Sold Johnson Controls, Inc.
We sold JCI today and redeployed the cash. Although a still quality stock, revenue growth has been slowing and the project average return dropped to 6.5%. We used the above stock selection guide in making this decision.
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Investors Fin. Services (IFIN)
SSG and PERT A (07-14-2005) | Google Stocks | Company Website
At the Q2 press conference on July 14, Investors Financial Services Corp. (IFIN) revised is earnings guidance downward for 2005 (10%), 2006 (8-10%), and 2007 and beyond (12-14%). See Q2 press release.
We previously had used 16% in our projections for June. The reduced earnings guidance is due in part to reduced interest income. A revised SSG, using 12% expected EPS growth, shows a projected average return PAR of 14.2% and a buy up to $48. However, given the company’s lowered guidance, the may be a stock to consider replacing.
Note: IFIN’s price dropped 17% on July 15 on announcment of the lowered guidance. The SSG was revised after the announcement using a projected EPS growth of 10% and the lowered price. The new projected average return is 15.51%. See revised SSG (07-15-2005). This certainly suggests some efficiency in the market.
The June Investor Advisory Service by IClub had reported IFIN a buy as well:
Investors Financial Services had a surprisingly slow quarter. First quarter revenue grew 8% with core services revenue growth of 16% being partially offset by an 11% drop in ancillary services revenue. EPS rose 11%, but a securities gain in 2005 and a one-time prepayment penalty in 2004 accounted for all of the apparent growth. The company obtained almost 30% of its revenue from net interest income. An analysis of its balance sheet shows that customers are withdrawing low-cost demand and savings deposits while Investors Financial adds to more expensive funding sources like time deposits and borrowed money. The concern is that it must exercise great care to avoid getting pinched by rising interest rates. IFIN (42.74) is a buy up to 65.
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Sold Commerce Bancorp (CBH)
We sold CBH on June 12, 2007. Primary reason was declining on return on assets.
Bed, Bath & Beyond (BBBY)
SSG and PERT A (04-01-2005) | Google Stocks | Company Website
Stock Selection Guide Updated. The SSG for Bed, Bath & Beyond has been revised. BBBY remains a high quality company and is within the “buy” range up to a price of $44.90.
There is an excellent article by Mark Robertson at www.fundas.com discussing Bed, Bath and Beyond. His analysis is right on target.
On April 6, BBBY reported its year end results. Sales were up 15% and net earnings increased 26.4%. This shows very positive growth and is in line with past years. Comparable store sales increased by 5.1%.
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ChevronTexaco (CVX)
SSG and PERT A (07-06-2006) | Google Stocks | Company Website
Growth. ChevronTexaco is not a classic growth company. However, the increasing demand for energy, the increase in energy prices and acquisitions have caused CVX’s revenues to grow at an annualized rate 16.5% over the past ten years. Earnings have grown at 12.2% over the same period. The attached SSG assumes a 5-year revenue and EPS growth rate of 5.7%. Value Line projects 5% revenue growth and 11.5% earnings growth. The First Call consensus projects EPS growth at 7.1%. So the SSG rate of 5.7% is convervative.
Valuation. Valuing energy companies is a specialty. Classic NAIC-type analysis is helpful but not very. So let’s look at what the experts say. McDep Energy Investment Research makes it energy stock recommendations and investment research available to the public (with a slight time lag from its subscribers). The “McDep” ratio provides a relative measure of whether an energy company is over or under valued using futures prices and assumption about energy reserves. Of the so called “mega caps,” CVX has the lowers McDep ratio (lower is better). See page 5 of the McDep “Meter Reader” report. Also the McDep web site have posted several reports discussing CVX
Bottom line. If energy prices recede, CVX will show a modest return. CVX currently pays an annual dividend $1.60 (3.13% yield) and earnings should grow at about 5%. Under this scenario, the projected average return for CVX is 12.2%. (This assumes a projected high PE of 12.1.) If energy prices remain the same or increase, CVX has considerable price appreciation potential.
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UTStarcom, Inc. (UTSI)
SSG and PERT A (12-19-2004) | Google Stocks | Company Website
Stock Selection Guide Updated. The SSG for UTStarcom has been revised. UTSI is a higher risk company than others in our portfolio but has the potential for significant return if it resumes even part of its historical growth rates. A recent webcast presented at the Lehman Brothers T4 conference on December 10 provides a good current overview.
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Capital One Financial
Stock Selection Guide Updated. The SSG for Capital One Financial has been revised. Capital One Financial remains a quality company. The stock has moved just out of the “buy” range into the “hold” range.
There is a replay of an informative presentation by the Capital One Financial CEO at the Merrill Lynch Banking & Financial Services Conference on November 15 available at the company website. If you listen to the presentation, be sure to view the presentation slides. The presentation explains the strategic direction of Capital One Financial.
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Affiliated Computer Svc
Affiliated Computer Services (ACS)
SSG and PERT A (11-24-2004) | Google “Stocks: ACS” | Company Website
The Affiliated Computer Services stock selection guide has been updated. Here are the highlights.
Quality. Section 1 of the SSG (the graph on page one), shows consistent growth. For ACS, the correlation coefficient (r^2) is 1.0 for earnings and .95 for sales. This is quite good. Looking at Section 2 of the SSG, the pre-tax profit margin is trending up and return on equity is even. These are both indicators of consistency and excellent management. Overall, ACS is a high quality company.
Growth. Historically, ACS has had very strong growth. It is a little tricky to estimate future ACS growth since recent financial statement reflect the divestiture of most of ACS’ government business and the acquisition of some new businesses. The management discussion in the current 10Q discusses internal revenue growth (measured as total revenue growth less acquired revenue from acquisitions and revenues from divested operations). After excluding the impact of the revenues related to the 2004 divestitures, revenues in the current quarter increased 22%. Internal revenue growth accounted for 11% of the 22%. The above SSG uses a revenue growth of 15.8% based on Value Line.
Valuation. Using the “preferred proceed” in the SSG, the projected 5-yr EPS is $5.88. (See SSG for pre-tax margin, tax rate and shares outstanding.)
The projected average return over five years is 14.5%. Here is how it is calculated:
- Projected 5-yr Price = Projected P/E * Projected EPS Projected 5-yr Price = 19.9 * 5.88 = $117.02Projected Avg Return = [(Future Price / Current Price)^(1/5) + Avg Div Yld - 1] * 100
Projected Avg Return = [(117.01 / 59.53) ^ (1/5) - 1] * 100 = 14.5%
Note: The Toolkit software does this automatically. Reviewing the calculations makes it easier to understand the results.
Summary. ACS (currently $59.53) is in the “buy” range. The upside-downside ratio is 3.9 to 1. The relative value is 100.
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Marsh & McLennan Cos.
Initial Position in Marsh & McLennan. On November 10, Moosepond Investors bought took an initial position in MMC. The stock selection guide assumes a 9% earnings growth rate and an average high PE of 18. MMC has been in the news recently. The current investigation by the New York State Attorney General into commission practices by the insurance industry and an allegation of bid rigging has caused the MMC’s stock price to drop from $46 per share to its current levels in the high $20s. This presents an excellent buying opportunity, but not one without risk. The October 26 press releases and webcasts on the MMC website give some assurance that management is aggressively working to resolve the issues raised by current investigation. By all traditional measures, MMC remains a high quality company. It remains to be seen whether the investigation will result in a loss of revenue to MMC be customer defection or a reduction in earnings as a result of changed commission practices.
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