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I have a hard time selling shares shares at a loss. Being (an especially self-competitive) human, I hate accepting defeat. I was mad at myself for not selling higher earlier, back when my gut told me to take some off the table.
Ever been in that spot?
I recently sold off half my position in FedEx (FDX). I've been a shareholder for several years now, and I watched the shares make a healthy climb from sub-$100 to $120. Then they fell back down, and then they fell even farther down. I followed my own rules and bought some on the way down as I periodically re-evaluated the business, so where did I go wrong?
Initially I had bought into FDX as a relatively stable beneficiary of increased Internet commerce. When people buy "stuff" over the web, they expect to receive it. More and more people are buying more "stuff" online, so more and more "stuff" gets shipped. I liked FDX's valuation at the time, and figured I could watch the shares rise steadily without worrying about the sometimes emotionally challenging and sharp fluctuations of the e-retailers (like Amazon).
Was my thesis wrong? I'm not sure. I don't think it was wrong, but I didn't foresee $130+ oil. My macro-picture was off. Like many folks, I have a diversified portfolio. While I increased my weighting of energy holdings within the last year, I also bought more FDX as it descended. Those energy holdings have seen some nice gains (and I've taken some profits in that sector), but FDX?
FDX can operate like a perfectly-oiled machine, but they can't do anything to make one of their significant input costs -- oil -- go down. Honestly, I hope that the oil bubble will pop soon. I don't know that it will, and so I decided to trade some FDX for cash. Until oil gets cheaper, I don't see any catalysts to drive FDX's shares higher.
Am I accepting defeat? I don't know, for sure, that I'm being defeated. I hate selling for a loss -- even a small one. I shouldn't feel too bad, because a lot of people didn't predict that oil prices would rise this high as quickly as they have.
Whatever you want to call it, I've reduced my exposure to FDX. If the bubble pops, maybe we'll see a bounce and I can catch some upside. In the meantime, I'm happy to have some cash on the sidelines.
Disclosure: I am long on FDX at the time of writing, but I recently cut my position in half. I do not own any position, long or short, in AMZN.
On 11 October 2007 the S&P 500 index climbed just over 1576. On 26 November 2007 it fell to nearly 1406. Why in Sam Hill did the S&P 500 to drop more than 10% in just over a month? I figure there are several reasons. For example, during that period:
Today the S&P 500 reached a high of just over 1508. What's different between now and then and why did we see a 100 point recovery in the S&P 500 from 26 Nov to 6 Dec? The recovery might have to do with the following:
Let's talk about the interest rate freeze for a moment. What short-term effects will that produce?
Also, since the holiday season often produces a large proportion of annual sales for retailers, it's logical to assume that if people feel better about their home situations, they're more likely to spend more $ during this holiday season. The macro-conditions listed above may have led to reduced expectations for retailers, and so if people spend more money than was anticipated, Bush's announcement may precede slightly higher-than-expected sales for retailers. It might be a good time to look into buying some of your favorite retailer...
All in all, to me it seems economic conditions look much better than they did a couple of weeks ago. Although the plan to freeze some mortgage interest rates may delay but not solve the mortgage "problem," perhaps a recession is farther away than many have predicted. Whether a recession is around the corner or far off in the distance, people are buying stocks and life's looking good for bulls.
I don't know about you, but I'm ready to dig my heels in and make $ome money. I hope you do the same. Good luck!
- The price of oil escalated to nearly $100/barrel
- The US dollar reached an all time low vs. the Euro
- Major financial institutions announced write-down after write-down, due to losses from mortgage-backed securities
- The media spread stories on the "credit crunch" and the "housing slowdown"
Today the S&P 500 reached a high of just over 1508. What's different between now and then and why did we see a 100 point recovery in the S&P 500 from 26 Nov to 6 Dec? The recovery might have to do with the following:
- Oil is trading for less than $90/barrel, with perhaps more downside since I figure some of the price increase was directly related to perceived risk of an American invasion of Iran (said risk has decreased after the much-discussed National Intelligence Estimate [NIE] was released earlier in the week)
- The dollar has recovered somewhat vs. the Euro
- The value of the write-downs may have been priced into the shares of financial institutions during the "correction"
- The media has been spreading word of a 25-50 basis-point rate cut at the upcoming Fed meeting on 11 December 2007
- President Bush outlined a plan to reduce the number of potential foreclosures by freezing some interest rates for certain mortgage holders
Let's talk about the interest rate freeze for a moment. What short-term effects will that produce?
- Fewer people will lose their homes to foreclosure, but some are still out of luck. These folks may have to negotiate to refinance at [ideally] lower rates*.
- More home-owners will feel better about their financial situations.
Also, since the holiday season often produces a large proportion of annual sales for retailers, it's logical to assume that if people feel better about their home situations, they're more likely to spend more $ during this holiday season. The macro-conditions listed above may have led to reduced expectations for retailers, and so if people spend more money than was anticipated, Bush's announcement may precede slightly higher-than-expected sales for retailers. It might be a good time to look into buying some of your favorite retailer...
All in all, to me it seems economic conditions look much better than they did a couple of weeks ago. Although the plan to freeze some mortgage interest rates may delay but not solve the mortgage "problem," perhaps a recession is farther away than many have predicted. Whether a recession is around the corner or far off in the distance, people are buying stocks and life's looking good for bulls.
I don't know about you, but I'm ready to dig my heels in and make $ome money. I hope you do the same. Good luck!
I can’t believe how ubiquitous Coach products are. Living in Southern California, I see so many Coach handbags, purses (how’s a purse any different than a handbag?), shoes, key rings, ... and the list goes on. Have you ever looked to see how much these products cost? I heard that key rings were a bargain, so I stumbled on over to the Coach web site. Lucky for me, I found out that I can purchase a “BLEECKER CHARM KEYFOB” for $98. Hot damn!
Okay, okay. I’m not writing about Coach (symbol COH) to mock their pricing. More important, is COH stock is a good buy right now? It closed today (Nov. 29, 2007) trading at just under $36/share.
Let’s go through some cursory analysis. According to Yahoo! Finance, here are some rounded-off COH stats of interest:
Market cap: $13.2 billion
Trailing P/E: 19.6
Forward P/E: 14.6
Revenue: $2.8 billion
Net income: $656 million
Total cash: $1.2 billion
Long-term debt: $3 million
52-week high: $54.00/share
52-week low: $30.52/share
Does anything stand out to you? My first thoughts are:
- COH makes decent profit.
- COH’s P/E is reasonable (according to www.standardandpoors.com, the average P/E of S&P 500 stocks was 18.25 for the month ending Oct 31, 2007).
- COH has a chunk of cash on hand.
- COH’s long-term debt is trivial.
- COH’s stock price is near its 52-week low.
Looks good to me. Let’s put more of the puzzle together.
EPS
For the most recent quarter ended Sept. 29, 2007, basic EPS was $0.42/share, up 24% from $0.34/share during the equivalent period in 2006.
Shares Outstanding
The average # of shares outstanding for the quarter ended Sept. 29, 2007 were 372.2 million, up 1.1% from 368.1 million for the equivalent period in 2006. More shares = Dilution. I’m not a fan of dilution, although granted in this case it’s not extreme. I'd prefer to see the # of outstanding shares decrease, not increase.
When a company makes money and we own shares, we want those shares to represent bigger portions of the pie. According to the most recent 10-Q filing with the SEC, COH has been using cash to buy back stock. This is a good thing. Had COH not bought back stock, the dilution would be worse.
Given that the company bought back stock within the last year, why were there more outstanding shares in the quarter ended Sept. 29, 2007 as compared to the equivalent time period in 2006? It looks as though COH spent $132 million buying back stock over the year ending Sept. 29, 2007. COH also grants stock options and share awards to its employees. It would make sense, then, that the number of shares repurchased is smaller than the number of shares added to the pool through share grants and exercising of options over that time period.
Is COH going to repurchase any more stock and thus curb dilution? According to the company’s 1Q2008 10-Q, in October 2006 the COH Board of Directors had authorized share repurchases totaling $500 million. As part of that share repurchase program COH has spent $132 million thus far for approximately 3 million shares at an average price of $43.72/share. That means $500 - $132 = $368 million remains available to repurchase shares. Nice.
Given COH’s strong cash position, they won’t need to take out loans to complete the authorized repurchases. I wouldn’t be surprised if, compared to what they’ve done so far under the current authorization, COH is more aggressively repurchasing shares at these near $30/share levels.
Keep in mind, too, that the COH Board of Directors has authorized six share repurchase programs since 2001. As COH continues to grow and accumulate cash, I would expect more share repurchase programs to be announced and executed.
What are the insiders doing?
Although I wouldn’t ever base a stock purchase solely on insider trading activity analysis, sometimes insider behavior is worth considering. According to Yahoo! Finance’s COH insider activity page, insiders sold shares pretty consistently throughout the year. The most recent insider sale was at nearly $51/share back in September 2007. Nothing since then. What might that tell you? It might be the case that COH insiders believe the stock has significant upside potential. If they anticipated that COH would drop further, wouldn't they sell now to maximize their profits? According to the 10-Q, there are options available to be exercised profitably. Put a slightly different way, why should COH insiders sell now if they figure COH will trade higher in the near future?
Keep in mind that this insider activity analysis is pure speculation on my part, but it makes sense to me to consider it when trying to form a big-picture view of the company and the stock.
Coach falls into the retail industry. What will happen if there’s a recession?
Lately, retail certainly hasn’t been the best-performing industry. When recession fears kick in, people get out of retail stocks. Although that macro situation likely will put some downward pressure on the stock, I think that COH is set up well to weather a recession storm like that. Given how freakin’ expensive Coach products are, I would guess that today’s average Coach product buyer isn’t too concerned about conserving cash. Coach product buyers are probably reasonably well off as it is, so I doubt their spending habits would change much in a recession. That’s my [possibly bogus] assumption, anyway.
Conclusion
COH looks like a healthy company to me. Sales and profits are rising year over year. The balance sheet looks good. Management is increasing shareholder value through stock repurchase programs. Besides a dividend, what more could you ask for? With the stock trading at a P/E that’s only slightly higher than the average S&P 500 stock, Coach at $36/share sounds good to me. In fact, I figure COH will be trading back up to $50/share by March 2008. If I were going to make a COH stock purchase I would buy a small portion (1/4th?) of a position first so that if the stock drops lower, I can pick up more shares at bargain prices. If it goes up from here, there’s no sense pouting over profit!
Full disclosure: I do not have any position, long or short, in COH at the time of writing.
How many people do you know who claim they’re addicted to eBay (ticker: EBAY)? For years now EBAY has been a pleasant epidemic for many, and EBAY’s business is far from grim. In case you’ve been living in a damp cave with no electricity and haven’t seen the light of day in ages, EBAY runs the world’s most popular online auction site. What you may not know is that EBAY also owns PayPal, Skype, Shopping.com, StubHub, Rent.com, and a percentage of craigslist.
Lately EBAY’s stock price has tumbled (down 20% since its mid-October high of just over $40/share), probably due to announcements regarding what some have termed “overpayment” for Skype. It’s also worth noting that the S&P 500 index has dropped just over 7% in that time frame. Sure, the purchase-Skype-move ought to be questioned, but does that make the stock not worth owning? Let’s take a look.
Quick P/E analysis
One of the first items I like to inspect when evaluating a stock is the P/E ratio, which relates the stock price to the profit the underlying company takes in. According to Yahoo! Finance, EBAY’s P/E sits at a whopping 273! To find out the Earnings portion of the P/E ratio, check out their income statement or look at their 10Q filed with the SEC. EBAY recorded a net loss of $935 million in 3Q2007, compared to many previous consecutive months of solid profit. Without the Q3 net loss, EBAY’s P/E would come back down to Earth.
Time to dig a little deeper
I’m no accounting guru, but I’ll explain my personal analysis of why EBAY lost so many peanuts in Q3: Skype. In the company’s 10Q for 3Q2007, they mention that upon analyzing their goodwill it was necessary to record a $1.4 billion goodwill impairment hit. Some might interpret that information to mean that EBAY bought Skype at a price that was $1.4 billion too high than what was fair. Ouch.
The 3Q2007 10Q explains that the final Skype-related payout will be recorded in 4Q2007, and that the payout amount is already reflected as a liability as of 3Q2007. Fair enough; I’m impressed by EBAY’s honesty here. I don’t care who you are, $1.4 billion is a lot of dough to “lose.” On the plus side, I like that the financially negative aspects of the Skype purchase will be done and over with by the end of 4Q2007. Whether Skype operations produce a profit is another issue, but the 10Q seems to indicate that, yes, Skype operations generate profit for EBAY. In fact, revenues at EBAY’s Communications segment are growing at a faster rate than any other EBAY business segment’s revenues. More numbers on this later.
What are EBAY’s business segments and how are they performing?
Speaking of business segments, what are EBAY’s business segments and how are they performing?
The 10Q breaks financial results down into three categories:
Although the Communications segment lost $25 million in the 9 months Sept. 30, 2006, it generated $27 million in the 9 months ended Sept. 30, 2007. As of the 9 months ended Sept. 30, 2007, all three business segments currently are generating profits. Also, net revenues at the Marketplaces, Payments, and Communications segments are all increasing (by 25%, 33%, and 106%, respectively comparing the 9 months ended Sept. 30, 2007 vs. 9 months ended Sept 30, 2006). All this has to be good news for EBAY and EBAY shareholders.
Where does EBAY do business?
Given the recent weakness in the U.S. dollar, it makes sense to ask where – geographically – EBAY pulls in revenue. Under these circumstances I like businesses that do ... business ... overseas. According to the 10Q, as of the 9 months ended Sept. 30, 2007 international revenues made up over 50% of EBAY’s total revenues. In contrast, as of the 9 months ended Sept. 30, 2006, U.S. was the source of over 50% of total revenues. The 10Q directly states that their “foreign currency exposures have increased substantially and are expected to continue to grow.” I dig the shift.
Does the balance sheet look healthy?
EBAY’s balance sheet looks very healthy.
Long-term debt? Zero, zip, zilch.
Cash & cash equivalents + short-term investments? $4 billion on Sept. 30, 2007 vs. $3.2 billion a year ago Sept. 30, 2006, up 24%. Nice. I like cash.
How do this year’s financials compare to last year’s?
Let’s look at how much money EBAY is collecting and how much they’re spending.
Total revenue for the 9 months ending Sept. 30, 2007 totaled $5.5 billion vs. $4.2 billion a year ago same period (29% increase). Score.
Minus the Skype goodwill impairment charge, operating expenses for the 9 months ending Sept. 30, 2007 totaled $2.9 billion vs. $2.4 billion a year ago same period (20% increase).
EBAY is also netting more profit as time passes. According to Yahoo! Finance, analysts estimate 2007 EPS at 1.49 / share; for 2008 analysts estimated EPS of 1.66 / share. Take those numbers with a grain of salt; analysts can be wrong and have under-estimated EBAY’s EPS for the last few quarters.
Of course there are other factors to consider, but I really like that EBAY is increasing revenues faster than it’s increasing spending (29% vs. 20% respectively over the periods mentioned above). Oh yeah, and EBAY is making more profit.
Is management actively increasing shareholder value?
You bet. One common way to increase shareholder value is for the company to buy back shares. As of January 2007, EBAY’s board of directors had authorized share repurchases totaling up to $4 billion ($2 billion authorized in 2006; another $2 billion authorized in 2007). As of the end of 3Q 2007, EBAY had spent $2.8 billion buying back stock. $4 billion authorized - $2.8 billion spent = $1.2 billion: the amount the company may spend repurchasing shares through January 2009. The average price per share paid during these repurchases is $31.63, but in 2007 the average price per share paid for repurchases was $33.31.
Remember that decreasing the number of outstanding shares generally increases shareholder value. Think of shares as small slices that together make up a company ownership pie. If the company makes money and reduces the number of slices, then each slice is bigger – i.e., each share becomes more valuable.
With this in mind, like most public companies EBAY provides its employees a stock option compensation plan. In analyzing changes to the number of outstanding shares, we should also examine outstanding stock option grants. According to the 10Q, as of January 1, 2007 options grants could add up to 136 million shares into the pool. As of Sept. 30, 2007 options grants could add up to 125 million shares, with an average grant price of $10.51 / share, into the pool. Throughout the year, new options were granted (for 20 million shares), some were exercised (19 million shares), and some were forfeited/cancelled/expired (12 million). I find it interesting that so many shares were forfeited/cancelled/expired – only 7 million less than how many were exercised. Go figure.
Anyways, what does it all mean? It seems that the company has repurchased more shares than have been added to the pool in the form of exercised options, so overall there are fewer EBAY shares available now vs. a year ago (1.36 billion outstanding as of Sept 30, 2007 vs. 1.43 billion outstanding as of Sept 30, 2006 – a net reduction of 72 million shares). I wouldn’t be shocked if we were to see another repurchase authorization by 1Q2008, but of course I have no clue if that will happen.
Management is increasing shareholder value. Hooray!
Conclusion
EBAY looks to be a solid company that’s doing more business and making more money over time. With EBAY trading at just under $32 / share as I write this, is EBAY a good buy right now?
I could be wrong, but EBAY looks good to me, right here and right now. Always use your own judgment and conduct your own analysis before making investment decisions; what I’ve written here are my personal thoughts.
A fun exercise?
How high will EBAY trade within a year? I have no friggin’ clue and neither do you, but for fun I’ll take a guess. I think analysts’ estimates for profit (EPS of 1.66) next year are a little low, in part because I think we’re going to see another share buy-back announced soon. Solid profits + share buy back = increasing EPS.
Let’s suppose 2008 EPS is 10% higher than the predicted 1.66, which brings us to ~1.80.
Suppose analysts are right that 2007 EPS will be 5% higher than the analyst-predicted 1.49 => 1.56 (not including the Skype goodwill impairment charges). The EPS growth rate, then, could be (1.80 – 1.56) / 1.56 = 15% year over year.
Cramer (yes, I read Cramer’s insights and watch his show occasionally) often mentions that people pay a P/E of 2x the growth of a growing stock. This in mind, 15 (% growth rate) x 2 = 30 predicted P/E. Since EBAY has no long term debt and such a strong cash position, I think a P/E of 30 sounds reasonable.
EPS x P/E = share price.
1.80 x 30 = $54.00. There you have it. I’m probably wrong, but I’m officially guessing that EBAY will trade as high as $54.00 within the next year. I have no shame and I’m ready to be wrong!
Full disclosure: At the time of writing, I do not have any position (short or long) in EBAY. Admittedly, after writing this article I’m seriously considering initiating a small position.
Lately EBAY’s stock price has tumbled (down 20% since its mid-October high of just over $40/share), probably due to announcements regarding what some have termed “overpayment” for Skype. It’s also worth noting that the S&P 500 index has dropped just over 7% in that time frame. Sure, the purchase-Skype-move ought to be questioned, but does that make the stock not worth owning? Let’s take a look.
Quick P/E analysis
One of the first items I like to inspect when evaluating a stock is the P/E ratio, which relates the stock price to the profit the underlying company takes in. According to Yahoo! Finance, EBAY’s P/E sits at a whopping 273! To find out the Earnings portion of the P/E ratio, check out their income statement or look at their 10Q filed with the SEC. EBAY recorded a net loss of $935 million in 3Q2007, compared to many previous consecutive months of solid profit. Without the Q3 net loss, EBAY’s P/E would come back down to Earth.
Time to dig a little deeper
I’m no accounting guru, but I’ll explain my personal analysis of why EBAY lost so many peanuts in Q3: Skype. In the company’s 10Q for 3Q2007, they mention that upon analyzing their goodwill it was necessary to record a $1.4 billion goodwill impairment hit. Some might interpret that information to mean that EBAY bought Skype at a price that was $1.4 billion too high than what was fair. Ouch.
The 3Q2007 10Q explains that the final Skype-related payout will be recorded in 4Q2007, and that the payout amount is already reflected as a liability as of 3Q2007. Fair enough; I’m impressed by EBAY’s honesty here. I don’t care who you are, $1.4 billion is a lot of dough to “lose.” On the plus side, I like that the financially negative aspects of the Skype purchase will be done and over with by the end of 4Q2007. Whether Skype operations produce a profit is another issue, but the 10Q seems to indicate that, yes, Skype operations generate profit for EBAY. In fact, revenues at EBAY’s Communications segment are growing at a faster rate than any other EBAY business segment’s revenues. More numbers on this later.
What are EBAY’s business segments and how are they performing?
Speaking of business segments, what are EBAY’s business segments and how are they performing?
The 10Q breaks financial results down into three categories:
- Marketplaces (sites like www.ebay.com)
- Payments (Paypal?)
- Communications (Skype?)
Although the Communications segment lost $25 million in the 9 months Sept. 30, 2006, it generated $27 million in the 9 months ended Sept. 30, 2007. As of the 9 months ended Sept. 30, 2007, all three business segments currently are generating profits. Also, net revenues at the Marketplaces, Payments, and Communications segments are all increasing (by 25%, 33%, and 106%, respectively comparing the 9 months ended Sept. 30, 2007 vs. 9 months ended Sept 30, 2006). All this has to be good news for EBAY and EBAY shareholders.
Where does EBAY do business?
Given the recent weakness in the U.S. dollar, it makes sense to ask where – geographically – EBAY pulls in revenue. Under these circumstances I like businesses that do ... business ... overseas. According to the 10Q, as of the 9 months ended Sept. 30, 2007 international revenues made up over 50% of EBAY’s total revenues. In contrast, as of the 9 months ended Sept. 30, 2006, U.S. was the source of over 50% of total revenues. The 10Q directly states that their “foreign currency exposures have increased substantially and are expected to continue to grow.” I dig the shift.
Does the balance sheet look healthy?
EBAY’s balance sheet looks very healthy.
Long-term debt? Zero, zip, zilch.
Cash & cash equivalents + short-term investments? $4 billion on Sept. 30, 2007 vs. $3.2 billion a year ago Sept. 30, 2006, up 24%. Nice. I like cash.
How do this year’s financials compare to last year’s?
Let’s look at how much money EBAY is collecting and how much they’re spending.
Total revenue for the 9 months ending Sept. 30, 2007 totaled $5.5 billion vs. $4.2 billion a year ago same period (29% increase). Score.
Minus the Skype goodwill impairment charge, operating expenses for the 9 months ending Sept. 30, 2007 totaled $2.9 billion vs. $2.4 billion a year ago same period (20% increase).
EBAY is also netting more profit as time passes. According to Yahoo! Finance, analysts estimate 2007 EPS at 1.49 / share; for 2008 analysts estimated EPS of 1.66 / share. Take those numbers with a grain of salt; analysts can be wrong and have under-estimated EBAY’s EPS for the last few quarters.
Of course there are other factors to consider, but I really like that EBAY is increasing revenues faster than it’s increasing spending (29% vs. 20% respectively over the periods mentioned above). Oh yeah, and EBAY is making more profit.
Is management actively increasing shareholder value?
You bet. One common way to increase shareholder value is for the company to buy back shares. As of January 2007, EBAY’s board of directors had authorized share repurchases totaling up to $4 billion ($2 billion authorized in 2006; another $2 billion authorized in 2007). As of the end of 3Q 2007, EBAY had spent $2.8 billion buying back stock. $4 billion authorized - $2.8 billion spent = $1.2 billion: the amount the company may spend repurchasing shares through January 2009. The average price per share paid during these repurchases is $31.63, but in 2007 the average price per share paid for repurchases was $33.31.
Remember that decreasing the number of outstanding shares generally increases shareholder value. Think of shares as small slices that together make up a company ownership pie. If the company makes money and reduces the number of slices, then each slice is bigger – i.e., each share becomes more valuable.
With this in mind, like most public companies EBAY provides its employees a stock option compensation plan. In analyzing changes to the number of outstanding shares, we should also examine outstanding stock option grants. According to the 10Q, as of January 1, 2007 options grants could add up to 136 million shares into the pool. As of Sept. 30, 2007 options grants could add up to 125 million shares, with an average grant price of $10.51 / share, into the pool. Throughout the year, new options were granted (for 20 million shares), some were exercised (19 million shares), and some were forfeited/cancelled/expired (12 million). I find it interesting that so many shares were forfeited/cancelled/expired – only 7 million less than how many were exercised. Go figure.
Anyways, what does it all mean? It seems that the company has repurchased more shares than have been added to the pool in the form of exercised options, so overall there are fewer EBAY shares available now vs. a year ago (1.36 billion outstanding as of Sept 30, 2007 vs. 1.43 billion outstanding as of Sept 30, 2006 – a net reduction of 72 million shares). I wouldn’t be shocked if we were to see another repurchase authorization by 1Q2008, but of course I have no clue if that will happen.
Management is increasing shareholder value. Hooray!
Conclusion
EBAY looks to be a solid company that’s doing more business and making more money over time. With EBAY trading at just under $32 / share as I write this, is EBAY a good buy right now?
I could be wrong, but EBAY looks good to me, right here and right now. Always use your own judgment and conduct your own analysis before making investment decisions; what I’ve written here are my personal thoughts.
A fun exercise?
How high will EBAY trade within a year? I have no friggin’ clue and neither do you, but for fun I’ll take a guess. I think analysts’ estimates for profit (EPS of 1.66) next year are a little low, in part because I think we’re going to see another share buy-back announced soon. Solid profits + share buy back = increasing EPS.
Let’s suppose 2008 EPS is 10% higher than the predicted 1.66, which brings us to ~1.80.
Suppose analysts are right that 2007 EPS will be 5% higher than the analyst-predicted 1.49 => 1.56 (not including the Skype goodwill impairment charges). The EPS growth rate, then, could be (1.80 – 1.56) / 1.56 = 15% year over year.
Cramer (yes, I read Cramer’s insights and watch his show occasionally) often mentions that people pay a P/E of 2x the growth of a growing stock. This in mind, 15 (% growth rate) x 2 = 30 predicted P/E. Since EBAY has no long term debt and such a strong cash position, I think a P/E of 30 sounds reasonable.
EPS x P/E = share price.
1.80 x 30 = $54.00. There you have it. I’m probably wrong, but I’m officially guessing that EBAY will trade as high as $54.00 within the next year. I have no shame and I’m ready to be wrong!
Full disclosure: At the time of writing, I do not have any position (short or long) in EBAY. Admittedly, after writing this article I’m seriously considering initiating a small position.
With Starbucks stock at a 52-week low, is it a good time to buy?
Would you care for a venti, non-fat, sugar-free, one-pump hazlenut, pumpkin spice latte?
These are serious questions that deserve serious answers.
I admit it: I like Starbucks coffee. I buy the beans and I buy the fresh, hot coffee. Would I buy the stock? SBUX is trading for just around $23/share as I write this entry.
Summary/Recommendation
If my portfolio weren’t so heavy into stocks that rely on consumer discretionary spending, I’d consider making a small SBUX purchase today (by small purchase I mean 1/5th to 1/3rd of a total, ultimate position). Since I’m a concerned about near-term financial results of consumer discretionary companies, the 1/5th number sounds attractive to me.
(FYI there are many reasons why I buy / sell stocks in increments, or portions of a position. It's taken some time, but I’ve come to terms with that I won’t be able to call an absolute bottom. If the stock goes up, I’m happy because I made money. If it goes down with no changes as to why I bought in the first place, I take advantage of the bargain and buy more.)
Growth Stock?
I think that SBUX, as of several years ago, was a premier growth stock. Despite that SBUX continues to increase earnings annually, I think it no longer falls into the category of a premier growth stock. When growth stocks’ growth slows, as legendary investor Benjamin Graham explains, it’s almost a sure thing that there will be P/E multiple contraction. Keeping in mind P/E contraction is helpful when analyzing SBUX stock price behavior over the last several years.
Over the past several years, the P/E for SBUX has consistently dropped from nearly 70 down to around 28 where it's trading today.
When SBUX growth was higher, the stock tended to trade toward the higher end of that P/E range; however, as growth slowed the stock experienced P/E contraction and moved toward the lower end (note: although we see volatility and variation throughout the year, I’m alluding to an overall pattern). By analyzing past income statements we can observe that the year-over-year % change for Annual Operating EPS from 2004-2007 went from 42% (2004) to 28% (2005) to 20% (2006) to 15% (2007). The general rule is that when a growth stock's rate of earnings increase decreases, we often see P/E contraction.
It seems to me that SBUX is trending toward a value play. Given that's the case, how low the stock goes depends on a lot of things (SBUX ability to deliver, general Wall Street sentiment, etc.).
Shareholder Value
A question worth asking is “Is SBUX management actively increasing shareholder value?” In this case it seems that they’re making an attempt. According to the latest 10-Q (for 3Q2007), SBUX has bought back 20 million shares for a cost of $671 million in 2007. 26 million shares remained available for repurchase under current authorizations. Reducing the number of outstanding shares is a good thing for shareholders. Keep in mind, though, the benefit is partially offset by the number of shares that may be added to the pool thanks to outstanding options that are exercisable: 45 million with a weighted average exercise price per share of $13.60 (vs. the recent trading price of $23/share). Overall, the folks who control big money probably already factor in the potential dilution thanks to options when determining a fair value for this stock, so – depending on how the buy-backs are funded* – the buy-backs are a good thing because it means that over all there will be less net dilution. Less supply makes each share more valuable.
*Some analysts frown upon buy-backs that are funded by debt (instead of cash). In SBUX case the buy-backs seem to be funded by a combination of debt and cash, depending on how you look at it. What I can say for sure is that SBUX has delivered historically uncharacteristic negative cash flows for the last 3 quarters (according to their statements of cash flows). In the last 4 quarters their net income totaled $631 million; their buy-backs totaled $994 million. Something to consider…
The Industry
When deciding whether to purchase SBUX stock, it also makes sense to consider what’s going on in the industry. Restaurants have been paying increased commodity prices (like dairy). I think it's no coincidence that as commodity prices have gone up, and SBUX responded by recently raising in-store coffee prices across the board.
Some analysts are concerned about slowing of consumer discretionary spending, or worse a recession. These concerns probably increase the risk of pouring big money into the food/beverage industry. My take is it's not that they wouldn’t put any money in, but maybe that they wouldn’t put in as much as if conditions were considered to be more favorable.
Conclusion
I think SBUX is a good company and their stock is getting cheaper. In my estimation SBUX will continue to grow and earn more money each year in the years to come. With no dividend, I imagine SBUX management will continue to increase shareholder value by buying back stock. At some point Wall Street will decide that the prospects are good once again, which will be reflected in the stock price. I can’t pinpoint when that reversal (if you want to call it that) is going to take place, so buying a small position now might make sense.
One venti, non-fat, sugar-free, one-pump hazlenut, pumpkin spice latte coming right up!
Full disclosure: I do not own any positions in SBUX stock at the time of writing.
Would you care for a venti, non-fat, sugar-free, one-pump hazlenut, pumpkin spice latte?
These are serious questions that deserve serious answers.
I admit it: I like Starbucks coffee. I buy the beans and I buy the fresh, hot coffee. Would I buy the stock? SBUX is trading for just around $23/share as I write this entry.
Summary/Recommendation
If my portfolio weren’t so heavy into stocks that rely on consumer discretionary spending, I’d consider making a small SBUX purchase today (by small purchase I mean 1/5th to 1/3rd of a total, ultimate position). Since I’m a concerned about near-term financial results of consumer discretionary companies, the 1/5th number sounds attractive to me.
(FYI there are many reasons why I buy / sell stocks in increments, or portions of a position. It's taken some time, but I’ve come to terms with that I won’t be able to call an absolute bottom. If the stock goes up, I’m happy because I made money. If it goes down with no changes as to why I bought in the first place, I take advantage of the bargain and buy more.)
Growth Stock?
I think that SBUX, as of several years ago, was a premier growth stock. Despite that SBUX continues to increase earnings annually, I think it no longer falls into the category of a premier growth stock. When growth stocks’ growth slows, as legendary investor Benjamin Graham explains, it’s almost a sure thing that there will be P/E multiple contraction. Keeping in mind P/E contraction is helpful when analyzing SBUX stock price behavior over the last several years.
Over the past several years, the P/E for SBUX has consistently dropped from nearly 70 down to around 28 where it's trading today.
When SBUX growth was higher, the stock tended to trade toward the higher end of that P/E range; however, as growth slowed the stock experienced P/E contraction and moved toward the lower end (note: although we see volatility and variation throughout the year, I’m alluding to an overall pattern). By analyzing past income statements we can observe that the year-over-year % change for Annual Operating EPS from 2004-2007 went from 42% (2004) to 28% (2005) to 20% (2006) to 15% (2007). The general rule is that when a growth stock's rate of earnings increase decreases, we often see P/E contraction.
It seems to me that SBUX is trending toward a value play. Given that's the case, how low the stock goes depends on a lot of things (SBUX ability to deliver, general Wall Street sentiment, etc.).
Shareholder Value
A question worth asking is “Is SBUX management actively increasing shareholder value?” In this case it seems that they’re making an attempt. According to the latest 10-Q (for 3Q2007), SBUX has bought back 20 million shares for a cost of $671 million in 2007. 26 million shares remained available for repurchase under current authorizations. Reducing the number of outstanding shares is a good thing for shareholders. Keep in mind, though, the benefit is partially offset by the number of shares that may be added to the pool thanks to outstanding options that are exercisable: 45 million with a weighted average exercise price per share of $13.60 (vs. the recent trading price of $23/share). Overall, the folks who control big money probably already factor in the potential dilution thanks to options when determining a fair value for this stock, so – depending on how the buy-backs are funded* – the buy-backs are a good thing because it means that over all there will be less net dilution. Less supply makes each share more valuable.
*Some analysts frown upon buy-backs that are funded by debt (instead of cash). In SBUX case the buy-backs seem to be funded by a combination of debt and cash, depending on how you look at it. What I can say for sure is that SBUX has delivered historically uncharacteristic negative cash flows for the last 3 quarters (according to their statements of cash flows). In the last 4 quarters their net income totaled $631 million; their buy-backs totaled $994 million. Something to consider…
The Industry
When deciding whether to purchase SBUX stock, it also makes sense to consider what’s going on in the industry. Restaurants have been paying increased commodity prices (like dairy). I think it's no coincidence that as commodity prices have gone up, and SBUX responded by recently raising in-store coffee prices across the board.
Some analysts are concerned about slowing of consumer discretionary spending, or worse a recession. These concerns probably increase the risk of pouring big money into the food/beverage industry. My take is it's not that they wouldn’t put any money in, but maybe that they wouldn’t put in as much as if conditions were considered to be more favorable.
Conclusion
I think SBUX is a good company and their stock is getting cheaper. In my estimation SBUX will continue to grow and earn more money each year in the years to come. With no dividend, I imagine SBUX management will continue to increase shareholder value by buying back stock. At some point Wall Street will decide that the prospects are good once again, which will be reflected in the stock price. I can’t pinpoint when that reversal (if you want to call it that) is going to take place, so buying a small position now might make sense.
One venti, non-fat, sugar-free, one-pump hazlenut, pumpkin spice latte coming right up!
Full disclosure: I do not own any positions in SBUX stock at the time of writing.
