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Halliburton (HAL) Undervalued Growth

My previous post on Halliburton was mainly focused on presenting the company’s growth prospects on the back of the American oil boom. Now there’s even more reason to buy the company besides its relative undervaluation and high growth potential.

Baker Hughes Acquisition

Halliburton recently put out a bid for Baker Hughes for $35 billion. This represented a 56% premium to the price of Baker Hughes before any buyout news had started. Halliburton also attached a breakup fee of $3.5 billion to the deal, forcing them to have to give Baker Hughes 10% of the buyout amount back if the deal for some reason did not go through. The high premium and large breakup fee of this transaction did not go through well with investors, however, and they sent the share price of Halliburton tumbling a full 10% in intraday trading. This was a complete overreaction.

Those disliking Halliburton’s high premium for Baker Hughes are forgetting that Halliburton made the deal now for a reason: falling oil prices had ravaged oil companies’ share prices, sending oil majors like Baker Hughes and Halliburton down 30-40% from highs. Halliburton’s “large premium” for the acquisition of Baker Hughes was actually only 1% above the highs Baker Hughes had achieved just months ago, meaning that Halliburton had actually bought out the company at a significant discount, theoretically buying the company for only a 1% premium if oil prices stabilize.

The other investors that sold on the $3.5 billion breakup fee may have a bit more merit to their argument, however, it is still flawed. The norm of acquisition breakup fees for companies is only 4% of the total transaction amount, and Halliburton’s is 10%. This is a very hefty amount, and leaves Halliburton to lose a lot if this deal goes awry. A major issue that could cause the buyout to stop is regulators. It is not very likely that regulators would approve this deal if Halliburton had simply made the offer without any planning ahead, since the combined company would control too much power and would be able to create a virtual monopoly. However, Halliburton has already said that they are willing to sell off parts of their business that generate $7.5 billion in revenues in order to convince regulators to okay the deal. $7.5 billion for Halliburton is almost 1/4 of their total revenues, and it’s extremely doubtful that regulators would still not allow the deal if Halliburton is willing to chop off 1/4 of its businesses to get it done. Also, if the deal does indeed not go through for some improbably reason, Baker Hughes has also offered Halliburton a $1 billion breakup fee, meaning that the total amount Halliburton would lose would only be $2.5 billion.

Halliburton is a strong company with strong growth prospects riding through the American oil boom. The acquisition of Baker Hughes would only strengthen its industry position, and would let it dominate the oil services market, surpassing rival Schlumberger. Halliburton’s drop on this deal is completely unwarranted, along with the recent slump of oil prices. The company is in a great position right now, and will be even better once the Baker Hughes deal goes through.

Gilead (GILD) High Growth Potential

Gilead is a leading biotechnology company that specializes in hepatitis C curing. They are best known for their biggest drug: Sovaldi. The company has achieved stellar growth in the past two years, but is still priced at a very cheap valuation and has very high growth prospects for the future.

Undervalued

The primary reasoning for Gilead’s low valuation (forward P/E ratio of just 10) is that there are fears that Sovaldi, which generates nearly 50% of the company’s revenues, is priced too high and would not generate enough sales. This has already turned out to be a misconception, however, since the drug has already generated massive revenue streams for the company, and has proved that people would still buy and use the drug despite the price tag. Also, Sovaldi is easily the leader in the hepatitis C industry, since it has both the safest and most successful results for curing hepatitis C. Therefore, Gilead does not deserve this low-valuation multiple, and, based on the company’s success in the past and its massive pipeline that has a lot of potential for the future, is at least worth twice as much as its current market cap.

Growth Potential

Gilead’s management has already demonstrated its ability to dominate a health care industry, as they did with Sovaldi and hepatitis C. They can easily carry this ability into other industries, and are certainly trying to, with drugs for HIV/AIDs, Oncology (tumors), and Cardiovascular and Respiratory diseases in their pipeline. Also, Gilead has barely scratched the surface of international sales, with international Sovaldi sales for the first quarter of 2014 at just $200 million, while American Sovaldi sales were at $2 billion. With the rest of Gilead’s products at a 60-40 domestic to international sales ratio, Sovaldi has a lot of room to grow internationally.

Gilead is an undervalued company with an impressive, industry-dominant position. They still have a lot of growth potential ahead of them through international sales and their large pipeline, which the market is discounting due to a supposed high-pricing of their main drug, Sovaldi. This concern is misguided, however, since the drug has been performing fabulously since its inception, and should do even better in the future, once international sales get underway.

International Business Machienes (IBM) Undervalued

Drop on Earnings

IBM dropped significantly today when it reported its earnings, which were significantly less than the consensus analyst estimate. This major earnings failure comes at the same time as investors are beginning to question IBM’s sustainability and power; whether or not Big Blue really has the same ability to grow as it did before.

Business Transition

In actuality, IBM is not nearly the company it was before. The company is currently going through a huge transition from a hardware company to a software company, focusing on high growth areas such as the cloud. The company has already shed off many of their hardware businesses by selling them off, and today has even reported that they will pay GlobalFoundries $1.5 billion to take their semiconductor chip units, a part of the business that has been unprofitable for years.

Misguided Bearish thesis

The main argument against IBM is that their revenues have been falling for years now, and will likely continue into the future. That, however, is misguided, since the most fundamental reason that IBM’s revenues have been falling is because they have been going through this business transition, and need time to re-stabilize their business.

Low Valuations

At trailing and forward P/E ratios of just 10, IBM is exceptionally undervalued. This is a company that has major market share in a rapidly growing part of the tech industry: the cloud.The growth prospects and what IBM could do with their new business position are enormous, yet the market is valuing its growth potential like it’s nothing.

Shareholder Friendly

Also, IBM is a dividend aristocrat, meaning that the company has increased their dividends for more than 25 years in a row, adding up to a very nice flow of cash. The company is also a serial re-purchaser of their own stock. Spending billions of dollars in buybacks every year, the company is still speeding up their share repurchases, especially since they think shares are so undervalued now.

“Road Maps”

The company is also very good at setting goals and achieving them, never straying from the path to success. Management lays out what they call “road maps” every few years, which involve setting an EPS price target for the future years. They easily attained their last road map target a few years back, and are currently on a good track to surpass their 2014 target of $16 per share.

Warren Buffett

It’s also worth a mention that respected investor Warren Buffett also holds IBM as one of his core “Big Four” holdings. These Big Four stocks are four companies (WFC, KO, AXP, and IBM) that he has held through thick and thin, good and bad. These are companies that he expects to hold forever, and expects them to be extremely lucrative over that time period as well. He recently purchased IBM, but the other three were bought in the 1960s and 1980s, and have now netted him gains in the thousands of percentages and vastly outperformed the market. Also, IBM is a technology company, an industry that Buffett has long declared too hard to understand and changeable. The fact that IBM is one of the only tech companies in his entire portfolio shows that he has probably already done much research on the company and therefore trusts it above all others.

Conclusion

IBM is a great company that is trading at incredibly low valuations in the short-term. These valuations should stabilize to an acceptable level in the future, which should most likely also reflect some premiums because of Warren Buffett’s support of the company and it’s shareholder-friendly history. The current bearishness in the company is only an effect of revenues that have dropped in the short-term due to an inevitable company transition into the software business. This issue of revenues will come to pass when the company gets back on track with their business and finishes their transition into the software business. Investors should look to IBM for sustainability, growth, and undervaluation.

Halliburton (HAL) High Growth Prospects

Halliburton provides services to oil companies for the exploration and development of oil. The company’s share price has fallen considerably in the past few months due to a falling crude oil price, providing potential investors with an excellent opportunity for a buy.

American Oil Production

America is becoming much less reliant on foreign countries for oil, and this oil independence is causing the American oil production business to thrive. One of the prime benefactors of this shift in oil production is Halliburton, since they generate almost 50% of total revenues from America. their services and equipment are also of utmost importance when it comes to drilling and refining oil, so an increase in American oil production will likely provide a catalyst for a large uptrend in the share price. Halliburton’s ability to grow has already been shown in the past two years, when the company achieved 50% gains both years on the back of American oil production growth.

Undervalued by P/E Ratio

Halliburton’s 10-year and 5-year average P/E ratios are both around 15, while the current forward P/E ratio is just 10. This historically low P/E ratio is quite unjustified, as the current oil situation in America would only cause the company to have better prospects for the future, not the opposite. The market is currently pricing Halliburton for a 25% decline that would bring it back to its historic P/E ratio of 15, but the company’s future growth prospects look favorable for a high-growth scenario, which leads to the current stock valuation to be extremely conservative and inaccurate.

Short-Term Decline

In the past 3 months the company’s stock has already dropped 25% from highs due to a short-term worry that crude oil prices will continue to fall. This kind of a drop has plagued the entire energy sector, although the validity of the worries are very questionable. The oil bears are citing oversupply and under-demand as reasons to be short oil. However, taking a very conservative stance on the situation, oil companies have already been hammered by the fears of oil prices dropping and global economic worries, and are already priced at such absurd levels that they are already anticipating future losses. That means that the current valuations for oil companies are exceedingly low, built on fears that oil will head even lower, and already pricing in a further 15% or so of a drop in oil prices, This fear, however, is best categorized as a short-term worry that will dissipate within the next few months.

Halliburton is undervalued company because of short-term worries that will likely be gone in the next quarter or so. They also have considerable growth prospects because of America becoming more oil independent.

Micron (MU) High Growth Prospects

Micron specializes in making DRAM chips and NAND products, and occupies a dominant portion of those fast growing industries. The company is well known now for its 500% gains from just 2 years ago. However, intimidating as it is to buy into such a stock now, I believe Micron still has substantial growth ahead of it.

Large Barriers to Entry

Almost all of Micron’s ability to grow lies in the maintaining of its semiconductor chip industry power. PC sales growth as well as the common popularity of iPhones has allowed Micron to rack up substantial gains, considering its dominant place in the industry that supplies the chips for these electronics.  Naturally, however, the company would also be at a great risk if other corporations were to invade the industry, stealing away precious market share from Micron. That would be very unlikely to happen, however, as there are various barriers to entry in the semiconductor chip market: advanced technology and skilled workers are necessary for the production of semiconductor chips, initial investments for getting into the industry are high, and Micron already has the rights to thousands of patents that they made to protect their products.

Low Current Valuation

The current valuation reflect a lot of fear baked into a company that is quite unjustified. A trailing P/E ratio of 13 and a forward P/E ratio of just 8 are both well below the market’s, which makes little sense, as Micron has already demonstrated its exceptional ability to grow, and there is no foreseeable headwind for the company in the future. These valuations most likely reflect the fear of newcomers to the semiconductor chip market that would thereby cause Micron to lose market share, but the point against that scenario was already made in the previous paragraph. Micron’s valuation is exceptionally low for such a fast growing company, and therefore provides investors with a large margin of safety for buying into a high growth stock.

Hedge Fund Investors

Large hedge funds absolutely adore Micron as a stock; David Einhorn and Seth Klarman lead the pack with Micron as their largest holdings (19% and 34% of their total portfolios, respectively). Also, over 20 of the world’s largest hedge funds own Micron as a holding that is more than 5% of their total portfolios. This kind of trust put into a company by such a large amount of hedge funds shows that many of the world’s greatest investors consider Micron to be a strong investment, and are also more than willing to put their money where their mouth is.

Micron is a high growth company with minimal risks, the largest of which is just speculation and can be disproved by a variety of factors. Large hedge funds are also heavily invested into the company, and its low valuation and high growth prospects lead it to boast an extremely favorable risk to reward ratio.

General Motors (GM) Undervalued

General Motors is probably best known for their previous bankruptcy, however, that has almost no resounding effect on the current conditions of the company. In the short-term, it massive recalls based on the ignition switch mishaps have driven the value of the company to extreme lows.

 Over-Reaction Due to Recalls Over Ignition Switches

The prevailing fear over these recalls has been that the company has tainted the long-term image of their company by failing to spot these failures before many deaths arose from them. Although a tragic event, these recalls will likely not have any resounding impact of the future of the company. A similar event to this already occurred to Toyota in 2009, and, although Toyota suffered like GM for a while, shares were soon back on track to growth and the company regained its reputation easily. Also, sales of GM following the recalls have been up to par, indicating that the recalls are not affecting customers’ decisions to buy GM vehicles.

Low-Valuation Based on Common Valuation Metrics

With a forward P/E ratio of just 7, far below the value of the overall market, and slightly under the average P/E ratios of most auto companies (which is currently 9 or 10), GM is being greatly discounted by the market in general. It’s P/S (Price to Sales) ratio is also a meager 0.34, and the company’s dividend yield is a good 2.80%, albeit with a lofty payout ratio of 68%. The dividend will likely be lower in the future, since, although the company probably will not willingly reduce their dividend, the share price could see considerable accumulation which would subsequently produce a lower dividend yield.

Large Investors Interested

Warren Buffett, David Tepper, and Mohnish Pabrai are three investors that are betting on GM’s growth in the future. The great part about these three investors, however, are that they all occupy completely different investing niches, but all find the same amount of value in GM. Buffett needs no introduction; as a long term investor it’s likely he cares very little about GM’s current low valuation. His long-term faith in the company, however, shows that it could make a very profitable long-term investment. David Tepper is a growth investor, and, having achieved 40% annualized gains for his hedge fund (Appaloosa) since its start in 1993, is a successful one as well. He likely sees GM as undervalued and having many growth opportunities, such as China, which spurs him to have GM as the third largest holding in his portfolio. Mohnish Pabrai is probably the lesser known of the three investors here. He is a ‘safe’ investor, meaning that he follows Graham’s teachings of margin of safety very profoundly. He likely sees the undervaluation of GM as an adequate margin of safety for his investment, which happens to be 22% of his entire portfolio and his second largest holding (comprised of warrants, options to buy into the company in the future, instead of actual stock).

GM is a well-run company that is exceptionally undervalued. It is also supported by three well respected and completely different large investors, meaning that it should be appealing to every kind of investor’s eye.

POSCO (PKX) Undervalued

POSCO is one of the largest steel companies in the world. It is headquartered in South Korea, and has seen a share price decline ever since the 2008 financial crisis because of an overabundance of steel production and an under abundance of demand.

Price to Book Value

POSCO’s P/B ratio sits at a modest 0.64, which is extremely cheap considering a company’s book value rarely will dip below the relative fair value of 1. POSCO’s 0.64 P/B ratio indicates a 50% undervaluation of the current share price, assuming the company does not increase its book value at all in the future. This scenario, however, is unlikely, as the company has demonstrated over a 25% annual growth rate in book value since for the past decade. The historical normal P/B ratio for POSCO is about 1.1, which is also much higher than the current amount.

Great Management and Underlying Company

POSCO is also known well for Warren Buffett’s praise (and investment) in the company. Although it doesn’t show up in Berkshire Hathaway’s list of holdings, that’s simply because the decline of the stock has probably put it to a holding size that the SEC doesn’t require Buffett to put in his list of holdings. His fondness of the company likely has to do with its stellar management, whose prowess has been shown time and time again by the various awards and accolades that the company has received for its success as a company guided by its good management. Also, POSCO, unlike many other raw material companies, is still very profitable, having earned upwards of $1.2 billion last year. The company also boasts a projected P/E ratio of just 13.

POSCO is an undervalued, unloved company because of its place in a weak industry. It is easily the best steel company out there, though, and should profit greatly off the stabilization of steel prices due to its immense undervaluation.

Coach (COH) Contrarian Play

Shares of Coach are down more than 50% since their highs in 2012, due to increased competition in their industry from the likes of Michael Kors, leading to falling American sales. The company now seems to be battered down to acceptable levels, leaving the fashion company undervalued as well as poised for success in the future.

International Sales Still Strong

Asian markets are still offering Coach incredible growth potential. Sales are being projected to grow 60% over the next five years in China and Japan. The company is aiming to open more stores internationally over the next few years, and establish their footprint there before any other competitors do. The company’s margins in China are also astoundingly high: over 70%. The company’s earnings in China contrast perfectly with those in North America; sales are projected to fall over 20% in North America in the next year, and margins remain at acceptable levels of about 20%.

New Designs

The company’s old bags have obviously fell out of fashion with customers, especially when compared to Michael Kor’s products. In order to respond to this fall in demand, Coach hired a new designer, Staurt Vevers, to try and get Coach’s products popular again. It’s up to consumers whether or not they buy Coach’s new products, but the hiring of Vevers does demonstrate that the company’s management is taking large steps to try and turn their company around.

Current Stock Conditions

Perhaps one of the most interesting factors of Coach’s stock is that their dividend has not been cut since their stock began declining. Although the company didn’t increase their dividend in 2014, their yield is still 3.90%, an above average yield, especially for a company in decline. Their net income and cash hoard are more than enough to support their dividend, as their payout ratio is just 41%, and the payout ratio based on future earnings projections is still only about 60%. They also have about $860 million is cash, and only $140 million in debts. The P/E ratio of the company is low, sitting at a trailing amount of 11. Profit margins are still positive, at 16%. All these factors show that the company is still profitable, with low valuations and a sustainable high yield. Shares are definitely not worth 50% less than their 2012 highs.

Coach is still an iconic brand that can find growth in emerging markets as well as in their new designer, Staurt Vevers. The current stock conditions are fair and show that the company is definitely worth more than it is currently valued at.

 

Walt Disney (DIS) Strong Investment

Disney is perhaps one of the most well known companies in America. And that gives it an impressive moat over its competitors.

Moat (Recognized Brand)

Disneyland is the trip of a child’s dream, and its not unlikely that their most favorite movie is not also a product of Disney’s. Not just appealing to children, however, Disney have found lovers among teenagers and adults that grew up watching their various movies. Disney also owns several recognized and watched channels as well, such as Disney Channel (obviously), ABC, and ESPN. The main emphasis, however, rests upon Disney’s ability to control their audience; a new classic Disney movie will surly always come with more publicity than any modern movie put to immense amounts of propaganda. Investors simply need to look to Disney’s latest release: Frozen, and the love it received from viewers just days after its release.

Current Company Condition

Disney has been growing their net income and EPS at an astounding rate since 2008, and has since then more than doubled these earnings metrics. This growth has been met with an equal growth in share price, leading it to trade at a fair valuation when compared to past levels. Investors should keep in mind, however, Disney rarely trades at a bargain price. The company’s growth and brand name is valued highly by investors, and therefore almost always trades at a premium to the overall market. Also, the company is only slightly shareholder friendly, but have yet to develop any stable dividend increase system (although they have been increasing, just rather randomly), or share repurchase programs (which have only occurred in slight amounts).

Disney is a great company with great growth and a great brand.