Monday, December 17, 2012

Is PPG Getting the Bargain from Azko Nobel?

Recently, the largest global independent paint and coating company, Azko Nobel(NASDAQOTH: AKZOY), announced it will sell its sluggish North American Decorative Paints segment, with 5,000 employees and 8 manufacturing facilities, to its US rival PPG Industries (NYSE: PPG) for around $1.05 billion. The is expected to be closed in the second quarter next year. Is it good for Azko Nobel or PPG Industries, or both? Let’s dig deeper.
For Azko Nobel
The Decorative Paints Americas, including the North American business, with several brands such as Glidden, Dulux, and Coral, has experienced consistent revenue growth from $1.86 billion in 2009 to more than $2.22 billion in 2011. Out of the total $2.22 billion revenue for the Americas region in 2011, North America took the majority ($1.5 billion). The products have been sold to homeowners, professional painters, and commercial contractors as end users via retail chains such as Wal-Mart, Home Depot, and Leroy Merlin. In 2011, Azko Nobel recorded $20.65 billion in revenue; thus, its North American Decorative Paints accounted for around 7% of the corporation’s total revenue.
The company’s CEO, Ton Buechner said:
“Over the past four years, the team has done a great job in turning the North American Decorative Paints business around. I am pleased that we have found a respected company to take over the business. This agreement is a good outcome for all stakeholders.”  
The deal would give Azko Nobel around $875 million in cash. As of September 2012, Akzo Nobel booked nearly $10 billion in stockholders' equity, whereas the total short and long-term debt was nearly $5.5 billion. So the net amount that the company received from its North American decorative coating would amount to 8.75% of the total equity.
PPG would have an edge, as it is already the large world’s provider of protective and decorative coatings. This purchase will make the company become the world leader in coatings maker. The second and the third position would belong to Akzo Nobel andSherwin-Williams (NYSE: SHW), respectively. PPG expected to to take advantage of a “prolonged construction market recovery.” With the acquisition, PPG would own 600 AkzoNobel paint stores and a combined network of around 1,000 stores dedicated to North American market. Charles Bunch, the chairman and CEO of PPG, said, “It also complements PPG's national home center strategy by extending our branded paint product offerings to more than 8,000 retail outlets, and finally, it enhances our already strong presence in the independent paint dealer channel.” Bunch estimated that the share buyback program would begin in early 2013, with around $500 million - $750 million.
In fiscal 2011, PPG got nearly $14.9 billion in the total revenue; the acquisition of North American agricultural coatings would add up by 10% of 2011 sales. This would put PPG in more in line in the market of agricultural coating with Sherwin-Williams, which just recently entered an agreement to purchase the Mexico leader in paint in coatings, Consorcio Comex, for around $2.34 billion.
Foolish Bottom Line
As Warren Buffett often says, “The price is what you pay, the value is what you get.” In 2011, Comex had total revenue of $1.4 billion, so the deal valued Consorcio Comex at nearly 1.7x P/S. However, PPG only paid 0.7x P/S. It seems that PPG is getting the bargain; however, the synergy needs to be taken into account as well.

Should We Be Bullish on This Retail Pharmacy's Dividend?

The largest pharmacy and healthcare provider of the country, CVS Pharmacy (NYSE:CVS) has been strongly confident about the growth of the business, with the significant increase in demand of specialty drugs under Obamacare, starting in 2014. Recently, CVS has reaffirmed its FY12 guidance and also raised its quarterly dividend by around 38%, to $0.225 per share, which would be paid on February 4 next year to shareholders on record of January 24. It sounds exciting, and before taking any actions based on the bullish news, we need to look deeper into the business fundamentals and the company's outlook. 
Strong 2013 ahead…
CVS has given to shareholders a strong guidance for 2013. The pharmacy retailer estimated to deliver adjusted diluted operating EPS of $3.84 to $3.98 per share, with a growth range of 13.25% to 17.25%. It also expected to generate $6.4 billion to $6.6 billion in operating cash flow, delivering $4.8 billion to $5.1 billion in 2013. More interestingly, the company assumed that it would complete the $4 billion in share buybacks in the next year. In addition, the dividend has been increased to $0.225 per share as mentioned above, raising the annual dividend to 90 cents per share. At the current trading price of $48.50 per share, the dividend yield would be more than 1.85%.
The CEO Larry Merlo believes in the strong growth of around 10,000 baby boomers being eligible for Medicare everyday. Dave Denton, the executive VP and CFO commented:
“In late 2010, we set a dividend payout ratio target of 25% to 30% by 2015, which implied a compounded dividend growth rate of approximately 25% per year from 2010.  Today's increase allows us to meet our 25% dividend payout ratio target two years early and marks our tenth consecutive year of dividend increases. We remain committed to using our free cash flow to enhance total returns for our shareholders through a combination of high-return investments, dividend increases and value-enhancing share repurchases."
Historical impressive operating performance
In the last 5 years, CVS has delivered a quite sustainable increase in both the top and bottom lines, and especially, the consistent growth in dividends. 
CVS Revenue TTM data by YCharts
The company’s revenue and EPS have experienced quite compatible growth, about 57.3% and 52.6%, respectively. Over the trailing twelve months, CVS recorded $2.94 earnings per share. What would impress income investors is the consistent growth in its dividends. In 2002, it paid out $0.20 in dividends per share, and it has increased to $0.50 per share in 2011. Income investors might rest assured that CVS maintained quite a conservative payout ratio, by only 19.3% in 2011.
Walgreen Might be a Better Pick?
During the last 5 years, its performance has been in between of its two competitors, including Walgreens (NYSE: WAG) and Express Scripts Holding Company(NASDAQ: ESRX).
CVS Total Return Price data by YCharts
Express Scripts is the best performer, with a 53.2% total gain, whereas Walgreens is the worst, with 10%. CVS stands in the middle, with more than 31%. The loss of Walgreen might be due to the fact that it has lost its customers to CVS during its dispute with Express Scripts on a prescription issue. With the similar trailing twelve month net margin, Walgreen and CVS are valued similarly in the stock market: CVS of 8.1x EV/EBITDA and Walgreen of 8.28x EV/EBITDA. Even with the nice increase in the dividends, the dividend yield of Walgreen is still far higher, with 2.7%, compared to 1.85% of CVS after the dividend increase. Among the three, Express Scripts is the most expensive, with 13.5x EV multiples, but it had the lowest margin and the lowest return on capital, of only 1.4% and 4.8%, respectively. 
My Foolish Take
CVS might make a nice run in 2013. Indeed, all three stocks would perform quite well in the long run with the established market leading positions in the US healthcare market. However, fundamentally, I am more inclined to Walgreen due to its higher return on invested capital, higher dividend yield, and similar valuation. 

What the World Searched for in 2012

Google Zeitgeist just recently released information telling us what the world searched for this year. It was represented in two categories: Trending and Most Searches. According to Google Zeitgeist, Trending is the searches with the highest traffic amount “over a sustained period in 2012 as compared to 2011,” whereas Most searches is the term withhighest volume of searches. With more than 84% of the global search market share, it would be interesting for investors to look into Google’s search data to somehow determine the relative attractiveness of the investments and find the potential opportunities.
The Cause of $65.6 billion Loss Ranks the Third
In 2012, Google statistics told us that the world has conducted 1.2 trillion searches in 146 languages. Globally, the top of the trending list is the tragic death of Whitney Houston, followed by the “dress classy, dance cheesy” Gangnam Style. The third trending search is Hurricane Sandy, which has damaged parts of the Caribbean, as well as the Mid-Atlantic and Northeastern US two months ago. The hurricane has cost roughly $65.6 billion, devastation that's behind only Katrina. American International Group (NYSE: AIG)estimated that the net exposure to Sandy unsurprisingly surged to around $1.3 billion after-tax. The loss is considered to be hug,e as it is two times higher than the $650 million loss that The Travelers Companies (NYSE: TRV) has to take. Following Artemis, AIG’s percentage losses were much higher than Travelers, as AIG owned around 3% of the market share in the region, whereas Travelers’ market share was 8.5% - 9%.
However, I think the Sandy loss is only temporary, and AIG is on the way to creating more value for its shareholders. In several years after receiving $182 billion from the US government, it has been restructured. Recently the Treasury agreed to sell more than 234 million shares at around $32.50 per share to totally exit its investments in AIG, with more than $22 billion in profit.  In addition, AIG sold its 80% stake in ILFC, the second largest aircraft-leasing business in the world, to Chinese investors for around $4.23 billion. The sale lets AIG focus on its core operations, a move that investors have praised. CEO Robert Benmonsche mentioned, “The aircraft leasing business is not core to our insurance operations. The transaction will have a positive impact on AIG’s liquidity and credit profile and will enable us to continue to focus on our core insurance businesses.”
Global Tablet Leader is Next on the List
After Hurricane Sandy, the fourth trending search is the IPad 3. Even though its owner,Apple (NASDAQ: AAPL), experienced a drop of global tablet market share in Q3 to50.4%, it is still the leader in the market, far higher than the market share of its nearest competitor, Samsung, at 18.4%. 

For the Smart Connected Device, Samsung is still taking the lead a the surprisingly huge jump in market share, from 14% in Q3 last year up to 21.8% this quarter; whereas Apple ranks second with only 15.1% of market share. 

Many investors might be worried about the iPad maker's future. Some analysts even gave the company a price target of $400 per share. At the current price of $539 per share, Apple is trading at only 8.8x forward earnings, 0.5x PEG, and paying a 1% dividend yield. With the market leading position, huge cash on hands, decent dividend yield, and low valuation, Apple would appeal as a low risk bet for investors.
Foolish Takeaway
And the search list goes on with Diablo 3, the role playing video game, Kate Middleton, the 2012 Olympics, etc. It is really interesting to know what the whole world has been concerned with during 2012. Investors need to dig deeper into each query, and we might find interesting insights with investment opportunities. Please let me know, as I would love to hear and discuss insights and ideas! 
Disclosure: Long AAPL

The Best Buy Is the Cheap Buy

Shareholders of Best Buy (NYSE: BBY) would cheer for a daily gain of as much as 20% in the stock price, due to the news that Richard Schulze, the company’s founder would take the company private for “at least $5 billion to $6 billion,” according to the Minneapolis Star Tribune. However, it was not clear whether the buyout included debt or not. Should the news make Best Buy a nice arbitrage for investors? Is the buyout price too cheap?
Stock Volatility on the Growing Number of Stores
The electronic retailer had been a great winner for its shareholder in the period of 2002 – 2006, when its share price increased significantly from $10 in 2002 up to $57.50 in 2006. In the global recession period, it also made a strong come back from $17.63 in November 2008 to $48.60 in April 2010. However, it has kept declining gradually due to the fast growing competition of online retail against the brick and mortar retail business. Best Buy has kept expanding its stores in the last 5 years, from 1,313 in fiscal 2008 to 4,308 in fiscal 2012 with more than 59.6 million square footage in total. The growth has been mainly contributed by the growth of International stores, from only 342 to 2,861 during this 5-year period.

International Stores
Total stores
Comp stores growth (%)
Along with the extreme growth in the international footprint, Best Buy experienced a fluctuation in comparable store sales growth, and it has been declining in the last 2 years.
Bad Move in Europe
However, in terms of cash flow, since fiscal 2004, Best Buy has managed to consistently generate positive but fluctuating operating cash flow and free cash flow over time. But the positive free cash flow figure in 2009 is quite misleading.
USD million
Operating Cash Flow
Free Cash Flow
Best Buy’s operating income has plunged from nearly $2.4 billion in fiscal 2011 to only more than $1 billion in fiscal 2012. It was due to a more than $1.2 billion goodwill impairment charge of Best Buy Europe that the company took during the year. However, the free cash flow in fiscal 2009 hasn’t included the acquisition of a 50% stake in Best Buy Europe for $2.2 billion, which helped to increase its total international store count significantly. 3 years later, the impairment charge wiped out more than 50% of the total purchase price.
Is Schulze Getting the Bargain?
Previously, in early August, Schulze already made the buyout offer to Best Buy for around $24 - $26 per share, valuing the total retailer at $8.8 billion. Currently, it was trading much cheaper. At $14.12 per share, the total market capitalization is $4.77 billion. Including $1.2 billion in debt, the total transaction value would be close to $6 billion, or $5.7 billion net of cash. However, Best Buy still had nearly $1.7 billion in goodwill and intangibles, which I think will be likely to get impaired again in the near future. Currently, the tangible book value of Best Buy is only $7.20 per share, half of its market price.
There has been an increasing diverse opinion about whether Best Buy could compete with Amazon (NASDAQ: AMZN). Some said that shoppers might browse and try products at Best Buy and then purchase at Amazon. David Einhorn, in the middle of this year, has commented that the store surveys showed that there was no price benefit for doing that. The sluggish performance domestically might be due to the fact that the retailer didn’t have the “must have” consumer electronic products, rather than its competitive position with other retailers including Wal-Mart (NYSE: WMT) and online retailer Amazon. Interestingly, the market is valuing Best Buy at only 2x EV/EBITDA, whereas Wal-Mart is valued at 7.8x EV/EBITDA. Amazon is the most expensive, with nearly 52x EV/EBITDA.
Foolish Bottom Line
Best Buy is quite cheap at the current price. The bad performance in Europe has cost Best Buy dearly, in terms of the acquisition price and the impairment charge, which reflect in the stock performance. Investors might consider Best Buy to be in an opportunistic position if they are willing to take on risk.

This Stock is a Buy Despite Insider Sales

Since November this year, the longtime CEO of Analog Devices (NASDAQ: ADI), Jerald Fishman, has sold company shares in the open market when the share price of this integrated circuits manufacturer reached its 52-week high. The 60,000 shares have been sold at around $40.64 -  $41.12 per share, with a total transaction value of nearly $2.5 million. During the same time, several other insiders have been exercising their options at $19 - $28 per share and simultaneously selling their shares in the open market. Should we follow those insiders and sell Analog Devices? Let’s find out.
Customer Base and Geographical Diversification
Analog Devices, incorporated in 1965, is the global leader in analog, mixed signal, and digital signal integrated circuits, which are used in many types of electronic equipment. The majority of Analog Devices’ revenue has come from two main product categories: Converters (44%) and Amplifiers/Radio Frequency (26%).  Converters are used to convert back and forth between analog signals and digital signals, and amplifiers are used for analog signal conditioning. The company’s products are sold to four main market categories: Industrial, Automotive, Consumer, and Communications. The Industrial segment accounted for the majority of Analog Device's revenue in fiscal 2012 (46%).
It is interesting to note two important points in the business operation: first is the diversification of the customer base. The company was reported to have thousands of customers worldwide, and no single customer accounted for more than 10% of total sales. The largest customer accounted for around 3% of the total fiscal 2012 revenue. Second is the diversification in geographical sales. The two main regions, the US and Europe, each took around 30% of the total revenue. Then came China, with 13%, Japan with 12%, and the rest of Asia with 9% of the total sales.
Fluctuating but Cash-cow Business
In the last 10 years, Analog Devices has experienced quite a fluctuating performance. Sales did not grow much. In 2003, its revenue was more than $2 billion, and in 2012, it grew to only $2.7 billion. However, its EPS was experiencing significant growth during the last 10-year period, from $0.78 in 2003 to $2.13 in 2012.  
ADI Revenue TTM data by YCharts
In addition, Analog Devices has been generating consistently positive but fluctuating free cash flow in the same period. In fiscal 2012, it generated $815 million in operating cash flow and $682 million in free cash flow. 
Analog Devices’ cash cow machine is backed by a strong, liquid balance sheet. As of October 2012, it booked $4.17 billion in total stockholders’ equity, $3.9 billion in cash and short-term investments, low goodwill and intangibles level, and only nearly $830 million in both long-term and short-term debts. 
Peers performance
In the last five years, semiconductor companies haven't performed so badly. Out of four companies, including Analog Devices, NXP Semiconductors (NASDAQ: NXPI),STMicroelectronics (NYSE: STM), and Texas Instruments (NASDAQ: TXN), only STMicroelectronics generated capital loss for its shareholders. 
ADI data by YCharts
Looking deeper into the operating metrics of all four semiconductor’s businesses, we can see that Analog Devices is the stock of choice among the four.

Net margin (%)
ROIC (%)
Div yield (%)
Both NXP and STMicroelectronics are generating losses; in addition, NXP is the most leveraged company and it doesn’t pay out any dividends. STMicroelectronics is payingthe highest dividend yields, but the business has been generating losses over the last 12 months, and it is currently valued the most expensive. Texas Instruments is currently profitable, but the net margin is just more than half of Analog Devices’ and its ROIC is also lower.
Foolish Bottom Line
Even though Analog Devices experienced the heavy sales from its CEO, the company's performance has justified the current high price. Analog Devices would be the income stock of choice for an investor's long-term diversified portfolios. 

This Insurer Is a Buy With its New CEO

Genworth Financial (NYSE: GNW) recently announced that they appointed Thomas J. McInerney to be the company’s new CEO and President, and he would be elected to be on the board of directors. Personally, I feel excited with this news, as Genworth Financial'a true profitability has been shadowed by the low consolidated earnings, which were restrained by its mortgaged insurance unit. Hopefully the new CEO will take some actions to unlock the potential value of this insurance holding company. 
Low operating income due to Mortgage Insurance Unit
Genworth, incorporated in 2003, is considered to be the financial security company with its investment, wealth management and insurance services to 15 million customers in 25 countries. Over the years, the majority of its revenue has come from the U.S. Life Insurance segment, of $6.13 billion in 2011. The second and third revenue sources were International Mortgage Insurance ($1.5 billion) and International Protection ($1 billion). U.S Mortgage Insurance only brought about $719 million in revenue in 2011, but it generated an operating loss of $477 million. Thus, in 2011, Genworth earned only $261 million in operating income, bringing the total net income to shareholders to $122 million. Its diluted EPS was only $0.25 per share.
Decent Balance Sheet
Genworth’s operation is backed by a decent balance sheet. As of September 2012, it had $17.6 billion in total stockholders’ equity, only $4.9 billion in long-term debt and $3.75 billion in cash. The majority of liabilities, as we expect in any insurance, are in future policy benefits and policyholder account balances. On the asset side of Genworth, the majority of its investment was in fixed maturity securities, of $62.2 billion, out of $74.9 billion in total investments. In the fixed income category, Genworth invested mainly in fixed income securities of US corporate, $26.3 billion and non-US corporate, $15.4 billion. 
2012 a Sour Year…
2012 has been not a good year for this insurer. Genworth had had a plan for many months to sell off 40% of its Australian mortgage insurance arm in an IPO to raise more cash, but the plan had been halted. In May, its previous CEO, Michael Fraizer, had misjudged that the US mortgage insurance segment would bounce back in mid-2011. However, the situation got worse and worse, and $375 million was provided to support the unit. It all reflected in the stock price, in the middle of March this year, the stock began to experience its free fall. To take advantage of the plunge, many famous hedge fund investors pour money in to buy the company’s shares including Seth Klarman, Ray Dalio, David Einhorn and Edward Lampert. 
Peers comparison
Compared to its peers including Metlife (NYSE: MET) and Prudential Financial (NYSE:PRU), year-to-date performance has been quite similar. Genworth gained only 0.9%, whereas MetLife and Prudential gained 3.65% and 2.3%, respectively.  

GNW data by YCharts
Genworth is the smallest company among the three, with only $3.4 billion in total market cap, whereas MetLife’s total market cap is $36.23 billion and Prudential’s is $24.32 billion. Even with the restrained consolidated earnings caused by the mortgage insurance unit, Genworth’s P/E is only 9.14x whereas MetLife’s is 13.45x and Prudential’s is 20.3x. The market is valuing Genworth at only 0.2x P/B. MetLife and Prudential are valued at three times higher, of 0.6x P/B.
Foolish Bottom Line
The new CEO, McInerney has a proven record in heading the insurance business, including ING Groep, Aetna Financial Services and ING America. He truly would unlock the potential value of Genworth. Indeed, I think Genworth looks cheap now even with the worst situation happening for its mortgage insurance unit.

Disclosure: Long GNW