintenance services to a wide range of customers, including oil and gas, chemical, pharmaceutical companies as well as for U.S. federal government agencies. Most work takes place in the USA, U.K. and Ireland. 

Jacobs has had an enviable long-term record of increasing sales, earnings and book value. They have done this all with internally generated funds. As of June 30th they held $1.059 billion in cash against less than $48 million in total debt. 

Here are their per share (split adjusted) numbers as reported by Value Line: 

FY (end Sep.) Sales C/F EPS B/V Avg. P/E
2002 41.59 1.32 0.99 6.30 17.5x
2003 41.33 1.46 1.14 7.54 17.1x
2004 40.51 1.44 1.13 8.86 19.3x
2005 48.47 1.71 1.29 9.81 20.2x
2006 62.90 2.08 1.64 12.03 23.4x
2007 70.49 2.85 2.35 15.34 21.6x
2008 91.70 3.98 3.34 18.30 24.1x

Zacks sees FY 2009 and FY 2010 EPS at $3.26 and $2.98 respectively. That takes into account both the slow economy as well as the less than robust market conditions in the oil and gas industry. 

That puts the trailing multiple at about 13.7x and the forward year’s P/E at< 15x. Compare those with the historical P/E valuations in the prior 7 years from the chart above. A return to about 17 times what should be cyclically low FY 2010 earnings would bring these shares back to over $50 again. 

Value Line projects EPS of $4.60 over the next 3 - 5 years. Morningstar assigns a current ‘fair value’ of $53 /share. Standard and Poors assigns JEC their highest (5-Star) rating and carries a 12-month price target of $57 /share. Value Line also notes that Jacobs Engineering has 90th percentile rankings in both ‘price growth persistence’ and ‘earnings predictability’ (with 100th being best). 

How can you best play a high-quality stock like Jacobs when you feel the year-ahead earnings will be lower? Consider buying the shares and selling LEAP options for 2012. 

Why so long? By then earnings should be picking up with the broader economy. If you leave both the shares and the options alone through their early 2012 expiration (and things go as expected) you will get tax deferment on the gains until you file your tax-year 2012 Schedule D in April 2013. 

Jacobs has a fairly high (1.45) Beta making options premiums quite attractive for sellers. 

Here’s a play that looks quite good to me right now… 

Read more…

Hudson City Bancorp – Yielding Total Return for Options Writers

October 14th, 2009 5 comments

HCBK:NDQ - Oct. 13, 2009 Close: $13.17 

52-week range: $7.46 (Mar. 9, 209) - $18.93 (Nov. 4, 2008) 
Dividend = $0.15 quarterly = 4.55% current yield   hcbk-logo
 

Hudson City Bancorp, Inc. offers offering traditional deposit products, residential real estate mortgage loans and consumer loans. In addition, the Company purchases mortgages and mortgage-backed securities and other securities issued by United States government-sponsored enterprises. Its revenues are derived principally from interest on its mortgage loans and mortgage-backed securities, and interest and dividends on its investment securities. They have about 131 branches in NY, NJ, and CT. HCBK converted from a chartered mutual savings bank into its current form in two stages. The first came in 1999 and the final step took place on June 7, 2005. 

In direct contrast to almost all other banks Hudson City posted record earnings in 2008 and is on track for another all-time high in EPS for 2009. In fact, 2009 will likely be the ninth consecutive year of improved earnings and increased dividends. This is quite a feat in light of the past few years housing market. 

As of year-end 2008 about 99% of HCBK’s loans were first mortgages and just 1% were consumer and other loans. They managed to sidestep the worst of the carnage through the use of old time banking standards. Forbes magazine called them “The Best Managed Bank in America” in both 2007 and 2008. 

Here are their impressive (split adj.) per share numbers as reported by Value Line: 

Year Mort. Loans EPS Div. B/V Avg. P/E Avg. Yield
2001 17.19 0.21 0.07 2.02 16.6x 2.1%
2002 21.19 0.31 0.11 2.14 17.4x 2.0%
2003 23.28 0.35 0.16 2.18 24.1x 1.9%
2004 27.96 0.40 0.22 2.35 28.1x 1.9%
2005 32.99 0.48 0.27 8.83 23.8x 2.4%
2006 46.60 0.53 0.30 8.84 24.9x 2.3%
2007 65.11 0.58 0.33 8.89 23.9x 2.4%
2008 74.49 0.90 0.45 9.43 19.1x 2.6%

First half 2009 earnings per share were $0.52 versus $0.40 and Zacks now sees 2009 – 2010 EPS at $1.05 and $1.15 respectively. That puts HCBK’s multiple at< 12.6x this year’s and under 11.5x next year’s estimates. Compare those P/Es with all the historical valuations in the chart above. HCBK shares are near the cheapest they’ve ever been. 

Dividends were initiated in 2000 and have been raised in each year since. The current yield of 4.55% is better than the interest rates on bank CDs, treasury notes and virtually everything else without high risk. It’s also the best yield in HCBK’s history as seen from the chart above. 

Value Line notes Hudson City’s financial strength as B+ and gives them 90th percentile rankings in both ‘stock price stability’ and ‘earnings predictability’ (with 100th being best). HCBK shares have outperformed 80% of the 1700 stocks in Value Line’s research universe on a long-term basis. Morningstar sees ‘fair value’ for Hudson City as $15/share. 

A rebound to just fourteen time 2010 estimates of $1.15 would see HCBK back above $16 /share within about 15 – 18 months. Add in the generous dividend yield and this looks like an attractive total return stock. 

Is a $16 target price reasonable? Sure. HCBK shares touched highs of $16.10, $25.00 and $15.90 in calendar 2007-2008 and 2009 YTD. With earnings and dividends now better than ever before, there is no reason these shares shouldn’t attain at least their old highs. 

Here’s a way to play with even less risk… 

Read more…

The Mosaic Company – A fertile buy/write opportunity.

October 13th, 2009 No comments

Mosaic [NYSE:MOS] Oct. 13, 2009 $48.60

52-week range: $21.94 (Nov. 20, 2008) - $59.34 (May 20, 2009)mosaic_logo

 

 Mosaic, formed through the merger of IMC Global and Cargill’s crop nutrition business, is a major global producer and distributor of crop nutrients. The company mines, processes, and distributes the three key fertilizer products- potash, phosphate, and nitrogen. Mosaic is #1 worldwide in phosphate and #2 in potash production. They also manufacture and distribute animal feed ingredients. The company serves customers in over 40 countries.

The commodities boom of late 2007 into early 2008 pushed operating margins to record levels in FY 2008 [FYs end May 31]. EPS surged to $4.38 and $4.28 in the past two fiscal years but the current year is expected to come in at only $2.80 /share. 

Zacks expects a rebound to $4.44 in FY 2011. MOS was considered a great ‘weak dollar’ play being both an exporter and a commodity producer. As such their shares ratcheted up to $97.60 in late 2007 on the way to their all-time high of $163.30 in 2008. 

At today’s quote of $48.60 this appears to be a good ‘cycle low’ entry point for long-term investors. The company recently pre-paid $1 billion in long-term debt leaving the balance sheet with no debt (net of cash on hand).  

Dividends were initiated in 2008 and stand at $0.05 quarterly for a small, but well-covered current yield of 0.41%. 

Cargill still owns about 64.2% of the outstanding shares from the contribution of their fertilizer operations at the company’s creation in 2004. 

The high Beta @1.70 makes for exceptional option premium for those willing to sell calls and puts. This is where I see a great play.

Here is a good looking combination that makes sense to me right now…

Read more…

Good News from S&P…Dividend increases are exceedingly rare right now.

October 10th, 2009 No comments

Standard and Poors announced that dividend hikes fell to just 191 in the quarter ended September 30th while 113 companies cut or eliminated their payouts.

s-p-banner

 

s-p-logo

Since 1955 every year saw more increases than reductions with the average ratio being 15:1 in favor of higher payouts.

The chart below shows the details from the third quarter of the past two years.
 
S&P’s 7000 CompanyUniverse
 
Q3 2008
 
Q3 2009
Dividend Increases
346
191
Dividend Cuts/Omissions
 
138
 
113
Increases/Reductions
2.51x
1.69x
 
Because dividend adjustments are a lagging indicator, periods with poor dividend fundamentals (like 2008-2009) are often great buying opportunities.
 
This counter-intuitive concept is similar to that used when buying cyclical stocks when their P/Es are high (due to depressed earnings at the bottom of economic cycles).
 
 _____________________________________________________________
 
Here’s a less than stellar commentary on the wisdom of corporate Boards….
 
Standard & Poors report on corporate share buybacks indicates poor timing in the execution of these programs among S&P 500 companies.
 
Here are the past three years of data for S&P 500 company buybacks (Q3 2009 numbers are not yet available).
 
S&P 500 – Share Buybacks
Q3 – 2007 [near DJIA all-time high]
$172 billion [all-time high]
Q2- 2008
$87.9 billion
Q2 - 2009
$24.2 billion
 
 When stocks were high buybacks were rampant. As shares got progressively cheaper in 2008 and 2009 buybacks slowed dramatically.
 
Corporate boards were just as bad in their market timing as most of the so-called emotional small investors who traditionally buy high and sell low.

Big Risks in Bonds and Bond Funds

October 10th, 2009 No comments
Vanguard published a quick guide to the theoretical losses on short, medium and semi-long term bond funds that would occur with 1% and 2% bumps in interest rates. 
The dollar is plummeting against foreign currencies and trillions in stimulus money have yet to be reflected in inflation figures. Vanguard’s 1 – 2% projected rate increases may prove way too mild. Even so, here are the figures they published… 

Vanguard defines 

Short-Term Bond Funds as: 2.6 years average duration
Total Bond Market Funds as: 4.4 years average duration
Long-Term Bond Funds as: 12.1 years average duration

By definition, longer term bonds (like 30-year Treasuries) would show much bigger losses than the table below lists for average durations up to just 12.1 years.

bond-omage

Fund Category
 		 Price Drop on 1% Rate Rise
 		 Price drop on 2% Rate Rise
 
Short-Term Bond Fund
 		 (-2.6%)
 		 (-5.1%)
 
Total Bond Market Fund
 		 (-4.5%)
 		 (-9.4%)
 
Long-Term Bond Fund
 		 (-11.0%)
 		 (-19.9%)
 

Risk-averse investors should be very wary of any fixed income vehicles with more than one year maturities.

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