Equity – Page 98

Amazon and Walmart

Continuing some large-cap cursory scanning, I notice that Amazon is still at its very lofty valuation – I have no idea why they are trading so highly, but then again, that’s been the case for quite some time.

Whenever I look at Amazon I instinctively punch in Walmart. They have been in a trading range for most of last decade, but interestingly enough, they’ve appeared to have broken out of their trading range:

Back in the early 2000′s, Walmart was trading a very healthy P/E (around 20-25) and they had to settle into their valuation by actually earning enough in earnings to warrant the price. A few years ago they were around the 10-11 future-looking P/E range, while now they have crept up to 14 times future earnings. Is this because capital that was otherwise earmarked toward fixed income investments has moved into the equity side? Walmart equity is as close to a GDP-linked bond-like instrument as you could have gotten in the large cap market and I am wondering if others are seeing it this way?

Walmart is pretty much the economic barometer of the US retail economy and the other explanation is that maybe the US economy is recovering or stronger than the media makes it out to be?

I also notice that Target has exhibited a similar boost this year, albeit somewhat less pronounced than Walmart.

Microsoft vs. Google

I’m not interested in investing in large cap companies, but they are interesting to look at a superficial level. Sometimes this superficial analysis gets me very close to actually purchasing large cap companies (e.g. I thought Starbucks was a good purchase around $12/share back in late 2008/early 2009 when it was going through its coffee crisis during the economic crisis – I never did purchase them simply because there were so many other alluring securities trading at dirt cheap prices at this time).

Getting back to the original topic, looking at trailing 12 month P/Es (after subtracting net cash balances of both companies), Microsoft is at 12.1 and Google is at 15.9. So Microsoft is about a quarter cheaper than Google, just based on past earnings values.

Intuitively, Google looks like a much cheaper investment than Microsoft when you plug the question into your mind “Which company will be more relevant five years from now?”, or you can also use the more direct variant “Which company will grow its earnings more in five years from now?”. Both companies are in the revenue range ($74 billion for Microsoft and $43 billion for Google) where the law of large numbers is evoked – long gone are the days of 40% growth.

This is a fairly elementary analysis, but a hypothetical decision to invest a dollar in Google vs. a dollar in Microsoft is an easy decision. Google is probably the better medium term play.

However, I wouldn’t discount Microsoft’s chances too heavily – when I look at my own computing habits, I still see myself using a Microsoft operating system most of the time, and also Microsoft Office.

On this note of stickiness, as long as Yahoo doesn’t screw up their finance portal by adding in features which are utterly useless (e.g. how their news services are not filterable by content provider), I still find it to be my main “standby” webpage for just getting quick metrics on companies. I don’t know how they were able to be so sticky, but they way they present public information is a touch better than the others, including Google. If it wasn’t for Yahoo Finance, I’d find them to be completely useless.

Rosetta Stone – posting lacklustre quarter

Rosetta Stone (NYSE: RST) posted their second quarter results today and they were below analyst estimates by a fair chunk.

Investors should keep in mind the company is still in the middle of a turnaround process to get costs down and restore some semblance of profitability while keeping their main product line viable in the world of freely offered software. The current CEO is new to the position, but has been with the company as their CFO prior to being promoted to CEO. They are trying to optimize the revenue stream and milk it for what it is worth, and this is going to be a lumpy process as they figure out what is and what is not working – keep in mind that sales and marketing has crept up from 45.5% of revenues in 2009 to 50.6% in 2010 and 60.2% in 2011; assuming you can ratchet down this ratio without adversely affecting the top line, you will be adding significant incremental profit to the bottom line. It just isn’t going to be done in a quarter.

The stock will probably get hammered about 15% in Thursday’s trading and I will consider adding to my position if it goes to the single digits.

Keep in mind that the company does have $120 million cash on the balance sheet and at Wednesday’s closing price of $13.13/share, this does make an enterprise value of $156 million. This is sure to go lower on Thursday. When you consider this is a software company with a quarter billion in sales a year, this seems to be relatively cheap, albeit in a business that is not going to grow like a weed.

Genworth MI Canada reports second quarter

Readers are likely aware of my position in Genworth MI Canada (TSX: MIC) and they reported their second quarter results today. The quarter was relatively boring, with losses on claims slightly lower and investment income slightly lower (due to lower rates). Loss ratio is 32% and expense ratio is 17% (total 49%) for the quarter, which is tracking roughly on-line the previous year. Delinquency rates continue to decline, with total portfolio down to 0.17% (from 0.25% year-previous).

Portfolio is at a 4.2% yield with a 3.5 year duration, approximately 3% in cash, 7% equities and 90% in fixed income (corporate and government).

Nobody said this company will be exciting. It isn’t.

Book value, excluding intangibles, is $26.30/share. With the market value being $16.97 as of today’s closing, even if the company exhibits mediocre performance, it is still likely undervalued. They key risk continues to be some sort of collapse or meltdown in the real estate market. Also, underwriting business will be slowing due to recent changes in the Government of Canada’s policies on mortgage insurance.

Apple running up against the law of large numbers

Apple’s 3rd quarter results: I find it funny when analysts report a company making $8.8 billion in net income from $35 billion in sales to be a “miss”, but indeed that is what they are reporting today. Sales figures on notebooks, desktops, iPods and iPhones appear to be flattening out. The iPad continues to exhibit significant growth and is probably in the midpoint of its growth trajectory before it finally starts to taper out.

Apple has grown so large that it will become more and more difficult to post high percentage growth figures. Before this release, the market is saying that the entity is worth about $560 billion (noting that at the end of June the company now has $117 billion in cash on its balance sheet). In after-hours trading, the stock is down 5%, so that shaves off about $30 billion off of its capitalization, to about $530 billion.

Extrapolating the last quarter’s results into a full year gives a P/E of 15, or if you subtract the cash stack, a P/E of 12. When you factor in that growth will not quite come as easily for the company, one can get a semblance of how this $530 billion capitalization is not going to become a trillion dollars anytime soon. Still, when you ask yourself if Apple is going to go the way of the dodo like Nokia and Research in Motion, the answer is instinctively no, but nobody thought those other companies would be surpassed so quickly either. Apple has one huge asset in its advantage that its competitors currently do not: it is a fashion icon.