YCHARTS Blog

Online Colleges - Students or Profits?

Tue, 09 Mar 2010 07:46:00 -0500

The market for post-secondary education is over $386 billion in the U.S. Couple that with the fact that only 35% of adults have more than a 4-year degree and you have a big opportunity.

Online education providers realize this and are changing the way millions of students get their education. Schools like University of Phoenix and DeVry have grown rapidly over the past decade and have no plans of slowing down.

The four largest providers in the online education market are all growing revenues in the 30% range YoY with solid cash positions and reasonable PE multiples given the growth rates. See YoY revenue growth rates below.

The value proposition is simple. Get a degree and increase your long-term earnings power. The data supports this at a macro level as the chart below illustrates.

Source: U.S. Bureau of Labor Statistics, 2009 annual data

Investors benefited from owning shares in the online education sector over the last decade. The chart below shows the 10 years returns as of the end of Q409 for Apollo Group (APOL) +378%, DeVry (DV) +203%, ITT Education (ESI) +1143% and Strayer Education (STRA) +976%. Will this trend continue?

University of Phoenix is the leader in terms of revenue and students. Phoenix has over 420K undergrads and 78K graduate students dwarfing all public universities that top out with ~50K students.

Profit margins in the sector are solid and relatively stable ranging from 15% to 25%.

Earnings yield provides a good way to compare returns vs alternative investments like the 10 year. APOL and ESI look the most attractive with earnings yields over 7%.

Many people question the benefits of getting a degree online and the value proposition of the leading companies in the sector. Below are some of the reasons often cited:

When calculated by the federal standard used by the Department of Education, UOPX’s overall graduation rate is 16%, which, when compared to the national average of 55%, is among the nation’s lowest.
For-profit education is heavily dependent on government funding. Title IV accounts for a large percentage of revenue at four largest companies.
Online Colleges spend a high percentage of profits on self-promotion/advertising that could otherwise be spent on improving the education. See chart below.

The online education sector has been attractive over the last decade from an investor standpoint. There are definitely issues with graduation rates and the general value provided to students but if you are looking for a growth sector with strong fundamentals, a compelling macro story, that tends to do well when unemployment rates are high this is a sector to consider.

Can Microsoft Stop Its Decade-Long Slide?

Wed, 17 Feb 2010 20:37:00 -0500

Microsoft (MSFT) may be large and very profitable, but it has been on a steady decline over the past decade. The company peaked at over $600 billion in market cap in 1999 and is now valued at $250 billion (a loss of over $350 billion in value). Microsoft’s loss in market capitalization is higher than the value of any company today, to put that into perspective.

During the dot com boom, many companies started to create cloud based applications to power everything from business applications to email, and for the most part they failed. Today, more and more applications are moving to the cloud, and users are getting comfortable doing just about everything via the web, enabling access from an ever growing number of devices.

Microsoft is in an interesting place right now. The company has a huge windows and office business that is being attacked from all sides by Google (GOOG), Apple (AAPL) and open source software vendors. Microsoft is a company without a clear vision, even though they have products that most of us still use on a daily basis. We think Microsoft will figure it out, but it is likely to lead to lower margins and a continued drop in market cap.

Let’s look at how the company is performing financially.

Top Line Growth

Microsoft announced revenue of $19 billion for the second quarter ending 12/31/09. Microsoft’s revenue increased 14% YoY.

“Exceptional demand for Windows 7 led to the positive top-line growth for the company,” said Peter Klein, chief financial officer at Microsoft. “Our continuing commitment to managing costs allowed us to drive earnings performance ahead of the revenue growth.”

Windows and Windows live managed to grow at nearly 70% YoY based on the strength of Windows 7. The Server and Tools division was up over 2% but all other divisions posted YoY losses in revenue.

Profit margins improved in all divisions except online, which continues to lose money, but the long-term trend is down.

Valuations

Microsoft’s PE has also trended down over the last decade with profit margins. Right now, MSFT trades at less than 13 times next year’s estimates.

Conclusion

So what happens now? MSFT is a company with declining margins and lots of new competitors vying to disrupt its dominance in operating systems and business productivity applications. The market isn’t very optimistic in Microsoft’s ability to turn things around, given the low multiple being put on the company. We would avoid the stock until the company clearly articulates a strategy to address macro trends to cloud computing and open source software that doesn’t cannibalize its existing business.

AT&T vs. Verizon: Good For Consumers, Not Investors

Tue, 19 Jan 2010 19:59:00 -0500

As you are aware from the barrage of TV commercials, AT&T (T) and Verizon (VZ) are both vying for the growing wireless market with new phones, claims of the best wireless coverage and now dropping prices.

The charts below show why the fight continues to get more aggressive in the telecom industry. The CAGR is expected to grow at a respectable 6.6% between 2007 & 2012. Wireless is the largest segment and expected to grow from 47% of total revenue to over 56% by 2012. The total opportunity for global wireline and wireless revenue is projected to expand from $1.65 trillion in 2007 to over $2.27 trillion in 2012.

In addition, new entrants like Apple (AAPL) and Google (GOOG) are adding pressure as they rip down the walled gardens that have existed for too long and focus on consumers. Apple’s goal is to sell hardware and apps while Google focuses on ads. Gartner just released a report that estimates that Apple was responsible for 99.4% of mobile app sales in 2009. AT&T and Verizon should have owned this market. In any event, consumers are winning with better phones, more services, options and ultimately lower prices but this isn’t necessarily good for AT&T & Verizon.

Industry Overview

Wireless Accounts

Wireless is the most important category with the largest long-term opportunity for the carriers. Verizon grew retail customers to over 86 million in Q309 and added 1.2M accounts. Average revenue per user (ARPU) was 52.78. See Verizon full report here. AT&T has ~82 million wireless subscribers and an ARPU of $61.23. AT&T added 2 million subscribers in Q3.

Revenue Growth

AT&T’s growth in revenue is closely correlated with the introduction of the iPhone.

iPhone on Verizon

2010 should get even more interesting as Verizon is expected to carry the iPhone and many users that have been frustrated with AT&T’s coverage may be all to excited to switch. Verizon’s red map commercials have been pretty effective in convincing AT&T customers that Verizon will allow you to use the iPhone as a phone.

Long-Term Growth

The chart below shows Verizon’s growth over the last 10 years. Revenue grew by over 228% in the last decade but net income only grew .17%.

AT&T performed better over the last decade with revenue up 297% and net income up by 150%.

Capital Expenditures & Profitability

Both are spending heavily on CAPEX with Verizon spending 126% of operating income and AT&T at 85%.

AT&T’s profit margin consistently more than doubles Verizon’s in the 10% range.

Stock Performance

If you have owned either company over the last decade, you have seen the stock price drop considerably but the dividend has provided some relief.

Conclusion

The established telecom players could go the way of newspapers if they aren’t careful. Mobile usage is expected to explode over the next decade with lots of companies keen on disrupting the market.

AT&T and Verizon should stop focusing on each other and turn their attention to the consumer. Otherwise, you might see Apple, Google or some other player radically disrupt the entire industry more than they have to date.

AT&T is currently valued at nearly $152 billion with Verizon near $85 billion. Like the overall the telecom industry, AT&T and Verizon generate lower profit margins, on large debt, with declining wireline businesses and high SG&A expenses. In general, these are not the characteristics that drive strong earnings growth or strong stock performance.

The macro theme for the wireless space is extremely positive and we expect lots of innovation and some great investment opportunities. However, AT&T and Verizon have not proven that they can adapt at this point and we are avoiding the stocks as a result.

You can access full telecom industry metrics or setup your custom watchlist here.

Stock Watchlists Now Live / Reserve Your Username

Mon, 18 Jan 2010 11:39:57 -0500

Since our Alpha launch in June, we have been growing rapidly and are approaching 50,000 users. Users requested the ability to set up and personalize their watchlists on YCharts. Today, we released this functionality. You can set up your watchlist here. Once you set up your watchlist(s) it will appear on the upper left side of the front page.

Customize Fundamental Metrics

You can customize your watchlist to show any of the fundamental metrics that we track. The real-time stream can also be set to show only news, tweets, videos of stocks that are in your watchlist.

Add Stock to Watchlist from Quote Pages

You will see a logo next to all company names when you are on a quote page. Use this to add a company that you are researching to a watchlist. See below.

Social Features (Public / Private Settings)

When you register you have the option to make yours watchlist(s) public or private. If you choose to leave it public other users will be able see the stocks in your watchlist by visiting http://ycharts.com/profiles/username.

Our approach is to launch fast and iterate so expect a lot more functionality and social features over the next several months. Feel free to post your ideas here.

Apple, Google, Microsoft - Will Tech Train Continue in 2010?

Mon, 04 Jan 2010 06:22:00 -0500

The S&P 500 ended the year up over 26%. Technology led the way posting a 60% return for the year with Google, Microsoft and Apple all adding ~$100 billion in market cap in 2009 or ~$274 million a day.

Apple (AAPL) was up ~150%, Google (GOOG) up over 100%, and Microsoft (MSFT) up over 60% for the year. We analyze the key business metrics below to evaluate that attractiveness of the companies as we move into 2010.

Market Capitalization

Microsoft’s Market Cap is the largest at $276 billion up from ~$173 billion at the end of 2008. Google’s Market Cap is approaching $200 billion up from ~$97 billion at the end of 2008. Apple’s Market Cap is now $190 billion up from ~$76 billion at the end of 2008.

Growth and Profitability

Apple continues to have the strongest top line revenue growth at 25% YoY. Google’s revenue is up 7% YoY and Microsoft dropped 14%. See revenue growth chart below.

Apple’s revenue is driven by innovative products including the iPhone, Mac and expectations are high for the iSlate tablet. Google’s revenue growth has declined steadily as the search business matures and it has been unable to find a new revenue source beyond text ads. Microsoft’s issues have been well documented but they do have the Windows 7 release that should improve revenues.

Gross Margins

Microsoft generates the highest gross margins at 78%, Google is consistently 63% and Apple is 37%. See 10 year trends below.

Research & Development

Microsoft and Google both spend about 20% of their profits on research and development with Apple at just under 10%.

Profit Margins

Microsoft and Google have both consistently delivered profit margins in the 25 to 30% range. Apple’s margins are lower at ~17% but have risen for the last 5 years with higher margin product launches like the iPhone.

Net Income

Microsoft more than doubles both Google and Apple in terms of net income but you can see that the difference is getting smaller as Google and Apple continue to grow at a faster pace. Check the indexed chart to compare the growth rates.

EPS

The chart below shows the indexed EPS values beginning Q105. You can see that Apple has grown EPS the fastest at 435% with Google at 298% and MSFT at 74%. EPS has the highest correlation to price and explains why Apple has outperformed both Microsoft and Google during this timeframe.

Cash on Hand

All three companies have enormous cash positions. Google has been the most opportunistic on the acquisition front but you would expect Microsoft and Apple to do more deals given their large cash piles and higher stock prices.

We see that all 3 companies have strong and consistent margins with Microsoft and Google having stronger margins but weaker on the top line than Apple. Let’s move to valuation.

Valuation

Google’s TTM PE Ratio is over 40 with top line revenue weakening. This includes Q408 which looks like an aberration. Analyst estimates are for Google to earn $26.42 next year which gives you a 23.47 forward PE and YoY revenue growth of 17%. Google is trying everything to grow top line revenue including acquisitions, Chrome browser, Chrome OS, mobile hardware and software. Time will tell if they can enter these new markets successfully and diversify its revenue stream. Google will continue to deliver strong profits but the growth story is concerning and the multiple looks a little rich right now.

Apple’s PE is over 33 but top line revenue growth is strong. Analysts expect Apple to earn 7.81 this year ending Sept which gives you a forward PE of 27. Revenues are expected to increase 23% YoY. Apple is approaching our fairly valued price of $220 to $230 in the near term so we would not be adding to positions here.

Microsoft has the lowest PE Ratio at just under 20 with weak top line growth but it appears to be stabilizing and Windows 7 should improve things. Analyst consensus is for 2.7% revenue growth in the year ending June 2010 and 8% in 2011. The forward PE for the year ending June 2011 is ~15 based on 2.09 EPS estimates. We see fair value in the $30 to $35 range.

Conclusion

Microsoft, Google and Apple have all had $100 billion plus increases in market cap during 2009 but continue to get into each others’ markets which should be good for consumers but may hurt margins over time. They are all trading near our fair value estimates so the upside may be limited in 2010 given the huge runs experienced last year. We would hold positions but not be adding at these levels.

Disclosure: Long GOOG, AAPL

You can access all fundamental, growth and valuation rankings here.

What do you think of the banks?

Thu, 24 Dec 2009 11:07:43 -0500

Banks have taken a lot of criticism and they deserve it. As you know, banks make their money from interest rate spreads and charging fees on accounts. Below we analyze these key business factors to determine the attractiveness of the banking sector.

Taxpayers bailed out the top money center banks with $145 billion in TARP Funds and allowed banks to recover. See market cap impact below.

The fed continues to keep rates at abnormally low levels which helps banks borrow huge amounts of capital and lock in spreads.

Bank Response to Rescue

As all of this has taken place, the top money center banks proceeded to increase service fees and dilute shareholders. Banks will generate close to $40 billion from service fees on their customer accounts this year and the trend is up and to the right.

For example, Bank of America generated over $10 billion in service fees during the last year. This represents a significant part of BofA’s revenues at high margins. As you can see below, Bank of America has steadily increased their service charges over the last couple of years. You get the full details here.

BofA is planning to continue increasing fees and annual credit card fees are next.

“According to BofA spokesperson Betty Reiss, the annual fees would range from $29 to $99, “We’re testing this to see what the feedback is. Fees are being added based on “risk and profitability”.

All of the major banks generate a large percentage of their revenue from service fees and they do this at huge margins so a fair amount of the bottom line is driven by service fees.

What are the fees for?

WellsFargo details their diversified fee strategy below.

The chart below is telling. The big banks raised overdraft fees from $23.70 in 2002 to $33.43 in 2008. The 41% increase in bank fees over 6 years has increased the banks bottom line and come from the weakest consumers for the most part.

Below are the top major money center banks by market capitalization. JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C).

Customer Experience

You are most likely a customer and have experienced the fees on cash withdrawals, bank account maintenance fees, credit cards and mortgages. You may not enjoy being a customer but you have to admit that the business model is scaleable.

Business Metrics

The fed continues to hold rates low which enables banks to make solid interest rate spreads, banks continue to raise fees and capital ratios have improved (see below).

Tier 1 Capital Ratios

Improved Cash Positions

Real Estate Market

The big challenge in moving into the banks is anticipating the real estate market recovery. If the real estate market doesn’t get worse or even improves a little the banks will be in much better shape. The correction eliminated a lot of bubble wealth and appears to be stabilizing.

Real Estate Prices

Conclusion

We would cautiously get exposure in the banking sector. The major money center banks have already paid back their TARP funds and diluted prior shareholders. It is hard to see how the major banks will loose over the long-term given the accommodative fed policy, ease of generating and increasing fees, plus all of the safety nets in place thanks to their customers/taxpayers.

You can analyze all of the banks here.

Amazon.com vs Traditional Retailers

Thu, 17 Dec 2009 08:02:25 -0500

People are shopping online and buying everything from books to electronics. Amazon.com is the place that over 75 million people use to make their purchases each month.

Amazon.com provides a great service but what about the stock? We analyze the key fundamentals, growth rates, profit margins and relative valuations below.

Jeff Bezos the CEO of Amazon.com has surprised many over the years as he built (AMZN) into a major online retailer that is profitable and approaching $30 billion in revenue. In 2009, investors have gravitated to the stock which is now valued at over $56 billion dollars after a 170% run up year to date. See the dramatic market cap gains in the chart below.

Amazon.com Fundamentals

Let’s start with the fundamentals. Amazon is an amazing low cost online retailer. The investment thesis is often that they have a lower cost base due to the online focus. In reality, they operate on very thin margins just like every other discount retailer. See the income statement below. Revenue and expenses ramp but the thin margins do little to move net income up.

AMZN Income Statement

The Balance Sheet is strong and trending in the right direction. Amazon does operate with lower debt levels than more traditional retailers and they have paid down their long-term debt over the last decade.

Cash Flow from operations continues to improve. So, overall things are fundamentally sound for Amazon.com and as more people migrate their spend online Amazon will benefit.

Amazon.com Growth & Profitability

Amazon has impressive revenue growth for the category and is well above peers.

The question longer-term is how long can they continue to grow in the high 20% range year over year. In five years, will Wal-mart (WMT), Costco (COST), Target (TGT) be able to compete more effectively given their relative scale and pricing power? In addition, they are all building substantial online businesses.

AMZN Relative to Peers

We compared AMZN to Wal-mart and other large discount retailers for a reality check on key metrics. Wal-mart, Target, and CostCo were included in our analysis for relative valuation, growth and profitability comparisons. AMZN leads the pack in terms of top-line growth with ~28% YoY revenue growth.

Just keep in mind the relative scale of the companies. For example, Wal-mart is expected to generate $432 billion in revenue next year compared to Amazon.com at almost $30 billion next year. It will take just 25 and 1/2 days for Wal-mart to generate Amazons annual revenue.

Amazon.com generates profit margins in the mid 3% range consistently which is normal for discount retailers.

Amazon.com Valuation

Fundamentals, growth and profitability metrics are all positive. Let’s move on to valuation.

Price to Sales Multiple

Amazon trades at ~2.6 times sales and well above the peer set that trade ~.50 times sales. If AMZN were to trade at 2X its peers or 1X sales the market cap would be about 1/2 of the current $56 billion.

Earnings Yield vs 10 Year Treasuries

If you follow Buffett, you know that he often considers the earnings yield of buying the entire company vs 10 year treasuries. In Amazons case, you could buy AMZN and generate 1.31% or buy treasuries and generate 3.60%. The difference is significant on a $56 billion dollar investment. You also have to factor in the risk of each investment.

Analyst Consensus & YPEG Ratio

20+ analysts cover Amazon.com, average estimates are for AMZN to earn 1.88 per share in 2009 and 2.53 in 2010 or 35% EPS growth. Revenue estimates are 23.88 in 2009 and 29.84 in 2010 or ~25% YoY growth. Assuming the analysts are correct, if you calculate the YPEG ratio by taking the 2010 EPS of 2.52 x EPS Growth rate of 35% you get a price of $88. This is close to 50% below the current price level. In addition, you would expect the EPS growth rate to continue to decline as AMZN grows.

Conclusion

After looking at the run up in AMZN this year and the relative growth and valuation we would consider moving out of AMZN at these levels and potentially moving to more traditional retailers like WMT if you want exposure in retail. AMZN could fall 30%+ and still be considered overvalued at these levels.

Has Goldman Sachs Been Running Too Hard for Too Long?

Thu, 10 Dec 2009 12:13:00 -0500

“Even a banker can make money with a steep yield curve.” Goldman Sachs (GS) has been a great earnings turn-around story from a loss of $4.97/share to a positive $5.25/share in just 3 quarters.

Goldman’s shareholders have also been rewarded as GS stock has appreciated from trough to peak during those same three quarters over 250% — achieving their highest market cap ever…in spite of a declining balance sheet.

There is no doubt that Goldman Sachs is currently the leader of the financial pack, but perhaps that lead dog has been running too hard for too long and is ready to take a break.

The first indication is the price chart. While the S&P 500 has been making new highs (albeit fewer and less dramatic recently, thus potentially spelling a pull-back for the general market), since the mid-October peak, GS stock is off double digits. From a relative strength standpoint, Goldman looks weak and fading. Should the markets take a well-needed breather, Goldman’s beta of 1.47 would suggest it will fall even more.

Fundamentally, there are several indicators that Sacks is ready for a decline.

GS P/E Ratio

Earnings

Perhaps earnings can appreciate 35% from $5.25 to $7.08. GS highest level of earnings per share of $7.01 came just before the market collapse when leverage was at an all-time (and-not-to-be-seen-again-due-to-regulation) high and the financial markets were operating at frothy levels. While a steep yield curve is helping GS make money right now, these are abnormal levels of earnings/share that are artificially and temporarily held in place by an accommodative Fed policy.

GS Earnings per Share Chart

Price to Sales Ratio Price to Sales ratio is near the 10-year high for the stock. Long-term averages would suggest a 1.38 ratio, but with GS trading closer to 2.0, that is over a 40% premium.

Price to Sales Ratio chart

This phenomenal stock performance is happening even while GS top line growth is a negative 9.2%.

Revenue Growth chart

Goldman has intelligently maneuvered during these times, but cutting expenses can only go on for so long before it ceases to have the same marginal effect and then the company starts losing muscle and not fat.

10 Most Valuable U.S. Companies vs Treasury Yields

Wed, 02 Dec 2009 07:00:00 -0500

2009 has turned out to be a great year for equities especially after the financial meltdown we experienced. The federal reserve continues to liquify the system and low yields are forcing investors into higher yielding equities.

The S&P 500 is up 21.3% YTD as of November 30. The index leadership driven by consumer discretionary stocks is up 33%, materials up 43.21% and technology up 51.46%. December is off to a strong start and analysts are now upgrading companies that led the ‘09 recovery.

Yields on 10 year treasuries are down to 3.21% and near historic lows. Below is the long-term treasury yield curve. The red line represents current levels.

Let’s look at the earnings yield for the top 10 most valuable U.S. companies to gauge the attractiveness of equities vs risk free bonds. The table below shows the top 10 U.S. stocks based on market capitalization with their net income for the TTM and theoretical risk free return.

8 of the 10 companies above are returning earnings in excess of the return you would generate from buying 10 year treasury bonds. The risk free return is calculated by taking the companies market capitalization times the 10 year treasury yield.

For Exxon Mobil, you could buy the entire company for $360 billion dollars and generate $21.05 billion in earnings. The other option would be to buy $360 billion in 10 year treasuries yielding 3.21% which would generate $11.55 billion a year.

You can also see this by looking at the XOM earnings yield below which is at 5.67% and above the 10 year yield.

Earnings yields for Microsoft (MSFT), Wal-Mart (WMT), Procter & Gamble (PG), British Petroleum (BP), Johnson & Johnson (JNJ), General Electric (GE) and International Business Machines (IBM) are all yielding above treasuries. The two stocks that appear to be yielding below treasuries are Google (GOOG) and Apple (AAPL). Both stocks have outperformed the markets by a wide margin and could be getting fairly valued in the near term.

With Google, you could buy the whole company for ~$184 billion which generated $4.93 billion in net income over the TTM but if you bought treasuries you would generate close to $6 billion. So treasuries are a better investment right?

Keep in mind that Google took a $1.1 billion hit in Q408 for asset impairment charges related primarily to investments in AOL and Clearwire. Google continues to make acquisitions and Eric Schmidt has indicated that they plan to be more aggressive moving forward. Google acquired YouTube, DoubleClick, dMarc, AdMob, Feedburner and many other smaller companies with less than stellar results. If you add back the Q408 impairment charge you get to company earnings which are above the equivalent risk free yield.

Time will tell if Google can invest its cash wisely. This is one of the key questions for investors given the maturity of the search business and the fact that Google already dominates the market and generates the vast majority of it’s revenue from text ads. The chart below shows Google’s unique visitor count for the last 12 months.

Apple is another high-flyer with a current earnings yield of 3.14%. This looks like another case where treasuries provide a better yield.

However, if you are an investor in Apple you know that subscription accounting rules make this a little more challenging to figure out. Reported GAAP figures widely understates Apple’s performance. Therefore, investors should focus on the non-GAAP numbers. Apple generated $8.3 billion in non-GAAP earnings over the TTM which is also above the risk free return for AAPL.

In general, earning yield provides a simple way to make comparisons but it is only a starting point. Often, as is the case with GOOG and AAPL you have to dig deeper to get the real comparison. Try evaluating your investments versus less risky assets like the 10 year. Take note of where the companies are in the earnings valuation cycle. You can see from the AAPL and GOOG charts above that earnings yield has often provided good buy and sell signals.

Final note, if the yield on treasuries return to more historical norms these comparisons become harder. Treasury yields would have to move up 100+ basis points to start becoming more attractive than the equities mentioned here. You can access full fundamental stock rankings including earnings yield here.

Analyze Earnings Yield Like Warren Buffett

Mon, 16 Nov 2009 22:41:00 -0500

Berkshire Hathaway (BRK.A) filed their 13-F today that details all portfolio holdings. It is well documented that Warren Buffett likes to look a companies earnings yield relative to bonds to determine how attractive it is. The 10 year yield is currently at 3.33%.

Below we analyze the earnings yields (EPS/Stock Price) for Berkshire Hathaway’s current holdings:

Gannett - GCI Earnings Yield 18.70%
NRG Energy - NRG Earning Yield 17.90%
Torchmark - TMK Earnings Yield 10.82%
Travelers - TRV Earnings Yield 10.10%
Exxon - XOM Earnings Yield 8.47%
Santefi Aventis - SNY Earnings Yield 8.29%
Kraft Foods - KFT Earnings Yield 7.62%
Johnson & Johnson - JNJ Earnings Yield 7.44%
GlaxoSmithKline- GSK Earnings Yield 7.29%
Proctor & Gamble - PG Earnings Yield 6.95%
Moody’s - MCO Earnings Yield 6.91%
General Electric - GE Earnings Yield 6.90%
Union Pacific - UNP Earnings Yield 6.81%
Beckton Dickinson - BDX Earnings Yield 6.64%
Wal-Mart - WMT Earnings Yield 6.41%
Norfolk Southern - NSC Earnings Yield 6.10%
Lowes - LOW Earnings Yield 5.81%
Comcast - CMCSA Earnings Yield 5.70%
Burlington Northern BNI Earnings Yield 5.36%
Home Depot - HD Earnings Yield 5.05%
Coca-Cola - KO Earnings 4.78%
Nike - NKE Earnings Yield 4.75%
M&T Bank - MTB Earnings Yield 4.38%
CostCo - COST Earnings Yield 4.10%
UPS - UPS Earnings Yield 3.62%
US Bancorp - USB Earnings Yield 3.45%
Wells Fargo - WFC Earnings Yield 3.25%
Carmax - KMX Earnings Yield 3.20%
Iron Mountain - IRM Earnings Yield 3.15%
Wesco Financial - WSC Earnings Yield 3.05%
American Express - AXP Earnings Yield 2.68%
Republic Services - RSG Earnings Yield 2.40%
Washington Post - WPO Earnings Yield .55%
Bank of America - BAC Earnings Yield .19%

Most of the holdings are yielding well above 10 year treasuries with strong consistent earnings paths. This tends to bode well for future performance. You can get rankings by earnings yield or any another metric here.

Earnings yield is a good starting point to quickly evaluate the relative yield on a company vs bonds. Typically, you want a couple points above treasuries for the additional risk in equities and Berkshire Hathaway does this for the most part. Check your stocks and see how many have earnings yields over treasuries. You may be surprised with the results.

Can Walmart Growth Plans Move the Stock?

Mon, 02 Nov 2009 21:00:20 -0500

Walmart announced plans to accelerate growth with investments in emerging markets. Will they deliver shareholder value in the process?

Walmart already has a significant presence in international markets. As of September 30, 2009 Walmart had 4,300 stores in the United States. International units totaled 3,859 or 47% of stores.

“We’re stepping up growth in our international operations to take advantage of growing economies and opportunities in emerging markets, such as China and Brazil,” said CFO Tom Schoewe.

The company expects 1% to 2% growth this year. Next year is expected to increase to 4% to 6%, inline with historical revenue growth levels.

In the long-run earnings and prices are highly correlated. Just look at a long-term chart of the S&P500 and the corresponding earnings chart. The market tends to over shoot the up and down swings in the short term but over time earnings always drive the price in a regression to the mean.

Walmart has consistently grown revenues and profits for the last decade but the market has taken this growth and continued to lower the multiple on earnings. Market saturation of stores in the U.S. has led many to stay away from the stock but WMT may be worth a second look with the focus on international markets and their urban strategy.

The chart below shows the market cap and EPS for the last decade.

The chart below shows the declining multiple the market is giving WMT over time.

Walmart has grown revenues from $40 billion a quarter in 1999 to over $100 billion a quarter currently but the market cap decreased from $250 billion to $194 billion during this massive growth.

Analysts have been hyping Amazon.com recently on the notion that they are taking share as everyone goes online to buy goods that are traditionally sold at Walmart and Target. It does appear that Target is losing the online battle but Walmart is not losing share to Amazon based on Compete.com metrics. Amazon is bigger online but the YoY change in traffic is +23% for Amazon.com and Walmart.com.

Also, keep in mind the relative size of the firms. See below the revenue for Amazon.com, Walmart and Target.

The market has discounted Walmart over the last decade. With an attractive dividend yield over 2%, earning yield near 7% and consistent growth and profit margins we would be a buyer of WMT on any major market pull backs. Our proprietary models value WMT in the $59 to $65 range. We would be an aggressive buyer in the mid 40’s.

Disclosure: No Position

What is E*TRADE Really Worth?

Tue, 27 Oct 2009 15:01:02 -0400

Ameritrade (AMTD) and E*TRADE (ETFC) report earnings today. AMTD reported earnings of $.26 before the bell beating analyst estimates by $.04. The online broker said Q4 profits declined by 8.9% but trading activity reached the highest quarterly level ever.

Average client trades per day surged to 411,000 in Q4, up 35% YoY and up 5% sequentially.
Client assets increased to $302 billion, up 8% from $278 billion a year ago.
Net new client assets $5.4 billion.
TD Ameritrade posted a profit of $156.7 million or $.26 cents a share below the $172 billion reported a year earlier.
Revenues increased by 1.3% to $657.9 million.

FY 2010 guidance and valuation for AMTD:

The average AMTD analyst estimate for 2010 EPS is currently $1.26, in the middle of the company provided range. Analysts have the revenue estimates at $2.68 billion for 2010 also in the middle of the range provided by company management. Our proprietary YCHARTS valuation model has AMTD valued at just under $20 a share so we see the upside limited with the stock currently at $19.36.

E*TRADE reports after the bell today. Expect continued strong performance from the brokerage unit. The loan portfolio results and guidance are key. E*TRADE took huge losses over the past several quarters related to the loan portfolio. Analysts are expecting a loss of $.06 on revenue of $202M.

Source: Yahoo! Finance

Recent Events

Analysts at Citi and FBR Capital upgraded ETFC shares but the stock has traded sideways. In addition, Citadel diversified its holdings selling a large number of shares recently that put pressure on the stock.

Valuation

It is hard to put a value on E*TRADE given the negative earnings but the price to sales ratio tends to provide a good signal for companies that are experiencing rough times. ETFC is currently trading well below its peers.

E*TRADE continues to deal with the hangover from the credit crisis but recent guidance suggests the worst is over. On 9/15/09, E*TRADE provided guidance on the loan portfolio with estimated net charge-offs of $350 million to $375 million and estimated provisions for loan losses of $300M to $375 million.

E*TRADE Business Update Highlights 9/15/09:

Exchanged $1.7 billion of high yield debt for zero coupon convertible debentures which reduced annual interest payments reduced by $198 million.
QTD DARTs 17% increase YoY
Record accounts 8.5% increase YoY to 2.7 million brokerage accounts.
Home Equity delinquencies significantly lower, down 34% YTD
1-4 Family delinquencies gradually lower, down 12% YTD
Loan loss provision and internally generated bank capital reaching break-even point.
29% decrease in loan portfolio from 9/30/07 to 6/30/09, $32.3 billion and $22.9 billion respectively.
77% reduction in undrawn home equity lines.

Here is the deck E*TRADE management presented 9/15/09

ETFC Summary

Consider recent analyst upgrades
Improving loan portfolio trends
Much lower interest expense
Brokerage business strength
Relative price to sales valuation
Potential for acquisition

If the economy improves in 2010, expect E*TRADE to trade up significantly from here and the loan portfolio trends to continue. There is significant risk in ETFC given the level of uncertainty in the loan portfolio and the real estate market overall but we see the risk/reward as positive at these levels.

Disclosure: Long ETFC

Microsoft Beats Earnings Estimates by $.08

Fri, 23 Oct 2009 08:53:00 -0400

Microsoft Corp. today announced revenue of $12.92 billion for the first quarter ended Sept. 30, 2009, a 14% decline from the same period of the prior year. Operating income, net income and diluted earnings per share for the quarter were $4.48 billion, $3.57 billion and $0.40 per share, which represented declines of 25%, 18% and 17%, respectively, when compared with the prior year period.

The stock is up 8% pre-market at 28.77.

Quarter Overview:

Revenue driven by Windows (record licenses sold) and Xbox Demand (2.1 Million Units Sold)
Halo 3 ODST was the #1 selling console title in U.S. last month
Xbox Live revenue growth >50%
PC market grew 0 to 2% y/y and was +mid teens sequentially
Business segments stabilizing
Cost Discipline
Adjusted EPS growth of 8% over comparable period last year
Operating cash flow of $6.1 billion
Resumed share repurchases
Strong product pipeline
Adjusted revenue $14.4 billion (adjusting for $1.5 billion Windows 7 revenue deferral)
Adjusted operating income $5.9 billion
Operating cash flow $6.1 billion
$1.4 billion of share repurchases
x86 server market remained weak, estimated ~20% decline
Online advertising revenue down 3%
US Search revenue up mid single digits
Bing market share in U.S. up every month
Yahoo! / Bing agreement
Business revenue declined 4%
Non-annuity business PC weakness, >20% decline
Consumer revenue declined 34% due to prior year inventory
SharePoint, Office Communications Server, and CRM revenue grew double digits

“We are very pleased with our performance this quarter and particularly by the strong consumer demand for Windows,” said Chris Liddell, chief financial officer at Microsoft. “We also maintained our cost discipline, which allowed us to drive strong earnings performance despite continued tough overall economic conditions.”

Guidance:

Lowering FY10 Opex guidance to a range of $26.2B - $26.5B
COGS should increase Y/Y one point as a percentage of revenue
Capex guidance $2.0B
Tax rate 25%

FY10 Q1 MSFT Earnings Deck

Amazon.com Q3 Earnings Beat Estimates

Fri, 23 Oct 2009 01:16:50 -0400

Amazon.com (AMZN) reports Q3 EPS of $0.45, beating consensus by $0.12. Revenue came in at $5.5B, an increase of 28% year over year. Increased guidance for Q4 sales to $8.12B-9.12B. The consensus revenue estimate was $8.11B.

Stock is up over 13% after-hours. Below is the Amazon.com Q3 earnings deck.

AMZN Q3 2009 Earnings Presentation

Mary Meeker presented at the Web 2.0 forum and provided some...

Wed, 21 Oct 2009 13:27:25 -0400

Mobile Internet Adoption

AAPL Revenue Growth

UK Mobile Carriers

Mary Meeker presented at the Web 2.0 forum and provided some amazing charts on the stock market, economy and technology sector.

Her message “The Mobile Internet Is and Will be Bigger than Most Think”.

The adoption curves of Apple’s iPhone & iTouch vs Netscape & AOL are impressive.

Mary outlined how the financial markets have rebounded with the technology sector leading markets higher.

Economic indicators have started to improve.
Apple mobile share will continue to surprise on the upside.
Social networking and mobile will drive huge changes in communications and commerce.
Japan provides a great road map for mobile growth & monetization trends in the U.S.
Carriers in U.K. saw rapid defections as the walled gardens opened up.
Mobile related shifts will create and destroy material shareholder wealth.

Mobile related companies are all trading up including AAPL which is at 206.99 currently.

The entire Mary Meeker Web 2.0 presentation is below.

Mary Meeker Web 2.0 presentation

YHOO Earnings Above Estimates

Tue, 20 Oct 2009 17:15:00 -0400

Yahoo managed to surprise the street after the bell with better than expected earnings. Yahoo! has $4.5 Billion in Cash and Marketable Debt Securities and sees the business stabilizing. Yahoo! Inc. (NASDAQ: YHOO) reported revenues of $1,575 million for the quarter ended September 30, 2009, a decrease of 12 percent from the third quarter of 2008 and slightly above the second quarter of 2009. Net income per diluted share for the third quarter of 2009 was $0.13, compared to $0.04 for the third quarter of 2008

Free cash flow for the third quarter was up to 20 percent to $258 million compared to $215 million for same period of 2008.

“With revenue coming in above our guidance and flat sequentially, we had a solid third quarter that signals our major businesses have stabilized,” said Yahoo! chief executive officer Carol Bartz.

It looks like a good quarter but the revenue growth story for Yahoo! remains weak.

The most concerning story we see is the revenue growth trend and the traffic metrics.

Yahoo! needs to find a way to reverse the drop in traffic to start growing top-line revenue again. Google continues to beat Yahoo on both fronts.

The stock is trading up after-hours.

Below are the Q309 Yahoo earnings details.

YQ3_Q309 YHOO Earnings Slides

Photo

Mon, 19 Oct 2009 17:18:00 -0400

AAPL Posts Huge Earnings

Mon, 19 Oct 2009 17:17:00 -0400

Apple announced fourth quarter earnings well above street estimates. AAPL is trading at $203 after-hours.

Key Metrics:

Earnings of $1.82 EPS vs $1.26 last year. Analysts were expecting $1.42 EPS.
Revenue was $9.87 billion, 12% yoy growth. Analysts were expecting $9.2 billion.
Net Income $1.67 billion, 18% yoy growth
Gross Margins 36.6% vs 34.7% last year
International revenue is 46% of total revenues

Units Sold:

3.05 million Macs, 17% unit increase
10.2 million iPods, 8% unit decline
7.4M iPhones, 7% unit growth

Priceline lets you “Name your Own Price” and its...

Mon, 12 Oct 2009 11:31:45 -0400

Priceline lets you “Name your Own Price” and its working. Shares of PCLN are up over 120% YTD. The company has become dominant in the U.S. and Europe for discount travel with plans to replicate their success in Asia. Priceline is a global online travel company that offers its customers a range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services.

We believe PCLN will continue to grow nicely but the stock has gotten ahead of the fundamentals. As of 9/30/09, over 7 million shares were short with 9.3 days to cover. Short interest peaked on 4/15/09 with 11.3 million shares short. Much of the run in PCLN is likely due to shorts covering into the current market rally. At some point, Priceline will revert back to more normal valuation and growth trends which will put pressure on the stock.

12 analysts cover Priceline with a median price target of 179.50. FY10 average estimates are at 8.92 so at 19 times earnings you get a 169 fair value but we see this as the best case scenario.

Below are some of the issues facing PCLN:

Top Line Yr/Yr Revenue Growth Rates Slowing - PCLN’s revenue grew rapidly over the past 3 years but it will have a tough time growing at the same pace moving forward given the larger numbers.
Price to Sales Ratio outside of normal range. PCLN trades at 3.5 times sales and above levels where it last sold off.
TTM Price to Earnings Ratio at high end of historical range.
Gross Profit Margins increased significantly over the last 3 years but Net Profit Margins remain in the 10 to 15% range per quarter.
Priceline.com traffic down in Q3 according to Google Trends and Compete.com.

Bulls in PCLN can take some comfort in the simple calculation of the FY10 analyst estimate times the earnings growth rate mentioned previously.

Bears can point to the erratic EPS trends to discount the 8.92 estimates for FY10 and beyond. If you assume a 6.00 to 7.00 EPS for the next couple of years, the fair value is closer to 114 to 133.

We tend to agree with the bearish view at this point.

Disclosure: No Position

We received a lot of requests to add the ability to compare...

Fri, 09 Oct 2009 22:08:50 -0400

We received a lot of requests to add the ability to compare multiple metrics for the same company. For example, you might want to compare the stock price to earnings per share to see how correlated they are or look at the stock price vs PE ratio to see if a stock is trading outside of it’s long-term range.

Check it out and let us know what you think.