Beating Buffett

PepsiCo [NYSE:PEP] manufactures and markets salty snacks as well as carbonated and noncarbonated beverages and foods. The firm’s organizational structure constitutes three primary business units: PepsiCo Americas Foods, PepsiCo Americas Beverages, and PepsiCo International. The company’s broad portfolio of brands includes Pepsi, Gatorade, Tropicana, Frito- Lay, Doritos, and Quaker.

PepsiCo has pulled back from a recent high of $64.48 and an all-time peak of $79.80 (in 2008) to this afternoon’s quote of $59.55 /share. Was there any bad news to account for this? Not really. EPS dipped slightly from a record $3.34 in 2007 to $3.21 in 2008 before rebounding last year. 2009 is expected to have come in at about $3.72 once Q4 results are posted in early February.

Zacks now sees $4.17 /share for 2010 putting PEP’s multiple at about 16x last year’s and 14.3x this year’s estimates. To get a feel for how cheap that is for PEP take a look at the per share data from continuing operations as reported by Value Line:

PepsiCo has shown remarkably steady growth in sales and earnings while also increasing its dividend more than three-fold since 2000.

Value Line assigns PEP their highest safety and financial strength rankings and notes their ‘stock price stability’ and ‘earnings predictability’ are both in the top 1 percent of all stocks in VL’s 1700 stock universe.

The 10-year average P/E has been 21.9x versus the current forward multiple of 14.3x. The current yield of 3.02% is better than almost any other time during the past two decades. It’s also higher than what’s now available on money market accounts and 1 – 3 year CDs.

It would seem that a rebound to at least 17x projected earnings will be likely sometime over the next 12 – 24 months. That (still below-normal) P/E would bring PEP back to over $70 based on 2010 projections.

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Coke shares need no introduction. This high quality, good yielding issue has dipped with the market from a recent high of $59.45 to finish today at $54.14/share. EPS hit an all-time high in 2008 and are expected to have come in slightly higher for 2009 once Q4 earnings are released.

KO garners Value Line’s highest ratings for financial strength, safety, stock price stability and earnings predictability. They also have the approval of an obscure investor named Warren something or other.

Here are Coke’s historical per share numbers from continuing operations as reported by Value Line:

* 2009 data includes Q4 estimates

At today’s close of $54.14 KO shares trade for < 15.8x the 2010 consensus estimate of $3.43 making the present multiple near the lowest of the past 20 years. The dividend is now 3.03% based on last year’s payout.

A rebound to even a 17.5x multiple on forward estimates would bring KO shares back up to above $60 by year-end. That would be a 10.86% rise from here. Add in the yield and 13% - 14% seems like a conservative 12-month target. 

Is that reasonable to expect? Value Line is using a 21 multiple for their 3 – 5 year projections. Standard and Poors now carries a 12-month goal of $65/share while assigning KO their highest, 5-star rating. Morningstar has a ‘consider selling’ price of $68.80/share.

KO shares hit peak prices of $64.30 - $65.60 in 2007 – 2008 and touched $59.45 pretty recently.

While Coke does not seem to have home-run potential it does seem a good bet to creep higher as its earnings and dividends grow over time.  The longer the time period the surer you might feel that KO shares will be higher than today.

Under that scenario here’s a nice two-year play that could generate outstanding total return with a pretty low risk profile.

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Value Line released its own figures for the record of their timeliness rankings for 2009 in their Jan. 29, 2010 edition [available on-line today].

In the Value Line system Group 1’s are their highest rated stocks for year-ahead performance and Group 5’s are their ‘must sell’ projections for the worst year-ahead price action.

Here are the dismal results for those that actually followed their advice:

If you followed their recommended strategy of buying/holding only shares ranked 1 & 2 for timeliness and selling those ranked 4 & 5 you had the worst possible results last year whether you adjusted or didn’t adjust throughout that very volatile environment.

In today’s new issue of Value Line they also reviewed how various stock market strategies performed last year. Once again the Group 1’s underperformed in a big way.

I am a long-time subscriber to Value Line as a great source of stock information in what I see as the most useful format in the industry. I am, and have been, a long-term critic of their momentum based timeliness system.

Use the data. Ignore the timeliness ranks.

See the 10-year data in the comment that follows…

Disclosure: None

MYERS Industries, Inc. [NYSE:MYE - $9.18] is an international manufacturer of polymer products for industrial, agricultural, automotive, commercial, and consumer markets. The Company is also the largest wholesale distributor of tools, equipment, and supplies for the tire service and under-vehicle repair industry in the United States.

EPS hit an 8-year high in 2007 before dipping with the economy in 2008 and 2009. The recent sale of two rubber product subsidiaries brought in about $10 million in net cash and should set MYE up for improved results in 2010.

Here are Myers’ per share numbers from continuing operations as reported by Value Line:

* 2009 data includes Value Line estimates for Q4

The company is quite optimistic that this year will show big improvements due to debt reduction, cost cutting and restructuring moves completed during 2009. Consensus views now center on 2010 earnings of $0.75 - $0.80 /share or about 35% above last year’s EPS excluding non-recurring items.

At last week’s closing price of $9.19 the forward multiple is now < 12x the mid-range estimate. That’s the lowest P/E for MYE since 2000. The average multiple was 18.7x over the seven years from 2003 through 2009.

The six-cent quarterly dividend is well covered and provides a nice current yield of 2.61%. That’s the second highest yield in the past 20 years for Myers with the only higher payout coming due to the market meltdown of late 2008 into early 2009.

There were two insider buys by Director Richard Johnston totaling 10,000 shares in mid-November.  There have been no insider sales since June of 2009.

It doesn’t seem a stretch to expect a price of at least $11.30 by around year end based on 14.7x projected earnings (the lowest average annual P/E of the past 9 years). That would make for a gain of 22.9% from the current quote and a 25.5% total return including the dividend.

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InterContinentalExchange [NYSE:ICE - $100.16] is among the world’s largest derivative exchange groups and over-the-counter markets. They provide energy, soft commodities, and financial trading products. ICE serves the risk-management, asset-allocation, and speculative needs of financial institutions, investors, and commercial companies.

ICE was formed in 2000 and came public on November 21, 2005. Sales and earnings have grown substantially since their IPO. EPS are expected to have hit record levels of about $4.53 in 2009 and to grow further – to about $5.23 in 2010.

Here are their per share numbers as reported by Value Line:

* 2009 data includes Q4 consensus estimates

The worldwide market for futures, commodity and credit derivatives appears to be in an expansion mode which bodes well for ICE. The shares are not cheap at 22.1x last year’s and about 19.2x expected 2010 earnings- but they are now well under their historical multiples as can be seen from the chart above.

The balance sheet is rock solid. Treasury cash of over $393 million exceeded total debt of $330 million as of September 30, 2009. Total interest coverage is running a very healthy 25x. There is no defined benefit pension plan and capital spending needs are minimal.

Value Line is using a 25 multiple in figuring their 3- 5 year target pricing for ICE. I’m going even more conservative and only assuming a 22.5x P/E. That would bring ICE shares back to > $117 by year end if the consensus estimate is accurate.

ICE shares are down from about $113 to start this month and market VIX has increased due to the three-day, 553-point drop in the DJIA. I’m using those two factors to put on a two-year trade that offers good upside with only moderate risk.

Here’s my trade: Read more…

ITT Corporation (ITT), is a diversified company engaged in the design, manufacture and sale of a range of engineered products. The Company’s three principal business segments are: Defense Electronics & Services, Fluid Technology and Motion & Flow Control. The Defense Electronics & Services segment provides high-technology electronic systems and components, communications systems plus engineering and applied research. Fluid Technology covers water and wastewater treatment systems, pumps and related technologies for residential, commercial and industrial applications. ITT’s Motion & Flow Control businesses provide products and services for defense, aerospace, industrial, transportation, computer, telecom and marine.

2009 is likely to have posted the first down earnings year in more than a decade. Even so, the dip is likely to be small- with EPS going from an all-time record $4.04 to about $3.74. The consensus view for this year is for a rebound to $4.00 /share.

Here are ITT’s [split adjusted] per share figures from continuing operations as reported by Value Line:

* 2009 data includes consensus estimates for Q4

The company has been a stellar performer over the past 10 years as judged by its progress on all fundamental measures.

At this afternoon’s price of $49.23 it is offered at just 13.2x trailing and about 12.1x projected 2010 earnings. That’s very low compared with their 10-year median P/E of 16x. A rebound to even a 15 multiple would bring ITT back to the $60 range by year end if the EPS estimates are on target.

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