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