http://www.investopedia.com/articles/07/retailsalesdata.asp
Using various individual retail sales figures in December and January may be one of the best indicators available for how to predict the next five to nine months of retail economic activity. Read on to discover how retail groupings can be used as a market indicator.
Same Store Sales
Before getting into individual metrics, the single commonality that is defined among analysts and investors in the retail space is same store sales. This is simply a measure of the change in sales over a defined period - usually year over year - for all stores open for more than a year.
As with most stocks, earnings per share and revenues do matter and should be a point of focus, but it is just as vital to watch the important retail metric of same store sales. Retailers that produce strong and steady same store sales are often those that offer the best performance.
Important December/January Data Release
The holiday onslaught is not just confined to the shopping malls of America, but finds itself on Wall Street with the torrid release of same store sales data. It usually starts after the first week of December and continues through to late January, as retailers have differing release dates.
In the 1990s, before the advent of online shopping and gift cards, this time frame was late December to mid-January horizon, but online sales growth and the proliferation of Christmas gift cards has since widened out the holiday shopping season. (For related reading, see Capitalizing On Seasonal Effects.)
Retail chains have also standardized their release of same store sales within a few days of each other for consistency, which typically occurs on the first trading Wednesday evening and Thursday of January. After the release of this holiday sales data, the investment community usually tries to make its assumptions for the next four to nine months. The reason that analysts wait for one month's data to forecast six to nine months in the future is because the holiday season is the most critical quarter to retailers.
Gaining an Idea of the Overall Consensus and Outlook
For a forward fiscal year, retail analysts usually make their largest fiscal forecast estimate changes in mid-January to early February of each year right after most companies report earnings and all of the major holiday misses or surprises are apparent. Generally, they do not make any additional major changes until the summer, when the "back to school" effect can be seen. There are exceptions, such as a firm-specific changes or a major market event, but this pertains to the group as a whole.
Upon the release of Q4 earnings reports, which encompasses the holiday season, companies tend to offer their year-ahead guidance. Analysts will also shore up their previous forecasts and will often change their ratings on retailers, especially if large forecast changes need to be made. (For more insight, see Strategies For Quarterly Earnings Season, Surprising Earnings Results and Earnings Forecasts: A Primer.)
This helps to provide additional clarity in the projected strength of a company's sales looking forward, along with the overall retail climate. If several major retailers start to issue weak guidance, it is usually a sign of large-scale retail weakness and should be a warning sign to retail investors.
The Importance of Retail Grouping
There are a wide number of very different retailers in the market. To gain an overall understanding of the retail market along with distinguishing strength and weakness within retail segments it is wise to group similar retailers.
For broader-based retail chains, consistent leaders, such as Wal-Mart, Target and Costco Wholesale might be the key players to consider. Of course, the companies that top this list will vary and the list itself will change over time. While these are just a small segment of the wide retail sector, due to their size, the retail sales data of these companies are some of the most important to watch to be able to gauge spending health in the economy.
To gain an understanding of whether or not consumers are buying bigger ticket items, check out the consumer electronics, mainly brick-and-mortar companies like Best Buy, who sell big screen TVs. You can also look to online retailers, such as Amazon.com, to gauge the health of consumer internet spending.
To gauge how often people are going out for dinners, which is often a sign of consumer health, look to mega-chain restaurants like Brinker International and Darden Restaurants. However, chains such as McDonald's, Yum! Brands and other fast food or quasi-fast food chains should not be in the equation, because their products fall more into the range of consumer staples than discretionary goods.
The list can grow longer by the minute if you want to be very specific in your segmentation, but breaking down the retail space into just a few segments can still give you insight into how consumers are spending. The following chart provides an example of how your retail spreadsheet might look:
Retail Component December Guidance & January Reporting Guidance for Calendar Q1 Guidance for Calendar Q2 & more
Wal-Mart (WMT) - - -
Target (TGT) - - -
Costco (COST) - - -
Ralph Lauren (RL) - - -
VF Corp (VFC) - - -
Limited (LTD) - - -
Nike (NKE) - - -
Brinker (EAT) - - -
Darden (DRI) - - -
Kohl's (KSS) - - -
Federated (FD) - - -
JC Penney (JCP) - - -
Best Buy (BBY) - - -
Amazon.com (AMZN) - - -
UPS (UPS) - - -
Fedex (FDX) - - -
JB Hunt (JBHT) - - -
YRC Worldwide (YRCW) - - -
RailAmerica (RRA) - - -
Packaging Corp (PKG) - - -
Bemis (BMS) - - -
Which Retail Components Should You Ignore?
Not all retailers will shed light on the spending health of consumers, typically, these are the companies that sell life staples, which are purchased regardless of the economic conditions. Examples of these companies include basic-level food chains and drugstores.
Also, autos and other transportation-related sectors aren't a good gauge as U.S. auto manufacturing and sales since the '90s have been steadily less correlated to overall economic spending, partly because of foreign auto sales forging ahead into the U.S. and partly because of the perpetual woes of the Big Three and the incentives they use to lure new car buyers. As this has grown to be more and more of a problem each year, it is not likely that any sizable change would be expected there. (For related reading, check out the Industry Handbook.)
Housing product sellers like Home Depot and Lowe's also aren't the best indicator of consumer health because of the inherent ties to housing and the drastic swings that the housing sector tends to experience.
Why should investors care?
If the retail consumer's spending is going to slow down for three to six months, the rest of the economy has to operate on different assumptions. Housing is volatile, autos are volatile and durable goods are volatile, and the swings are often temporary, but systematic retail change can be longer-lasting.
What can alter these factors as an indicator?
A severe positive or negative global shock event can impact discretionary retail spending overnight. A drastic decision out of the Federal Reserve on its monetary policy or a rapid and unexpected interest rate cycle shift can change this scenario as well. Critical changes are rare, but when they unexpectedly occur, it changes the game.
Severe commodity or energy price changes can also drastically alter the cost structure of this scenario, although this is often well publicized. A severe bull market or severe bear market must also be taken into consideration.
Conclusion
General consumer discretionary spending and the related parts of retail are what define a good or bad economy, and catching this trend can be invaluable. Picking a year's high-flier or a severe laggard in each group does not usually help, because of overall index misrepresentation. Therefore, using the traditional, steady choices of stocks in each retail group can provide savvy investors with a wealth of information.
by Jon Ogg, (Contact Author | Biography)
Jon Ogg has been a financial news analyst since 1997. Some of his accomplishments include creating an audio squawk for active traders called TTN (it was sold in 2003 and became a news broadcast desk that became part E*Trade); working as a licensed bond broker to U.S. and E.U. financial institutions; acting as a financial advisor and portfolio manager in Copenhagen, Denmark; and gaining experience in private financings. He received a Bachelor of Business Administration in finance at University of Houston. Jon has lived in New York, Chicago, Copenhagen and Houston. To read more of his work, see his blog site www.247wallst.com.
Friday, October 3, 2008
Cashing In On Corporate Restructuring
Companies use mergers, acquisitions and spinoffs to increase their profits. Strategic mergers and acquisitions can help a company become more competitive in its field and improve its bottom line, while spinoffs are a way to get rid of underperforming or non-core business divisions that can drag down profits. While mergers, acquisitions and spinoffs can be great moves for companies, they can be even better for the enterprising investor willing to do a little research! If you do your homework, you can find profitable opportunities in these corporate actions - we'll take you through this process step by step.
Spinoffs
Why are spinoffs such a great investment opportunity? Typically, underperforming business divisions are loaded with debt. When they are cut off from the parent company, that company can become more valuable as a result. (For more insight, check out Conglomerates: Cash Cows Or Corporate Chaos?)
The Process
Here's how a typical spinoff situation works:
The company decides to spin off a business division.
The parent company files the necessary paperwork with the Securities and Exchange Commission (SEC).
The spinoff becomes a company of its own and must also file paperwork with the SEC.
Shares in the new company are distributed to parent company shareholders.
The spinoff company goes public.
Notice that the spinoff shares are distributed to parent company shareholders. There are two reasons why this creates value:
Parent company shareholders rarely want anything to do with the new spinoff. After all, it's an underperforming division that was cut off to improve the bottom line. As a result, many new shareholders sell immediately after the new company goes public.
Large institutions are often forbidden to hold shares in spinoffs due to the smaller market capitalization, increased risk, or poor financials of the new company. Therefore, many large institutions automatically sell their shares immediately after the new company goes public.
Simple supply and demand logic will tell you that such a large number of shares on the market will naturally decrease the price, even if it is not fundamentally justified. It is this temporary mispricing that gives the enterprising investor an opportunity for profit.
The Homework
Information is easy to find when it comes to spinoffs. Every parent company is forced to file paperwork with the SEC outlining everything that an investor needs to know (and then some). The most important form to look for is Form 10, which outlines the spinoff distribution terms. This document contains a few key things to look for:
Basic Company, Share and Pricing Information
Look at the new company's market cap. If it's smaller, large funds are more likely to sell it. Also look at the share distribution terms to see whether it makes sense to buy the parent company shares or to buy on the open market after the company goes public.
Distribution Type
Oftentimes, spinoff shares are distributed to parent company stockholders; however, in some cases partial spinoffs, rights offerings or other formats are used. This can provide increased leverage, or other advantages.
Insider Distributions
Insider holdings and activity are key when determining the value of a spinoff. High insider ownership gives management incentive to perform well and drives shareholder value. (For more on this, see When Insiders Buy, Should Investors Join Them? and Can Insiders Help You Make Better Trades?)
It is also a good idea to read press releases, related news coverage and other available media to determine how the public is going to react to the new spinoff. Press releases can be found under the company's ticker on Yahoo! Finance and company news can be found on Google News.
Overall, spinoffs outperform the market because of the inherent flaws in the spinoff process. Although not every spinoff opportunity represents an attractive investment, investors willing to dig a little deeper into SEC filings and press releases can find those that are with relative ease.
Mergers and Acquisitions (M&A)
Companies are notorious for failing at mergers and acquisitions - especially the mergers where two extremely large companies join forces. Add to that the fact that the M&A field is heavily dominated by arbitrage funds and other big players, and you may wonder how any small investor can make a profit. In fact, M&As can provide good opportunities for investors - it's just a matter of knowing how to find them. (For further reading, see The Basics Of Mergers And Acquisitions and The Wacky World Of M&As.)
The Process
While most M&A transactions are handled through stock and cash offerings, others are handled through the use of merger securities. These can include bonds, warrants, preferred stock, rights, and many others. Here's how the process works:
The acquiring company decides that it wants to buy or merge with another company.
It announces this intention either privately or publicly in a statement, hostile acquisition of stock, rumor, offering, or other means.
The company being acquired then considers the bid. The board of directors advises shareholders of the company's recommended vote and then sends out a proxy to all shareholders who vote on whether or not to sell the company.
If the merger is approved, both companies file the necessary paperwork with the SEC outlining the terms, time and other details of the sale.
The company is bought and integrated into the acquiring company, and the acquired company's shareholders are compensated.
The Homework
As mentioned above, these M&A transactions take place with cash, stock or other instruments. Cash transactions provide limited opportunity for retail investors because any value has already been taken away from arbitrageurs well before the transaction takes place. The same is often true with M&A's that take place with stock offerings because these provide the opportunity to short or buy the acquiring company's stock.
Merger securities are another story. Oftentimes, nobody wants to deal with merger securities for the same reasons they don't want to deal with spinoffs - because they aren't allowed to (as is the case for larger funds) or because they don't care for or understand the new securities. This presents another great opportunity for investors to profit.
The most important forms to look at when researching merger securities are:
Form S4 - This form covers any new securities issued as a result of a merger.
Schedule 14D - This form covers tender offers filed by public acquiring companies.
Schedule 13E - This form covers tender offers when a company is going private.
M&A deals vary greatly in what's offered; therefore, it is important to carefully analyze each deal. Mathematics can tell you the fair value of the securities being offered and a look at management can show how serious the company is about maintaining performance.
Overall, M&A deals involving merger securities rather than cash or stock present a great investment opportunity for the same reason as spinoffs - they are ignored by the majority of the public. However, like spinoffs, it is important to carefully research each opportunity before buying.
Conclusion
Both spinoffs and M&A activity present great investment opportunities for investors willing to dig in to the SEC filings and press releases to find the information they need. In best of situations, spinoffs continue to outperform the market, while mergers involving obscure offerings continue to cause unjustified selling.
Resources
-"You Can Be A Stock Market Genius" by Joel Greenblatt (1997) - This is one of the best books on mergers, acquisitions, spinoffs, rights offerings, bankruptcies and other unique investment opportunities for retail investors.
-Edgar Database - This is the SEC's database where investors can find all company filings free of charge.
-SECFilings.com - This is a free website that lets you sign up for email alerts whenever certain types of filings are made - an excellent way to have investment opportunities delivered to your inbox every day!
by Justin Kuepper, (Contact Author | Biography)
Justin Kuepper has many years of experience in the market as an active trader and a personal retirement accounts manager. He spent a few years independently building and managing financial portals before obtaining his current position with Accelerized New Media, owner of SECFilings.com, ExecutiveDisclosure.com and other popular financial portals. Kuepper continues to write on a freelance basis, covering both finance and technology topics.
Spinoffs
Why are spinoffs such a great investment opportunity? Typically, underperforming business divisions are loaded with debt. When they are cut off from the parent company, that company can become more valuable as a result. (For more insight, check out Conglomerates: Cash Cows Or Corporate Chaos?)
The Process
Here's how a typical spinoff situation works:
The company decides to spin off a business division.
The parent company files the necessary paperwork with the Securities and Exchange Commission (SEC).
The spinoff becomes a company of its own and must also file paperwork with the SEC.
Shares in the new company are distributed to parent company shareholders.
The spinoff company goes public.
Notice that the spinoff shares are distributed to parent company shareholders. There are two reasons why this creates value:
Parent company shareholders rarely want anything to do with the new spinoff. After all, it's an underperforming division that was cut off to improve the bottom line. As a result, many new shareholders sell immediately after the new company goes public.
Large institutions are often forbidden to hold shares in spinoffs due to the smaller market capitalization, increased risk, or poor financials of the new company. Therefore, many large institutions automatically sell their shares immediately after the new company goes public.
Simple supply and demand logic will tell you that such a large number of shares on the market will naturally decrease the price, even if it is not fundamentally justified. It is this temporary mispricing that gives the enterprising investor an opportunity for profit.
The Homework
Information is easy to find when it comes to spinoffs. Every parent company is forced to file paperwork with the SEC outlining everything that an investor needs to know (and then some). The most important form to look for is Form 10, which outlines the spinoff distribution terms. This document contains a few key things to look for:
Basic Company, Share and Pricing Information
Look at the new company's market cap. If it's smaller, large funds are more likely to sell it. Also look at the share distribution terms to see whether it makes sense to buy the parent company shares or to buy on the open market after the company goes public.
Distribution Type
Oftentimes, spinoff shares are distributed to parent company stockholders; however, in some cases partial spinoffs, rights offerings or other formats are used. This can provide increased leverage, or other advantages.
Insider Distributions
Insider holdings and activity are key when determining the value of a spinoff. High insider ownership gives management incentive to perform well and drives shareholder value. (For more on this, see When Insiders Buy, Should Investors Join Them? and Can Insiders Help You Make Better Trades?)
It is also a good idea to read press releases, related news coverage and other available media to determine how the public is going to react to the new spinoff. Press releases can be found under the company's ticker on Yahoo! Finance and company news can be found on Google News.
Overall, spinoffs outperform the market because of the inherent flaws in the spinoff process. Although not every spinoff opportunity represents an attractive investment, investors willing to dig a little deeper into SEC filings and press releases can find those that are with relative ease.
Mergers and Acquisitions (M&A)
Companies are notorious for failing at mergers and acquisitions - especially the mergers where two extremely large companies join forces. Add to that the fact that the M&A field is heavily dominated by arbitrage funds and other big players, and you may wonder how any small investor can make a profit. In fact, M&As can provide good opportunities for investors - it's just a matter of knowing how to find them. (For further reading, see The Basics Of Mergers And Acquisitions and The Wacky World Of M&As.)
The Process
While most M&A transactions are handled through stock and cash offerings, others are handled through the use of merger securities. These can include bonds, warrants, preferred stock, rights, and many others. Here's how the process works:
The acquiring company decides that it wants to buy or merge with another company.
It announces this intention either privately or publicly in a statement, hostile acquisition of stock, rumor, offering, or other means.
The company being acquired then considers the bid. The board of directors advises shareholders of the company's recommended vote and then sends out a proxy to all shareholders who vote on whether or not to sell the company.
If the merger is approved, both companies file the necessary paperwork with the SEC outlining the terms, time and other details of the sale.
The company is bought and integrated into the acquiring company, and the acquired company's shareholders are compensated.
The Homework
As mentioned above, these M&A transactions take place with cash, stock or other instruments. Cash transactions provide limited opportunity for retail investors because any value has already been taken away from arbitrageurs well before the transaction takes place. The same is often true with M&A's that take place with stock offerings because these provide the opportunity to short or buy the acquiring company's stock.
Merger securities are another story. Oftentimes, nobody wants to deal with merger securities for the same reasons they don't want to deal with spinoffs - because they aren't allowed to (as is the case for larger funds) or because they don't care for or understand the new securities. This presents another great opportunity for investors to profit.
The most important forms to look at when researching merger securities are:
Form S4 - This form covers any new securities issued as a result of a merger.
Schedule 14D - This form covers tender offers filed by public acquiring companies.
Schedule 13E - This form covers tender offers when a company is going private.
M&A deals vary greatly in what's offered; therefore, it is important to carefully analyze each deal. Mathematics can tell you the fair value of the securities being offered and a look at management can show how serious the company is about maintaining performance.
Overall, M&A deals involving merger securities rather than cash or stock present a great investment opportunity for the same reason as spinoffs - they are ignored by the majority of the public. However, like spinoffs, it is important to carefully research each opportunity before buying.
Conclusion
Both spinoffs and M&A activity present great investment opportunities for investors willing to dig in to the SEC filings and press releases to find the information they need. In best of situations, spinoffs continue to outperform the market, while mergers involving obscure offerings continue to cause unjustified selling.
Resources
-"You Can Be A Stock Market Genius" by Joel Greenblatt (1997) - This is one of the best books on mergers, acquisitions, spinoffs, rights offerings, bankruptcies and other unique investment opportunities for retail investors.
-Edgar Database - This is the SEC's database where investors can find all company filings free of charge.
-SECFilings.com - This is a free website that lets you sign up for email alerts whenever certain types of filings are made - an excellent way to have investment opportunities delivered to your inbox every day!
by Justin Kuepper, (Contact Author | Biography)
Justin Kuepper has many years of experience in the market as an active trader and a personal retirement accounts manager. He spent a few years independently building and managing financial portals before obtaining his current position with Accelerized New Media, owner of SECFilings.com, ExecutiveDisclosure.com and other popular financial portals. Kuepper continues to write on a freelance basis, covering both finance and technology topics.
Trademarks Of A Takeover Target
Is it possible to determine whether a company is a potential takeover candidate before a public announcement has been made? Absolutely - if you know what to look for. Read on to learn the characteristics that well-financed suitors look for in their target companies. Once you know what the big companies are looking for, you'll be able to determine which companies are prime candidates for takeovers. (To learn about how you can benefit from takeovers as an investor, read Trade Takeover Stocks With Merger Arbitrage and Cashing In On Corporate Restructuring.)
Product/Service Niche
A large company has the luxury of being able to develop or acquire an arsenal of varying services and products. However, if it can buy a company at a reasonable price that has a unique niche in a particular industry (either in terms of a product, or service), it will probably do so.
Smart suitors will wait until the smaller company has done the risky footwork and advertising before buying in. But once a niche is carved out, the larger firm will probably come knocking. In terms of both money and time, it is often cheaper for larger companies to acquire a given product or a service than to build it out from scratch. This allows them to avoid much of the risk associated with a startup procedure.
Additional Financing Needed
Smaller companies often don't have the ability to market their items nationally, much less internationally. Larger firms with deep pockets have this ability. Therefore, look for not only a company with a viable product line, but one that, with the proper financing, could have the potential for large-scale growth. (For more insight, see Venturing Into Early-Stage Growth Stocks.)
Clean Capital Structure
Large firms want an acquisition to go forward on a timely basis, but some companies have a large amount of overhang that dissuades potential suitors. Be wary of companies with a lot of convertible bonds or varying classes of common or preferred stock, especially those with super voting rights. (For related reading, see Knowing Your Rights As A Shareholder.)
The reason that overhang dissuades companies from making an acquisition is that the acquiring firm has to go through a painstaking due diligence process. Overhang presents the risk of significant dilution and presents the possibility that some pesky shareholder with 10 to 1 voting rights might try to hold up the deal. If you think a company may be a prospective takeover target, make sure it has a clean capital structure. In other words, look for companies that have just one class of common stock and a minimal amount of debt that can be converted into common shares.
Debt Refinance Possible
In the latter half of the 1990s, when interest rates began to decline, a number of casino companies found themselves saddled with high fixed interest first mortgage notes. Because many of them were already drowning in debt, the banks weren't keen on refinancing those notes. And so, along came larger players in the industry. These larger players had better credit ratings and deeper pockets, as well as access to capital and were able to buy up many of the smaller, struggling casino companies.
Naturally, a large amount of consolidation occurred. After the deals were done, the larger companies refinanced these first mortgage notes which, in many cases, had very high interest rates. The result was millions in cost savings.
When considering the possibility of a takeover, look for companies that could be much more profitable if their debt loads were refinanced at a more favorable rate.
Geographic Proximity
When one company acquires another, management usually tries to save money by eliminating redundant overhead. In other words, why maintain two warehouses if one can do the job and is accessible by both companies? Therefore, in considering takeover targets, look for companies that are geographically convenient to each other and, that if combined, would present shareholders with a huge potential for cost savings.
For example, many analysts believe consolidation in the drug industry is likely because it is not uncommon to see company headquarters and operations in this industry situated near competing firms. As such, consolidation of these firms could lead to higher margins and increased shareholder value.
Clean Operating History
Takeover candidates usually have a clean operating history. They have consistent revenue streams and steady businesses. Remember, suitors and financing companies want a smooth transition, so they will be wary if a company has, for instance, previously filed for bankruptcy, has a history of reporting erratic earnings results, or has recently lost major customers.
History of Enhancing Shareholder Value
Has the target company been proactive in telling its story to the investment community? Has it repurchased its shares in the open market? Suitors want to buy companies that will thrive as part of a larger company, but also those that, if needed, could continue to work on their own. This ability to work as a standalone applies to the investor relations and public relations function. Suitors like companies are able to enhance shareholder value.
Experienced Management
In some cases, when one company acquires another, the management team at the acquired company is sacked. However, in other instances, management is kept on board because they know the company better than anyone else. Therefore, acquiring companies often look for candidates that have been well run. Remember, good stewardship implies that the company's facilities are probably in good order, and that its customer base is content. (For related reading, check out Evaluating A Company's Management.)
Minimal Litigation Risk/Threats
Almost every company at some point in time will be engaged in some sort of litigation. However, companies seeking acquisition candidates will usually steer clear of firms that are saddled down with lawsuits. In general, suitors avoid acquiring unknown risks.
Expandable Margins
As a company grows its revenue base, it develops economies of scale. In other words, its revenues grow, but its overhead - its rent, interest payments and maybe even its labor costs - stays the same, or increases at a much lower rate than revenue. Acquirers want to buy companies that have the potential to develop these economies of scale and increase margins. They also want to buy companies that have their cost structure in line, and that have a viable plan to grow revenue.
Solid Distribution Network
Particularly if the company is a manufacturer, it must have a solid distribution network or the ability to plug into the acquiring company's network if it is going to be a serious takeover target. What good is a product if it can't be brought to market?
Make certain that any company you believe could be a potential takeover target has not only the ability to develop a product, but also the ability to deliver it to its customers on a timely basis.
Word of Warning
Investors should never buy a company solely because they believe it is, or may become, a takeover target. These suggestions are merely meant to enhance the research process and to help identify characteristics that may be attractive to potential suitors. (To learn more about these companies, read Pinpoint Takeovers First.)
Bottom Line
With the investment community focused on ever-increasing profitability, large companies will always be looking for acquisitions that can add to earnings fast! Therefore, companies that are well run, have excellent products and have the best distribution networks are logical targets for a possible takeover.
by Glenn Curtis, (Contact Author | Biography)
Glenn Curtis started his career as an equity analyst at Cantone Research, a New Jersey-based regional brokerage firm. He has since worked as an equity analyst and a financial writer at a number of print/web publications and brokerage firms including Registered Representative Magazine, Advanced Trading Magazine, Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities. Curtis has also held Series 6,7,24 and 63 securities licenses.
Product/Service Niche
A large company has the luxury of being able to develop or acquire an arsenal of varying services and products. However, if it can buy a company at a reasonable price that has a unique niche in a particular industry (either in terms of a product, or service), it will probably do so.
Smart suitors will wait until the smaller company has done the risky footwork and advertising before buying in. But once a niche is carved out, the larger firm will probably come knocking. In terms of both money and time, it is often cheaper for larger companies to acquire a given product or a service than to build it out from scratch. This allows them to avoid much of the risk associated with a startup procedure.
Additional Financing Needed
Smaller companies often don't have the ability to market their items nationally, much less internationally. Larger firms with deep pockets have this ability. Therefore, look for not only a company with a viable product line, but one that, with the proper financing, could have the potential for large-scale growth. (For more insight, see Venturing Into Early-Stage Growth Stocks.)
Clean Capital Structure
Large firms want an acquisition to go forward on a timely basis, but some companies have a large amount of overhang that dissuades potential suitors. Be wary of companies with a lot of convertible bonds or varying classes of common or preferred stock, especially those with super voting rights. (For related reading, see Knowing Your Rights As A Shareholder.)
The reason that overhang dissuades companies from making an acquisition is that the acquiring firm has to go through a painstaking due diligence process. Overhang presents the risk of significant dilution and presents the possibility that some pesky shareholder with 10 to 1 voting rights might try to hold up the deal. If you think a company may be a prospective takeover target, make sure it has a clean capital structure. In other words, look for companies that have just one class of common stock and a minimal amount of debt that can be converted into common shares.
Debt Refinance Possible
In the latter half of the 1990s, when interest rates began to decline, a number of casino companies found themselves saddled with high fixed interest first mortgage notes. Because many of them were already drowning in debt, the banks weren't keen on refinancing those notes. And so, along came larger players in the industry. These larger players had better credit ratings and deeper pockets, as well as access to capital and were able to buy up many of the smaller, struggling casino companies.
Naturally, a large amount of consolidation occurred. After the deals were done, the larger companies refinanced these first mortgage notes which, in many cases, had very high interest rates. The result was millions in cost savings.
When considering the possibility of a takeover, look for companies that could be much more profitable if their debt loads were refinanced at a more favorable rate.
Geographic Proximity
When one company acquires another, management usually tries to save money by eliminating redundant overhead. In other words, why maintain two warehouses if one can do the job and is accessible by both companies? Therefore, in considering takeover targets, look for companies that are geographically convenient to each other and, that if combined, would present shareholders with a huge potential for cost savings.
For example, many analysts believe consolidation in the drug industry is likely because it is not uncommon to see company headquarters and operations in this industry situated near competing firms. As such, consolidation of these firms could lead to higher margins and increased shareholder value.
Clean Operating History
Takeover candidates usually have a clean operating history. They have consistent revenue streams and steady businesses. Remember, suitors and financing companies want a smooth transition, so they will be wary if a company has, for instance, previously filed for bankruptcy, has a history of reporting erratic earnings results, or has recently lost major customers.
History of Enhancing Shareholder Value
Has the target company been proactive in telling its story to the investment community? Has it repurchased its shares in the open market? Suitors want to buy companies that will thrive as part of a larger company, but also those that, if needed, could continue to work on their own. This ability to work as a standalone applies to the investor relations and public relations function. Suitors like companies are able to enhance shareholder value.
Experienced Management
In some cases, when one company acquires another, the management team at the acquired company is sacked. However, in other instances, management is kept on board because they know the company better than anyone else. Therefore, acquiring companies often look for candidates that have been well run. Remember, good stewardship implies that the company's facilities are probably in good order, and that its customer base is content. (For related reading, check out Evaluating A Company's Management.)
Minimal Litigation Risk/Threats
Almost every company at some point in time will be engaged in some sort of litigation. However, companies seeking acquisition candidates will usually steer clear of firms that are saddled down with lawsuits. In general, suitors avoid acquiring unknown risks.
Expandable Margins
As a company grows its revenue base, it develops economies of scale. In other words, its revenues grow, but its overhead - its rent, interest payments and maybe even its labor costs - stays the same, or increases at a much lower rate than revenue. Acquirers want to buy companies that have the potential to develop these economies of scale and increase margins. They also want to buy companies that have their cost structure in line, and that have a viable plan to grow revenue.
Solid Distribution Network
Particularly if the company is a manufacturer, it must have a solid distribution network or the ability to plug into the acquiring company's network if it is going to be a serious takeover target. What good is a product if it can't be brought to market?
Make certain that any company you believe could be a potential takeover target has not only the ability to develop a product, but also the ability to deliver it to its customers on a timely basis.
Word of Warning
Investors should never buy a company solely because they believe it is, or may become, a takeover target. These suggestions are merely meant to enhance the research process and to help identify characteristics that may be attractive to potential suitors. (To learn more about these companies, read Pinpoint Takeovers First.)
Bottom Line
With the investment community focused on ever-increasing profitability, large companies will always be looking for acquisitions that can add to earnings fast! Therefore, companies that are well run, have excellent products and have the best distribution networks are logical targets for a possible takeover.
by Glenn Curtis, (Contact Author | Biography)
Glenn Curtis started his career as an equity analyst at Cantone Research, a New Jersey-based regional brokerage firm. He has since worked as an equity analyst and a financial writer at a number of print/web publications and brokerage firms including Registered Representative Magazine, Advanced Trading Magazine, Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities. Curtis has also held Series 6,7,24 and 63 securities licenses.
Falling Knife In Motion (RIMM)
It's always dangerous to try to catch a falling knife. Buying a former highflying stock at a discount price is certainly tempting; but make sure you grab the handle, not the blade.
Research in Motion (Nasdaq:RIMM) is one such falling knife. On Friday, after Research in Motion slashed its profit margins guidance for coming quarters, the stock plunged 27%. The stock is down 55% from its highs in June. Is its safe to reach out for Research-In-Motion? To find out, it's worth taking a look at the company's valuation.
Beware of Sharp Objects
Research In Motion's enterprise value is about $37 billion and by my calculations the company will probably generate about $1.4 billion of free cash flow this year. Research In Motion is therefore trading at about 26 times free cash flow. That multiple is still on the high side, but it is much more reasonable than the multiples that market has given it over the past two years. I reckon a safe multiple for Research In Motion is about 20-25.
The stock is finally close to that range and could be approaching a floor. If the company's business really falls apart, the stock price could drop below $50 per share which would be far below today's $67 share price. That's unlikely, but not impossible as expectations of market growth fall across the broader market. (To learn more, read Analyze Cash Flow The Easy Way.)
DCF Tells the Story
I've also been working on a discounted cash flow analysis. My rosiest forecast assumes that Research in Motion will grow its free cash flow of $1.4 billion by 20% over the next four years, then by 10% through year ten, and 5% for years 11 through eternity. I've also assumed a discount rate of 10%.
This scenario - which demands lot from the wireless messaging specialist - generates a share valuation of $65.40. In other words, Research in Motion has pretty aggressive growth built into its current price.
Over the next few quarters, there is the chance that as the global economy weakens and it faces heightened competition from the likes of Apple (Nasdaq:AAPL) and Palm (Nasdaq:PALM), we could start to see Research In Motion's revenue forecasts trimmed further for 2009. The stock could weigh on the downside until that's over.
Bottom Line
In this market, Research In Motion is a risky place to put your money. Sure, it's nearing fair value. But stocks that fall fast tend to fall much further than you might expect. And for buyers that can hurt.
By Ben McClure
Research in Motion (Nasdaq:RIMM) is one such falling knife. On Friday, after Research in Motion slashed its profit margins guidance for coming quarters, the stock plunged 27%. The stock is down 55% from its highs in June. Is its safe to reach out for Research-In-Motion? To find out, it's worth taking a look at the company's valuation.
Beware of Sharp Objects
Research In Motion's enterprise value is about $37 billion and by my calculations the company will probably generate about $1.4 billion of free cash flow this year. Research In Motion is therefore trading at about 26 times free cash flow. That multiple is still on the high side, but it is much more reasonable than the multiples that market has given it over the past two years. I reckon a safe multiple for Research In Motion is about 20-25.
The stock is finally close to that range and could be approaching a floor. If the company's business really falls apart, the stock price could drop below $50 per share which would be far below today's $67 share price. That's unlikely, but not impossible as expectations of market growth fall across the broader market. (To learn more, read Analyze Cash Flow The Easy Way.)
DCF Tells the Story
I've also been working on a discounted cash flow analysis. My rosiest forecast assumes that Research in Motion will grow its free cash flow of $1.4 billion by 20% over the next four years, then by 10% through year ten, and 5% for years 11 through eternity. I've also assumed a discount rate of 10%.
This scenario - which demands lot from the wireless messaging specialist - generates a share valuation of $65.40. In other words, Research in Motion has pretty aggressive growth built into its current price.
Over the next few quarters, there is the chance that as the global economy weakens and it faces heightened competition from the likes of Apple (Nasdaq:AAPL) and Palm (Nasdaq:PALM), we could start to see Research In Motion's revenue forecasts trimmed further for 2009. The stock could weigh on the downside until that's over.
Bottom Line
In this market, Research In Motion is a risky place to put your money. Sure, it's nearing fair value. But stocks that fall fast tend to fall much further than you might expect. And for buyers that can hurt.
By Ben McClure
Thursday, October 2, 2008
Two Tech Stocks Trading at a Rare Value
With the stock market in turmoil, Cisco (CSCO) and Juniper (JNPR) have again fallen below our Consider Buying price. Although we can understand investors' reluctance to jump feet first into equities at this point, we believe both of these firms' long-term prospects remain intact.
Both companies fell victim to the collapse of the technology bubble earlier this decade. From August 2000 to March 2001, each stock lost 80% of its market value, and both remain well below the peak in 2000. Although it's clear that investors overestimated the amount of value that these two networking firms would capture as people around the world plugged into the Internet, both firms have steadily grown during the last eight years. We're now in another period of high uncertainty, and with the U.S. economy on shaky ground and non-U.S. markets losing steam, corporate IT budgets will likely be cut. Despite this short-term murkiness--which has pushed both Cisco and Juniper shares sharply lower thus far in 2008--we think investors will be handsomely rewarded by owning these stocks over the long haul.
Three Reasons Why Cisco and Juniper Are Great Buys
Our investment thesis on both firms rests on three points. First--and most important in the short run--both companies are flush with cash. Cisco has more than $20 billion in net cash, while Juniper has more than $2 billion. Cisco has already generated nearly $6 billion in free cash flow since the beginning of the year. Although Juniper's $375 million in free cash flow pales in comparison to its larger rival, that number is still impressive considering Juniper has generated all of that cash on less than $2 billion in revenue. While recent performance has been solid, history suggests that both companies will navigate a downturn reasonably well. During 2001 and 2002, when earlier years of overinvestment combined with recessionary pressures led to a precipitous decline in corporate IT spending, Cisco managed to generate more than $8 billion in free cash flow, while a much smaller Juniper eked out $18 million.
Looking longer term, the underlying fundamentals for these businesses also remain healthy. Both firms are key enablers of global interconnectivity--that is, helping people communicate anywhere in the world. We think that the trends of mobility, network convergence, and global connectivity will ensure that the markets for these firms' primary products will grow over the long run. Cisco and Juniper are market leaders, and we expect both firms to take share from weaker competitors.
Finally, unlike the heady market capitalizations enjoyed by Cisco and Juniper prior to the tech bubble collapse earlier this decade, each of these companies is trading at a reasonable valuation today. Our discounted cash-flow models bear this out, but so does a quick gut check. Subtracting each firm's net cash balance from its market capitalization, Cisco is trading at roughly 10 times the amount of cash it generated in the previous 12 months, and Juniper is trading at roughly 12 times its trailing 12-month free cash flow. Although not dirt cheap, we think these are very modest valuations given the strength of the underlying businesses.
Each firm's stock price could certainly fall further in the near term, but it's not often that investors can buy such great businesses at such reasonable prices, in our view. These are two of a number of firms within the technology sector that have become attractively priced, and now is a good time to be choosy. Particularly in the current market environment, we would look to invest in firms trading at a reasonable discount to our fair value estimate that have narrow or wide moats, healthy balance sheets, and generate plenty of cash. We think investors with longer time horizons will do very well by sticking with this strategy.
Both companies fell victim to the collapse of the technology bubble earlier this decade. From August 2000 to March 2001, each stock lost 80% of its market value, and both remain well below the peak in 2000. Although it's clear that investors overestimated the amount of value that these two networking firms would capture as people around the world plugged into the Internet, both firms have steadily grown during the last eight years. We're now in another period of high uncertainty, and with the U.S. economy on shaky ground and non-U.S. markets losing steam, corporate IT budgets will likely be cut. Despite this short-term murkiness--which has pushed both Cisco and Juniper shares sharply lower thus far in 2008--we think investors will be handsomely rewarded by owning these stocks over the long haul.
Three Reasons Why Cisco and Juniper Are Great Buys
Our investment thesis on both firms rests on three points. First--and most important in the short run--both companies are flush with cash. Cisco has more than $20 billion in net cash, while Juniper has more than $2 billion. Cisco has already generated nearly $6 billion in free cash flow since the beginning of the year. Although Juniper's $375 million in free cash flow pales in comparison to its larger rival, that number is still impressive considering Juniper has generated all of that cash on less than $2 billion in revenue. While recent performance has been solid, history suggests that both companies will navigate a downturn reasonably well. During 2001 and 2002, when earlier years of overinvestment combined with recessionary pressures led to a precipitous decline in corporate IT spending, Cisco managed to generate more than $8 billion in free cash flow, while a much smaller Juniper eked out $18 million.
Looking longer term, the underlying fundamentals for these businesses also remain healthy. Both firms are key enablers of global interconnectivity--that is, helping people communicate anywhere in the world. We think that the trends of mobility, network convergence, and global connectivity will ensure that the markets for these firms' primary products will grow over the long run. Cisco and Juniper are market leaders, and we expect both firms to take share from weaker competitors.
Finally, unlike the heady market capitalizations enjoyed by Cisco and Juniper prior to the tech bubble collapse earlier this decade, each of these companies is trading at a reasonable valuation today. Our discounted cash-flow models bear this out, but so does a quick gut check. Subtracting each firm's net cash balance from its market capitalization, Cisco is trading at roughly 10 times the amount of cash it generated in the previous 12 months, and Juniper is trading at roughly 12 times its trailing 12-month free cash flow. Although not dirt cheap, we think these are very modest valuations given the strength of the underlying businesses.
Each firm's stock price could certainly fall further in the near term, but it's not often that investors can buy such great businesses at such reasonable prices, in our view. These are two of a number of firms within the technology sector that have become attractively priced, and now is a good time to be choosy. Particularly in the current market environment, we would look to invest in firms trading at a reasonable discount to our fair value estimate that have narrow or wide moats, healthy balance sheets, and generate plenty of cash. We think investors with longer time horizons will do very well by sticking with this strategy.
Tuesday, September 9, 2008
how bond reacts to equity market news
But the move also raises questions about U.S. government borrowing, he said. As a result, supply concerns could continue to weigh on the long end of the U.S. yield curve, pushing interest rates higher and steepening the yield curve.
Ten-year Treasury note prices fell, pushing yields up (UST10Y 3.69, +0.00, +0.1%) 4 basis points, or 0.04%, to 3.74%.
Ten-year Treasury note prices fell, pushing yields up (UST10Y 3.69, +0.00, +0.1%) 4 basis points, or 0.04%, to 3.74%.
Sunday, September 7, 2008
房市决定未来走向
因为美国的经济增长还会下降，苏晖认为，美元短期走强后，中线(6个月)可能就只会保持某一个区间，而长线来说，特别对亚洲货币，美元在两到三年之内可能会走软。
“除非美国经济出现转型，才可能真正出现反转，”她说，美国有贸易逆差和政府赤字，这导致货币供应量增加，美元贬值。
徐建海说，如果美国经济恢复到石油泡沫前的水平，包括房屋市场和金融行业都恢复的话，未来两年油价肯定还能够达到每桶150美元，可能会更高，到200美元。
苏晖认为，目前决定美国经济最重要的因素就是房屋市场的走向。从今年年初到现在，房屋按揭贷款违约率一直在加速，但目前已经到了一定的程度，违约率会保持在一个比较稳定的水平。
但如果房价继续下降，违约率无法保持，大量的银行还会倒闭，失业率会进一步上升，股票市场等都会受到较大影响。
“如果这种情形发生，利息不但是下调，还可能会降到零，”苏晖说。
她表示，未来美元利率的走向将由失业率和通胀率两个数据决定，如果失业率超过5.8％，或者是核心通胀率(不包括能源和食品)从目前的2.4%下降到2%，美国都可能进一步采取降息措施。
“除非美国经济出现转型，才可能真正出现反转，”她说，美国有贸易逆差和政府赤字，这导致货币供应量增加，美元贬值。
徐建海说，如果美国经济恢复到石油泡沫前的水平，包括房屋市场和金融行业都恢复的话，未来两年油价肯定还能够达到每桶150美元，可能会更高，到200美元。
苏晖认为，目前决定美国经济最重要的因素就是房屋市场的走向。从今年年初到现在，房屋按揭贷款违约率一直在加速，但目前已经到了一定的程度，违约率会保持在一个比较稳定的水平。
但如果房价继续下降，违约率无法保持，大量的银行还会倒闭，失业率会进一步上升，股票市场等都会受到较大影响。
“如果这种情形发生，利息不但是下调，还可能会降到零，”苏晖说。
她表示，未来美元利率的走向将由失业率和通胀率两个数据决定，如果失业率超过5.8％，或者是核心通胀率(不包括能源和食品)从目前的2.4%下降到2%，美国都可能进一步采取降息措施。
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