AT&T Inc. (NYSE:T)07/30/2010 July 29, 2010 Current Price – US$26.04 While AT&T Inc. is basically a utility there are two factors that make it a compelling investment candidate at this time. First, the stock is paying a dividend that yields 6.5% and is trading at low valuation relative to historic pricing ratios and discounted value of projected cash flows. The dividend has increased annually for past 26 years and appears to be secure given that the company continues to generate more than sufficient operating cash flow to support growth, pay dividends and cover interest many times over. Second, AT&T appears to be well positioned to benefit from trends toward increased usage in mobile broadband, wireline data services and convergence of communications/entertainment services. The company has made capital investments of more than $55B to support growth in these areas in the past three years has the advantage of being the exclusive U.S. carrier of iPhones, giving it an early lead in capture of broadband mobile market share. Rumors circulate that the exclusive relationship with Apple might not continue much longer, but in the meantime, AT&T continues to capitalize on the love affair with all-things-Apple. The transition from voice services to higher margin broadband services (both wireline and wireless) that the industry is currently undergoing offers the opportunity to see a bump in share prices that would be uncharacteristic for a mature telephone utility. At current valuations, this growth does not seem to be fully priced into AT&T’s shares. AT&T Inc. (T) is a communications holding company who, through its subsidiaries and affiliates, provides wireless, Wi-Fi, high speed Internet and voice services. The company has annual consolidated revenues of US$123B derived from four primary business segments: Wireless (45% of revenues), Wireline Voice (25%), Wireline Data and Managed Services (25%) and Advertising Solutions and Other (5%). 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 AT&T Inc.of US$28.94. Expected return should this price be realized in the markets within the next 12 months would be: Price yield 11.2% Dividend yield 6.5% Total return 17.7% Risks Listed below are some of the immediate risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report. General Economic Conditions – a return to recessionary conditions or a prolonged recovery could lead to reduced discretionary spending by consumers or financial difficulties for key suppliers of network equipment. Regulation – asymmetrical regulation of the converging industries in which AT&T operates may result in AT&T being unable to compete on level playing field in some instances and modification to existing regulations may remove some of AT&T’s established advantages in others. Competition – high margins in growing business segments invite competition from new companies that are subject to lower historical cost basis and may be subject to lesser regulatory conditions. Increased competition would tend to increase pricing pressures and drive down profit margins. Spectrum Availability – restrictions on general and company specific access to required radio spectrum may inhibit revenue growth. The Numbers Share Price ($US) 26.04 Market Cap ($US B) 154 No. Shares (M) 5,926 ROE 12.7% ROA 4.8% P/E Ratio 13.1 Price/Sales Ratio 1.5 Price/Book 1.3 Current Ratio 0.6 Interest Coverage 5.2 Total Debt/Equity 0.67 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. Manulife Financial Corporation (TSE:MFC)07/20/2010 July 20, 2010 Current Price – C$14.98 Manulife Financial Corporation (MFC) has been caught up in what has been termed “a perfect storm” for life insurance companies, but has come through with a stronger balance sheet and improved policies on risk management. The steep decline in equity markets in 2008, combined with near zero interest rates, contributed to drastic reductions in MFC’s net income in that year ($0.5B in 2008 vs. $4.3B in 2007) and its share price suffered accordingly. The reduction in profits can be principally attributed to $3.8B in charges from its equity exposure in a group of products known as “variable annuity guarantees”. The charges highlighted the company’s overexposure to these products, insufficient capitalization and inadequate hedging efforts. Subsequently, MFC has shored up capital reserves with new equity and restructured debt, and has taken a strategic decision to reduce it’s reliance on variable annuity products for revenue (premiums and deposits down from $18.5B in 2008 to $11.3B in 2009). While markets remain skittish, equities will likely recover eventually, interest rates will rise and MFC’s share price should see a stunning recovery. In the meantime, the company continues to pay a decent dividend (3.5% yield), make strategic acquisitions at discount prices and expand geographically. Manulife Financial is a leading Canadian-based financial services group operating in 22 countries and territories and offering services in individual life insurance, group life and health insurance, long-term care services, pension products, annuities, mutual funds and banking products. The company has annual premiums and deposits of $71B and more than $439B under management. 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 Manulife Financial Corporation of C$24.19. Expected return should this price be realized in the markets within the next 12 months would be: Price yield 61.5% Dividend yield 3.5% Total return 64.9% Risks Listed below are some of the immediate risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report. Regulation – It is likely that increased regulation and capital requirements will be forthcoming in the wake of the recent financial crisis that could, at least on a temporary basis, materially impact earnings. Actuarial and Risk Management - As MFC is in the risk business, fundamental errors in actuarial calculations, asset allocation and diversification, and hedging activities could have material adverse impact on earnings. Acquisitions – Frictions, discontinuities and unrealized synergies with companies acquired as part of MFC’s strategic growth plan could have material impact. The Numbers Share Price ($CDN) 14.98 Market Cap ($CDN B) 26.7 No. Shares (M) 1,763 ROE 13.3% ROA 1.7% P/E Ratio 6.9 Price/Sales Ratio 0.6 Price/Book 1.0 Total Debt/Equity 0.24 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. Archer Daniels Midland Company (NYSE:ADM)07/14/2010 July 14, 2010 Current Price – US$26.98 Archer Daniels Midland Company (ADM) presently appears to be trading at a discount to its intrinsic value and will likely see significant price correction as we exit the current recessionary period. As a commodity processor and distributor, the company’s earnings are highly sensitive to demand conditions for both inputs (crops and energy) and outputs (processed food, feed and energy products). Subdued demand conditions have currently depressed earnings; however, going forward, fundamental drivers such as growing emerging economies, rising expectations for high-quality food, and increasing global energy demands suggest improving conditions for ADM’s markets. One ADM’s largest revenue segments, Oilseeds, can generally pass input price increases through to consumers, meaning increased revenues would be expected to directly increase earnings without diminishing profit margins. Other segments may be able to pass price increases through to a lesser degree. Further, the stock should act as an effective hedge to inflation driven by increasing food and energy prices. ADM is one of the world’s largest processors of oilseeds, corn, wheat, cocoa, and other feedstuffs and is principally engaged in procuring, transporting, storing, processing, and merchandising these agricultural commodities and their transformed products (food, feed and energy). The company derives annual revenues of US$69B from three primary business segments: Oilseeds Processing (35% of Sales), Corn Processing (11%) and Agricultural Services (46%). 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 Archer Daniels Midland Company of US$36.25. Expected return should this price be realized in the markets within the next 12 months would be: Price yield 34.4% Dividend yield 2.2% Total return 36.6% Risks Listed below are some of the immediate risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report. Weather, Disease, Government Programs - The availability and price of the agricultural commodities utilized as raw materials, and the demand levels and selling prices of the products that the company produces, can be affected by weather, disease, or government programs and materially impact revenues and profits. Energy - Fluctuations in energy prices could adversely affect the company’s operating results, in both revenues and costs. Geopolitical – As a geographically diverse entity, ADM is subject to economic downturns, political instability and other risks of doing business globally which could adversely affect earnings. Risk Management - Hedging strategies to manage price, interest rate and foreign exchange risks may not be successful in mitigating the company’s exposure to these risks. The Numbers Share Price ($US) 26.98 Market Cap ($US B) 17.3 No. Shares (M) 643 ROE 12.7% ROA 5.0% P/E Ratio 11.1 Price/Sales Ratio 0.3 Price/Book 1.2 Current Ratio 2.1 Interest Coverage 6.2 Total Debt/Equity 0.47 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. Becton, Dickinson and Company (NYSE:BDX)07/07/2010 July 7, 2010 Current Price – US$68.18 Becton, Dickinson and Company is selected as this week’s candidate on the basis of attractive valuation, a strong balance sheet and competitive returns. The medical devices industry in which BDX operates presently faces significant demand and pricing pressures particularly from current recessionary conditions, health care reform initiatives, and threat of competition form new entrants (emerging market producers and integration/consolidation within the value chain). BDX, however, holds and continues to build competitive advantages in productivity, product quality, innovation and brand establishment. I feel that these advantages, combined with opportunities for geographic expansion and the appetite of an aging western demographic for high quality healthcare, will result in correction to the value of BDX’s shares in due time. BDX is a global medical technology company engaged principally in the development, manufacture and sale of medical devices, instrument systems and reagents used by healthcare institutions, life science researchers, clinical laboratories, the pharmaceutical industry and the general public. Annual revenues (U.S.$ 7.2B in 2009) are derived from three major business segments; Medical (52%), Diagnostics (31%) and Biosciences (17%). The company is geographically diversified with manufacturing in 15 countries and derives 55% of revenues outside of the United States. Continued global expansion, high margin product development and operational productivity improvement form the basis for BD’s long term growth strategy. The company has paid 37 consecutive years of increasing dividends. 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 Becton, Dickinson and Company of US$83.15. Expected return should this price be realized in the markets within the next 12 months would be: Price yield 22.1% Dividend yield 2.2% Total return 24.3% Risks Listed below are some of the immediate risks faced by the company. For a more complete discussion of risk, refer to the company’s annual report. Healthcare Reform – reforms proposed in the United States and other developed markets threaten to place downward pressure on product demand and profit margins. Competition – ongoing consolidation and vertical integration within the industry, or new entrants from developing economies, may result in pricing pressure and headwinds to gaining international market share. Currency Exchange – weakening currencies in foreign markets tend to reduce U.S$ revenues and make U.S. imports less attractive in those markets. Legal - BDX is involved both as a plaintiff and a defendant in numerous legal proceedings and claims that arise in the ordinary course of business, particularly in matters of antitrust and product liability, and while they attempt to make provisions for probable liabilities, unanticipated material liabilities may still exist. Technological – possible threat of development of lower cost processes by competitors or the introduction of substitute technologies (i.e. needleless injection). The Numbers Share Price ($US) 68.18 Market Cap ($US B) 15.9 No. Shares (M) 233 ROE22.9% ROA13.2% P/E Ratio 13.2 Price/Sales Ratio 2.2 Price/Book 3.1 Current Ratio 2.6 Interest Coverage 41.3 Total Debt/Equity 0.33 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. 3M Company (NYSE:MMM)06/30/2010 June 29, 2010 Current Price – US$78.49 While 3M Company is not presently trading at low enough price levels to be considered a classic value investment, the company is trading at a modest discount and I feel that it presents as a good investment candidate for the times. With a strong balance sheet (Interest Coverage: 30.3, TD/Equity: 42.6%), generous free cash flow (FCF/Sales: 17.5%) and high margins (Operating: 22.8%, Net Profit: 15.0%), 3M is well positioned to expand revenues in coming years through innovative new product introductions, aggressive marketing to capture market share from weakened competitors and ongoing strategic acquisitions. Further, the company has a long, stable record of paying out a growing dividend (Yield: 2.68%). 3M is a diversified global manufacturer and marketer of a wide variety of products operating in six primary business segments: Industrial and Transportation (31% of Sales); Health Care (18%); Consumer and Office (15%); Safety, Security and Protection Services (13%); Display and Graphics (13%); and Electro and Communications (10%). The company, known for major brands such as: Nexcare, Post-it, Scotch, Ace, Thinsulate and Filtrete, operates 177 manufacturing plants, employs 75,000 people globally and has annual revenues of US$23B. 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 3M Company of US$87.39. Expected return should this price be realized in the markets within the next 12 months would be: Price yield 11.3% Dividend yield 2.8% Total return 14.1% Risks Global Economic Conditions – Operating in 65 countries with a widely diversified product portfolio, 3M has broad exposure to negative general economic conditions, particularly as in the presently subdued end-market sectors such as automotive, housing and commercial real estate. Currency Risk – With 63% of revenues generated outside the United States, reported revenues are at risk with strengthening of the U.S dollar. New Product Introductions – Lack of market acceptance or adoption is always a risk given 3M’s reliance on innovation as a growth driver. Acquisitions – Failure to effectively integrate acquired companies or realize anticipated synergies. Legal and Regulatory – While 3M makes provision for known or anticipated liabilities, the potential for unexpected, unmitigated, material future liabilities exists. The Numbers Share Price ($US) 78.49 Market Cap ($US B) 56 No. Shares (M) 713 ROE 28.3% ROA 13.9% P/E Ratio 15.6 Price/Sales Ratio 2.2 Price/Book 4.5 Current Ratio 2.4 Interest Coverage 30.3 Total Debt/Equity 0.43 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. CF Industries Holdings, Inc. (NYSE:CF)06/23/2010 June 22, 2010 Current Price – US$64.62 CF Industries is the second largest nitrogen fertilizer producer and the third largest phosphate fertilizer producer in the world among public companies. Revenues ($2.6B in 2009) are derived globally through cyclical sales to the agricultural industry. Profitability is driven by factors affecting price and volume, primarily global economic conditions and weather, and by factors affecting cost, primarily raw materials costs, natural gas prices and operational efficiency. While CF Industries is very competitive with industry leaders in terms of operating margins (26.1%) and return on equity (22.9%) they currently trade at a significant price discount to earnings relative to peers (10.6 P/E for CF vs. 24.3 P/E for the industry). I feel that this is a discrepancy that will resolve as the global economic recovery progresses and CF Industries has the opportunity to digest its recent acquisition of former competitor Terra Industries. The acquisition has left CF Industries with a somewhat weaker balance sheet, but a return to greater demand and more positive pricing conditions as we exit the recession would likely lead to an early retirement of the debt used to fund the merger and restore a traditionally conservative balance sheet. In short, CF Industries appears to be an attractively priced and well positioned cyclical stock poised to benefit greatly from increased global demand for food and feed stocks in coming years. 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 CF Industries of US$77.24. Expected return should this price be realized in the markets within the next 12 months would be: Price yield 19.5% Dividend yield 0.6% Total return 20.1% Risks
The Numbers Share Price ($US) 64.62 Market Cap ($US M) 4,591 No. Shares (M) 71.1 ROE 22.9% ROA 16.3% P/E Ratio 10.6 Price/Sales Ratio 1.9 Price/Book (tang) 1.8 Current Ratio 2.4 Interest Coverage N/A Total Debt/Equity 0.94 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. Exxon Mobil Corporation (NYSE:XOM)06/17/2010 June 16, 2010 Current Price – US$62.46 Exxon Mobil is the world’s largest publically traded integrated oil and gas company. The company can be viewed as having three major business segments: Upstream (i.e. resource extraction, drilling), Downstream (refining and retailing) and Chemical (i.e. plastics, polymers and industrial chemical production). Exxon appears to be particularly attractive at this time as global recessionary conditions have caused a reduction in revenues and margins while negative perception of oil and gas companies stemming from BP’s Gulf of Mexico problems has further depressed share prices. However, the longer term earnings drivers for Exxon remain strongly positive. The primary drivers for Exxon are crude oil prices, retail prices and volume demand. The fundamental economic conditions of the industry; diminishing supply and growing global demand (particularly in emerging markets where demand is expected to grow at 2.5% annually through 2030), indicate that prices and margins will improve rapidly as the World recovers from this recession. While substitute sources of energy continue to be developed, there is no real scalable, economically viable, substitute that presents a competitive threat to Exxon’s business model in the foreseeable future. Exxon leads the major producers in its industry in terms of ROE, Operating Margins and Debt/Equity, and has a projected dividend yield of 3.0%. During the recent economic downturn Exxon has continued to invest excess cash flow in new capital projects, repurchase shares from the open market and increase dividends at a reasonable rate. 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 Exxon Mobil of US$75.94. Expected return should this price be realized in the markets within the next 12 months would be: Price yield 21.6% Dividend yield 3.0% Total return 24.5% Risks Source: Exxon Mobil
The Numbers Share Price ($US) 62.46 Market Cap ($M) 295,811 No. Shares (M) 4,736 ROE 18.7% ROA 8.7% P/E Ratio 14.2 Price/Sales Ratio 0.9 Price/Book Value 2.7 Price/FCF 33.1 Price/Book (tang) 2.8 Current Ratio 1.1 Interest Coverage 62.5 Total Debt/Equity 0.1 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. Novartis Ag - ADR (NYSE:NVS)06/10/2010 June 10, 2010 Current Price - US$47.01 Novartis is a diversified health care company comprised of four major divisions: Pharmaceuticals, Vaccines and Diagnostics, Sandoz (generics and biosimilars) and Consumer Health. Novartis sports a decent projected dividend yield (4.2%), a strong balance sheet and currently low price ratios relative to its industry and own historical levels. If there is a fly in the ointment, it’s that a fair portion their top selling drugs (representing 30% of current revenues) face patent expiration in the next two to five years. That having been said, Novartis is aggressively seeking to expand revenues through acquisitions (more than 7 since 2008 including the ongoing bid for Alcon), new product developments (more than 30 regulatory approvals received in 2009, 135 projects in the pipeline, more than 30 at phase III and 11 awaiting regulatory approval) , and through geographic expansion. Low reliance on debt thus far and growing free cash flows give Novartis a significant runway for launching new products and an aging demographic in industrialized countries bodes well for future product demand. In the meantime, they have a history of thirteen consecutive growing annual dividends to offer comfort if it takes the market a while to recognize the value in the company. Valuation Based on a blend of valuation methods (discounted cash flows, dividend discount model, and historical and industry price ratios) I arrive at current valuation for Novartis Ag – ADR of US$60. Expected return should this price be realized in the markets within the next 12 months would be: Price yield 27.6% Dividend yield 4.2% Total return 31.8% Risks Patent expirations – the previously discussed risk that Novartis will be unable to backfill lost revenues from expiring patents. Currency risks arising particularly from downward pressure on the Euro due to sovereign debt worries. Europe is Novartis’ largest geographic revenue contributor. Pricing pressure – drug companies may face increasing pressure as states institute health care reforms to cope with burgeoning national debts. Legal – Novartis, like others in its industry, is subject to ongoing legal action from governments, corporations and consumers. While some provisions have been made, final liabilities can not be know in advance and may prove to be material. The Numbers Share Price $47.01 Market Cap $107B No. Shares 2.2B ROE 17.0% ROA 9.8% P/E Ratio 11.4 Price/Sales Ratio 2.2 Price/Book Value 1.9 Price/FCF 9.1 Price/Book (tang) 3.2 Current Ratio 2.1 Interest Coverage 27.5 Total Debt/Equity 0.32 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. | Company reviews on Weekly Stock Call are available free of charge, however, the enterprise does incur costs in providing this value. If our reviews have helped you to improve the returns on your portfolio, and you would like to contribute a fraction of the extra returns realized to the ongoing publication of Weekly Stock Call, please click the "Contribute" button below.
Your support is greatly appreciated. David Scollon, President, Scollon Asset Analytics Ltd. MonthMay 2012 CompaniesAll 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. |
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