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.

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.

American Airlines Group (AAL) Poised for Success in the Airline Industry

American Airlines recently completed their merger with US Airways, giving them a prominent and powerful place in the rapidly growing airline industry.

Consolidation (Reduction of Competition)

The airline industry recently went through a series of acquisitions and mergers that left only a few big players in the mature market that actually command any real market share. American Airlines, United Continental, Delta Airlines, and Southwest Airlines are the four biggest airline companies and command the vast majority of market share. This low-competition feel gives all the growth to be had to these huge corporations, which should benefit them greatly.

Airline Industry Growth

The airline industry is on a tear, growing more than 100% on average in 2013. This growth is only set to continue into 2014 and 2015, as the economy becomes better and better, and oil prices maintain their slow, nearly flat growth. Some investors are afraid that tensions rising in Iraq could dramatically increase oil prices, but many of the airlines have already locked in their prices for the foreseeable future at the current levels, and a spike in prices wouldn’t drastically affect them until their contracts expire in 2015-16.

American Airlines (Most Undervalued Pick)

American Airlines is trading at a modest forward P/E ratio of just 6. While also able to boast the enormous returns the other airlines have posed in the past, it’s incredible that such a high growth company could trade at such a low valuation. Renowned hedge fund manager David Tepper currently holds American Airlines as his top holding, showing his faith in the company’s prospects. His fund (Appaloosa) has causally outperformed the S&P anywhere from 1 to 20% almost every year for the last decade. He also owns other airline companies, although none of them near as large of holdings as American Airlines.

New Capital Plans

With its new growth prospects and almost $8 billion in cash, American Airline’s management is looking for new ways to spend money, namely giving it back to shareholders. They recently announced a $1 billion dollar share buyback plan as well as their first divided in over 30 years. This shows management’s confidence in the company’s growth prospects following the merger with US Airways.

American Airlines is a market-dominant, undervalued, shareholder friendly company that has shown it can achieve over 100% gains every year. Investors would be insane to avoid this company and its growth prospects.

Blackstone Group (BX) Undervalued

Blackstone is an asset management firm. It recently made a few of the companies they own go public: Sea World, Pinnacle Foods, Hilton, and Michael’s. The company is currently undervalued based on many factors.

AUM (Assets Under Management) Growth and Net Income Growth

Blackstone has been aggressively growing their AUM and net income over the past few years, ever since their company began to be profitable in late 2012. Since then net income has spiked from just $89 million to over $1.5 billion now. Also, its AUM grew to $278 billion in 2014, a growth rate of 21% from its 2013 AUM. Its share price, however, does not reflect this growth as it has remained relatively unchanged ever since the beginning of 2014, signaling that the company is currently undervalued based on their earnings and AUM growth relative to share price growth. This point is further made, since the current P/E ratio is only 15, and the forward P/E ratio of the company is a minute 9. A company with such  fast growing earnings and AUM should definitely not be trading at a fair current valuation and a heavily discounted projected valuation.

Asset Management Industry Growth

The asset management industry itself is poised for much growth in the future, as the alternative investments that Blackstone offers to their clients (real estate, private equity, bonds, etc.) have preformed well over the past few years, especially during the Great Recession, giving them much popular demand which in turn drives up the earnings of the companies that offer them as investments. Economic recoveries, such as the current economic condition, also drive up asset management and private equity earnings, as the retail investor makes up much of Blackstone’s clientele, and they typically must wait for an extended increase in the market in order to begin investing, such as now.

Blackstone is a fast growing company that is being undervalued by the market. Rarely do investors get the chance to buy such a market-dominant and fast-growing company at such a low price.

 

CNinsure (CISG) Undervalued by a Wide Margin

CNinsure is a rather small Chinese insurance company. Obviously, the first thoughts that come to mind when hearing the words ‘small Chinese company’ are probably quite negative, however, that simply means that others do not take the time to look into these kinds of companies, and us as investors can benefit greatly from them.

Total Cash Greater than Market Cap

One of the primary ways to measure the size of a company is by its market cap, which is mostly influenced by the company’s share price. The odd thing about CNinsure is that the company has more cash ($409 million) than its market cap ($348 million). This overwhelming amount of cash could serve as a very high margin of safety in buying into a relatively stable underlying insurance business, as their revenues have been increasing for over a decade straight, cutting right through the Great Recession like it was nothing. This excessive cash pile combined with such a sturdy business is almost unbelievable. I believe some knowledgeable investors would now be assuming that the company simply shorts stocks with its float from its insurance business, as that would require the borrowing of money to first sell the stock and buy into it again at a lower price, however, this is not the case, as the company did not state the cash in its annual report as ‘restricted cash’ which is the term for cash derived from un-covered shorts, meaning that this cash is both tangible and usable on short notice. The company also has no debt whatsoever, meaning that none of the cash was borrowed on loans.

Miscalculations based on ADRs

Keep in mind that this is a comparison of the cash of the company to the company’s ADR’s market cap, meaning that these are only the shares traded on the NASDAQ Global Fund, and the company could have more shares being traded on the SSE (Shanghai Stock Exchange), which would inflate its market cap. However, investors could then compare the company’s cash to their book value, since that would include all operations and does not change based on where it is being traded. Through this comparison, as the company’s book value is approximately $500 million, the cash of the company still makes up for 80% of the total book value, meaning that, when buying this stock, you are essentially only paying $100 million for a business that earned $19 million last year, equating to a P/E ratio of just 5. While the company still has many growth prospects ahead of them based on their past revenue growth. The reason many investors have not found this company yet is perhaps easily attributed to its tiny market cap in a foreign country that many investors prefer to avoid.

Update: I’ve asked the CNinsure company; they do not have any listing in China, so their total market cap is only the $350 million in America, rendering the entire third paragraph obsolete, although it is good knowledge to know anyway. This also further strengthens my argument and makes CNinsure even more undervalued.

CNinsure is an odd, small company in a country that is notorious for bad investments (China), however, the company itself seems unknown and unloved, and investors can take advantage of the public’s general avoidance of it to buy a company at a very cheap price.

Deere (DE) Undervalued

Deere makes construction and farming equipment. The stock has the label of cyclical, since the share price tends to vary considerably throughout the course of time, often disregarding the movement of the overall market. Currently the company looks to be undervalued and is a strong play for the future.

Net Income and Share Price Disconnect

Naturally, the main form of a company’s capital gains result from gains in the earnings of a company: for a mature company, a 50% gain in net income would likely result in an approximately 50% gain in share price, although, as we know, the stock market is almost never so predictable. Multiple factors could influence the company’s share price gains besides earnings in the short-term, but, in the end, earnings normally take dominance in controlling the share price. This is why the P/E ratios of a company normally never deviate too much from the company’s historic mean, since its price and earnings grow at approximately the same rate. Deere, however, presents an astoundingly high disconnect between the share price growth and net income growth, which presents a good opportunity to buy the company. The current P/E ratio of the company is only 9, caused by an increase in net income that met with a stagnant share price movement. Since the beginning of 2011, Deere has seen a 50% increase in net income, although its share price has barely inched higher a couple of percentage points. If investors were to use EPS growth instead of net income, the earnings growth number would further increase because the company has also been aggressively buying back shares since that time. This coupled with the fact that Deere is a proven cyclical company points to a very strong buying opportunity, since the end of the bearish, or in this case, not bullish cycle will surly result in future gains once the P/E ratio is restored to its historic mean of about 14, representing an easy 50% percent gain in share price over any gain in earnings.

Future Population Growth and Finite Farmland to Support It

Deere is in a very powerful position in the world. The company provides farming and construction equipment to consumers and companies that need them. Specifically, the farming business of Deere should see considerable gains in the future, as a growing world population will require more efficient farming methods and machinery, products that Deere offers to customers. Growing population benefit all companies in general, but Deere specifically is poised very well in the farming machinery market by owning a considerable market share, while that industry can only see more and more accelerated growth in the future.

Shareholder Friendly (Somewhat)

Deere is not the classic Coca-Cola that returns billions to investors every year through consistent share repurchases and dividends, but the company has been increasing dividends for a decade now, and has instituted a reasonable share repurchase program starting a few years back. Since 2010, the company has reduced their shares outstanding by a full 25%, which does represent a considerable amount of their total float. The company also currently has a strong 2.60% annual dividend, which is easily supported by a 22% payout ratio. This factor is especially important, as the company can easily double their current dividend without harming the company’s cash flow too much. This represents ample dividend growth opportunity, combined with their past ten years of consistent increases, which could easily lead to a very fruitful dividend payout in the future.

Deere is a strong company that operates in an ever growing industry. The share price is currently being lowered by the market on account of the company’s cyclical nature, but the negative cycle seems to be over for the company. Investors should take this opportunity to buy into the company at a depressed share price to reap the rewards in the end.

Bank of America (BAC) Undervalued

Bank of America is the second biggest bank in America by assets and the third largest by market cap. Nevertheless, multiple factors have contributed to Bank of America becoming extraordinarily undervalued in comparison to both current market levels and its past valuations.

Litigation Issues (And Why They Really Don’t Matter)

The most recent plague to hit Bank of America are the litigation issues with the DOJ (Department of Justice). The company is being forced to give billions in cash to the government in order to make up for the mortgage issues that caused the crash of 2008 and the near-bankrupcy of the company. The current negotiations are standing at $17 billion in payments to the DOJ, with $9 billion in cash and rest to be paid later on. To put into perspective as to how much money that truly is, last year’s annual net income for the company was only a meager $10 billion, nowhere near enough to cover the payment to the DOJ. So where’s Bank of America supposed to get the money to pay the government? In its massive cash hoard. In an effort to not have a global crisis like 2008 again, the government is requiring banks to hold extreme amount of capital on hand instead of loaning it out to consumers. They then check the banks through an annual “stress test”, simulating a financial crisis similar to 2008 and seeing if the banks have the necessary capital to survive those kinds of recessions. Bank of America has well over enough money to pay back the DOJ in its cash pile, which sits at an incredible $524 billion. Unfortunately for investors, Bank of America cannot spend this money on operations, as it is not truly “their” money. Nevertheless, Bank of America has ample time to earn back the money they owe to the DOJ and get one of the largest settlements of all time off of its shoulders. The bank currently has minimal negative headwinds and should grow without hinderance in the future.

The Merrill Lynch Accounting Issue (And Why it Doesn’t Matter Either)

Bank of America, in the most recent release of their total capital for the government stress test, apparently overstated their total reserves in Merrill Lynch by $4 billion. Since the Federal Reserve now has to approve of all captial plans by banks, such as buybacks and dividends since many banks were too slow to cut their dividends in 2008 and further contributed to the overall decline, Bank of America had to resubmit their capital plan to the Federal Reserve, this time only asking for a dividend increase instead of a share buyback plan as well (which they already had approved before). Investors overreacted to this declaration and the stock is still nowhere near the highs they had before this issue was found and made public, but the Federal Reserve has already approved a dividend increase, but no share buyback. Long-term investors in the company shouldn’t mind this minor mistake by management, as their is not lasting effect on the company from this action. Unless you count a minor share buyback plan that would only reduce shares outstanding by 3%. I am confident in management’s ability to continue growing the company and I believe that by the next year they will have the neccesary capital to recieve both a dividend increase and a share buyback program.

Current Undervaluation (P/B Ratio)

The recent article on AIG showed that it was undervalued by 23% based on the price to book value. In short, this means that, when all the liabilities are subtracted from all the assets of the company, you come up with a figure 23% above the market cap of the company, so you can essentially buy every dollar the company owns for 72 cents. Incredibly, Bank of America is undervalued by the exact same amount as AIG, and the undervaluation probably stems from the same fact of both companies: that they nearly went bankrupt in 2008 and investors are still fearful of them. Us, as intelligent investors, can take advantage of this fear and be greedy, as Warren Buffett would put it, and profit off buying an undervalued company that others are too fearful to touch.

Bank of America is an extreamly undervalued company that seems to be being beaten down from every single direction right now. None of the current issues affect the long-term health and future of the company, however, and should be taken as a buying oppurtunity for when the company’s true value is found.

 

 

 

Western Union (WU) Undervalued

Western Union is a money-movement company that has been beaten to a pulp in the past few years. The main contribution to such negative investor sentiment is the rise of new competitors to Western Unions business, mainly companies that facilitate the money-movement system through online and technological ways instead of  Western Union’s methods which typically involve physically going to a Western Union counter and picking up or sending the money yourself.

Wrong Mindset for Bears (Western Union’s Business Not at Risk)

Bears on the Western Union train continuously state that new companies such as Paypal are significantly more efficient at transferring money than Western Union. This fact is very true, but the problem is that the two companies don’t target the same customer base. Western Union’s main customers are consumers that don’t have phones or tablets of laptops, so they are forced to use Western Union’s “old-fashioned” ways of doing things. So to say, it’s entirely plausible that both Paypal and Western Union are successful as companies, as they do not operate in the same part of their industry, since their consumer bases are different. Bears would then argue that technology that can access the internet and use systems such as Paypal are continuously gaining popularity, and as world economies prosper, as will their citizens, thus giving them money to buy these technological advances. This is not exactly true in the foreseeable future. It would take years, if not decades, for the countries of the world to all develop and prosper as much as countries like America and the European Union, and while the gradual shift to online forms of money-movement may hurt Western Union’s earnings, no proof of that happening exists in the past few years.

Financial Structure (Earnings and Cash Flow Remain Strong)

For the past decade, Western Union’s revenues have grown consistently higher, as have their EPS (Earnings Per Share) numbers. This gives no proof whatsoever that the bearish case is playing out in any meaningful way. How could a company be losing customers and still gaining in revenues and earnings? The company has also been averaging a little more than $1 billion a year in cash flow, allowing it considerable room to expand its dividend and share buyback programs. They also still control the vast majority of market share in their industry, as the next largest competitors have 4 times less revenues than Western Union.

Shareholder Friendly (Dividends and Buybacks)

Western Union’s dividend streak has been somewhat choppy, but they have managed to increase their dividend considerably for the last decade, giving the the current yield of 3% annually, a very nice amount for the average investor. The payout ratio for the company is also only 35%, which gives them even further room to expand their dividend. The company is also an avid share repurchaser, having reduced its total shares outstanding over 26% since 2007. They have shown no signs of slowing their repurchasing program, and management has already authorized another $500 million in repurchases in 2014.

Low Valuations (P/E Ratio, High Short Interest, Low Share Price)

Western Union’s share price has remained in the same relative are for the past 6 years, ever since the Great Recession. This is due to the sell-offs that the rise of competitors have caused for the company. Now, however, these sell-offs have worked for the bullish case, since the company now trades at a measly P/E ratio of 10, well below the current S&P P/E ratio, as well as the industry average for Western Union. Also, the company has a very high amount of short interest; about 12% of its float is in shorts. Although this may sound like bad thing, it too works in Western Union’s favor, as there are many people betting against the company, so much of the downside it can see is already priced into the stock. Likewise, the sell-offs that Western Union has experienced only mean that there are more people waiting on the sidelines, and, if they see something good come out of Western Union, such as evidence that the rising of competitors does not adversely affect Western Union’s business, then there is a higher base of investors that would buy into the company, since it is so oversold. Although this manner of thinking may sound relatively flawed, especially if current trends continue, when applied to a strong business (or the stock market in general), it proves very fruitful. For example, in destructive recessions like 2008, everyone was selling. But the sheer amount of selling in the market forced prices to go up, since there was so much money out of the market that money had nowhere to go but back into it, driving prices back up. And vice versa for excessive bull markets such as 2000.

Western Union is an extremely recognized and respected business that commands a major market share; bears are misinterpreting the new rise of competitors to its industry, and heavy selling the the short term can only lead to heavy buying later on.

 

Gazprom (OTC: OGZPY) Undervalued

Undervaluation Reasoning

The biggest company in Russia and the largest natural gas provider in the world, Gazprom is incredibly undervalued. The underlying argument for this declaration is that the p/e ratio of the company is only 2, meaning that the company’s market cap is only two times its net yearly earnings. Last year Gazprom earned 36 billion in net income (money earned after all deductions to revenues), compared to just 32 billion by Exxon Mobil (XOM), the largest oil company by market cap in the world. The difference between Gazprom and Exxon Mobil, however, is that Gazprom’s market cap is just 87 billion, while Exxon Mobil’s market cap is a whopping 443 billion dollars (for an explanation on market cap refer to the previous post). Strictly by numbers, Gazprom’s market cap should be well over Exxon Mobil’s since its profits are higher, which would represent over a 400% increase in share price.

Company Negatives

This growth, however, would not be realistic. Exxon Mobil is a well-managed, shareholder-friendly company that operates in the largest economy in the world, whereas Gazprom’s management couldn’t care less about shareholders and doesn’t make moves for shareholder’s benefits. These factors significantly reduce Gazprom’s valuation, but definitely not to the extent that they are worth 80% less than a company that they earn more profits than, Exxon Mobil. The current situation in Russia, regarding the annexation of Crimea, also plays into this valuation, although it does more good than bad. Geopolitical risks like Crimea will die out eventually, but they drive share prices down in the short term. This gives an excellent entry point for long term investors, however, short term traders could find the extreme amount of volatility until the matter is resolved to be quite hard to tolerate. How long you are willing to hold Gazprom, as well as how long you think it will take for Gazprom’s true value to be spelled out by the share price will determine whether or not to buy the company.