Wednesday, August 7, 2013

A Closer Look at Berkshire Hathaway's Second-Quarter Results

Warren Buffett could be considered the greatest investor of all time. Nobody could beat him when it comes to investing results. Under his leadership and his capital allocation talent, Berkshire Hathaway's (NYSE: BRK-A) operating performance has kept growing, leading to magnificent share price growth, from only $15 per share in 1965 to $176,500 per share at the time of writing, marking an incredible annualized gain of 21.5% in the past 48 years.
A close look at Berkshire Hathaway’s derivative positions
Recently, Berkshire Hathaway posted huge growth in its second-quarter earnings results. In the second quarter, Berkshire Hathaway increased its revenue from $38.55 billion to nearly $44.7 billion. The year-over-year revenue growth was due to a 13% growth in the insurance business, 7.2% growth in railroad, utilities and energy segment, and a significant improvement in derivative positions, from a loss of more than $1 billion last year to a profit of $461 million this year.
The huge gain in its derivative positions could be mainly attributed to the gain in the European equity index put options, written on four major equity indexes including S&P 500, FTSE 100, the Euro Stoxx 50, and the Nikkei 225, with the expiration dates in the range of June 2018 to January 2026. The remaining weighted average life of all contracts were estimated to be around 7.5 years as of June 2013.
Writing European style put options with long maturities let Warren Buffett have much more cash in premium to go investing and earn decent returns on it. He does not have to pay his counterparty until maturity, and the payment is made only if the reference index to which the put was tied goes lower than it was at the inception of the contract.
Dated back to 2009, Warren Buffett has explained the “equity put” portfolio in detail in his letter to shareholders, he mentioned that “only the price on the final day that counts.” In order for Berkshire Hathaway to lose nearly $31 billion in options, all of those four major indexes have to fall to zero on their various termination dates. Thus, the increase in value in many major indexes in the past year has been the main factor for the significant rise in the equity index putoptions value.
In the operating business, Berkshire Hathaway experienced the highest gain from the railroad BNSF business, from $1.28 billion to nearly $1.4 billion. Moreover, the growth also happens in the financial products, Marmon, McLane and MidAmerican businesses.
Berkshire Hathaway’s two biggest equity positions
For the long-term, Warren Buffett is still bullish on Wells Fargo (NYSE: WFC)and Coca-Cola (NYSE: KO). Those two companies are the two largest positions in the Berkshire Hathaway investment portfolio. With more than 458.17 million shares, Wells Fargo was the largest position, accounting for 19.9% of his total portfolio, while Coca-Cola, with 400 million shares, ranked second, accounting for 19% of his total portfolio as of March 2013.
Wells Fargo is known to have conservative lending practices, which might generate lower income than its peers in a boom phase, but it would let its shareholders sleep well in challenging times. The bank, with presence in nearly 9,100 stores, serving more than 70 million customers, is considered the market leader in consumer and small business lending, residential mortgage, and the commercial market. In the long run, the bank targets its efficiency ratio at 55%-59%, with the ROA in the range of 1.40%-1.60%, while the ROE could be in the range of 12%-15%.
Income investors might like Wells Fargo with its capital plan. For full year 2013, the bank estimates to spend more money than 2012 to buy back its shares. If Wells Fargo spent the equivalent amount of money like last year, of $4 billion, for share repurchases, the repurchase yield could be around 1.7% at its current price. It is trading at $44.50 per share, with the total market cap of $235.6 billion. The market values Wells Fargo at 1.57 times its book value. The dividend yield comes in at 2.80%.
Coca-Cola has also been a favorite long-term stock for investors with its marvelous concentrates. It has a long operating history dated back to 1886, having more than 500 beverage brands in more than 200 countries. Coke has become the global product for all walks of life, from the rich to the poor, from a billionaire to farmer. It has a global leading position with nearly 42% market share, while PepsiCo, its closet competitor, has only around 30% of the market. Other non-alcoholic ready-to-drinks (NARTD) products including Fanta, Sprite, and Del Valle are also the leaders in their markets.
In the second quarter, Coke reported sluggish results, due to the “challenging global macroeconomic environment and unusually poor weather conditions in the quarter.” Despite the recent not-so-good quarter, the company sticks to its 2020 Vision. Its Chairman and CEO, Muhtar Kent, remained bullish in the large NARTD market of 585 million, 37% under the age of 21 and more than 18 million in the emerging middle class.
By 2020, the company expects to double its system revenue with higher margins. The number of servings is estimated to double to more than 3 billion a day, equivalent to around 3%-4% annual volume growth. It is trading at around $40.20 per share, with a total market cap of $178.3 billion. The market values Coke at as much as 15 times its trailing EBITDA.
My Foolish take
Berkshire Hathaway, under Warren Buffett’s leadership, will still be a great long-term stock for patient investors. With more than 70 diversified great operating businesses, Berkshire Hathaway should deliver decent returns for its shareholders in the future. Long-term common stock investors could also invest in Coke and Wells Fargo, due to their global market leading positions, decent profitability, and potential growth.

Three Successful Social Networking Sites

Recently, Facebook (NASDAQ: FB) experienced a significant daily gain of 26% to more than $33.40 per share. After the rise, Facebook’s total market cap has approached around $80.80 billion. Facebook soared mainly due to an impressive second quarter earnings result. Let’s take a closer look at those results to see whether or not Facebook is a good buy now.
Impressive second quarter growth
In the second quarter, Facebook has managed to increase its revenue by as much as 53%, from $1.18 billion last year to $1.81 billion this year. The advertising revenue came in at $1.6 billion, accounting for around 88% of its total revenue. The net income was $333 million, or $0.13 per share, a big improvement compared to a loss of $(157) million, or a $(0.08) per share in the same quarter last year. Facebook has reached 1.15 billion monthly active users (MAUs) as of June 2013, a year-over-year growth of 21%. The mobile MAUs experienced a much higher year-over-year growth of 51% to 819 million.
LinkedIn is for professional networking
Facebook is considered the most popular global social networking site in the world. It owns a lot of private users’ data, including pictures, profiles, comments and updates. Another famous social networking site is LinkedIn (NYSE: LNKD). However, LinkedIn focuses on professional social networking, giving people the chance to network based on the career and professional basis. In the first quarter 2013, LinkedIn managed to grow its member base to 218 million. LinkedIn is trading at $204.50 per share, with a total market cap of around $22.5 billion.
LinkedIn members could feel comfortable to pay to be upgraded to the premium level for better professional networking and have more valuable contact access, while it will be much harder for Facebook to charge its members. Consequently, Facebook’s main revenue source is advertisements. Interestingly, LinkedIn’s main revenue stream was Talent Solutions, which generated around $184.3 million in the first quarter of 2013, whereas the Marketing Solutions and Premium Subscriptions segments contributed only $74.8 million and $65.6 million, respectively, in sales.
Yelp – connecting people to local businesses
In terms of valuation, LinkedIn has a much higher price-to-sales valuation at 19.7, while Facebook is valued at only nearly at 11.7 times its price-to-sales. Another much smaller social networking site, Yelp (NYSE: YELP), is also valued at a higher valuation that Facebook at 16.45. Yelp is trading at $41.50 per share, with total market cap of around $2.6 billion. The market values Yelp at 16.4 times its price-to-sales. Yelp concentrates its business on a different niche, connecting people with local businesses. When you go somewhere, you want to know about different types of restaurants, plumbers or salons to choose from, which is why people use Yelp. Yelp provides reviews that help users share different opinions and experiences about local businesses. The company reported that there were around 102 million unique investors visiting the websites, with around 39 cumulative reviews.
Facebook, LinkedIn and Yelp do not directly compete with each other. LinkedIn and Yelp have been quite successful with its social networking niche markets. I personally think that all of those three businesses will grow rapidly in the future. Importantly, with the rising trend of mobile usage, all three sites need to increase the number and the stickiness level of mobile users.
My Foolish take

Facebook, LinkedIn and Yelp could fit well in the technology portfolio of long-term investors. However, with the high valuation and the fast changing nature of the technology industry, all three stocks are expected to be extremely volatile. Thus, investors should diversify their technology portfolio with a lot of other large well-established tech companies.

This Cash-Cow Nitrogen Fertilizer Business is Cheap

Dan Loeb, the famous hedge fund manager, has successfully delivered sweet long-term returns for his investors by investing in attractive event-driven equity and credit opportunities around the world. Since its inception in December 1996, his fund, Third Point Offshore Fund, has generated a 17.8% annualized return, outperforming the S&P 500’s return of only 6.6%.
According to his second quarter letter to shareholders, he initiated a long position in CF Industries Holdings (NYSE: CF) in the second quarter. Right after the news, CF Industries experienced a significant daily rise at nearly 12%. Should we follow Dan Loeb into CF Industries? Let’s take a closer look.
Low cost producer with low dividend payout ratio
CF Industries is considered one of the biggest nitrogen and phosphate fertilizer products manufacturers and distributors, owning five nitrogen fertilizer-manufacturing facilities in the U.S., a 75.3% stake in Terra Nitrogen, a 66% economic interest in the biggest nitrogen fertilizer complex in Canada and other nitrogen and ammonia joint ventures around the world. The two biggest revenue contributors are UAN, with nearly $1.89 billion in revenue, and Ammonia, with $1.68 billion in 2012 sales.
What I like about CF Industries is its historical consistent positive cash flow generation. Its operating cash flow has increased from $344 million in 2004 to nearly $2.38 billion in 2012, while the free cash flow rose from $311 million to more than $1.85 billion during the same period. Since 2005, the company also offered growing dividends to shareholders, from $0.02 per share in 2005 to $1.60 per share in 2012.
However, the dividend yield is very small because of the very low payout ratio. CF Industriesis trading at $202.30 per share, with the total market cap of around $12 billion. The current dividend yield is only 0.90%, with the payout ratio of only 5%.
Sustainable cash flow and cheap
Dan Loeb liked CF Industries because it was one of the lowest-cost producers in the world. He thought that its structured cash flow generation strength was not recognized by investors and proposed that the company’s management should increase dividend payments to shareholders. CF has the advantage of having access to low-cost North American natural gas, the main input for nitrogen fertilizer manufacturing. Assuming the input cost was $5 Henry Hub/natural gas and $275 per ton nitrogen fertilizer price, Dan Loeb estimated that the annual free cash flow could be around $1.2 billion. Thus, CF Industries is trading at around 10% free cash flow yield.
Moreover, if the demand for nitrogen fertilizer is higher than the supply, CF will benefit further, generating higher cash flow than the above assumption. With the conservative cash flow multiple of 4, every $25 change in nitrogen price above the cost floor (the breakeven price for nitrogen manufacturers) will generate an additional $15 value per share. In addition to the increase in dividend payments, Dan Loeb also suggested the company to execute the remaining $2.25 billion share buyback, creating an additional yield of nearly 19%.
Agrium and Potash are more expensive, with higher dividend yields
Its peers, Agrium (NYSE: AGU) and Potash of Saskatchewan (NYSE: POT), offer investors much higher dividend yields and have a much higher valuation than CF Industries. Agrium is trading at $91.50 per share, with the total market cap of around $13.70 billion. Agrium has a much higher valuation than CF Industries, at 6.4 times its trailing EBITDA. At the current trading price, Agrium’s dividend yield is 2.30%, with the payout ratio of around 16%.
Agrium was also the activism target of JANA Partners. JANA Partners thought that Agrium’s full value potential was not realized because of its conglomerate structure with two different businesses: a volatile fertilizer business and a stable farm product distribution business. Thus, JANA proposed that it should separate the retail business via a tax-free spin-off transaction and reduce excessive unallocated corporate expenses. Afterwards, it should release excess working capital and increase cash return to shareholders via dividends and share buybacks. JANA estimated that the business restructure could unlock as much as $50 value per share for Agrium shareholders.
Potash has the highest valuation among the three. It is trading at $37.90 per share with a total market cap of $32.90 billion on the market. It is valued at as much as 10.1 times its trailing EBITDA. Potash offers the highest dividend yield at 3.80% with the highest payout ratio at 33%. Potash is the global leading company in crop nutrients. The company ranks number one, accounting for 20% of the global potash capacity, while it is the third largest player in the world in nitrogen and phosphate.
Looking forward, Potash is well-positioned for the global growth in fertilizer consumption. Inthe period of 2012-2016, the annual growth in potash, nitrogen and phosphate came in at 3.5%, 1.3% and 2.7%, respectively. Potash estimated that it could account for 42% of the new global operational capacity in 2012-2016, and 23% of the global operational capability in 2016. In the next three years, the company expects to generate stronger cash flow but reduce capital spending so that it could have more financial flexibility.
My foolish take
CF Industries seems to be a good nitrogen long-term stock for patient investors due to its low payout ratio, strong cash flow, low-cost operational structure, and low valuation. Furthermore, under the pressure from activist investor Dan Loeb, investors might expect that CF Industries could take action in the near future to unlock shareholders’ potential value. 

Tuesday, July 2, 2013

Three Smartphone Companies for Your Tech Portfolio

Recently, Blackberry (NASDAQ: BBRY) experienced a significant drop of nearly 27.5% in only $10.50 per share within one trading day. The free fall of the stock price might be due to the company's sluggish first quarter earnings results. Dated back to the company’s heyday in the middle of 2007, Blackberry was trading at more than $230 per share with a the total market cap of more than $120 billion. At the time of writing, Blackberry was sold on the market at only $5.5 billion. Personally, I think it was too cheap.
Blackberry’s sluggish shipments
In the first quarter of 2014, Blackberry's revenue came in at more than $3 billion, around 7% higher than its revenue in the first quarter of last year. The company's gross margin experienced decent improvement, from 28% last year to 33.9% this year. The company reported that it had shipped around 6.8 million smartphones in the recent quarter, including 2.7 million new Blackberry 10 phones. The shipment volume came short of analysts’ expectations of 7.5 million shipments, including 3.6 million Blackberry 10 phones.
In the smartphone world, Samsung (NASDAQOTH: SSNLF) is still the global leader. According to IDC, Samsung shipped 70.7 million units in the first quarter 2013, a significant growth of 60.7% compared to 44 million unit shipments in the first quarter of last year. It holds the number one position with a 32.7% market share in the smartphone industry.Apple (NASDAQ: AAPL) ranked second with a much lower number of shipments due to slower growth in the recent quarter. With 37.4 million unit shipments in the first quarter, Apple’s market share stayed at 17.3%.
In the first quarter of 2014, the company generated a loss of $84 million or -$0.16 per share. Blackberry also mentioned that the Venezuela foreign currency restrictions had around $0.10 per share impact on the reported GAAP earnings per share. The company's operating cash flow was positive at $630 million. What I like about Blackberry is its conservative capital structure; as of June 2013, it had nearly $9.4 billion in equity, more than $2.8 billion in cash and short-term investments, and no debt. Its intangible assets came in at more than $3.5 billion.
Prem Watsa is bullish about Blackberry
Prem Watsa, the “Canadian Warren Buffett,” is the 10% owner of the company. He is quite bullish about the company's ongoing turnaround under the leadership of CEO Thorsten Heins. Although there is a lot of competition in the smartphone industry including Apple, Samsung and Google, the he believed that smartphone market would be a fast growing market. Watsa pointed out that Blackberry still has around 75 million users in the world and its product catch is security. He thinks that Blackberry, with its unique security level, still has its place in the market. Of course, the turnaround would take a lot of time and there would be more ups and downs along the way. In the long-term, Watsa believes that Blackberry’s fair value is around $40 per share.
Samsung with its preferred stocks
At $10.50 per share, Blackberry is valued at only 3.6 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Apple has a much higher valuation, trading at $396.50 per share with a total market cap of $372.2 billion. The market values Apple at around 6.1 times its trailing EBITDA.
Interestingly, what might make investors excited is Samsung with its low valuation. The global smartphone leader has the similar valuation to that of Blackberry. Samsung is trading at $1,140 per share, with the total market cap of $149.20 billion. It is valued at only 3.6 times its trailing EBITDA.
Li Lu, the money manager for Charlie Munger, liked Samsung preferred stocks in particular and South Korean preferred in general as they are traded at a deep discount to common stock. The cheapness was due to the irrational perception that they were not debt or equity. In the Korean market, while Samsung common is trading at 1,342,000 Korean won, its preferred stock is only 840,000 Korean won which is a nearly 40% discount to the common share price.
Apple with its potentially high total yield
Apple could also make a good compelling investment case. The company recently took advantage of the low debt financing by issuing $17 billion in bonds with a rate equivalent to the highest-rated AAA companies in the world, ranging from 0.511% to only 3.883%. By using its cash on hand and recent debt financing, the company intends to return $100 billion in cash in the next two years via dividends and share repurchases. It has already announced raising its share buyback amount by $50 billion to $60 billion, while increasing its dividend to $3.05 per share. At the current trading price, Apple’s dividend yield is quite juicy at 3%.
My Foolish take

All three of these tech giants, Apple, Samsung and Blackberry, could fit well in the long-term portfolios of technology investors. Apple could potentially produce a total yield at 26.8%, including buybacks and dividends, in the next two years if it executes its $100 billion cash return plan. While investors could view profitable Samsung, the global leader in smartphone industry, is quite cheap due to its quite low EBITDA multiple, Blackberry could be seen as a turnaround play with the backup of one of the most successful investors in the world, Prem Watsa. To conclude, Francis Chou once commented that Blackberry’spatents alone were already worth more than $13 per share, 30% higher than its current trading price.
Disclosure: Long BBRY, AAPL

Thursday, May 30, 2013

Is This Premium Electric Car Maker a Good Buy Now?

Shareholders of Tesla Motors (NASDAQ: TSLA) must be very happy as the share price has jumped significantly in a very short period of time. Since the middle of March 2013, Tesla has risen more than 3 times, from $35 per share to more than $110 per share. Should we invest in Tesla at these levels? Let's find out.
Turning to profitability and repaying government loans
I personally think that the market has been quite bullish about Tesla due to its recent strong first-quarter earnings results. After years of losses, Tesla finally reported GAAP profits. With 4,900 vehicles delivered in the first quarter, its automotive sales increased more than 18 times, from $30.2 million in the first quarter last year to nearly $561.8 million this year. Net income came in at $11.25 million, a big improvement compared to a loss of nearly $90 million last year. Actually, the positive net income was also due to a $10.7 million gain in the Department of Energy common stock warrant liability and another $6.4 million gain in the currency exchange.
Another positive point is that Tesla has repaid the loans from the Department of Energy that it had borrowed three years ago. The company reported that it is the only American auto business that has fully repaid the government’s loan. The company said that it had wired around $451.8 million to the government. The money it used to repay the government was from the recent common stock and convertible senior notes offering of $968 million. Tesla founder Elon Musk intended to purchase around $100 million worth of shares, including $45 million from the offering and $55 million directly from the company.
Model S – the best selling electric car in the U.S.
Electric car Tesla Model S is the hottest on the market right now. Recently, Consumer Reports announced that the Model S got the overall test score of 99 on a 100-point scale, meaning that it was nearly perfect. General Motors’ (NYSE: GM) Volt ranked second with more than 4,420 Volts in the first quarter, lagging Model S’ unit sales of more than 4,700.Ford’s (NYSE: F) electric car, Focus Electric, also got a decent review by Consumer Reports as being “solid, sophisticated and a delight to drive.” However, Ford Focus Electric’s sale came in at only 419 units in the first quarter. Combined with other hybrid versions, Ford’s sales ranked the fifth, after Tesla, General Motors, Nissan, and Toyota.
But extremely high PEG and P/S ratios
The market places a $12 billion market value on Tesla, which has generated $945 million in revenue and has reported an operating loss of $295 million in the past twelve months. Interestingly, Tesla’s market cap has risen significantly to be equivalent to 17% of Ford’s market cap and 22% of the General Motors’ market cap.
The market values Tesla at more than 10 times its sales and nearly 60 times its book value. Ford and General Motors, with $58.9 billion and $45.7 billion, respectively, in their total market caps, have much lower P/S and P/B ratios. While General Motors is worth 30% of its total sales and 172% of its book value, Ford is valued at 43% of its total sales and 3.34 times its book value.
Many investors would argue Tesla's high market valuation might be due to the high growth that it has experienced. However, its PEG ratio is also quite rich, as high as 42.7. Both Ford and General Motors have PEG ratios below 1, at 0.97 and 0.62, respectively.
My Foolish take
Although Tesla's Model S is hot and intriguing, ranking the best selling electric cars in the U.S. in the first quarter, I would not invest in Tesla at its current trading price. With an extremely high valuation, I would expect Tesla’s valuation would shrink in the near future. Among the three companies, I like General Motors the most, with a low valuation and the strongest balance sheet.

Wednesday, May 15, 2013

Sony Is Relatively Cheap, and Opportunistic

Famous hedge fund manager Dan Loeb has come to Japan, targeting one of the biggest Japanese corporations, Sony (NYSE: SNE). Dan Loeb revealed that his firm, Third Point LLC, with 64 million shares, including both direct share ownership and cash-settled swaps, was the largest owner of Sony. Dan Loeb has laid out several steps to unlock the hidden shareholder value, believing that the company has as much as a 60% potential upside.
Two steps to unlock Sony’s value
In the recent letter to Mr. Kazuo Hirai, the President and CEO of Sony, Dan Loeb mentioned that Sony could maximize the company’s shareholder value by two steps: first was to take a part of Sony Entertainment listed, and the second was to focus on industry-leading businesses for the future growth of Sony Electronics.
Indeed, Sony’s business was divided into several segments including Consumer Products & Services, Professional, Device & Solutions, Pictures, Music, Financial Services and Sony Mobile. While the two biggest revenue contributors were the Consumer Products & Services segment and the Professional, Device & Solutions segment, those two segments generated operating losses in 2012. The Financial Services segment was actually the most profitable segment, with ¥131 ($1.31) billion in operating income in 2012. The Pictures, Music and Sony Mobile have also generated consistent positive operating income, with The Pictures, Music and Sony Mobile have also generated consistent positive operating income of ¥34.1 billion ($341 million), ¥36.9 billion ($369 million) and ¥31.7 billion ($317 million), respectively.
Dan Loeb stated that Sony should take around a 15% to 20% stake in Sony Entertainment public so that the public could realize its high profitability with the great asset in television and motion picture production. Moreover, its management could have an incentive to grow the business they control. Sony was advised not to have a standard IPO, dividend or spinoff but rather a subscription right to current shareholders, to ensure the economic interests of Sony’s current shareholders. Third Point was ready to “backstop” the IPO up to $1.5 to $2 billion. According to Dan Loeb, if Sony Entertainment could have the similar margin to its U.S. peers, its EBITDA might rise up to 50%. With a EBITDA multiple of 9, Sony might realize an additional market valuation of ¥625 ($6.25) billion, or ¥540 per share, or 25% of the current trading price.
Sony Electronics and its Japanese peers
Its other business, Sony Electronics, has been producing sluggish returns and losses in the past ten years. However, the company was still undervalued on the market. Sony Electronics was worth around $8 billion, valued at 8 times FY13 EBIT guidance of around $1 billion. Dan Loeb wrote: “When considering Sony’s strong operating profit recovery, favorable product cycles, export orientation, and relative balance sheet strength, we see a strong re-rating potential to multiples of consumer electronics peers like Sharp (NASDAQOTH: SHCAY.PK) and Panasonic(NASDAQOTH: PCRFY).”
Panasonic was also the big Japanese electronics corporation. Most of its revenue, 17% of the total revenue, were generated from the AVC Networks. Appliances and Eco Solutions both ranked second, each accounting for 15% of the total revenue while Industrial Devices was the third biggest revenue contributor, representing 14% of the total revenue. The business keeps innovating new electronics products. Several days ago, Panasonic announced its new Breakfast Collection, including different kitchen appliances including a Coffee Maker, a Kettle and a Toaster. The NT-ZP1 Toaster has different slots for different bread slices. The NC-ZF1 Coffee Maker, with Aroma Selector could let users adjust the water flow for milder or stronger coffee, whereas the NC-ZK1 Kettle let users boil water quite quickly.
Panasonic seems to employ high leverage for its operations. As of Dec. 2012, it had ¥1.34 trillion ($13.4 billion) in equity, ¥515 ($5.15) billion in cash and as much as ¥1.56 trillion ($15.6 billion) in total debt. Panasonic is trading at $8.60 per share on the market, with the total market cap of $19.90 billion. It has quite a low EV multiple of only 4.1 on the market. The P/B stayed at 1.14.
Sharp has been expanding its business into TVs and mobile handsets as well as LCD related business for the past 13 years. The company has just laid out five main strategies for recovering and growing the business. The five main plans included business portfolio restructuring, LCD business profitability improvement, ASEAN market focus, fixed costs reduction and financial position improvement. The company also pushed for strategic partnership with companies from different industries. Recently, it just signed a basic agreement with Makita Corporation, to broaden the business areas including homes (house/rooftop) to premises (grounds). Sharp also announced that it was seeking further collaboration in the robotics business. Sharp was expected to generate around generate around ¥216.8 ($2.16) billion in EBITDA in 2014. With ¥946.9 ($9.46) billion in debt, its 2014 EV/EBITDA was 7.12.
The lowest valuation with an additional value of ¥725 per share
Interestingly, Sony has the lowest valuation among the three. Sony is trading at $20.80 per share, with a total market cap of $21 billion. The market values Sony at only 3.62 times EV/EBITDA. Dan Loeb suggested that there were over ¥525 per share of hidden value that the market had not reflected in Sony’s share price. He also expected that there were over ¥525 per share of hidden value that the market had not reflected in Sony’s share price. He also expected another ¥200 due to “the movement in the EUR/JPY relationship to be reflected in analyst estimates.
My Foolish take
Dan Loeb has pointed out what the greatest asset that Sony has, Sony Entertainment. Sony considered the entertainment business was indeed the important source for the company’s growth and it was not for sale. However, Sony’s spokeswoman said that the company “look forward to continuing constructive dialogue with the shareholders as it pursues its strategy.” Sony looks quite interesting with its low valuation compared to its electronics peers, it could also be considered an opportunistic pick upon Dan Loeb’s activism.

Wednesday, May 8, 2013

Unlock the Hidden Value in This Stock

JANA Partners, lead by the famous activist investor Barry Rosenstein, has become active again. In the middle of April, JANA accumulated as much as more than 5 million shares (including options to purchase 824,600 shares) of Oil States International (NYSE: OIS), which was equal a 9.1% stake in the company.
In its recent 13D filing, JANA reported that the aggregate cost of its Oil States’ stake was around $340 million. Since the beginning of the year, Oil States has gained more than 7%. Should investors follow Barry Rosenstein into Oil States? Let’s find out.
Accommodations could be a REIT
Oil States is the leader in supplying specialty products and services to major oil, gas, and coal producing companies around the world. The business is operating in four main business segments: Accommodations, Offshore Products, Well Site Services, and Tubular Services.
The majority of its revenue, $1.78 billion, or 40.3% of total 2012 revenue, was generated from the Tubular Services segment. Accommodations ranked second with $1.11 billion in revenue, while Well Site Services generated the least revenue out of the four segments contributing only $713.6 million in 2012. Interestingly, Accommodations and Well Site Services are the two biggest income contributors, with $364.6 million and $156.8 million, respectively, in operating income. Tubular Services had a very thin margin of only 4.2%, contributing only $75 million in operating income.
According to the 13D filing, JANA seems to push for corporate changes in Oil States. The two parties have had discussions to separate Oil States’ “Well Site Services segment from its Accommodations segment and the formation of a REIT for Accommodations.” As I take a closer look at Oil States’ recent 10-K filing, I estimated that the Accommodations segment has around 1,470 acres, which is equivalent to more than 64 million square feet.
Valued cheaply compared to Simon Property
Compared to the largest mall REIT in the world, Simon Property (NYSE: SPG), the real estate of the Accommodations segment (both lease and owned) is around 26.4% of Simon Property’s total real estate size. Simon Property currently owns or has interests in around 325 retail real estate properties, with around 242 million square feet in total.
Furthermore, Simon Property had a 29 % stake in Kl├ępierre, a REIT operating 260 shopping centers in 13 countries in Europe. At $176 per share, Simon Property is worth around $55.23 billion on the market. Thus, a rough approximation would relatively value Oil States’ Accommodations segment at more than $14 billion, more than three times higher than Oil States’ current market cap of only $4.2 billion.
The market values Simon Property at more than 37 times its trailing earnings and 9.5 times its book value. In terms of earnings valuation, as the Accommodations segment of Oil States generated $364.6 million in operating income, the equivalent earnings valuation would place Oil States’ Accommodations segment at nearly $11 billion.
J.C. Penney’s hidden real estate value is also huge
Simon Property has shown no interest in the sale-leaseback option of J.C. Penney’s(NYSE: JCP) 111 stores in Simon malls in the U.S., because the occupancy rate has been on the rise. J.C. Penney, after experiencing a significant drop of more than 53% in the past twelve months, has been trying to turn itself around.
As of January 2013, it had $3.17 billion in equity, only $930 million in cash, and as much as nearly $3 billion in long-term debt. The company has been trying different alternatives to divest several real estate holdings for more cash. J.C. Penney and its advisers have been thinking of several options, including real estate spin-off and sale-leaseback.
Cantor Fitzgerald LP expected that the company could raise $1.5 billion by spinning off its real estate into a new company, and use this company to issue senior notes, backed by unsecured guarantees. J.C. Penney currently has nearly 112 million square feet of real estate in total. Indeed, if J.C. Penney operated as a REIT, it would be worth half of Simon Property, or more than $20 billion. At $17 per share, J.C. Penney is worth only $3.7 billion on the market.
My Foolish take
As J.C. Penney operates as a retail operator, not a real estate player, it would take a lot of time to unlock its huge potential real estate value. However, Oil States’ Accommodations segment is not about retail, it is about lodged properties. As the Accommodations segment has been generating decent operating income, it seems to be much easier and take less time to unlock its hidden asset value. Indeed, I personally think that Oil States could be considered an opportunistic stock.

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