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

HPQ: We Predicted It But …

August 30th, 2010 by hackel No comments »

Last week, on credittrends.com , I wrote:

Whether HPQ is successful or not in its bid, one would expect the Board to increase the $4.4 billion remaining authorization in its share repurchase program, both in an attempt to appease analysts and investors who have been critical of the firm as well as present a united and undaunted front to investors and customers of a Board having strength and conviction while potential new CEOs are being interviewed.

I do not agree with today’s announced additional $10 billion share repurchase as it does not add value to existing shareholders.

» Read more: HPQ: We Predicted It But …

Strategic Decisions Must Have Quantitative Backing For Success

August 27th, 2010 by hackel No comments »

The proper measurement of risk and reward is what distinguishes the mediocre from the superior executive. While perhaps the easy way out is to forgo investment opportunities altogether, historically noteworthy investors have shown the assumption of risk can bring on large returns. On the other hand, as we clearly see in the case of HPQ, the inappropriate assumption of risk can destroy value.

» Read more: Strategic Decisions Must Have Quantitative Backing For Success

Hewlett-Packard (HPQ) Fair Value Estimate

August 27th, 2010 by hackel No comments »

When BP (BP) was in the heat of the Gulf explosion crisis, we presented our free cash flow sensitivity analysis (here) and forecast, showing the stock was fairly valued in the mid- to perhaps upper- $30s range.  When the stock reached $40, we reported that investors were “getting giddy” over its prospects (see article here)—that were not warranted given its free cash flows, and increased cost of equity related to the uncertainly of its free cash flows and updated capital structure.

Here we do the same now for Hewlett-Packard (HPQ): which results in a fair valuation of $47.27.

» Read more: Hewlett-Packard (HPQ) Fair Value Estimate

Comment on HPQ

August 26th, 2010 by hackel No comments »

While the bidding for 3PAR (PAR) is reminiscent of two drunks at a horse auction, whereby the winner is the loser, the 2 point decline in HPQ (HPQ) shares seems excessive. By taking $4.6 billion off its market value relative to the $1.6 billion (at last count) acquisition, investors appear to be ignoring the enterprise’s 8% free cash flow yield. The executives at HPQ have done an admirable job wringing costs out of the firm, from supply chain to benefits.

» Read more: Comment on HPQ

HPQ, Business Acquisitions, and Share Buybacks

August 25th, 2010 by hackel No comments »

The fact that HPQ (HPQ) and DELL (DELL) have recently grossly underperformed the technology index is tacit recognition their pursuit of 3PAR (PAR) is a value destroying acquisition. Investor response is therefore appropriate in light of the minimum $1.6 billion cash outflow, in return for an asset that is barely free cash flow positive, and brings to light the seriousness in which business acquisitions must be analyzed. In fact, I estimate, 3PAR would need to add over $ 40 million in free cash flow for the deal to make sense, a scenario not foreseen for at least 3 years.

» Read more: HPQ, Business Acquisitions, and Share Buybacks

Business Acquisitions

August 23rd, 2010 by hackel No comments »

The Dow ran up some 90 points this morning, possibly in reaction to Hewlett-Packard’s (HPQ) bid topping for 3Par (PAR). Analysts and reporters again stressed the cash on balance sheets that has been building since 2009 Q1.

READ FULL ARTICLE

HPQ, 3PAR DEAL

August 23rd, 2010 by hackel No comments »

A quick reading of 3PAR’s (PAR) financial statements reveals the $1.6+ billion deal is not value-adding for HPQ shareholders.

READ FULL ARTICLE

GM: Who’s Next? Answer: At Least 1,300 More

August 22nd, 2010 by hackel No comments »

In itsAugust 18th S1 filing, GM (GM) stated its US defined benefits plans were underfunded by $17.1 billion and its non-US plans by $10.3 billion. The Company states its discount rate should be approximately 75 basis points lower, given current rates.

READ FULL ARTICLE

You Ain’t Seen Nothin’ Yet!

August 21st, 2010 by hackel No comments »

ALBANY — State Comptroller Thomas DiNapoli revealed plans yesterday to slash the state pension fund’s growth forecast for the first time in a decade amid growing concerns about exploding retirement costs.

READ FULL ARTICLE

When Will Analysts Learn?

August 20th, 2010 by hackel No comments »

HEADLINE ON HEWLETT-PACKARD

Hewlett-Packard (HPQ: $39.72, $-1.0400,-2.55%) is down after Morgan Stanley (MS) says the company needs more aggressive buybacks to boost shares, Bloomberg reports. Morgan Stanley cut its price target to $56 from $62.

If this is a true representation as to how this analyst feels, it speaks poorly as to the state of current day security analysis.

READ FULL ARTICLE

OTEX- Good Quarter

August 19th, 2010 by hackel No comments »

Despite 2 analyst downgrades this past week, OTEX share are up 12% today, and now is now up about 10% since first recommended here.

While I will wait for the 10Q before additional comment, from the estimate of free cash flow and cost of capital, it appears the two large brokerage firm analysts were off the mark in their analysis.

Related article:

Disclosure: No positions

Kenneth S. Hackel, CFA
President
CT Capital LLC

Subscribe to CreditTrends.com by Email

If you are interested in learning how to analyze the pension plan, including plan accounting, effect on earnings, cash flow, financial structure and valuation, order “Security Valuation and Risk Analysis” out this fall from McGraw-Hill.

Selling in HPQ Overdone; Stocks 6% Undervalued

August 17th, 2010 by hackel No comments »

Because I will be busy with final page proofs on the text, I will be unable to edit the full report on HPQ this week.

The analysis suggests, however, that selling in HPQ has been overdone, given its free cash flow, growth rate in cash flows (from operating activities and free), cost of capital (of 8.1%), return on invested capital, and stability measures. Adjustments were made which lowered reported operating cash flows and increased balance sheet debt.

READ FULL ARTICLE

What Investors Don’t Understand About Pension Plans

August 11th, 2010 by hackel 1 comment »

I’ve been writing for a couple of years now about an impending cataclysm about to hit company earnings, cash flows and credit. As we know, many firms were bailed out from having to make stepped-up contributions thanks to the large rally in the financial markets in 2009. 

READ FULL ARTICLE

Probability of a Stock Market Crash Versus 1 Year Ago

August 10th, 2010 by hackel No comments »

CT Capital’s cost of capital and other models provide key data from which to decompose stock market risk. With that, our “crash predictor” is presented.

READ FULL ARTICLE

The Best Indicator of Future Stock Prices Over Last 10 Years

August 9th, 2010 by hackel No comments »

I am currently page proofing  my upcoming text, a book I am sure could improve your investment returns, and at the same time, save you a lot of heartache. Order by clicking a picture of the book to the right.

It is a landmark book, half devoted to the analysis of free cash flow and metrics based off of free cash flow, such as return on invested capital. Do not use EBITDA for this. I expect the book will be widely adopted.

READ FULL ARTICLE

Pensions

August 6th, 2010 by hackel 1 comment »

Corporate defined benefit plans are no better than 75% fully- funded, when adjusting for more realistic investment assumptions and the more powerful discount rate. This is in contrast to current financial reporting using exaggerated assumptions.

READ FULL ARTICLE