Tuesday, March 12, 2013

Tweedy Browne's Top Stocks (Last Part)


Tweedy Browne, one of the most respected value investment funds in the world, was featured in the article “The Superinvestors of Graham-and-Doddsville,” written by Warren Buffett in 1984. As its investment philosophy derives from Benjamin Graham, value investors should follow Tweedy Browne’s moves closely.
In two previous articles, I have talked about its four biggest holdings: Johnson & Johnson,Cisco SystemsDevon Energy and ConocoPhillips. In this article, I will uncover two more stocks, each accounted for more than 5% of Tweedy Browne’s total portfolio. One is Baxter International (NYSE: BAX), a diversified healthcare company, and the other is Phillip Morris International (NYSE: PM), the fastest growing global tobacco maker.
Baxter’s Business Snapshot
Baxter International is the manufacturer of products for patients with immune disorders, infectious diseases, kidney diseases and trauma, with two main business segments: BioScience and Medical Products. The company sells its products in more than 100 countries through independent distributors and drug wholesalers. In 2012, the majority of Baxter’s revenue, more than $7.95 billion, or 56% of its total revenue, was generated from the Medical Products segment, while the BioScience segment generated nearly $6.24 billion in revenue. However, the BioScience segment contributed $2.3 billion in pre-tax income, much higher than the pre-tax income of $1.6 billion of the Medical Products segment.
A Cash Cow with Good Growth
I am quite impressed with Baxter's operating performance in the past five years. Since 2008, Baxter has consistently generated increasing revenue, profits and cash flow. The revenue increased from $12.35 billion in 2008 to $14.19 billion in 2012, while the EPS grew from $3.16 to $4.18 in the same period. Its dividend followed the same trend, rising from $0.91 per share to $1.57 per share. In addition, the company operates with a strong balance sheet. As of December 2012, it had $6.94 billion in total stockholders’ equity, $3.27 billion in cash, and only $350 million in short-term debt and capital leases. The biggest liability item was pensions and other benefits--nearly $2.43 billion. Since 2008, it has invested nearly $3.7 billion to buy back its stocks from the market. The treasury stock has reached $7.6 billion as of December 2012. 
Tweedy Browne owned more than 2.6 million shares in the company, with a total value of $173.6 million, representing 5.1% of its total portfolio at the end of 2012. The company is trading at $67.60 per share, with the total market cap of $37.15 billion. Baxter is valued at nearly 10 times EV/EBITDA.
The Biggest Fast Growth Global Tobacco Company
Philip Morris International is the sixth largest holding in Tweedy Browne’s portfolio. It owned more than 2 million shares in the company, with a total value of more than $170 million. Philip Morris accounted for 5% of the fund’s portfolio. Philip Morris, spun off from Altria Group, is the largest global cigarettes and other tobacco products manufacturer in the US, and operates in more than 180 markets outside the US. Philip Morris is well known for its Malboro brand, the world’s best selling international cigarette, which accounted for around 33% of its total shipment volume in 2012. The majority of its revenue, 36.7%, was generated from Asia. Europe ranked second, accounting for 29.6% of the total revenue. Indeed, Philip Morris is expected to keep growing in the future, as it derives the majority of its revenue from emerging markets, where tobacco regulations haven’t been so strict yet. Altria, its ex-parent, doesn’t have such a wide moat as Philip Morris as it is operating solely in the struggling US tobacco industry, with strict regulatory control.
Philip Morris really is a cash cow, generating consistently increasing free cash flow. Since 2003, its free cash flow increased from $4 billion in 2003 to nearly $8.4 billion in 2012. At first glance, investors might be scared of the company’s negative equity and huge debt. As of December 2012, it had -$3.5 billion in total stockholders’ equity, $3 billion in cash, and nearly $22.85 billion in short and long-term debt. The reason for negative equity is that Philip Morris financed its significant share buybacks with debt. Since 2008, the treasury stock skyrocketed from $2.28 billion to nearly $26.3 billion.
With the current trading price of $91.75 per share, Philip Morris’ total market cap is nearly $153.3 billion. The market is valuing the company at 11.5 times EV/EBITDA. Altria is a much smaller company, with $67.2 billion in total market cap. With a current trading price of $33.55 per share, Altria is valued at 10.53 times EV/EBITDA.
Foolish Bottom Line
Between the two tobacco companies, I strongly prefer Philip Morris due to its dominating global market position, potential huge growth and reasonable valuation. Indeed, investors might invest in Baxter and Philip Morris and hold them for a long run. As Baxter and Philip Morris are paying dividend yields of 2.3% and 3.5%, respectively, those two stocks fit well in investors’ income portfolios. 

Tweedy Browne's Top Stocks (Part II)


In my previous article, I wrote about Tweedy Browne’s two largest positions: Johnson & Johnson and Cisco Systems. Those two stocks seem to be qualified for investors to hold for the long run. In this article, I will cover two oil/gas stocks that Tweedy Browne is bullish about. One is Devon Energy Corp (NYSE: DVN) and the other is ConocoPhillips (NYSE: COP). Those two stocks combined accounted for 10.8% of its portfolio. Let’s look closely to see whether or not we should buy those two stocks for our own portfolios.
Devon- The Cheapest and The Most Profitable
Devon Energy is one of the leading energy company in the US with the operations in different North America onshore areas in the US and Canada. The majority of its revenue, $7.15 billion, or 75.3% of the total revenue, was generated from the sale of oil, gas and natural gas liquids (NGL). The second biggest revenue source was the marketing and midstream segment, with nearly $1.66 billion in revenue in 2012. Devon Energy generated a loss of $206 million in 2012 as it incurred more than $2 billion in asset impairments. In December 2012, Devon had estimated proved reserves of around 3 billion BOE.
Devon didn’t employ huge amounts of debt in its operation. As of December 2012, it had $21.3 billion in total stockholders’ equity, $7 billion in cash and short-term investments, and nearly $11.65 billion in both long and short-term debt. The company generated around $5.2 billion in EBITDA, thus the Debt/EBITDA ratio stayed at around 2.24x. At the current trading price of $54.15 per share, Devon’s total market capitalization is nearly $22 billion. The market is valuing Devon at around 5.13 times EV/EBITDA. The company is paying investors a dividend yield of 1.5%. 
Compared to its peers Encana Corporation (NYSE: ECA) and EOG Resources (NYSE:EOG), Devon has the cheapest valuation. Encana, with a trading price of $18.23 per share, is worth $13.42 billion on the market. The market is valuing Encana at 7.86 times EV/EBITDA. Among the three, EOG is the largest company with nearly $34.5 billion in total market cap. At the current price of $126.90 per share, the market is valuing EOG at 8.96 times EV/EBITDA. What makes me interested is that although Devon is valued the cheapest, it also the most profitable company among the three. It enjoyed 26% operating margin, while the operating margins of Encana and EOG were only 5% and 12%, respectively.
As of December 2012, Tweedy Brown owned nearly 3.74 million shares, with the total value of about $194.5 million, representing 5.7% of its total portfolio. Devon was the third largest position in Tweedy Brown’s portfolio.
The Largest Independent Oil & Gas Company
The fourth largest position was ConocoPhillips. It had nearly 3 million shares in the company, with a total market value of more than $173.2 million, accounting for 5.1% of its total portfolio. ConocoPhillips is considered the largest global independent exploration and production company, with worldwide operations. As of December 2012, it had 8.6 billion BOE in proved reserves. ConocoPhillips also had a quite conservative balance sheet as well. It had nearly $48 billion in total stockholders’ equity, more than $27 billion in cash and investments, and nearly $21 billion in debt. With the current trading price of $58.20 per share, ConocoPhillips is worth more than $71 billion on the market. It is valued quite cheaply, at only 4.24 times EV/EBITDA. ConocoPhillips is paying to investors a decent dividend yield of 4.6%.
Foolish Bottom Line
Indeed, both Devon and ConocoPhillips are worth holding for the long run as they are quite profitable, valued quite cheaply on the market, and employed reasonable amount of leverage. In addition, both of them might fit well with the portfolios of income investors, as both are paying sustainable and increasing dividends over time. 

Tweedy Browne's Top Stocks (Part I)


Tweedy Browne is one of the successful investment partnerships that was featured in Warren Buffett’s Graham-Doddsville Superinvestors article. As of December 2012, the fund concentrated a lot of its money in its top six holdings, including Johnson & Johnson (NYSE:JNJ)Cisco Systems (NASDAQ: CSCO)Devon EnergyConocoPhillipsBaxter International and Philip Morris International. In this article, we will dig deeper into both Johnson & Johnson and Cisco Systems to see whether or not investors should follow Tweedy Browne into these stocks.
A Global Leading Healthcare Company
Johnson & Johnson is one of the biggest global companies involved in the research, development, manufacture, and sale of health care products. It has around 275 operating companies in 60 countries, with three main business segments: Consumer, Pharmaceutical and Medical Devices. The majority of its revenue, $27.4 billion, or 40.7% of the total sales, was generated from the Medical Devices segment. The Pharmaceutical segment ranked second with $25.35 billion in sales, while the Consumer segment generated nearly $14.45 billion in revenue in 2012. 
Segments
Pre-tax Operating Margin
Consumer
11.76%
Pharmaceutical
23.70%
Medical Devices
26.20%
Among the three, the Medical Devices segment is the most profitable with 26.2% pre-tax operating margin, while the least profitable segment was Consumer, with only 11.76% operating margin.
Johnson & Johnson has quite a sustainable operating performance record. In the past 10 years, while the revenue has increased from $41.86 billion in 2003 to $67.2 billion in 2012, the EPS rose from $2.40 per share to $3.86 per share in the same period. The dividend is also on the rise, from $0.93 per share to $2.40 per share. Interestingly, the company has a quite conservative balance sheet. As of September 2012, it booked $64.28 billion in total stockholders’ equity, more than $21 billion in cash, and only $16 billion in both short and long term debt.
As of December 2012, Tweedy Browne owned more than 4.36 million shares in the company, with a total value of $306 million, accounting for 8.9% of its total portfolio. With the current trading price of $76.32 per share, Johnson & Johnson is worth more than $213 billion on the market. It is valued at nearly 9.9 times EV/EBITDA.
A Global Leader in Networking and IT Industry
The second largest position in Tweedy Browne’s portfolio was Cisco. The company is the designer and manufacturer of Internet Protocol based networking and other communications and information technology products. Cisco has a diverse customer base, as no single customer represented about 10% or more of its net sales. The majority of its revenue, $14.5 billion, or 40% of total sales, was generated from the sales of switching product category. NGN Routing product category ranked second, with $8.43 billion in total sales in 2012. According to IDC, Cisco was the global leader in the Ethernet Switch market, with more than 62% market share. Hewlett-Packard (NYSE: HPQ) ranked second, with only 9.3% of the total market. 
Source: IDC 
As of December 2012, Tweedy Browne held more than 10 million shares of Cisco, with a total value of nearly $200 million, accounting for 5.8% of its total portfolio. With a trading price of $20.90 per share, Cisco is worth nearly $111.4 billion on the market. The market is valuing Cisco at only 6 times EV/EBITDA. HP is trading at nearly $19.80 per share, with a total market cap of $38.6 billion. HP is valued at nearly 3.8 times EV/EBITDA. In late 2012, HP was hit quite hard, as it had to write down one of its biggest acquisitions, Autonomy, with around $8.8 billion in charges. After the write-down, HP remained quite a risky stock for investors, as it still had around $35.5 billion in goodwill and intangible assets that was quite vulnerable to future impairment.
Foolish Bottom Line
With the consistent operating performance, leading market positions and reasonable valuations, I personally think both Johnson & Johnson and Cisco are excellent stocks to hold for long-term investors.

Looking Closer at This Helicopter Operator Spin-off


Charlie Munger has advised that in order to succeed in investing, one of the things that investors should do is to carefully study spin-offs. Indeed, spin-off situations could offer investors a lot of compelling investment opportunities. Recently, Seacor Holdings (NYSE:CKH) spun off its helicopter operating business, Era Group (NYSE: ERA). Since then, Seacor has dropped from $87 to only $70.10 per share, while Era has been staying in the range of $20 - $23 per share. Let’s dig deeper to see what investors should be bullish on in this spin-off situation. 
Seacor Snapshot
Seacor is a global leading equipment and services provider to offshore oil/gas and marine transportation industries with several business segments: Offshore Marine Services, Aviation Services, Shipping Services, Inland River Services, and Alcohol Manufacturing. Seacor has been trying to restructure its business. In December, it sold its energy trading business to Par Petroleum Company for around $14 million. One month later, it spun off Era, the Aviation Services segment.
The majority of Seacor's revenue, $520 million, or nearly 33% of its total revenue, was generated from the Offshore Marine Services segment. The Aviation Services ranked second with $273 million in revenue, while the Inland River Services contributed around $226 million in revenue in 2012. In its operation, Seacor employed a quite reasonable leverage level. As of December 2012, it had $1.74 billion in total stockholders’ equity, nearly $960 million in short and long-term debt and nearly $310 million in cash and marketable securities. What makes me interested in Seacor is that the company has kept buying back its shares over time. Since 2007, the treasury stock has more than doubled, from $487 million to more than $1 billion.  
Era Snapshot
Era is considered one of the biggest global helicopter operators and helicopter services for major integrated oil/gas companies including Shell, Petrobras, Anadarko and the US government. Era has combined helicopter operating business model and contract-leasing business model. The contract-leasing business model, accounting for 20% of the total revenue in the first nine months of 2012, allows Era to reach penetrate new geographic markets while generating increasing cash flow.
In 2011 pro forma financial statement, Era generated $258 million in revenue and nearly $12.8 million in profits. Era seemed to have quite reasonable leverage. As of September 2012, it had $415.9 million in total stockholders’ equity, $10.85 million in cash, and $278 million in long-term debt. Interestingly, it had nearly $200 million in deferred income taxes, which were effectively considered the interest-free loan from the government.
Peer Comparison
Era is trading at $20.32 per share, with a total market cap of nearly $500 million. The market is valuing Era at 10.78 times EV/EBITDA. Compared to its peers PHI (NASDAQ: PHII) andBristow Group (NYSE: BRS), Era seems to have a bit more expensive valuation than the other two. Bristow is the largest company among the three, with $2.1 billion in total market cap. At the trading price of $58.30 per share, Bristow is valued at 10.16 times EV/EBITDA. PHI, with the total market cap of $470 million, has the cheapest valuation at 8.26 times EV/EBITDA. Among the three, Bristow seems to be the most profitable company, with the highest operating margin at 15.42%, while the operating margins of PHI and Era were 9.7% and 9.92%, respectively. Whereas both PHI and Era don't pay any dividends to shareholders, Bristow pays to its shareholders 1.4% dividend yield.
Foolish Bottom Line
Looking forward, Seacor seems to be more focused after divesting its energy trading business and spinning off Era. As both are involved in the capital-intensive businesses, I do not consider either Seacor or Era to be good long-term investments. Among those stocks mentioned above, Bristow seems to be the best pick at the moment as it had the highest operating margin and a reasonable valuation.

Should We Follow The Recent CEO Purchase of ExamWorks?


Recently, James Price, the CEO of ExamWorks (NYSE: EXAM) bought 14,500 shares of the company on the first day of March at an average price of nearly $14 per share, with a total transaction value of more than $200,000. For more than a year, ExamWorks has experienced a significant rise in its share price, from $6.50 to $15.25. Should investors follow James Price into ExamWorks at its current price?
Business snapshot
ExamWorks is considered a leading independent medical examination (IME) provider with four main geographical business segments: United States, Canada, United Kingdom, and Australia. The majority of its 2012 revenue, $340.2 million, or 65.3% of the total revenue, was generated in the U.S while the UK ranked second with $131.3 million in revenue. Its primary service is to help clients know the nature and permanency of medical conditions or personal injury, their causes, and the suitable treatment needed. ExamWorks reported that there were five types of clients that frequently need IME services including insurance companies, law firms, third-party claim administrators, government agencies, and state funds. No single customer has accounted for more than 10% of its total revenue for the past three years.
Generating losses and weak balance sheet
Over the past three years, ExamWorks has increased its top line significantly, from $164 million in 2010 to $521 million in 2012. However, the company has consistently generated losses during the same period. Since 2010, ExamWorks’ net losses have fluctuated in the range of -$6 million to -$15 million. The losses were due to high interest expenses and other expenses that the company had to pay in the past three years. Indeed, ExamWorks employed significant debt in its operations. As of December 2012, it had $244 million in total stockholders’ equity, $9 million in cash, and $379 million in long-term debt. What worries me more is that the company used debt and equity to finance two biggest items on the balance sheet: the goodwill of $370 million and intangible assets of $153 million. Thus, the company’s tangible book value was negative, at nearly -$300 million.
But has the most expensive valuation
At a current trading price of $15.25 per share, ExamWorks is worth $523.7 million on the market. In 2012, it generated around $63.68 million in EBITDA. Thus, the market is valuing the company at 13.63 times EV/EBITDA, a quite expensive valuation. Compared to its peers including CorVel Corporation (NASDAQ: CRVL) and Coventry Health Care (NYSE: CVH), ExamWorks seems to be the most expensive company among the three. CorVel is trading at $48.48 per share, with a total market cap of $524.7 million. The company is valued at nearly 9 times EV/EBITDA on the market. Coventry Health Care, at the current trading price of $45.70 per share, has a $6.1 billion market cap. It has a cheapest EV multiple valuation of 6.72 times EV/EBITDA. Among the three, ExamWorks is the least profitable company. In 2012, it generated only 1% operating margin while the operating margins of CorVel and Coventry were significantly higher, at 10% and 5%, respectively. ExamWorks also employs a much higher debt level than CorVel and Coventry. While CorVel doesn’t have any debt and Coventry had its debt/equity ratio at only 0.3x, the debt/equity ratio of ExamWorks is as high as 1.6x.
Foolish Bottom Line
I personally do not think ExamWorks offers investor compelling investment opportunity. In contrast, it is quite risky. With a negative tangible book value, huge goodwill and intangible assets and a high EV multiple valuation, this company doesn’t have any downside protection for value investors.

A Best Hospital for Investors


When looking for a business that has generated consistently high returns on capital, decent operating margins but was cheaply valued by the market, I came across an ambulatory surgery center (ASC) operator, AmSurg Corporation (NASDAQ: AMSG). AmSurg rose from $19 per share in August 2011 to $32.10 per share in Feb 2013. However, as the company missed analysts’ earnings estimates in the fourth quarter of 2 cents, the share price has dropped to $29.40. Should investors consider this drop as a buying opportunity? Let’s find out.
Business snapshot
AmSurg, formed in 1992, is considered the biggest owner and operator of 240 ASCs in the U.S., with partnership with more than 2,000 physicians. The company believed that ambulatory surgery offered significant advantages than hospital-based surgery as it was less expensive, more flexible, and it has faster turnaround time. The majority of its revenue, 55% of the total revenue, was generated at its gastroenterology centers while 32% of the revenue was from multi-specialty centers. Ophthalmology centers contributed 13% of the total 2012 revenue. In terms of payment, in 2012, around 73% of its revenue was derived from commercial and private payors while the government health care program Medicare contributed 27% of the total revenue.
An impressive 10-year operating performance
In the past ten years, AmSurg has demonstrated an impressive operating performance with significant growth. While the revenue increased from $300 million in 2003 to $929 million in 2012, EPS rose from $0.98 to $1.98 in the same period. Notably, the free cash flow has experienced nearly a tenfold increase within a decade, from $27 million to $267 million. What impresses me is the consistent huge return on capital that the company has generated over the past 10 years. According to Joel Greenblatt, the return on capital was calculated by dividing earnings before interest and taxes (EBIT) by the invested capital, whereas invested capital was the sum of net fixed assets and working capital. Since 2003, AmSurg’s return on capital has been fluctuating in the range of 108% to 134%. The company’s operating margin was also quite high, having been consistently above 30% over a decade.
Most efficiently-run and valued the cheapest
At the current trading price of $29.40 per share, AmSurg is worth nearly $940 million on the market. The market is valuing the company at nearly 5.5 times EV/EBIT. Compared to its peers including HCA (NYSE: HCA) and Community Health Systems (NYSE: CYH), AmSurg is the smallest but the most efficient company. HCA is the biggest company with a $17 billion market cap while Community Health Systems, at a current trading price of $42.10 per share, is worth $3.78 billion on the market.
 
AMSG
HCA
CYH
Operating margin (%)
30.4
14.7
9.3
Return on Capital (%)
115
31.3
14.9
EV/EBIT
5.5
9.65
11.5
D/E
0.9
Neg Equity
3.5
Dividend yield (%)
N/A
N/A
N/A
As we can see, AmSurg is the most profitable companies with the highest return on capital and the highest operating margin. Its operating margin was 30.4% in 2012, three times more than the operating margin of Community Health Systems and two times more than that of HCA. While the returns on capital of HCA and Community Health Systems were only 31.3% and 14.9%, respectively, AmSurg’s return on capital was as high as 115%. Interestingly, AmSurg generated higher profits and return without leveraging a lot. Its D/E ratio was only 0.9x while D/E of Community Health Systems was 3.5x. Among the three, HCA has the worst balance sheet, with $27.5 billion in long-term debt and negative equity of -$9.7 billion.
Valuation-wise, AmSurg is valued the cheapest with only 5.5 times EV/EBIT. Community Health Systems has the most expensive valuation at 11.5 times EV/EBIT, while HCA is valued around 9.65 times EV/EBIT on the market.
Foolish Bottom Line
With a consistently high return on capital, high operating margin, the lowest leverage level and the cheapest valuation, AmSurg could be considered a value stock for long-term investors.

Is the Buyout Offer for K-Swiss Fair?


Mario Gabelli, a famous investment manager, initiated a long position in K-Swiss (NASDAQ:KSWS) on Feb. 25, after the company received a buyout offer from E.Land World for $4.75 per share in cash, or $170 million. His move might indicate that he thought a $4.75 per share offer is not enough for K-Swiss.
Previously, he did the same thing about Caribou Coffee when the company was offered $16 per share in cash by Joh. A. Benckiser, as he thought Caribou Coffee was “statistically undervalued even at $16.” Let’s look closely into K-Swiss to determine whether or not the offer reflects the true value of K-Swiss.
Business snapshot
K-Swiss is the designer and marketer of different kinds of footwear, apparel and accessories under K-Swiss, its main brand. Since 2008, it has also had Palladium, another footwear brand for adventurers for all terrains. The majority of its revenue, $171 million, or 76.8% of the total revenue, was generated by the K-Swiss brand, while the Palladium brand contributed nearly $51.8 million in revenue in 2012. In terms of the sales channel, both brands sell their main products via wholesalers and distributors, accounting for 72% and 16%, respectively, for the K-Swiss brand and 78% and 16%, respectively, for the Palladium brand. 
High SG&A and increasing cash conversion cycle
For the last five years, K-Swiss has consistently generated losses with declining revenue. Revenue has decreased from $340 million to only $223 million while the net loss has fluctuated in the range of $13 million to $64 million. The main reason for these losses are the huge selling, general and administrative expenses (SG&A) of the company. In 2012,SG&A accounted for as much as 48.4% of the total sales.
Thus, K-Swiss' poor performance resulted from business mismanagement. The deteriorating performance could be easily detected by taking a closer look in the company’s cash conversion cycle (CCC). In 2005, it only took nearly 92 days to collect the cash. However, in 2008 and 2009, the cash conversion cycle shot up to nearly 119 and 145 days, and it kept going up to nearly 199 days in 2012.
Compared to its much larger peers, including Adidas (NASDAQOTH: ADDYY) and Nike(NYSE: NKE), investors might be shocked with K-Swiss' high cash conversion cycle.
CCC (days)
2008
2009
2010
2011
2012
Adidas
103.37
88.5
68.41
72.76
102.79
Nike
91.62
96.79
90.84
83.3
88.74
K Swiss
118.81
149.66
160.1
162.49
198.62
Nike seems to be the best in terms of converting its sales into cash as it has the lowest CCC. In 2012, its CCC was only 89 days while the CCC of K-Swiss was the highest at 199 days.
Seems like a good deal for E.Land World
Nevertheless, what is good about the company is its strong balance sheet. As of December 2012, it had $132 million in total stockholders’ equity, $43 million in cash and only $1 million in short-term debt. With a recent offer of $170 million, K-Swiss is valued at 0.76 times sales and nearly 1.3 times book value. As K-Swiss generated negative EBITDA, the EBITDA multiple is not valid.
Nike, with its current trading price of around $55 per share, is worth nearly $49.1 billion on the market. The company is valued at 1.94 times sales and as high as 4.87 times book value. The EBITDA multiple is 13.4. Adidas is trading at around $47 per share, with a total market cap of nearly $19.2 billion. The market is valuing Adidas at a cheaper valuation than Nike at 1 times sales and 2.5 times book value. The EBITDA multiple is also lower at 10.2.
Foolish bottom line
I personally think E.Land World is buying K-Swiss to restructure it by slashing its significant SG&A expenses. For E.Land World, K-Swiss seems to be a good deal as it has a high probability of success to turn K-Swiss around. However, for individual investors, K-Swiss has not been a good stock to accumulate since 2008. 

Why are Google, Baidu and Apple Good Buys?


It is quite interesting to see investors  project the future stock prices based solely on past prices. Of course, we might have some reasons to support target price that we already set for the stock in their minds. When Apple (NASDAQ: AAPL) reached $700 per share, many people projected that it would reach $1,000 soon. When Apple dropped to $500 per share, investors thought it might drop much further to $300. Similarly, now that Google (NASDAQ:GOOG) trades for $800 per share, many are speculating that it could easily reach $1,000.
Google and Baidu
Google is still considered the most dominant search engine in the world. According tocomScore, Google increased its search market share from 66.7% in December 2012 to 67% in January 2013. The second leading search entity was Microsoft, with a 16.5% market share. However, Google is not a leading search player in the world’s biggest market: China. Instead, the market leading search engine in China is Baidu.com (NASDAQ: BIDU). In the fourth quarter of 2012, Baidu’s market share in China was 78.3%, while the market share of Google stayed at only 16.7%. In the past six years, Baidu has experienced significant growth in both its top line and bottom line. Its revenue has grown from $280 million in 2007 to $3.58 billion in 2012. Its net income has also followed the rising trend, from $100 million to $1.67 billion in the same period.
With the Similar Valuation, but Baidu is More Profitable
At the current price of $89.73 per share, Baidu is worth nearly $31.4 billion on the market. The company is valued at nearly 13.9x EV/EBITDA. Google, on the other hand, is a much larger company with a $260.5 billion market cap. At the current trading price of $790.13 per share, Google is valued a bit cheaper, at 13.5x EV/EBITDA. Interestingly, Baidu seems to have a much more profitable operation than Google. Over the past 12 months, Baidu generated more than 49.5% operating margin, while the operating margin of Google was only 27%. Baidu’s return on invested capital was more than 47%, whereas the ROIC of Google was only 15.3%. 
Google – The More Innovative Company
However, Baidu has its advantages over Google in the Chinese market mainly due to Chinese regulations. Google is definitely a much more innovative company with a wider moat. Charlie Munger talked about Google’s moat a few years ago: “Google has a huge new moat.  In fact I’ve probably never seen such a wide moat. I don’t know how to take it away from them. Their moat is filled with sharks.”  In addition, Google employed little debt in its operation. As of December 2012, it had $71.5 billion in total stockholders’ equity, $6.2 billion in short and long-term debt, and more than $48 billion in cash. Its cash on hand accounted for more than 18.4% of Google’s total market cap. Meanwhile, $5.21 billion in cash and short-term investments represented only 16.6% of Baidu’s total market cap.
Apple Hidden Value Might be Unlocked Soon
Apple is also a technology giant that is famous for its huge cash hoard. With a total market cap of $421.6 billion, $137 billion cash on hand represented as high as 32.5% of Apple’s total market cap. Recently, David Einhorn has proposed a creative preferred stock distribution idea to effectively use Apple’s large amount of cash. He thought that Apple could issue around $500 billion in face value of preferred stock, paying 4% at no cost to existing shareholders. Just by doing that, Apple could unlock its potential value in its huge cash balance. As a result, Apple would be worth around $847 per share, an upside potential of more than 88.6%. Among the three, Apple seems to be the cheapest. At the current trading price of $449 per share, Apple is valued at only 6.34x EV/EBITDA.
My Foolish Take
Google, Apple and Baidu all seem to be good buys at their current prices with their own investment theses. Google is the most innovative company with great management and its global leading search engine. Baidu is a dominant search company in China, the world’s biggest market. Apple, with the lowest EV multiple and a huge cash balance, could be considered a value pick for now.  
Disclosure: Long Apple

Chesapeake Energy is an Opportunistic Buy


Chesapeake Energy Corporation (NYSE: CHK) has recently reported that it would sell its 50% interest in an oil and natural gas field Mississippi Lime to China’s Sinopec for more than $1 billion. Right after the announcement, Chesapeake dropped by nearly 7% to $19.10 per share. Will the sale benefit Chesapeake? Is Chesapeake an investment opportunity when its shares have recently tanked?
A Second Largest Natural Gas Company in the US
Chesapeake is considered to be the second largest natural gas producer in the US, only behind ExxonMobil (NYSE: XOM). The company had around 19.6 trillion cubic feel equivalent of proved reserves in 15 million net acres of leasehold in total, while ExxonMobil had nearly 26.7 trillion cubic feet equivalent. Previously, Chesapeake announced that it would sell its non-core assets to focus on profitable “core of the core” drilling area. Last year, the company sold up to $12 billion of non-core assets, and it targeted another $5 -$7 billion more this year. In the past 5 years, it has shifted its investment significantly to liquid plays for much higher returns. In 2008, only 13% of its total capital was invested in liquids, while 87% was invested in dry gas. In 2012, the situation was reversed--84% of the total capital was invested in liquids, whereas only 16% went to dry gas. 


Source: Chesapeake’s presentation
The revenue from liquids has grown dramatically, accounting for 59% of the company’s total realized revenue in 2012, whereas total liquids production represented 21% of the total production. 
Chesapeake seems to be reasonable in its operation. As of December 2012, it had nearly $17.9 billion in its total stockholders’ equity, $287 million in cash, and nearly $12.6 billion in short and long-term debt. The average maturity is around 5.3 years. The majority of its debt would be due in 2017, with the principal of nearly $4.3 billion. The debt amount due this year is only $464 million.
Sinopec’s Deal
Sinopec will buy a 50% stake in Chesapeake’s 850,000 net acres of Mississippi Lime for more than $1 billion. Mississippi Lime was reported to have around 850 billion cubic feet equivalent of proved reserves and had an average production of 34,000 barrels a day of oil and gas in the fourth quarter. Steven Dixon, Chesapeake's COO, commented: “We are excited to announce the execution of our Mississippi Lime joint venture with Sinopec, which moves us further along in achieving our asset sales goals and secures an excellent partner to share the capital costs required to actively develop this very large, liquids-rich resource play.”  As China has a huge shale oil/gas reserves, Laban Yu, a Jefferies analyst in Hong Kong, thought that Sinopec cared more about drilling and shale-fracking technology.
Peer Comparison
Chesapeake is trading at around $19.10 per share, with a total market cap of $12.70 billion. The market is valuing the company at nearly 5.6x EV/EBITDA. Another Chesapeake peer,Anadarko Petroleum (NYSE: APC), is a much bigger company with $39.3 billion in total market cap. At $78.60 per share, Anadarko is trading a bit more expensively at 6.7x EV/EBITDA. Anadarko had around 2.5 billion BOE in total proved reserves, including 8.4 trillion cubic feet natural gas. Recently, Global Hunter Securities has increased its target price for Anadarko from $107 per share to $110 per share, a 40% premium on its current trading price. ExxonMobil is the largest company among the three, with nearly $395 billion in total market cap. At $87.70 per share, ExxonMobil is valued the cheapest, at 4.17x EV/EBITDA. It is also paying the highest dividend yield to shareholders, at 2.6%, while the dividend yields of Chesapeake and Anadarko are 1.7% and 0.4%, respectively.
My Foolish Take
Chesapeake, with its huge proved reserves in natural gas, could be considered an opportunistic play on its natural gas asset. The come back of natural gas prices could potentially drive the company’s share price much higher in the near future. 
Disclosure: Long Chesapeake Energy

The Best Homebuilding Stock for Investors


Recently, Fool contributor Rick Aristotle Munarriz wrote an article about 4 stocks that might reach $1,000 before Google. In that article, he mentioned one homebuilder in the U.S., NVR(NYSE: NVR). Since August 2011, NVR has advanced significantly, from about $600 to more than $1,000 per share. Rick said that NVR seemed to be better than most of its peers as the company had remained profitable during the residential real estate crisis.
Let’s look closely to determine whether or not NVR is a good investment opportunity for investors now.
Business snapshot
NVR, founded in 1980, operates in the business of construction and sale of single-family detached homes, townhomes and condominium buildings. The company also has a mortgage banking and title services business to better serve its customers. NVR has not been involved in land development. Instead, NVR has acquired finished building lots at market prices from a variety of development entities under fixed price purchase agreements.
The company reported that this lot acquisition strategy avoids the risk of direct land ownership and land development. The business is divided into four main geographical segments: Mid-Atlantic, Northeast, Mideast and Southeast. The majority of its revenue, $1.88 billion, or nearly 60% of the total revenue, was generated from the Mid-Atlantic segment. The Mideast segment ranked second, with $630.4 million in revenue in 2012.
Homebuilders in general, and NVR in particular, would benefit from the improving real estate market in the U.S. In January, the National Association of Home Builders (NAHB) reported that the Improving Markets Index (IMI) is on the rise, growing from 12 markets in September 2011 to 259 metropolitan areas in February 2013. Interestingly, February was the sixth consecutive month of IMI's growth. According to NAHB, the index measures three sets of data including employment growth, house price growth and single-family housing growth to identify top improving housing markets in the U.S.
An impressive 10-year performance
The 10-year operating performance record of NVR is quite fantastic. In the worst period of the U.S. real estate market and economy during this period, NVR still reported profits. Net income dropped from nearly $700 million in 2005 to $100 million in 2008. However, the situation has improved as the net profit increased to $181 million in 2012. 2012 EPS came in at $35.12 per share and free cash flow was $252 million.
NVR could consistently generate profits without using a lot of leverage. As of December 2012, it had $1.48 billion in total stockholders’ equity, $1.34 billion in cash and $606 million in long-term debt. As the company has kept buying back its shares in the stock market for the past five years, the accumulated treasury stock has increased significantly, from nearly $3 billion in 2008 to $4 billion in 2012.
The most profitable but cheapest valued
With the current trading price of $1,000 per share, NVR is worth nearly $5 billion on the stock market. The market is valuing NVR at nearly a 15.2 EV/EBITDA ratio. The absolute EV multiple seems quite high, but compared to its peers including D.R. Horton (NYSE: DHI) andPulteGroup (NYSE: PHM), NVR’s valuation doesn’t seem to be high anymore. D.R. Horton is trading at $22.25 per share, with a total market cap of $7.15 billion. The market values D.R. Horton at nearly 25 times EV/EBITDA.
PulteGroup is the biggest company among the three, with a $7.36 billion market cap. It also has the highest valuation at nearly 30.7 times EV/EBITDA. Even with the lowest valuation, NVR seems to be more profitable than D.R. Horton and PulteGroup. NVR’s operating margin is the highest at 9% while the operating margins of D.R. Horton and PulteGroup were only 7% and 5%, respectively. PulteGroup is the most leveraged company with a debt-equity ratio of 1.1 while D.R. Horton employs no debt. NVR’s debt-equity ratio is a moderate 0.4.
Foolish takeaway
Personally, I am quite impressed with NVR as it remained profitable during the residential real estate crisis several years ago. With the lowest valuation, highest operating margin and moderate leverage among peers, NVR could be the best homebuilder for long-term investors to “surf” the U.S. real estate market recovery. 

This Leading Global Insurer is a Long Term Buy


One of the biggest insurance companies on the market, AIG (NYSE: AIG), has recently reported a loss of nearly $4 billion in its fourth quarter earnings results, due to Hurricane Sandy and the sale of its airplane leasing business unit. In February, AIG has fallen from $39.45 to $37 per share. However, in the past 12 months, its share price has advanced by more than 29%. Is AIG a long term buy after its fourth quarter earnings results?
A Fourth Quarter Losses but Improving Business Fundamental
In the fourth quarter of 2012, AIG’s net loss was $4 billion, or $2.68 per share, compared with net profit of $21.5 billion, or $11.31 per share, in the fourth quarter last year. For the full year 2012, the net income came in at $3.4 billion, or $2.04 per share, just less than a fifth of the 2011 net income at $20.6 billion, or about $11 per share.
The significant reduction in AIG’s net income in the fourth quarter and full year 2012 was due to two main reasons. First, AIG booked around $2 billion pre-tax catastrophe losses from Hurricane Sandy. Second, the net loss on the sale of International Lease Finance Corporation (IFLC) was around $4.4 billion. However, its operating income has improved significantly compared to 2011. Its Insurance operating income has grown from $4.4 billion in 2011 to nearly $6 billion in 2012, while the change in fair value of AIA and ML III has increased to $2 billion and nearly $2.9 billion, respectively. Thus, within a year, the after-tax operating income has more than tripled from $2 billion to $6.6 billion.
At the end of 2012, AIG agreed to sell 90% of its stake in aircraft leasing business to a Chinese consortium for as much as $4.8 billion. AIG bought IFLC in 1990 as it thought that the long life of aircraft assets could be matched the maturities of its life-insurance policies. AIG was one of the big financial giants that received a $182 billion bailout from the US government. Now, the $182 billion has been fully repaid, with the government realizing a profit of nearly $22.7 billion. AIG has been quite active in divesting its non-core businesses. In addition to the IFLC sale, the insurer has raised nearly $6.5 billion by selling the Asian life insurer AIA. Indeed, the divestiture of its non-core businesses will help AIG to regain its focus on its core global insurance businesses. 
AIG Should be Worth At Least $70 per share
At the current trading price of $37 per share, AIG is worth around $57.7 billion on the market. The market is valuing AIG at only 0.56x book value. Bruce Berkowitz once commented that AIG was “picking up pennies in front of a steamroller.” According to him, a business like AIG should be trading at a multiple of the book value. Thus, at lease AIG might reach its book value of around $66.38 per share. He said, “Maybe that happens in the $70s or the $80s, I don't know. But it gets about there. We‘ll see. And companies such as AIG can trade at a multiple of book value. But I don‘t want to go there yet. Just getting to our estimate of book value will be a very nice return for shareholders.”
Peer Comparison
Compared to its peers, including Allianz SE (NASDAQOTH: AZSEY) and AXA(NASDAQOTH: AXAHY), AIG seems to have the cheapest EV multiple. While AIG is valued at only 0.56x price-book ratio, the P/B of Allianz and AXA was 0.93x and 0.67x, respectively. Allianz, with a trading price of $13.50 per share, is worth nearly $61 billion on the market. AXA is the smallest among the three. With nearly $40 billion in the total market cap, its share price stays at around $17 per share. Among the three, AXA is paying the highest dividend yield at 4.3%. Allianz is paying 3.2% dividend yield, while AIG is not paying any dividend at the moment. Furthermore, AXA seems to have the most conservative balance sheet, with a 0.2x debt/equity ratio, while the debt/equity ratio of Allianz and AIG are 0.6x and 0.5x, respectively.
Foolish Bottom Line
With the divestiture of the non-core units, AIG will come back with much stronger revenue and profits from its core insurance business. As AIG is valued the cheapest at nearly 60% discount to the book value, AIG is definitely a long-term buy at its current price. 

How Much is Compuware Worth?


At the end of 2012, Elliott Management Corp offered to acquire Compuware (NASDAQ:CPWR) at around $11 per share, with a total transaction value of $2.3 billion. However, Compuware has rejected Elliott’s bid, as it thought that the offer was too low and not in the shareholders’ best interest. In addition, Compuware mentioned it was looking for a better offer from different buyout firms. Let’s look closely into the company to determine the intrinsic value range for Compuware.
Compuware Snapshot
Compuware, founded in 1973, is the provider of software solutions, professional services and application services, with six main business segments: Application Performance Management (APM), Mainframe, Changepoint, Uniface, Professional Services and Covisint Application Services. The majority of its revenue, $419.3 million, or 41.6% of the total revenue, was generated from the Mainframe segment. The second biggest segment was APM, with $270.4 million in revenue in 2012. The Professional Services ranked third, contributing more than $151.5 million in revenue. Compuware seems to have a diverse customer base, as it hasn’t had a single customer that accounted for more than 10% of the total revenue in the past 3 years.
Historical Fluctuating Performance
In the past 10 years, its revenue, EPS, and cash flow have been fluctuating. The revenue has decreased from $1.37 billion in 2003 to $1 billion in 2012, and the net income experienced a decline from $103 million to only $88.4 million in the same period.  However, EPS has been rising, from $0.27 to $0.40 in the past 10 years. The rise in EPS was due to the significant and continuous reduction in the number of total shares standing. In 2003, Compuware had 382 million outstanding shares. In 2012, the number of shares outstanding has been shrinking to only 220 million. Compuware operates with a quite strong and conservative balance sheet. As of December 2012, it had $1 billion in total stockholders’ equity, $65 million in cash and $70 million in long-term debt. As the company has been growing via acquisitions, it recorded a huge amount of goodwill and intangibles: $920 million in December 2012. Thus, the tangible book value was quite low, at only $0.62 per share.
An $11 Offer is not Enough?
Elliott Management is one of Compuware’s largest shareholders, with around 8% stake in the company. In the letter to Compuware’s board of directors, it mentioned although Elliott believed in the quality of the company’s assets, the company’s profitability, executive and growth have significantly underperformed. Elliott stated that Compuware’s stock has underperformed the Nasdaq and S&P 500 by 16 and 34 percentage points, respectively, in the past 1-2 years. Thus, it offered to buy Compuware at around $11 per share. Robert Paul, Compuware’s CEO, said that an $11 offer “does not take into account our progress returning the business to profitable growth and our future prospects.” The company would continue with its 3-part plan. First was a 3 year cost reduction program that should cut expenses by at least $60 million. In the full year 2014, the program intends to save at least $20 million. Second was to sell 20% of Covisint in the form of an IPO, and the remainder would be distributors to Compuware’s shareholders. Last but not least, it would pay investors a dividend yield of more than 4.5%.
Peer Comparison
At the current price of $11.84 per share, the total market cap is $2.5 billion. The market is valuing Compuware at 15.35x EV/EBITDA. Compared to its bigger peers, including BMC Software (NASDAQ: BMC) and CA Technologies (NASDAQ: CA), Compuware seems to be the most expensive company. CA Technologies is the biggest company among the three with a $11.2 billion market cap. With a trading price of $24.56 per share, CA Technologies is valued at only nearly 6x EV/EBITDA. BMC, with a trading price of $40.54 per share, is worth $5.8 billion on the market. The market is valuing BMC at nearly 9.8x EV/EBITDA. Interestingly, CA Technologies generated the highest operating margin at 30%, while the operating margins of Compuware and BMC were 12% and 21%, respectively.
Foolish Bottom Line
Among the three, CA Technologies seems to be a better bet than both BMC and Compuware due to its lowest valuation and highest operating margin. A $2.3 billion offer would value Compuware at as high as 14x EV/EBITDA. With a high EV multiple, I would not touch Compuware at its current price.  

A Sweet Deal for NetSpend's Shareholders


Recently, Total System Services (NYSE: TSS) announced that it would buy NetSpend Holdings (NASDAQ: NTSP) at about $16 per share, with a total transaction value of $1.4 billion. The offering price represented a 26% premium on NetSpend’s closing price last Monday.  Is $16 per share price tag fair for NetSpend’s shareholders? Is Total System a buy after this deal? Let’s find out.
NetSpend and Total System Business
NetSpend, founded in 1999, is a provider of general-purpose reloadable (GPR) prepaid debit and payroll cards to the under-banked and other consumers in the US. The company is selling its card via different distribution channels, including traditional retailers, directly-to-consumers, online marketing programs, etc. As of December 2012, NetSpend had more than 2.35 million active cards, as well as 500 distributors in more than 60,000 locations in the US. In the past 5 years, NetSpend has experienced a consistent growth in its revenue, from $183 million in 2008 to $351 million in 2012. However, the company generated a loss of $11.65 million in 2008. The loss in 2008 was due to a charge of $26.3 million for goodwill and intangible impairment. In 2012, NetSpend incurred nearly $37 million in settlement losses, which reduced the net income to $18.9 million. The operating cash flow in 2012 was $38 million.
Total System is a global payment solutions provider with three main operating segments: North America Services, International Services and Merchant Services. The majority of its revenue, $965.4 million, or 51.6% of the total revenue, was generated from North America Services. Merchant Services ranked second with nearly $512.6 million in revenue in 2012, while the International Services generated around $413.5 million in revenue.
Five Strategic Reasons to Acquire NetSpend
In order to finance the purchase of NetSpend, Total System will use its cash on hand and $1.3 billion in debt. The transaction is expected to be completed in the middle of 2013. In itspresentation, Total System listed five main reasons to purchase NetSpend. First, Total System could enter a fast growing prepaid market that was expected to double in the next 4-5 years. Second, it could give Total System an opportunity to create new partnerships with its existing bank customers. Third, the company could expand its customer base by entering new segments, including Corporates and Government Agencies. Fourth, Total System could leverage NetSpend's wide distribution network and innovative products. Last but not least, the deal would give Total System a better diversification. After the buyout, the North America Services segment will represent only 41% of the total revenue, while NetSpend will account for 18% of the total revenue. 
Source: Total System’s presentation
Is it Too Expensive?
In 2012, the combined EBITDA was around $613 million, 16% higher than Total System’s EBITDA of $528 million. With the current trading price of $22.90 per share, Total System’s market cap is $4.25 billion. The market is valuing Total System at 8x EV/EBITDA. After the deal, Total System would take on an additional debt of $1.3 billion and generate $613 million in EBITDA. Thus, the EBITDA multiple would be 9x. As NetSpend generated more than $87.1 million LTM EBITDA, the deal valued NetSpend at around 13.6x EV/EBITDA. The deal seems to be relatively quite expensive compared to Total System’s valuation and the market valuation of DFC Global (NASDAQ: DLLR), one of NetSpend’s peers. DFC Global is trading at $18.90 per share, with a total market cap of $792 million. The market is valuing DFC Global at only 5.32x EV/EBITDA. Among the three, DFC Global seemed to be the most profitable company. Its operating margin was the highest at 24%, while the operating margins of NetSpend and Total System were 20% and 19%, respectively. Among the three, only Total System is paying a 1.7% forward dividend yield to shareholders, whereas NetSpend and DFC Global are not paying any dividends.
My Foolish Take
I think Total System has overpaid to acquire NetSpend. Total System would be valued quite higher than the pre-acquisition's valuation due to its significant debt financing for the deal. Among the three, DFC Global is the better bet than the other two due to its highest operating margin and lowest valuation. 

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