Thu, 17 May 2012 12:58:22 -0800WeeblyThu, 17 May 2012 12:49:52 -0800http://www.weeklystockcall.com/1/post/2012/05/corning-incorporated-nyseglw.htmlMay 17, 2012
Current Price – US$12.92

Corning Incorporated (GLW) is a global, technology-based corporation that primarily derives revenue ($7.9B) from five reportable segments: Display Technologies (40%), Telecommunications (26%), Environmental Technologies (13%), Specialty Materials (14%) and Life Sciences (7%). The company manufactures and processes products at approximately 80 plants in 13 countries. 

The stock seems to have a lot of upside potential, but also lots of risk ... hence the big market discount. Corning has a broad product portfolio and is big player in LCD displays, Telco, smart phones and tablets, but has a very concentrated base of customers (10 customers = 51% of sales). While demand has been high for display and specialty glass, competition has been increasing and market growth rates have been leveling off resulting in a glut of global supply in some segments. High customer concentration and increasing competition could leave GLW vulnerable to significant risk from the loss of any major customer and might reduce pricing power (and margins). 

Still, the company’s balance sheet is solid (lots of cash, free cash flow, little debt), it invests heavily in R&D and facilities (CAPEX = 2X depreciation), and likes to return excess cash to shareholders through dividends and buybacks.

Finally, valuation of the firm at historically conservative growth rates suggests that the GLW is trading at a substantial discount to historical ratios and discount rates.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount method and historical and industry price ratios) I arrive at a current valuation for Corning Incorporated of US$19.05

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       47.4%
Dividend yield   2.3%
Total return     49.8%


Risks

Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

• General Economic Conditions & Demand – Revenues in all segments are sensitive to general market and economic uncertainty. In particular, reduced consumer demand for automobiles and heavy duty trucks, LCD televisions and monitors, notebook computers, fiber-to-the-premises build-out, or in the trend to larger LCD televisions could have significant adverse impacts on revenues and earnings.
  
• Key Customer Concentration – Sales are highly concentrated amongst a small proportion of Corning’s customers and could be negatively impacted by the actions or circumstances of one or more key customers leading to the substantial reduction in orders.
  
• Competition – Corning faces continuous stiff competition from existing competitors, low cost manufacturers and new entrants that may result in excess global production capacity, lower sales, margins and cash flow.
  
• Evolving Technology – Corning’s continued success depends on the timely introduction of appropriate new products and technologies. Failure to keep up with evolving technologies and effectively incorporate them in new products could materially impact sales.
  
• Currency Fluctuations – As the company derives revenues globally, but manufactures in select regions, significant fluctuations in exchange rates may adversely affect sales, net income and cash flow.
  

The Numbers

Share Price ($US)   12.92 
Market Cap ($US B)   20.0 
No. Shares (M)   1,568 
ROE   8.7%
ROA   6.6%
P/E Ratio   8.2 
Price/Sales Ratio   0.9 
Price/Book Ratio   2.6 
Current Ratio   5.5 
Interest Coverage   19.2 
Total Debt/Equity   15.0%

Analyst – David Scollon
Disclosure - At publication of this analysis I hold a long position in this security. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions. 
]]>Mon, 25 Jul 2011 07:15:53 -0800http://www.weeklystockcall.com/1/post/2011/07/microsoft-corporation-nasdaqmsft.htmlJuly 24, 2011
Current Price – US$27.53

Microsoft Corporation (MSFT), arguably the world’s most prominent software company, earns annual revenues of US$69.9B on sales and licensing of operating systems, applications, development tools and video games. The company derives revenues across its five major business divisions; Microsoft Business (32%), Windows (27%), Server and Tools (24%), Entertainment (13%) and Online Services (4%).

Despite the company’s ubiquitous market presence, its traditionally dominant position in PC systems software (Windows) and business productivity software (Office) is being challenged by industry evolution towards hosted applications (“Cloud Computing”), evolving hardware platforms (tablets and smart phones) and the widespread availability of open source software. Investors have responded to the uncertainly created with these developments by discounting the company’s stock considerably (P/E of 10.8 vs. historical and industry ratios of 17.3 and 17.9 respectively).

While these evolutions may challenge Microsoft, competition with Apple, Google, Oracle, Amazon and host of others is sure to drive innovation, convergence and consolidation in the foreseeable future. The company enters into this period of renewed competition with distinct competitive advantages including; a large entrenched customer base and established partner/channel networks, superior profit margins (operating 39%) and free cash flow (FCF/Sales 35%), emerging opportunities for server products in “cloud computing”, and recent strategic acquisitions and alliances with companies such as Skype, Nokia, Facebook and Hulu.

It might take some time for Microsoft’s share price to correct, but value should become evident as competition intensifies in more currently sexy tech products (tablets, smart phones, …) and margins in those products are squeezed. 

Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount method and historical and industry price ratios) I arrive at a current valuation for Microsoft Corporation of US$33.11

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield                      20.3%
Dividend yield                   2.3%
Total return                     22.6%


Risks

Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Global Economic Conditions – sales to OEM partners and Enterprise licensing revenues are strongly linked to general levels of economic activity and prolonged economic slowdown could adversely impact earnings.

Slow or Ineffective Response to Market Evolution - being left behind in developing applications for and migrating to new hardware and delivery modes could result in loss of market share and diminished revenues.

New Market Penetration – the risk of being unable to effectively penetrate some emerging markets or of having market share eroded by lower cost imitations could hamper revenue growth and erode market share.

 
The Numbers

Share Price ($US)   27.53 
Market Cap ($US B)   231.5 
No. Shares (M)   8,668 
ROE   44.0%
ROA   23.6%
P/E Ratio   10.8
Price/Sales Ratio   4.4 
Price/Book Ratio   3.4
Current Ratio   2.8
Interest Coverage   113.1Total Debt/Equity   22.0%

Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

Copyright © 2011 Scollon Asset Analytics Ltd.

All rights reserved. Unauthorized distribution or reproduction is strictly forbidden.

Scollon Asset Analytics Ltd. obtains information from various sources felt to be reliable but does not warrant its accuracy and disclaims for itself all liability arising from its use. No information provided shall constitute tax, legal, or investment advice, or an offer to buy or sell securities. ]]>Tue, 12 Apr 2011 07:28:09 -0800http://www.weeklystockcall.com/1/post/2011/04/intel-corporation-nasdaqintc.htmlApril 12, 2011
Current Price – US$19.94


Intel Corporation (INTC) is the world’s largest semiconductor chip company developing advanced integrated digital technology for industries such as computing and communications.
Annual revenues of 43.6 $US B are derived from the four primary business segments: PC Client Group (PCCG) – 72%, Data Center Group (DCG) – 20%, other Intel architecture (Other IA) – 4%, and all other – 4%. 

The company has a rock solid balance sheet with a current ratio of 3.4 and debt to equity of just 4.3%, strong, resilient margins (operating margin 35.5%), and is churning out tons of free cash flow (26% of revenues). Markets for Intel’s products continue to be driven by increased demand for personal connectivity, data centre growth for cloud computing and emerging markets growth. While the company faces heavy competition in all of its major markets, it continues to lead its significant competitors in operating and R&D efficiency, brand recognition and overall scale.

I view this company as a mature firm returning earnings to shareholders through dividends and share repurchases while still possessing an option for considerable growth, and I consider it to be currently under-priced.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount method and historical and industry price ratios) I arrive at a current valuation for Intel Corporation of US$25.45

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield          27.6%
Dividend yield      3.6%
Total return        31.3%


Risks

Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Demand Fluctuations - due to unfavorable economic conditions or shifting consumer preferences can result in underutilization of Intel’s considerable fixed asset base and materially impact earnings and cash flows. Many of Intel’s direct competitors have relatively less fixed cost exposure.

Market Response – given an environment of rapid product evolution and short product life cycles, a failure to respond quickly customer demands, or to appropriately anticipate those demands, could adversely impact earnings.


The Numbers

Share Price ($US)   19.94 
Market Cap ($US B)   111.5 
No. Shares (M)   5,696 
ROE   25.2%
ROA   19.7%
P/E Ratio   9.2
Price/Sales Ratio   2.7
Price/Book Ratio   2.3
Current Ratio   3.4
Interest Coverage   146.2
Total Debt/Equity   4.3%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

Copyright © 2011 Scollon Asset Analytics Ltd.
All rights reserved. Unauthorized distribution or reproduction is strictly forbidden.
Scollon Asset Analytics Ltd. obtains information from various sources felt to be reliable but does not warrant its accuracy and disclaims for itself all liability arising from its use. No information provided shall constitute tax, legal, or investment advice, or an offer to buy or sell securities.
]]>Mon, 31 Jan 2011 11:44:06 -0800http://www.weeklystockcall.com/1/post/2011/01/exelon-corporation-nyseexc.htmlJanuary 31, 2011
Current Price – US$42.56

Exelon Corporation (EXC) is an energy and utility holding company with annual revenues of US$18.6B from operations predominately in the Midwest and Mid-Atlantic US. The company’s earnings are primarily a function of weather conditions, levels of economic activity, supply pricing and competitive rivalry. Lower levels of economic activity in the US in recent years have hampered earnings, but longer term drivers point to a return to demand growth for energy in EXC’s markets. Specifically, the regulatory push to lower airborne industrial emissions should benefit the company with cost advantages as 93% of its power is nuclear generated and the gradual return of manufacturing to the US (as costs rise abroad) should yield an increase in energy demand and fuel market price increases. In the near term, lower natural gas prices may lead to reduced revenue growth for nuclear energy producers, however the current dividend makes waiting for a return to higher revenues (and the associated stock price increase) more tolerable. At current price EXC has a 4.9% dividend yield and is trading at a modest discount to historic valuation ratios suggesting that it would be a good candidate to provide a revenue component with some potential for equity growth to a diversified portfolio. I stress diversification with respect to EXC because, while the likelihood of catastrophic failure of one of the company’s facilities is slim, the financial consequences of such a failure could be immense. 


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount method and historical and industry price ratios) I arrive at a current valuation for Exelon Corporation of US$48.46

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       13.9%
Dividend yield   4.9%
Total return     18.8%


Risks

Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Environmental regulation – the company is subject to various Federal and State regulation and as such may be incur material adverse earning impacts in maintaining compliance.

Price and availability of raw materials – impacts both competitive market pricing of electricity and generation costs and changes in these factors can thus impact earnings.

Weather and general economic conditions – are primary determinants of demand. Unusually mild weather conditions or subdued economic conditions can reduce both demand and margins putting pressure on earnings.

Catastrophic failures – at any of the company’s facilities could have major negative impact on the continued operational viability of the company.

Interest rate risk – As the company carries significant levels of debt, increased financing costs could have adverse impacts on earnings.


The Numbers

Share Price ($US)   42.56 
Market Cap ($US B)   27.8 
No. Shares (M)   663 
ROE   19.8%
ROA   5.2%
P/E Ratio   10.8
Price/Sales Ratio   1.5
Price/Book Ratio   2.0
Current Ratio   1.7
Interest Coverage   9.0
Total Debt/Equity   93.0%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

Copyright © 2011 Scollon Asset Analytics Ltd.
All rights reserved. Unauthorized distribution or reproduction is strictly forbidden.
Scollon Asset Analytics Ltd. obtains information from various sources felt to be reliable but does not warrant its accuracy and disclaims for itself all liability arising from its use. No information provided shall constitute tax, legal, or investment advice, or an offer to buy or sell securities.
]]>Fri, 21 Jan 2011 02:28:21 -0800http://www.weeklystockcall.com/1/post/2011/01/wellpoint-inc-nysewlp.htmlJanuary 20, 2011
Current Price – US$61.56

WellPoint, Inc. (WLP) is the largest U.S. health benefits company in terms of medical membership, serving 33 million medical members through its affiliated health plans and a total of 70 million individuals through all subsidiaries and is second largest in terms of revenue ($US B 65 FY09). The company had grown aggressively through 2007 both organically and via acquisitions and mergers, but recessionary conditions have since hampered growth. It appears that the market is currently excessively discounting expected future earnings of the company based on uncertainty regarding the timing and pace of economic recovery in the U.S. and on the impacts of possible health care reforms on revenues and margins going forward.

In an industry that has seen considerable consolidation, WLP has emerged as a significant competitive presence having captured economies of scale in negotiating terms with both health services providers and within its marketing/distribution chain. The company also boasts strong industry ratings and holds exclusive rights to market products under the BlueCross BlueShield brands in its most significant markets.

Despite facing likely regulatory pressure on earnings and possible resistance to continued growth through further industry consolidation, and barring some unanticipated massive draw on health care services (i.e. a severe pandemic or widespread terrorist action), it appears that the company is on a solid financial footing (good interest coverage and manageable debt levels) and is trading at an attractive price. Ownership of a share in this company might also be expected to offer the individual investor a degree of hedging against potential increases in health care costs. The company does not pay a dividend, but has instead returned earnings to shareholders through opportunistic public market stock repurchases in recent years.


Valuation

Based on a blend of valuation methods (discounted cash flows and historical and industry price ratios) I arrive at a current valuation for WellPoint, Inc. of US$98.84

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       60.6%
Dividend yield   0.0%
Total return     60.6%


Risks

Listed below are some of the key risks faced by the company. This list is by no means comprehensive. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Health Care Regulation and Reform – in light of current U.S. political and fiscal conditions government regulation could be implemented effectively limiting revenue growth and profit margins of health benefits companies.

Economic Conditions – a prolonged or deepening economic downturn could further erode membership, reduce revenues from premiums and adversely impact earnings.

Large Scale Medical Emergencies - may result in unexpectedly high benefit claims and have a material adverse effect on earnings.


The Numbers

Share Price ($US)   61.56 
Market Cap ($US B)   24.2 
No. Shares (M)   433 
ROE   21.5%
ROA   10.1%
P/E Ratio   5.3
Price/Sales Ratio   0.37
Price/Book Ratio   1.0
Current Ratio   1.9
Interest Coverage   19.0
Total Debt/Equity   34.0%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.


Copyright © 2011 Scollon Asset Analytics Ltd.
All rights reserved. Unauthorized distribution or reproduction is strictly forbidden.
Scollon Asset Analytics Ltd. obtains information from various sources felt to be reliable but does not warrant its accuracy and disclaims for itself all liability arising from its use. No information provided shall constitute tax, legal, or investment advice, or an offer to buy or sell securities.
]]>Fri, 21 Jan 2011 01:46:38 -0800http://www.weeklystockcall.com/1/post/2011/01/note-to-readers-from-october-26-2010.htmlOctober 26, 2010

Dear Readers,

Since Weekly Stock Call’s first stock review published back on June 10th, the S&P 500 is up more than 9%. As illustrated in the chart above, the stocks reviewed and presented to date have generally performed quite well over this short period (on average outperforming the comparative index returns 15.6% to 7.5%). Keep in mind that it would not be unusual for mispriced stocks to take more than a year to correct.

However, as markets move to being more fully priced, it is becoming increasingly difficult to find attractively priced stocks that meet Weekly Stock Call’s investment criteria for balance sheet strength, liquidity, capital efficiency and prominent placement in an industry supported by promising market tailwinds. As it happens, this coincides with increased demands on my time in pursuit of professional and academic interests. These circumstances necessitate some adjustment to our operations.

What to expect going forward:

• More sporadic publication of stock reviews … despite the name of the site, I’d rather avoid publishing any review in a given week than to drop the standards for inclusion.
  
• I’ll be working on refinement of screening algorithms to improve efficiency and effectiveness in identifying high quality discounted companies.
  
• I’m considering the addition of a sample portfolio to highlight the benefits of proper asset allocation in optimizing return-to-risk versus undiversified stock picking or arbitrary portfolio construction.
  

Your interest to date is greatly appreciated and I hope that you will continue to benefit from Weekly Stock Call’s reviews in the future.

Best regards,

David Scollon
Scollon Asset Analytics Ltd.
]]>Mon, 18 Oct 2010 01:48:07 -0800http://www.weeklystockcall.com/1/post/2010/10/noble-corporation-nysene.htmlOctober 14, 2010
Current Price – US$35.90


Noble Corporation (NE) is the world’s second largest publically traded provider of diversified services for the oil and gas industry with annual revenues of $3.6B. The Company performs contract drilling services with its fleet of 62 mobile offshore drilling units located in key markets worldwide. 

So far the company has managed to execute admirably on its long-standing business strategy to actively expand international and offshore deepwater capabilities through acquisitions, rig upgrades and modifications, and to redeploy assets in important geological areas. In doing so it has developed superior margins and returns to equity (Op. Mar. 55%, ROE 22%), and a rock solid balance sheet churning out prodigious amounts of free cash flow ($1.4B FCF on $3.6B Rev.) while continuing to invest in growth of its capital equipment base and returning value to shareholders through share repurchases and growing dividend payments. The full value of the company’s shares do not appear to be recognized in the current market, however, a correction to prices seems likely as recessionary conditions improve and supply/demand dynamics return to a pre-recession state.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Noble Corporation of US$49.82.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       38.8%
Dividend yield   0.5%
Total return     39.3%


Risks

Listed below are some of the key risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Global Economic Conditions - This business depends on the level of activity in the oil and gas industry, which is significantly affected by volatile oil and gas prices. Recent worldwide instability in the financial and credit sectors and economic recession could have a material adverse effect on the company’s financial position, results of operations and cash flows.

Competitive Landscape – A combination of recent recessionary conditions, reduced oil prices and high historical economic profit within the industry suggest increased likelihood of industry consolidation and the potential for build-out of excess capacity and increased vertical integration by oil producers. The extent and impact of these developments is unpredictable and may have a negative impact on revenues and margins.

Regulation - Governmental laws and regulations, including environmental laws and regulations, may add to costs or limit drilling activity.


The Numbers

Share Price ($US)   35.65 
Market Cap ($US B)   9.1 
No. Shares (M)   257 
ROE   21.9%
ROA   17.6%
P/E Ratio   6.3
Price/Sales Ratio   2.7
Price/Book Ratio   1.3
Current Ratio   3.9
Interest Coverage   1200
Total Debt/Equity   10.0%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

Copyright © 2010 Scollon Asset Analytics Ltd.
All rights reserved. Unauthorized distribution or reproduction is strictly forbidden.
Scollon Asset Analytics Ltd. obtains information from various sources felt to be reliable but does not warrant its accuracy and disclaims for itself all liability arising from its use. No information provided shall constitute tax, legal, or investment advice, or an offer to buy or sell securities.]]>Wed, 06 Oct 2010 06:19:57 -0800http://www.weeklystockcall.com/1/post/2010/10/western-digital-corporation-nysewdc.htmlOctober 7, 2010
Current Price – US$28.78


Admittedly, I make the call on Western Digital Corporation (WDC) with some degree of trepidation. The company produces hard drives and solid state drives for manufacturers of computers, storage systems and consumer products, as well as, external hard drives for retail distribution. This means that it operates in a highly competitive industry that is subject to disruptive technological changes from both its competitors and its customers, and has high cyclical volatility. However, WDC does hold a very strong position with respect to market share (approximately 30% of market with revenues of $9.8B), brand name and reputation and is trading at an attractive valuation relative to historical multiples and projected earnings. Further, while the company does not presently pay a dividend, it has been generating large amounts of free cash flow ($1.2B in 2010) that will need to be put to productive use or returned to shareholders. This suggests the possibility of either a repurchase of shares or declaration of a special dividend at some point in the near future. 

While the fundamental drivers behind growth in demand for storage products (increased video storage, mobility, and emerging markets growth) remain strong, it remains an open question and concern as to if/when solid state storage devices catch up to WAG’s hard drives in terms of cost and capacity, and whether the company will be able to main its competitive advantages in transitioning to new technologies. 

Again, while this company appears to be attractively priced, have a very strong balance sheet and strong fundamental drivers for growth, it comes with a degree of market/technological uncertainty and cyclical volatility that may discourage less intrepid investors.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Western Digital Corporation of US$39.78.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield         38.9%
Dividend yield     ----%
Total return       38.9%


Risks

Listed below are some of the key risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Customer Concentration and Consolidation – 53% of revenues are derived from 10 customers. Loss of a key customer, or consolidation among the customer base, could negatively impact operating results.

Global Economic Conditions – A prolonged economic downturn could result in a decrease in revenues and an increase in operating costs adversely affecting operating results.

Markets and Technical Expansion - Entry into additional storage markets and products is complex and, if WAG is unable to successfully adapt, may lead to an erosion of competitive advantages and earnings.

Technological Innovation - Current or future competitors may gain a technology advantage or develop an advantageous cost structure that WAG cannot match.

Operational Concentration - Manufacturing operations are concentrated in a small number of large facilities subjecting the company to substantial risk of damage or loss if operations at any of these facilities are disrupted.


The Numbers

Share Price ($US)   28.78 
Market Cap ($US B)   6.5 
No. Shares (M)   233 
ROE   35.0%
ROA   21.9%
P/E Ratio   4.7
Price/Sales Ratio   0.7
Price/Book Ratio   1.4
Current Ratio   2.3
Interest Coverage   169
Total Debt/Equity   8.5%


Analyst – David Scollon

Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

Copyright © 2010 Scollon Asset Analytics Ltd.
All rights reserved. Unauthorized distribution or reproduction is strictly forbidden.
Scollon Asset Analytics Ltd. obtains information from various sources felt to be reliable but does not warrant its accuracy and disclaims for itself all liability arising from its use. No information provided shall constitute tax, legal, or investment advice, or an offer to buy or sell securities.]]>Sat, 02 Oct 2010 03:15:17 -0800http://www.weeklystockcall.com/1/post/2010/10/tidewater-inc-nysetdw.htmlOctober 2, 2010
Current Price – US$43.97



Tidewater (TDW) impresses with its conservative approach to financial and growth management, its scale and geographic diversification, and a demonstrated commitment to return value to shareholders through distribution of free cash flow through dividends or share repurchases. The company has a stated strategy to maintain a solid balance sheet, utilize cash flow to renew its fleet, return surplus capital to shareholders and remain ready to capitalize on business expansion opportunities if the price, quality of assets and timing are right. Capital expenditures from operating cash flows at rates exceeding depreciation, maintenance of low debt levels, and ongoing payments of dividends and share repurchases validate the company’s commitment to this strategy. The primary drivers for revenues for TDW are expected future levels of supply and demand for crude oil and natural gas, and on estimates of the cost to find, develop and produce reserves. This in turn drives oil and gas exploration and development activities and the demand for support services such as those provided by Tidewater. While global recessionary conditions have throttled back demand and depressed prices, TDW earnings have remained relatively flat. However, the fundamental drivers, increased energy demand coupled with dwindling supply, suggest that demand for the company’s services will rebound strongly and that share price should recover.

Tidewater runs the world’s largest offshore support vessel fleet with 394 vessels distributed globally. The company has annual revenues of $1.2B, with 90% of its revenue derived from international deployments and 10% from U.S. operations. The primary business is the provision of marine support services to oil and gas exploration, development and production companies, drilling companies, and other offshore services companies.

 
Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Tidewater Inc. of US$54.50.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield                      24.0%
Dividend yield                  2.3%
Total return                    26.3%

 
Risks

Listed below are some of the key risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Global Economic Conditions – As the primary driver for earnings is global demand for oil and gas, prolonged recessionary conditions and subdued demand may adversely impact earnings.

Competitive Pressures – The marine support services industry is highly competitive and competes largely on price. Continued addition of new capacity might adversely impact future earnings.

Industry Consolidation and Concentration – consolidation within the company’s customer base may lead to reduction in aggregate demand for marine support services and reduce pricing power. Currently, 31% of the company’s revenues are derived from just two customers. Loss of these customers would materially impact earnings.

 
The Numbers

Share Price ($US)   43.97
Market Cap ($US B)   2.3
No. Shares (M)   52
ROE   10.7%
ROA   7.8%
P/E Ratio   9.1
Price/Sales Ratio   2.1
Price/Book Ratio   0.9
Current Ratio   2.4
Interest Coverage   45
Total Debt/Equity   12%

Analyst – David Scollon


Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.

Copyright © 2010 Scollon Asset Analytics Ltd.
All rights reserved. Unauthorized distribution or reproduction is strictly forbidden.
Scollon Asset Analytics Ltd. obtains information from various sources felt to be reliable but does not warrant its accuracy and disclaims for itself all liability arising from its use. No information provided shall constitute tax, legal, or investment advice, or an offer to buy or sell securities.
]]>Fri, 24 Sep 2010 07:10:07 -0800http://www.weeklystockcall.com/1/post/2010/09/walgreen-co-nysewag.htmlSeptember 24, 2010
Current Price – US$29.51


Walgreen’s (WAG) business stands to benefit greatly from an aging demographic in the U.S. and the associated increased need for more and better prescription drugs. While the company does face stiff headwinds from government pressure to reduce pricing, it operates as a virtual oligopoly with competitor/partner CVS Caremark and should be able to resist significant erosion of its margins. Walgreen is principally a retail drugstore chain with over 7000 stores in the U.S. generating $63B in annual revenues (75% derived from the sale of drugs, the remainder from general merchandise). 

The company has achieved 36 consecutive years of revenue growth, is minimally dependent on debt and continues to return a growing dividend. Despite this, current share price seems to be significantly discounted based on analysis of historical valuation ratios and projected earnings.


Valuation

Based on a blend of valuation methods (discounted cash flows, dividend discount model and, historical and industry price ratios) I arrive at a current valuation for Walgreen Co. of US$36.14.

Expected return should this price be realized in the markets within the next 12 months would be:

Price yield       22.5%
Dividend yield   2.4%
Total return     24.8%


Risks

Listed below are some of the immediate risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report and 10K filing.

Government Regulation and Health Care Reform – the government has been considering proposals to reform the U.S. health care system that may increase government involvement in health care, increase regulation of pharmacy services, result in changes to pharmacy reimbursement rates that could adversely impact earnings.

Reductions in Third-Party Reimbursement Levels - from private or government plans, for prescription drugs could reduce margins on pharmacy sales and have a significant effect on retail drugstore profits.

Constrained Geography - an inability to find suitable new store locations at acceptable prices or expiration of current leases could limit future growth.


The Numbers

Share Price ($US)   29.51 
Market Cap ($US B)   28.7 
No. Shares (M)   991 
ROE   14.0%
ROA   7.9%
P/E Ratio   14.3
Price/Sales Ratio   0.4
Price/Book Ratio   1.9
Current Ratio   1.7
Interest Coverage   39.1
Total Debt/Equity   16%

Analyst – David Scollon


Disclosure - At publication of this analysis I hold no position in this security, but may take a long position in the future. I do not take short positions in any of the stocks reviewed on this site, nor do I receive any compensation from the companies studied for publication of my opinions.


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