Tuesday, October 27, 2015

Revving up with Cummins Inc(CMI)

I'll be adding another buy of Cummins Inc(CMI) today as the company released earnings.  I'll get a summary out in a few days regarding the buy. While not pretty overall I think at this price level it offers a good entry point for long term investors. Coincidentally that's what we do here.

Friday, October 23, 2015

Update on IBM & P&G

Both IBM & Procter & Gamble both reported earnings this week.  I do not plan on going into specifics of each report. Instead I'll mention some noteworthy items.

Lets start with IBM

"In the third quarter we again made progress in the transformation of our business to higher value, with strong growth in our strategic imperatives and expanded operating margins,” said Ginni Rometty, IBM chairman, president and chief executive officer. "We are continuing to make significant investments to build platforms around analytics, cloud, mobility and security that lay the foundation for a new era of cognitive business -- where we see long-term value for our clients and shareholders."

In other words we are struggling right now with the business, but patience is needed as we continue our turnaround. The move into cloud, data analytics, and other services is proving much tougher than the company originally projected. Although I think they are making solid sales gains in the space. YTD strategic imperatives are up 20%.  Specifically cloud revenues are up 45% YTD and have reached $9.4 billion the trailing twelve months.  The cloud is going to be a big move. It's so big that Microsoft has decided to give away free upgrades to it's platform in hopes that users will want to migrate to its extra cloud services, and their sales-force has been heavily pushing it's cloud options onto business' of all sizes.  So unfortunately patience is warranted as it's a competitive field all around.

 The company re-affirmed it's full year non-GAAP guidance of $14.75-15.75. Back in Q1 the company had originally guided non-GAAP for $15.75-16.50. Obviously not good to miss your own numbers for the year. GAAP results are expected to come in at $13.25-14.25. I prefer GAAP results as it's less prone to financial maneuvering.  If today were January 1st, 2016 we would have a GAAP P/E(TTM) of around 11 based on the current stock price. Add in the dividend of $5.20/share and we have a total stock yield(5.20+13.25/145) of 12.7% as of today at the low end of GAAP guidance.  If we knew the turnaround was complete this could be a very nice entry point. I'm going to keep an eye on the technical's as they are close to oversold territory. The stock seems to be finding support around $140 too. However for a fundamental take I think it might be prudent to wait until the next quarter and guidance for 2016 comes out. If the stock continues to get cheaper I might make an add to the existing position.

P&G(PG) is another longtime dividend champion dealing with declining sales revenues. Although the market met results with an upbeat tempo as the stock popped higher today. Yet as a consumer staple it's not as important to dwell on revenue, but instead on margin and cash generation. GAAP operating profit came in at 22.8% vs 19.4% for the same quarter last year. Nice to see that improve from a quarter a year ago. Cash generation is also still big as the company had cash from operations to the tune of $3.5 billion. After taking out Capex we have FCF of $3 billion for the quarter. Based off the cash flow statement provided in the earnings release the payout ratio 62% from FCF, and 52% when compared to operating cash flow.

Personally I'd like to see the competitive pressures ease a bit more before adding to the position. Also the stock has had a nice move up since it's foray into the high 60's a couple months ago. Otherwise it's business as normal for this one. Unless WB sells his position I'm going to sit back and collect the dividends.

Have a nice weekend!

Wednesday, October 21, 2015

Buying plant power

Yesterday I added to the existing Whitewave position. I apologize for not getting this post finished sooner. The stock was downgraded by Goldman Sachs and you can see their synopsis here.  While a slowdown in growth is to be expected as the company gets larger I personally believe the sell off is a little over done.

Back in August the company reported Q3 results with guidance for adjusted EPS in the range of 1.14-1.17 for 2015. At yesterday closing price of 40.25 that gives the stock a P/E of 35.30 at the low end of guidance. The company has been expanding it's presence in China, and we know during the quarter the yuan was devalued by the PBOC. However during this time the Euro has stabilized and meandered around 1.10-1.15 most of the quarter. Slightly stronger than what was recorded in Q3. I think the net currency impact will be close to a wash. Hence possibly why Goldman Sachs didn't mention it.  Also Goldman Sachs noted only a slow down in North American sales as a reason for their downgrade. Nothing was noted about international sales which have been growing at a strong rate despite currency headwinds.

The balance sheet isn't exactly solid, but it's not shaky either. Here are a few ratios I check. Data is from the most recent quarter(mrq)

Current Ratio - 1.19
Total Assets/Total Liabilities - 1.49
Total Assets - Goodwill & Intangibles/Total Liabilities - .72

I like to see all the numbers above 1 at an absolute minimum. So with the last ratio under one we must keep watching to see the trend. The company has been on a buying spree the last few years so their Goodwill & Intangibles has increased quite a bit.  Personally I think their Vega acquisition was on the expensive side, but I'm hoping their analysis has found some value that maybe the numbers don't necessarily portray. I think if the acquisitions stop for the next 6-12 months it will allow the company time to steady the balance sheet and increase it's strength.

Furthermore if you look at a basic chart from stockcharts.com you can see the price action has put WWAV very close to oversold territory on both the weekly and daily chart.  That makes me think most of the selling is out of the stock for the near future.

Well that's about it for this one.  I'll update the portfolio as of yesterdays closing price.

Thursday, October 15, 2015

Is Wal-Mart still a great stock?

Wal-Mart shocked a lot of investors and analysts the other day when the CEO let everyone know profits could slip by 12% in its next fiscal year. The drop is attributable to its increased employment costs, moderate sales growth, and increased capital expenditures.

One item to note is that the company plans to only spend $900 million on e-commerce for FY 2016, and then $1.1 billion for FY 2017. Odd considering the company has previously cited Amazon and other retailers e-commerce platforms as a threat to the company. The press release can be found here. A plus side is that the company has decided to initiate another $20 billion in share repurchases over this time period. Let's do some quick math to estimate the share count reduction.

Shares Outstanding: 3.21 billion
Assumed average purchase price: $68

20bil/68= 294.1 million shares purchased
3.21bil-294.1mil = 2.91bil shares left
294.1mil/2.91bil shares = 10%

In other words the company is looking to purchase 10% of the outstanding shares even if the shares traded almost 10 points higher than they are today. Its important to note that only 1.37 billion shares are floating as the Walton Family still owns a large portion of the company.

Coupled with the fact that they expect to generate $80 billion in cash over the next 3 years($26.6 billion/year) there seems to be no anticipation of a downturn in Wal-Marts balance sheet. The company has also generated a dividend growth rate by my calculations of 12.5% the last 10 years. With some back of the envelop math that means the company might be paying about $7.5 billion for 2015, $8.5 billion in 2016, and $9.5 billion for 2017 in dividends each year. That would keep its payout ratio around 35% which is very close the current 34% payout ratio from operating cash flow. Of course dividend growth and cash generation could slow which investors will need to keep an eye on.

According to the guidance from the company worst case scenario is EPS comes in at $3.88 - $4.14 if we take a 12% reduction at both ends of next years guidance of $4.40-4.70. At worst that means Wal-Mart is currently trading at 15 times earnings for the rough years ahead. Not really overvalued in my opinion.

The overall situation bodes watching in the near term.  As of now almost all the bad news is getting priced into the stock. Watching the technicals will be key to see if the stock holds along any historical support lines.  It will be interesting to see if Warren Buffet dumps his shares in the next 13G filing. In the meantime I'm going to watch the stock for a potential add. Companies with $485 billion in annual revenue don't disappear very easily.

Tuesday, October 13, 2015

About The Portfolio

I personally own all the stocks in my portfolio.  I wouldn't put it online if I didn't think they were solid companies.  I decided to use the date I began putting everything together for this site as the starting prices for the companies.  This way we can track from a single point in time the performance of the holdings and any additions/subtractions that might be made.  My goal is to add to these holdings as time progresses. If I make an add to an existing holding I'll use the price I actually bought shares at.  For example if I subsequently make two more adds to a position I'd take the closing price from inception and the actual buy price on the two add days to create the average price.

The goal here is to rely on these securities as part of my own personal plan to reach financial independence. This will allow me to pursue other endeavors in life without the fear or stress of being put out on the street.  I think that a combination of saving a lot of money and investing wisely anyone can vastly change the outcome and situation in each of their lives. I do understand that the impossible could happen overnight throwing any tediously crafted plan out the window.

I don't believe in diversification really. Neither does Warren Buffett. He's been quoted saying "Diversification is protection against ignorance. It makes little sense if you know what you're doing." Although if you look at his current portfolio he clearly is spread across many sectors. I'm not claiming to be a genius by any means. I've made plenty of mistakes over my life already. You can see I own almost every major tobacco stock trading in the USA. They'll never go out of business. If the government wanted them gone they would have done it back in the late 90's. Instead they settled with this agreement.  I also plan on buying more companies in the sectors I already own because I believe these companies/industries have an advantage not afforded to others. I'm big on food companies too. It's no secret they are dependable companies as it's why they are referred to as "staples" or "defensive" stocks. But some companies in this sector offer advantages that others do not have. Of course they are subject to changing competitive landscapes. But great companies adapt and continue to succeed even more. I try to shy away from technology. Besides IBM & CTSH I'd consider CMI, V, PYPL, & WAB as tech companies too even if the standard definition doesn't include them.  In all reality every single company utilizes technology to some degree in ever facet of their operations and sales. The key is to find companies with the right technology and innovation that affords them a competitive advantage over others in their industry.

I'll post the odd thing or two about the market, interesting facts, or correlations.  So there should always be something interesting going on here. Thanks for stopping by. I'll continually look to update the site and make changes for the better as time goes on. So I apologize in advance for any hiccups that maybe encountered.

Friday, October 9, 2015

What is investing for the long haul?

The answer to the articles question will sound reasonable to many investors, and idiocy to others. When we choose to invest our money we have a plethora of choices. There are so many investment companies and their agents out there trying to hawk us the best fund, or financial product to invest in.  The reality is that these funds are just a basket of underlying securities already widely available to the average investor through just about every discount online broker. So we can choose to put our money with the sales person with a great sounding idea(plus a hefty commission). But when that person decides to jump ship when things go south your left holding the bag.  Doesn't sound like they were in it for the long haul for you. Or we can learn how to do it ourselves, and it doesn't require a finance or accounting degree(although that helps).

Here I'll strive to seek out individual securities and investment ideas that will be there for me through good times and bad.  These investments are in it for the long haul.   I'd think Warren Buffet said it best

“An investor should act as though he had a lifetime decision card with just twenty punches on it.“

“If you aren't thinking about owning a stock for ten years, don't even think about owning it for ten minutes.”

I'd say he's done very well for himself by identifying companies that are built to last almost indefinitely. Now that doesn't mean one of his most famous investments, Coca-Cola, will never go bankrupt. Instead we should try to understand that there are certain companies, some of which are very unexciting, that produce great products and extraordinary profits for their shareholders. By identifying and investing in these companies we'll build our own portfolio that we can use to reach financial independence, fund retirement, and even pass down to future generations. How is that possible? Through the dividends the majority of the these great companies pay each year to their shareholders.  Over time these dividends end up as a tidal wave of cash in our accounts.  

The approach here won't be extremely analytical.  I'll look to buy great companies at great prices, or in following WB's mantra to buy great companies at fair prices too.  I'll post an analysis on each investment highlighting some of the key factors I use when deciding to purchase a company. Not to much rocket science here, but it will include a fair dose of hard work and knowledge. Buys are intended to be held at least 10 years with the idea of owning the stocks forever. If the situation changes drastically on any investment then selling will be prudent if the need arises at any time.  

You might be wondering why we don't just invest in an index fund, which is all the rage. The thing is I personally have some of my holdings in the SPY index fund, but not a big portion. Of course I want a piece of the overall action, and the dividends that come with it. But why would I want to completely settle for the average returns of what is an actively managed portfolio with companies I feel don't stand the test of time.  Maybe I'd rather own Home Depot instead of Lowes, or have nothing to do with Petsmart, Genworth, or Red Hat*.  Now these are just examples, and some are well run companies. But the fact is the index funds might not even own some of the companies that I believe  will offer superior results over time. 

Now I'm not new to investing, it's been a passion of mine since I was 12. I've had plenty of successful  and unsuccessful choices. So I'm not perfect in any sense.  I currently own stocks that I think are solid companies with great future prospects.  As a way of tracking the results I'll have a shareable spreadsheet** from Google Docs that will list the price of the securities starting  as of the close on October 7, 2015. I'll give a quarterly update, and if there are any new buys I'll put up a post and update the sheet accordingly. 

Thanks for coming along for the ride, or should I say "The Long Haul!"

* Based upon the link here
**Sheet updated and viewable 10/11/15

Full Disclosure: Long SPY.