Beating Buffett

FLIR Systems, Inc. [NDQ:FLIR - $26.47] designs, manufactures, and markets thermal imaging and broadcast camera systems for a variety of applications in the commercial and government markets. FLIR makes products for condition monitoring, research and development, airborne observation and broadcast, search and rescue, and surveillance and reconnaissance.

2009 marked the tenth straight year of improving year-over-year results for FLIR Systems. Full year EPS were up 14% climbing from $1.28 to $1.46. Fourth quarter earnings slightly disappointed however at $0.38 versus $0.41 and the shares pulled back to finish today at $26.47 from $33.35 in late December and an all-time high of $45.50 in 2008.

Here are FLIR’s (split-adjusted) per share numbers from continuing operations as reported by Value Line:

Along with their Q4 report management indicated expectations of $1.48 - $1.53 for 2010. Consensus views have adapted and now center on $1.51 and $1.68 for this year and next.

That puts FLIR’s multiple at about 17.5x the 2010 view and < 15.8x the 2011 estimate. Those are near the low end of the valuation range of the past nine years making this a potential buying opportunity.

Read more…

This ETF [NYSE:XLU - $28.98] seeks to replicate the performance, net of expenses, of the Utilities Select Sector Index. The fund invests at least 95% of assets in common stocks that comprise the index. The index includes companies from the electric utilities, multi-utilities, independent power producers, energy traders and gas utility industries.

XLU has an extremely low expense ratio of just 0.22% and has done a good job of tracking its underlying index. It has outperformed the overall S&P 500 over the past 5 and 10 year periods and is well ahead of its peer group over the past decade.

Here are XLU’s top 10 holdings (by percentage of portfolio) along with their current P/Es and their 10-year median multiples:

In every case the present P/E is significantly lower than that same company’s 10-year median multiple. The yield on the whole XLU portfolio is now about 4.37% - a higher rate than can now be obtained through purchase of Treasury Bills and Notes of up to 10 year maturities.

If the utility sector reverts back to its own 10-year average P/E of 14.4 we could see about a 17% share price improvement (due simply to multiple expansion) above and beyond any rise in the shares attributed to future increases in earnings or higher dividends.

After the big rise from the March 2009 market lows I think it’s unlikely that the average stock will continue to perform as well as it did in the previous year. That slower-paced market environment should make slow and steady utility shares more attractive on a relative basis than they were when most lower-quality and low/no dividend shares were surging higher.

Read more…

Endesa Chile [NYSE:EOC - $49.04] is an electrical power producer in Chile that handles 36% of the installed base capacity covering 9% of the Chilean population. They also operate in Argentina, Peru, Columbia and Brazil. Production is environmentally friendly with hydroelectric production at 70.7% , geo-thermal at 28.9% with the small remainder coming from wind.

2009 proved to be a record year with earnings rising from $3.11 to $4.11/share. In fact, last year was the seventh consecutive year-over-year improvement. Here are EOC’s per share (except revenues) numbers as reported by Standard and Poors:

As EOC’s fundamentals have improved their valuation has contracted. At yesterday’s close of $49.04 their multiple is < 12x trailing earnings and less than 11.6x consensus views of $4.24 - $4.39 for 2010.  Preliminary estimates for 2011 now run $4.74 /share.

While I don’t expect to see 20+ P/E’s again I do think it’s likely that EOC can command at least the 13.5x multiple that was the previous low before the late 2008 – early 2009 market meltdown. A rebound to even that conservative level could bring these shares back up to $57.24 or 16.7% above the current quote.

Add in the $1.02 dividend and its 2.08% yield and this regulated utility play could see a total return of almost 20% by year end. While not spectacular, it looks pretty good in a world where short term rates are near zero.

Is my $57.24 goal attainable? EOC shares traded as high as $56.20 already in 2010 and peaked at $57.45 in September of 2008. If the expected growth continues into 2011, a thirteen and a half multiple would bring a share price of about $64 by early 2012.

Empresa Nacional de Chile looks like an environmentally sound play that can ‘generate’ solid total returns.  

Disclosure: Author is long EOC shares.

Ingram Micro [NYSE:IM - $17.95] is a world leader in the wholesale distribution of computer products and related services with almost $30 billion in 2009 revenues. They serve more than 170,000 resellers in over 100 countries in North America, Europe, Asia/Pacific regions and Latin America.

IM recently reported better than expected results for their Q4 [ended Dec. 31, 2009] after also posting year-over-year gains in their third quarter. Estimates have been ramping upwards. Consensus estimates now see 2010 – 2011 EPS at $1.70 and $1.94 respectively.

This is especially good news as earnings from continuing operations had remained flat at $1.56 from 2006 through 2008 before declining in the first half of 2009. Here are the per share numbers for IM (excluding one-time items) as reported by Value Line:

The 2005 - 2008 plateau in earnings contributed to the contraction in IM’s multiple from > 15x to about 11.6x – 12.8x over most of the period since 2005. I believe the renewed growth will lead to an expansion of their P/E looking forward.

Based on the consensus views for 2010 and 2011 Ingram now sells for only 10.6x this year’s and < 9.3x next year’s expectations. A rebound to even 13 times the 2010 estimate brings me to a 12-month target price of $22.10 or 23.1% above this afternoon’s quote.

Read more…

Johnson & Johnson [NYSE:JNJ]  is likely the world’s largest and most diverse health-care company. They operate c three divisions: Pharmaceutical, Medical Devices & Diagnostics, and Consumer. In 2008 the sales and (profit) contributions were approximately: Pharm. 39% (44%), Med. Device & Diag. 36% (41%) and Consumer 25% (15%). Total sales in 2009 were just shy of $62 billion.

Despite years of rising revenues and earnings JNJ shares now trade at $63.50 – less than their 2002 high of $65.90 eight years earlier when EPS were $2.23 – only 51.8% of 2009’s $4.63 tally. In 2002 the annual dividend was $0.80 /share versus today’s rate of $1.96.  The 2002 multiple peaked at about 33x trailing earnings while the current P/E is just 13.7x last year’s earnings.

JNJ is a high-quality holding. Standard and Poors rates it as ‘A+’ in that category while Value Line rates them at their highest,  ‘A++’ financial strength. Treasury cash far exceeds total debt and the dividend yield makes for a well-covered and juicy 3.09%. JNJ scores in Value Line’s top 1% for both ‘stock price stability’ and ‘earnings predictability’.

Here are JNJ’s (split-adjusted) per share numbers from continuing operations as reported by Value Line:

At this afternoon’s quote of $63.50 Johnson and Johnson now trades for the lowest P/E in a decade (excluding the 2008-2009 lows) even as their fundamentals have reached all-time records in virtually every measurable category.

Why has this happened? The valuation was quite extended back in 2000 – early 2002 and was not sustainable at over 30x earnings. That would explain the early decade sideways stock price action but not the last few years’ fall from about $70 in 2005 and $72.80 in 2008. I think the past five years’ action is more a statement about the pressure being put upon medical device makers’ and prescription drug manufacturers’ margins in the push to restrict healthcare cost growth.

At some point, though, enough is enough. Zack’s sees 2010 – 2011 EPS as $4.92 and $5.36 respectively. Value Line is a bit more optimistic with estimates of $5.00 and $5.45 (Feb. 26, 2010 issue). It’s hard to picture JNJ selling consistently below at least 14 – 15x projected earnings.

Read more…

Computer Sciences Corporation (CSC - $52.02) is among the world leaders in the information technology (IT) and professional services industry. CSC offers an array of services to clients in both the commercial and government markets. CSC’s offerings include IT and business process outsourcing as well as professional services. Outsourcing involves operating all or a portion of a customer’s technology infrastructure. IT and professional services include systems integration, consulting and other professional services. Consulting and professional services includes advising clients on the acquisition and utilization of IT as well as business strategies, security, modeling, simulation, engineering, operations, change management and business process reengineering.

Despite the dire economic climate of 2008 through the present, Computer Sciences has continued to post record earnings per share. Fiscal 2010 [ends Mar. 31, 2010] is expected to come in at $5.00 /share – up 22.8% from FY 2009’s $4.07.

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

Computer Science has a ‘sticky’ client base with about 80% of its business derived from existing clients that would have a tough time changing providers. Their high percentage of government work ensures they won’t run into receivables problems. The federal government’s heavier use of outsourcing bodes well for future expansion.

What jumps out from the data chart above is the fact that as revenues, cash flow, earnings and book value have been growing – the stock price valuation has contracted to an extremely low multiple.

Zacks sees year ahead EPS of $5.22 making the forward P/E < 10x and the price/book value barely over 1.1x. Typically CSC shares have traded for at least 14x earnings and with a P/BV ratio of 1.5x – 2x. In the heady market environment of 1995 – 2000 CSC commanded multiples of 25 – 30 and peaked at over 5x book value.

Their balance sheet is in good shape with more than $2 billion in treasury cash and total interest coverage of about 4.6x. Value Line rates their financial strength as ‘A’ while Standard and Poors gives CSC a ‘B+’ quality ranking and their highest, 5-Star rating.  Value Line notes other positives with CSC’s ‘stock price stability’ and ‘earnings predictability’ at the 85^th and 100^th percentiles respectively (with 100^th being best).

Read more…

State Street Corporation is a financial holding company. State Street provides a range of products and services for institutional investors worldwide. They operate in two lines of business: Investment Management and Investment Servicing. Services include: custody, daily pricing, record keeping and administration, shareholder services, foreign exchange, brokerage, securities finance, deposit and short-term investment facilities, loan and lease financing, investment manager and hedge fund manager operations outsourcing, performance, risk and compliance analytics, investment research and investment management, including passive and active United States and non-United States equity and fixed-income strategies. As of year-end 2009 they held $18.79 trillion in assets under custody and administration and $1.91 trillion in assets under management. STT has operations in 25 nations around the world.

After posting all-time record earnings of $4.30 /share in 2008 State Street saw EPS drop to $3.46 (excluding non-recurring items) in 2009. They have fully repaid the TARP funding through share issuance and internally generated funds. After all was said and done, book value finished 2009 at its highest level ever and earnings per share (ex. non-recurring items) were the second best on record.

Here are the per share numbers from continuing operations (ex one-time charges) as reported by Value Line:

The dividend cut from $0.24 to $0.01 (quarterly) came as a result of the fiscal crisis of 2008- 2009. I would expect that this rate will be rapidly increased in the reasonable future.

At today’s quote of $44.60 /share State Street is now offered at < 12.9x last year’s somewhat depressed earnings and < 10.4x the consensus view of $4.30 for 2010. Value Line rates STT’s financial strength as ‘B++’ and puts them in the 85^th percentile for ‘earnings predictability’ (with 100^th being best). Standard and Poors assigns STT an ‘ A-‘ quality ranking while maintaining their highest, five-star rating on State Street.

 STT’s normalized price to book value ratio had run from 2.27x to > 4x in the nine years from 2000 through 2008. Today’s 1.52x book value level is substantially lower than typical for this high-quality stock.  Year-end 2010 book value is expected to exceed $33/share and a rebound to even 2x that figure would lead to a share price of $66.

Similarly, a reversion to a more normal P/E of even 15x would bring me to a 12-month target price of $64.50 based on the $4.30 /share expected EPS for 2010. Standard and Poors now carries a (slightly more conservative) 1-year target price of $62. Even that would bring a 39% gain from this morning’s price.

Read more…