Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘value investing’

Railroad Stocks Look Attractive at Current Prices

Contrary to the demise of coal usage, the railroad stocks are not dead yet.  The road and rail industry has trailed the S&P 500 in performance throughout 2012.  However, my analysis indicates that the rail stocks are undervalued and should be considered as a buy.  Last week, Goldman Sachs issued this report:

Goldman Sachs resumed coverage of the U.S. transportation sector with an attractive coverage view on railroads.   Canadian Pacific Railway (CP) was a top buy idea and made it to the conviction list. Goldman gave a buy rating to CSX Corp. (CSX) and Norfolk Southern Corp. (NSC).  The U.S. transportation industry still has room to raise rates further to recoup years of economic losses, said in a note.

I am in disagreement with Goldman on CP.  While CP is a good company, it is priced to high with a PE of 18 for a growth rate of 10%.  CP has a 5-year average PE of 14 which is comparable to the current industry average of 13.78.  If you like CP, wait for a pullback in price before entering.

My favorite rail stocks at this time are Norfolk Southern (NSC) and CSX Corp (CSX).  They both trade at a PE of around 12 which is lower than the industry average of 13.78.  NSC is trading at $72.25.  Medium-term trends in the majority of NSC’s markets remain favorable and support rising traffic, in our opinion. We see investments in its network improving capacity on heavily trafficked lanes like the Heartland and Crescent corridors, and leading to greater conversion of truck traffic over to rail.  Coal shipments will be down but the growth in other areas will overshadow its impact.  NSC has a 3-5 year projected growth rate of 13.8%.  NSC has a current dividend yield of 2.58% which compounds at 16.4% annually.  Looking forward 10 years, NSC will have a yield on cost of 11.9%.  NSC has an equity summary score of 9.0 out of 10 for a Bullish outlook.

CSX is trading at $21.89 with a one year price performance of -12.2%.  We believe CSX will benefit from economic recovery in the U.S., given its role in transporting many of the basic materials required in manufacturing and construction. We also think the recession forced a more intense focus on operating efficiencies, which should support wider margins during a period of rising volumes. CSX has a 3-5 year projected growth rate of 12.5%.  CSX has a current dividend yield of 2.50% which compounds at 15% annually.  Looking forward 10 years, CSX will have a yield on cost of 9.9%.  CSX has an equity summary score of 7.5 out of 10 for a Bullish outlook.

Union Pacific (UNP) is a little more expensive at a PE of 14 but it also has an EPS growth rate of 15%.  We believe UNP’s new traffic, especially shale-oil related, is coming on at higher prices than we had previously anticipated. On this, and slightly improved coal volumes, we are boosting our EPS estimate for ’12 by $0.24 to $8.19 and ’13’s by $0.22 to $9.02. We note that UNP posted Q2 EPS of $2.10, vs. $1.59, exceeding our estimate and the Capital IQ consensus, both of which were $1.96.  UNP is trading at $117.37 with a dividend yield of 2.01%.  Looking forward 10 years, UNP will have a yield on cost of 7.9%.  UNP has an equity summary score of 9.3 out of 10 for a VERY Bullish outlook.

Bershire Hathaway Portfolio Update

As of 12/31/2011, Berkshire Hathaway (BRK.B) owns 34 stocks with a total value of $66.2 billion.  The classic value investor Warren Buffett made a number of stock moves during the 4th quarter of 2011.  These are the details of the buys and sells.

Added: CVS Caremark Corp. (CVS)

Warren Buffett added to his holdings in CVS Caremark Corp. by 25.53%. His purchase prices were between $32.97 and $41.16, with an estimated average price of $37.2. The impact to his portfolio due to this purchase was 0.09%. His holdings were 7,106,500 shares as of 12/31/2011.

Added: Intel Corp. (INTC)

Warren Buffett added to his holdings in Intel Corp. by 23.17%. His purchase prices were between $20.62 and $25.66, with an estimated average price of $23.87. The impact to his portfolio due to this purchase was 0.08%. His holdings were 11,495,000 shares as of 12/31/2011.

New Purchase: Davita Inc. (DVA)

Warren Buffett initiated holdings in Davita Inc. (DVA). His purchase prices were between $60.64 and $76.81, with an estimated average price of $71.05. The
impact to his portfolio due to this purchase was 0.31%. His holdings were 2,684,500 shares as of 12/31/2011.

New Purchase: Liberty Media Corp. Liberty Cap (LMCA)

Warren Buffett initiated holdings in Liberty Media Corp. Liberty Cap. His purchase prices were between $61.11 and $79.67, with an estimated average price of
$46.2. The impact to his portfolio due to this purchase was 0.2%. His holdings were 1,701,400 shares as of 12/31/2011.

Added: International Business Machines Corp (IBM)

Warren Buffett added to his holdings in International Business Machines Corp by 11.43%. His purchase prices were between $173.29 and $194.56, with an estimated average price of $184.45. The impact to his portfolio due to this purchase was 1.83%. His holdings were 63,905,931 shares as of 12/31/2011.

Added: The Directv Group Inc. (DTV)

Warren Buffett added to his holdings in The Directv Group Inc. by 378.85%. His purchase prices were between $40.6 and $47.87, with an estimated average price of $45.35. The impact to his portfolio due to this purchase was 1.03%. His holdings were 20,348,400 shares as of 12/31/2011.

Added: Wells Fargo & Company (WFC)

Warren Buffett added to his holdings in Wells Fargo & Company by 6.18%. His purchase prices were between $23.18 and $27.785, with an estimated average
price of $25.68. The impact to his portfolio due to this purchase was 0.93%. His holdings were 383,703,628 shares as of 12/31/2011.

Added: Visa Inc (V)

Warren Buffett added to his holdings in Visa Inc by 25.02%. His purchase prices were between $84.26 and $103.15, with an estimated average price of $93.81. The impact to his portfolio due to this purchase was 0.09%. His holdings were 2,865,008 shares as of 12/31/2011.

Added: General Dynamics Corp. (GD)

Warren Buffett added to his holdings in General Dynamics Corp. by 26.52%. His purchase prices were between $55.67 and $66.92, with an estimated average price of $63.53. The impact to his portfolio due to this purchase was 0.08%. His holdings were 3,877,122 shares as of 12/31/2011.

Added: Verisk Analytics Inc. (VRSK)

Warren Buffett added to his holdings in Verisk Analytics Inc. by 63.96%. His purchase prices were between $33.06 and $40.13, with an estimated average price of $36.75. The impact to his portfolio due to this purchase was 0.08%. His holdings were 3,445,029 shares as of 12/31/2011.

Reduced: Johnson & Johnson (JNJ)

Warren Buffett reduced to his holdings in Johnson & Johnson by 22.51%. His sale prices were between $61.27 and $66.02, with an estimated average price of
$63.97. The impact to his portfolio due to this sale was -0.91%. Warren Buffett still held 29,018,127 shares as of 12/31/2011.

Sold Out: Exxon Mobil Corp. (XOM)

Warren Buffett sold out his holdings in Exxon Mobil Corp.. His sale prices were between $71.15 and $85.28, with an estimated average price of $78.88.

High Yield Dividend Stocks with Low Valuation

Based on Grey and Vogel’s research paper called “Analyzing Valuation Measures: A Performance Horse-Race over the past 40 Years,” the best valuation measure wasn’t the classic price-to-earnings (P/E) ratio.  It’s something similar to the P/E ratio though, with a more intimidating name: “EV-to-EBITDA.”

Grey and Vogel found that buying the cheapest 25% of stocks based on EV/EBITDA returned 17.66% a year from 1971-2010. This beat buying cheap stocks based on the P/E ratio, which returned just 15.23% a year over the same time.

My idea is to apply the EV/EBITDA metric to dividend stocks. It makes sense to buy dividend stocks at a lower value which gives the investor higher dividend rate of pay while waiting for a stock price increase to a higher valuation.  I am looking at stocks with a dividend yield of at least 3% and a return on equity of at least 10%.  The table below shows the best stocks meeting the criteria along with their EV/EBITDA ratios.

The list is loaded with companies in the oil industry with EV/EBITDA ratios below 5.0 such as: StatOil (STO), Marathon Oil (MRO), Total (TOT), ConocoPhillips (COP), and Chevron (CVX).  Among this group, TOT has the highest dividend yield at 5.0% with an EV/EBITDA of 3.23.

The telecom industry is well represented by companies such as Telecom Argentina (TEO), China Mobile (CHL), P.T. Telekomunikasi Indonesia, (TLK), BT Group plc  (BT) and Telefonos de Mexico SA de CV Co (TMX).  TLK has a 7.2% dividend yield with an EV/EBITDA of 4.01.

Click to enlarge

Get FREE Stock

Get FREE Stock - No Trade Commissions

Subscribe for FREE Trades

Subscribe for FREE Trades

* indicates required
/ ( mm / dd )
Archives
PopAds