Pensions-What UPS’s $2 billon Bond Sale Represents

November 9th, 2010 by hackel No comments »

UPS sold $2 billion in long-term bonds to fund its pensions yesterday, raising its total debt/equity to over 100%.

Although UPS is a solid and consistent generator of both free and operating cash flows, we saw that during the credit crisis of a short couple of years ago, even UPS’s fixed income securities could be impaired.

» Read more: Pensions-What UPS’s $2 billon Bond Sale Represents

Free Cash Flow Growth Led by Strong Cost Cutting and a Tad of Financial Engineering

November 8th, 2010 by hackel No comments »

If equity markets represent the flawless leading economic indicator generally believed, investors should be very comfortable nowadays. After all, the S&P 500 is up almost 12% so far this year. Yet, economists remain generally concerned.

Is it not then unreasonable to ask:   Are the glorious headlines trumpeting rising free cash flows portending a sustainable and durable continuation of the economic expansion or perhaps the result of severe cost cutting with a dose of imaginative accounting?

» Read more: Free Cash Flow Growth Led by Strong Cost Cutting and a Tad of Financial Engineering

Self Insurance-Boost to Cash Flow but Risk (Cost Of Capital) As Well

October 28th, 2010 by hackel No comments »

The province of insurance is often a misunderstood and lightly inspected area of security analysis. It is, however, becoming increasingly important in cash flow and risk analysis in light of rising health care costs, growth in corporate assets, a seemingly higher incidence of natural disasters and lawsuits, and other specialized needs for which insurance is required. This has resulted in the rising use of self-insurance as a cash savings technique.

» Read more: Self Insurance-Boost to Cash Flow but Risk (Cost Of Capital) As Well

Death, Taxes, and Health Care Costs

October 25th, 2010 by hackel No comments »

Ken Hackel, president of institutional equity manager, CT Capital, and author of Security Valuation and Risk Analysis (McGraw-Hill, 2010), warned about six months ago, of the impending pension liability. Now, as expected, firms with large defined benefit plans are fessing up to the power of the discount rate on the ultimate liability, which is now resulting in stepped-up contributions. Hackel estimates that for many firms, with 10-year Treasury bonds at 2.5%, a further 1% reduction in current yields could very well have the same impact as a 20% reduction in the estimated long-term investment return assumption. When Kenneth first started writing of the liability, a 1% reduction was roughly equivalent to a 15% decline.

» Read more: Death, Taxes, and Health Care Costs

It’s Here!-After All, It Only Took 40 Years

October 22nd, 2010 by hackel No comments »

Tell us what your new book is about?

Rarely does a does a book on finance and investments “break important new ground.”  I believe Security Valuation and Risk Analysis, encompassing my four decades covering about every facet of security analysis and corporate finance, does so.

» Read more: It’s Here!-After All, It Only Took 40 Years

Credit and Cost of Capital As Superior Predictors of Recession, Expansion and Stock Prices

October 18th, 2010 by hackel No comments »

Kenneth Hackel, president of institutional investment advisor, CT Capital LLC, submits that the lessons related to the crisis of the credit markets during 2007-2009, including effects on the economic and financial markets, have been well constructed. What he believes is not as well-known, is  the equity market, as measured by the S&P 500, has lost much of its prowess as a forecaster of pending economic change, and therefore as a forecasting tool of pending recession and expansion.

» Read more: Credit and Cost of Capital As Superior Predictors of Recession, Expansion and Stock Prices

Do You Really Understand Cash Flow Analysis?

October 8th, 2010 by hackel No comments »

Given the rise in financial valuations the past 7 weeks without any obvious increase in economic strength also present in the “Main Street” economy, detailed security analysis is now taking on increased gravity. This is especially so with another earnings “season” upon us, and with it, an avalanche of references to cash flow and free cash flow. If only investors and financial reporters had greater clarity regarding cash flow analysis, stock volatility would be much reduced and investors’ financial results improved.

» Read more: Do You Really Understand Cash Flow Analysis?

Are Security Analysts Over-Promising Again?

October 6th, 2010 by hackel No comments »

I see the head economist at Goldman Sachs (GS) is now forecasting the US economy will either be “fairly bad” or “very bad.” If his forecast proves accurate, what does that say about equity investors in general, who have carried valuations and equity benchmarks to new yearly highs? Does it also tell you Goldman’s economists and research teams are not on speaking terms?

» Read more: Are Security Analysts Over-Promising Again?

Credit Ratings Are Still Important In Determining Stock Valuation

October 4th, 2010 by hackel No comments »

During the height of the credit crises a short two years ago, the hint of a credit downgrade was sure to result in an outsized drop in the underlying stock.  On the other hand, a confirmation of a rating pushed the impacted stock higher.  Now, due to the considerable balance sheet re-liquefaction and built-up capital, the fear of a credit rating is not near as worrisome.

» Read more: Credit Ratings Are Still Important In Determining Stock Valuation

The MetLife (MET) News Just the Beginning

September 30th, 2010 by hackel No comments »

News from MetLife (MET) After Market Close: Low Interest Rates to Impact Earnings

Expect to hear a lot more about the impact of low interest rates. Not only is it affecting the asset side of the balance sheet, but the liability side as well, as I have been pointing out almost weekly since June.
» Read more: The MetLife (MET) News Just the Beginning

Intel (INTC) and Research in Motion (RIMM)

September 29th, 2010 by hackel No comments »

Intel (INTC) and Research in Motion (RIMM) came onto CT Capital’s buy list over the past month after having been brow-beaten by many security analysts. Analysts believed these firms are, or soon will be, succumbing to the modern tablet era which will either make their current product line-ups obsolete or less relevant, as a new stream of products gains a foothold on their market share.

» Read more: Intel (INTC) and Research in Motion (RIMM)

M&A Activity

September 27th, 2010 by hackel No comments »

I have written extensively on business combinations over the past six months, including “hidden” costs associated with their taking place.

The current economic environment, that of slow top line growth with a boost in year over year financial flexibility is often a recipe for happy investment bankers. But what does it mean for equities?

Here, history is crystal clear: investors would be incorrect to presume a step-up in merger activity would presage higher stock prices, which can only take place with improvements in free cash flows and reductions in the cost of capital.

While the cost of after tax debt continues to decline, the cost of equity has remained stable over the past month.

Adobe Systems (ADBE) Announcement Would Not Have Fooled Cash Flow and Credit Analyst

September 23rd, 2010 by hackel No comments »

The news of Adobe Systems (ADBE) yesterday would have not surprised the serious student of cash flow and cost of capital.

» Read more: Adobe Systems (ADBE) Announcement Would Not Have Fooled Cash Flow and Credit Analyst

IBM: A Case For Sam Palmisano firing Sam Palmisano

September 21st, 2010 by hackel No comments »

In this article we look at evidence that strongly suggests IBM (IBM), despite being turned into a cash “machine,” has done so not through its own R&D efforts, but rather through massive cost cutting. And its strategy is errily similar to that of Hewlett-Packard (HPQ), even prior to today’s announcement of a $1.7 billion acquisition, its second large announced deal over the past week.

» Read more: IBM: A Case For Sam Palmisano firing Sam Palmisano

IBM – CEO Sam Palmisano Should Look at Facts First

September 15th, 2010 by hackel No comments »

IBM (IBM) CEO Sam Palmisano should measure his words prior to speaking badly of others.

In an interview with the Wall Street Journal, Palmisano said that during former CEO Mark Hurd’s five-year tenure, Hewlett-Packard (HPQ) was hurt by sharp cuts in its R&D budget, and that the company was declining in relevance.
» Read more: IBM – CEO Sam Palmisano Should Look at Facts First

Bloomberg News: `Silent Heart Attack’ for Pensions Driven by Yields

September 14th, 2010 by Simon B. Adams No comments »

The Bloomberg News September 14, 2010, article discusses how corporate pension plans in the U.S. are falling behind future payouts to retirees by the most in a decade amid a slowing economy and the lowest bond yields on record.

In the article, Kenneth Hackel, president of credittrends.com and research and consulting firm CT Capital  likens the shortfall to a ‘silent heart attack’.  He believes “People aren’t recognizing the symptoms until the patient falls on the ground.”

» Read more: Bloomberg News: `Silent Heart Attack’ for Pensions Driven by Yields

New Age Security Analysis

September 13th, 2010 by hackel No comments »

If one values a share of stock using the same analysis and judgment as that of owning a US Treasury bond, they would consider its worth to be the present value of its tax-adjusted free cash flows plus a terminal value; for that is how bonds are indeed valued.
» Read more: New Age Security Analysis

S&P 8.1% Undervalued

September 10th, 2010 by hackel No comments »

Our cash flow/cost of capital model is the most comprehensive that exists, and, as readers know, has proved quite accurate. It was bearish going into the credit crisis and signaled significant under-valuation March 2009, to the extent we put out a special email.
» Read more: S&P 8.1% Undervalued

Proposed Tax Changes Would Affect Cash Flows and Valuation

September 10th, 2010 by hackel No comments »

The Obama administration’s proposal to make the research and development credit permanent and to allow for a temporary 100% tax deduction for qualified capital expenditures is sure to boost cash flows.  However should the IRC deduction 199 benefits be rolled back for the major oil companies, as is being currently discussed,  the impact to certain firms could be harmful in out years.
» Read more: Proposed Tax Changes Would Affect Cash Flows and Valuation

Business Acquisitions—Don’t Overlook Those Hidden Costs

September 8th, 2010 by hackel No comments »

The securities analyst must be aware of and take into consideration those “added” costs and expenses which can add significantly to the cost of a transaction. It is long been shown that  most mergers, while strongly defended by management, fail, in good part because they fall short in delivering the intended result—higher cash flows and lower cost of capital.
» Read more: Business Acquisitions—Don’t Overlook Those Hidden Costs

Is Oracle’s (ORCL) 7% Rise Today Justified?

September 7th, 2010 by hackel No comments »

In March 2005, shares in NCR Corp (NCR) tumbled over 17% the day it was announced Mark Hurd, its CEO, would leave the company to join Hewlett-Packard (HPQ). At NCR, Hurd had cut costs while increasing revenues, and as a result, free cash flow grew substantially. As the shares in NCR were falling on the date of announcement, stock in Hewlett-Packard rose over 10%.

» Read more: Is Oracle’s (ORCL) 7% Rise Today Justified?

Hewlett-Packard (HPQ) and Lexmark (LXK)—Cost of Capital Key to Forecasting Stock Price

September 7th, 2010 by hackel No comments »

I was looking at some of this years’ winners and losers and couldn’t help but notice the discrepancy in returns of Hewlett-Packard (HPQ) versus Lexmark (LXK) going back 3 years. For this year, Lexmark is up 35% and Hewlett-Packard down 25%.

» Read more: Hewlett-Packard (HPQ) and Lexmark (LXK)—Cost of Capital Key to Forecasting Stock Price

Pensions – Many Won’t Be As Lucky As Heinz (HNZ)

September 1st, 2010 by hackel No comments »

Despite today’s large equity rally, the S&P is still down over 2% for the year, in sharp contrast to a median S&P 8% pension actuarial investment assumption, while 10-year bonds yield 2.64%, a long way from the needed 5.8% median discount rate assumption.

» Read more: Pensions – Many Won’t Be As Lucky As Heinz (HNZ)

HPQ Current Fair Value

August 31st, 2010 by hackel No comments »

The current fair value of Hewlett-Packard has been reduced to $43.52, based on our current free cash flow estimates, which includes various adjustments to cash flow from operating activities.

» Read more: HPQ Current Fair Value

Buy This Book-You Need to Learn About Risk and Valuation

August 31st, 2010 by hackel No comments »

If you wonder why HPQ is now trading, despite the huge buyback announcement, which, when combined with its remainning $4.1 authorization, totals 16% of its outstanding shares, back to where it was on Friday, you need the book to your right: Security Valuation and Risk Analysis:

 

» Read more: Buy This Book-You Need to Learn About Risk and Valuation