Beating Buffett

Bob Evans Farms, Inc. [NDQ:BOBE] $27.49 - 5/25/10:  is a growing family of regional brands. The $1.75 billion company owns and operates 715 full-service restaurants and a complete line of retail food products under the Bob Evans and Owens names. The Bob Evans Restaurants are located in 18 states with a heavy concentration in the Midwest. Mimi’s Cafés are in 24 states with nearly one-half of the units located in California.

The slow economic conditions hurt the growth rate but failed to keep BOBE from equaling all-time high EPS of $2.10 in FY 2009 (ended April 30, 2009). FY 2010 likely finished with even better results of about $2.23 /share.

The consensus view for the current FY is for 4% growth to $2.32 – not too bad considering the state of the American economy. BOBE now trades for only 12.3x last year’s and under 11.9x forward earnings versus a 10-year median P/E of 14x.

Their recently raised quarterly dividend of $0.18 represents a generous and well-covered current yield of 2.62%. That’s one of the highest yields ever for this company’s shareholders.

If BOBE merely rebounds to a fourteen multiple on the current year’s estimate we’ll see a share price of over $32 over the coming 12 months. That leaves room for an 18% appreciation on top of the 2.6% yield.

Why not buy some shares while selling some December puts and calls?

Here’s a nice trade for the next 7 months:

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CIBER, Inc. [NYSE:CBR - $2.87] is a global information technology consulting, services and outsourcing company for both commercial and government clients. Services include application development and management, ERP implementation, change management, project management, systems integration, infrastructure management and end-user computing, as well as strategic business and technology consulting. Founded in 1974, CIBER has more than 8,000 employees. They operate in 18 countries with 14 Global Solution Centers and 70 local offices in North America, Europe and Asia/Pacific. Annual revenue in 2009 exceeded $1.0 billion. CIBER is included in the Russell 2000 Index and the S&P Small Cap 600 Index.

CBR had a tough 2009 due to recessionary conditions and the credit market’s freeze which forced them to issue new shares at an unfavorable price when maturing debt could not be rolled over at reasonable terms.

EPS dropped from $0.50 to $0.22 from 2008 to 2009 and book value was slightly diluted due to the secondary offering. Even so, today’s exceptionally low price makes Ciber shares look extremely undervalued.

Here are the per share numbers for CBR as reported by Value Line:

Consensus views for 2010 – 2011 project $0.22 and $0.32 putting CBR’s P/E at about 13x this year’s and < 9x the 2011 estimate. It doesn’t seem a stretch to think that CBR could trade at fifteen times the 2011 expectation or $4.80 /share sometime within the next 18 months. That leaves the shares with 67% upside from yesterday’s closing trade.

Back in 2002 – 2003 when EPS were similar at $0.22 and $0.31 CBR shares hit highs each year of over $11. In fact, just a glance at the chart above shows that CBR peaked at $5.66 and higher during each calendar year since 2001. CBR shares changed hands at $4.25 just a couple of weeks ago. A rebound to that April high would represent a 48% rise from the May 25^th close.

At just 39.4% of book value CBR is a potential takeover target. Many times in the past decade Ciber has commanded more than twice book value.

The recent market sell-off and CBR’s accompanying share price collapse has created opportunity. I see very little downside risk from $2.87 and wouldn’t be surprised to see a 50% - 100% move up over the next 12 – 18 months.

Dr. Paul Price – May 26, 2010

Disclosure: Author is long CBR shares and short CBR options.

Baxter [NYSE:BAX - $41.82] has dropped back over 32% from its 2010 high of $61.88 due to reduced guidance related to Obamacare costs and lower than expected plasma sales. Even so, full-year EPS are still expected to hit an all-time high. 

Baxter has been a very consistent grower but has shown occasional down years. A peak earnings year in 2002 saw BAX shares hit $59.90 before a disappointing 2003 outlook took the shares down to $24.10. Astute buyers near that point watched BAX go on a multi-year run which topped out in 2008 above $71. The current pullback may turn out to be a similar opportunity.

Here are Baxter’s per share numbers (excluding non-recurring items) as reported by Value Line:

Zacks and Standard and Poors are each looking for about $3.93 and $4.26 in EPS for 2010 and 2011 respectively. That puts Baxter’s multiples at 10.7x current year’s and about 9.8x next year’s estimates. Just a quick glance at the chart shows how cheap those are historically.

The $0.29 quarterly dividend represents a 2.77% current yield – almost double the typical rate from the past decade. It’s also more than most 2 – 3 year bank CDs pay in today’s near zero interest rate environment. That alone should provide some support for the stock at today’s closing price.

Value Line takes a very conservative view in using a 14 multiple to figure a 3 – 5 year goal price range of $75 – $90 with assumed earnings of $6.00 /share. Even 14x this year’s estimate would see BAX shares bounce back to the $55 range. That’s 31.5% above the present quote.

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I was sitting here trading on a pretty quiet and uneventful day when, in the last 15 - 20 minutes the DJIA dropped from about neutral to a 127 point loss and the NDAQ, which was in positive territory almost all day, also plunged to a 15.5 point loss.

There was NO NEWS of any kind to account for these large sell-offs.

Almost every stock I follow took a significant hit going into the close due entirely to high frequency trading pushing the market around. If you believe that stocks actually represent fractional ownership of companies then these type of declines should be welcomed as chances to buy cheap or to write puts at better prices than were available just mintues earlier.

It’s quite disconcerting to see your statement value drop on no news in just a few minutes. Knowing that the move is meaningless and could just as easily have been to the upside makes it bearable.

Had we gone up 100 points in those last 20 minutes we’d all be feeling good and ready to pat ourselves on the back for having put on some exposure earlier in the day. With no change in fundamentals don’t let the late sell-off depress you or shake your faith in the moves you made before the drop.

We’re now living and investing in a crazy world where it’s easy to doubt your own judgment. Fight off that self doubt and keep doing what you know is right based on all available information. You’ll be well rewarded in the end for buying into these computer generated, mindless dips.

Oracle Corp. [NDQ:ORCL - $22.00] is a leading provider of enterprise software. They added hardware to its product portfolio via the acquisition of Sun Microsystems, completed in January. Their software business consists of software licenses, software license updates and product support. ORCL’s services business account for about 19% of revenues.

Yesterday’s big selloff has knocked the shares back from a recent high of $26.63 to about $22 despite nothing but great results on fundamentals. Here are Oracle’s outstanding per share numbers (excluding non-recurring items) as reported by Value Line:

Sales, cash flow, earnings and book value per share have all grown every single year while the P/E has come down dramatically since 2002. ORCL even began paying a dividend during 2009.

Consensus estimates for the FY ending this month run from a low of $1.55 to the high from Value Line of $1.62 /share. For FY 2011 the range is now $1.83 - $1.90 /share. Even the lowest expectations put ORCL at about 14.2x trailing and 12x forward projections.

Those are extremely low valuations for ORCL by any historical measure. When tech was ‘the thing’ in early 2000 these same shares sold for a split-adjusted $46.50 on EPS of $0.35 – an absurd multiple of 133x [NOT a misprint!].

I’m a buyer of ORCL share and a seller of LEAP puts for 2012. Here are some of today’s actual price quotes due to the increased VIX readings.

A rebound to even 15 times the lowest FY 2011 estimate of $1.83 should bring ORCL back to over $27 allowing each of the above puts to expire worthless by the Jan. 21, 2012 expiration dates. By writing these long-term options you can get ‘float’ on the premiums received until you file your tax year 2012 schedule D in April of 2013 (assuming you hold the position all the way to expiration).

Dr. Paul Price

May 21, 2010

Disclosure: Author is long ORCL shares and short ORCL options.

FISV [NDQ:FISV - $49.64] is as consistent a growth company as I’ve come across. Here are their per share numbers (excluding extraordinary items) as reported by Value Line:

Value Line notes that Fiserv’s ‘stock price stability’ and ‘earnings predictability’ fall in the 90^th and 100^th percentiles (with 100^th being best). Why wouldn’t they? (Considering the cash flow, earnings and book value all rose during each year on the chart above).

What’s incredible is that Fiserv’s outstanding growth has been totally dismissed by the market. The P/E had compressed from a high 33 – 34x a decade ago to only 11.8x in 2009. The first quarter of 2010 did not disappoint. EPS hit a March quarter record of $0.95 versus 2009’s $.088 and full year estimates now run about $4.00 - $4.10. The consensus view for 2011 is pretty tightly centered on $4.40 - $4.45.

At this afternoon’s price of $49.64 FISV trades for about 12.4x the low-end estimate for 2010 and 11.3x next year’s expectations. Those are close to the all-time lows in terms of valuations for this fine company. Their 10-year median P/E has been 20x and Value Line sees fit to use a 19 multiple in calculating their 3 – 5 year target pricing. Standard and Poors sees present day ‘fair value’ as $59.80 or 16.2x trailing earnings from continuing operations. They list FISV as a 4-Star selection (with 5-Stars being tops).

If the $4 estimate for 2010 proves accurate (as is likely with the 100^th percentile ‘earnings predictability’ ranking) then a rebound to even a 15 multiple could support a rise to $60. That conservative goal would still make for a greater than 20% move by year-end.

Fiserv acquired Checkfree in December of 2007 increasing their exposure to paperless, electronic bill paying. After almost 2 ½ years this looks to have been a prescient purchase. Electronic banking seems to be a huge growth business.

It’s hard to believe we can own such a premium company at such a modest price. I’m a buyer of the shares and a seller of their December puts.

Here are the specifics on the most attractive puts at the moment…

Dr. Paul Price – May 18, 2010

Disclosure:  Author is long FISV shares and short FISV puts.

AllianceBernstein [NYSE:AB - $29.65] is one of America’s largest investment management companies. It is structured as a master limited partnership (which trades like stock) while getting the low tax rate and high distribution characteristics that go with the L.P. status.

AllianceBernstein L.P. is comprised of three businesses:

• Global Wealth Management-The Bernstein private client business is focused on helping wealthy individuals and families achieve their financial goals.
• Institutional Investments-AllianceBernstein Institutional Investments is a preeminent resource for institutional investors worldwide, delivering the full spectrum of the firm’s investment services and solutions to many of the world’s leading institutions.
• Institutional Research-Sanford C. Bernstein provides in-depth fundamental research, portfolio strategy, execution and brokerage services.

Revenues and earnings have rebounding smartly since the late 2008-early 2009 market meltdown. Q4 EPS were $0.62 versus $0.27 and Q1 came in at $0.46 against the $0.07 earned at the nadir of the market cycle in March 2009. 

Here are AB’s per unit numbers as reported by Value Line:

Current estimates for run from $2.16 - $2.24 for the current year and from $2.48 - $2.71 for 2011. Zacks is at the low end while Standard and Poors is taking the more optimistic viewpoints.

At yesterday’s close of $29.65 that puts AB’s multiples at just 13.5x the 2010 and 11.4x the 2011 midpoint expectations. Both of those are well below AB’s long-term normalized P/E of 16x. Should AllianceBernstein merely bounce back to even 15 times the mid-range current year estimate of $2.20 we’ll see $33 again by year-end. That same low-normal valuation would bring AB units back up to $39 by the end of 2011 if earnings come in pretty much as expected.

The actual trailing 12-month distribution rate was $2.16 per unit making for a 7.28% current yield on today’s quote. That’s extremely attractive in the near-zero interest rate environment imposed on us by the Fed.

If you add the capital gains potential to the very generous distribution you come up with a fabulous total return potential for holders of these units. Are my $33 and $39 target prices for YE 2010 -2011 realistic? Standard and Poors certainly agrees as they list a 12-month goal price of $38 in their latest research on AB. AllianceBernstein hit $35 just weeks ago this year. Just a quick glance at the chart above also confirms that AB changed hands above both my goal prices during each calendar year 2002 right through 2008. When the market was hot they often went for between $40 - $70. If anything, my projected pricing is probably too conservative.

I’ve been writing about AB periodically since March 2009 when the shares were around $15 and I’ve continued to hold and add to my position whenever AB pulled back due to general market action. AllianceBernstein is one of my largest personal holdings.

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