Some Interesting Companies: GPS, CSCO, RTN.L And FF
|April 17, 2016||Posted by Oddmund Grøtte under Stock Analysis|
Below you find some interesting companies I found on my latest scan:
The Gap (GPS)
Please click on the table below to make it bigger:
GPS is the third biggest clothing retailer in the world after Spanish Inditex and H&M of Sweden. GPS’ share price has gone down because of the turnaround they are in: they are losing market share to “faster” retailers as the two other mentioned.
I wrote JUN puts with strike 25 when stock price was at 28. Unfortunately, the stock plummeted in March when they reported same store sales showing 5% lower sales than one year ago. Perhaps low valuation is justified. However, they are still making a lot of free cashflow and yielding 3.8% at todays price of 23.7. PE is around 10 and free cashflow somewhat lower. I believe competitive advantage is pretty low, and so is the economic moat. They have increased dividend from 0.32 to 0.92 per share over the last 10 years. Share count has dropped from 836 to 413 million.
Cisco is a cash cow:
Cisco (Nasdaq ticker code: CSCO) is one of the biggest technology companies in the world, although founded as recently as 1984. It’s main business is networking, connecting computers together. Main products are switches and routers which together is 60% of revenue. 61% of sales are in the Americas, 25% in Europe and rest in Emerging countries. Switches are used for computer networks and routers to direct internet traffic.
As far as I can see Cisco has a huge economic moat. They have about 50% market share. No competitor is even close to these numbers. I’m certainly no tech expert but believe Cisco offers products and services for all levels in network equipment, allowing customers to deal with fewer vendors offering some barriers to entry.
The numbers over the last 10 years are pretty good, solid growth:
|Revenue USD Mil||5.609254|
|Gross Margin %||-0.85265|
|Operating Income USD Mil||4.408676|
|Operating Margin %||-1.15587|
|Net Income USD Mil||4.874294|
|Earnings Per Share USD||6.995325|
|Book Value Per Share USD||11.34575|
|Operating Cash Flow USD Mil||4.740365|
|Cap Spending USD Mil||4.74245|
|Free Cash Flow USD Mil||4.740139|
|Free Cash Flow Per Share USD||6.248827|
Cisco is spending a lot on buybacks but effect is reduced due to a lot exercised options as management compensation and somehow masking executive pay. It’s not priced as a growth company, but to me the growth is pretty good.
Also worth noting is the incredible amount of free cashflow they generate: on average 23% of every dollar in revenue is turned into free cashflow.
The balance sheet is rock solid with a huge amount of cash. They hold about 60 bn USD in cash, and excess cash is around 31 bn USD. This equals to about 6 dollars per share! This is quite extraordinary to be an US company.
Long term interest bearing debt is just . Liabilities to assets is below 50%.
Cisco started paying dividend recently in 2011, hence it has a very short history. The dividend is very safe. Currently they pay 26 cents per quarter which at todays share price is a yield of 3.3%. Payout ratio is still pretty moderate at 45%.
At todays share price of 27.4 USD, trailing P/E is about 13. Adjusting for excess cash P/E is much lower at 10. Worth noting is that P/FCF is slightly lower than the P/E ratio. Looking back at the last 5 years Cisco is priced slightly lower than average, but not much.
There should be room for increasing the dividend many years to come. If Cisco drops from current level I want to be a buyer. On a weak day I want to write puts at 26 or 25.
There is a reason why Warren Buffet does not invest in technology stocks: change can happen fast and there is difficult to make estimations on future earnings. Cisco is no exception. During the recession in 2008/09 revenue fell about 8%.
The Restaurant Group (RTN.L)
This stock is listed in London.
This is a rather unknown stock to me that was filtered on my last scan. The stock has fallen a lot over the last year. Here are the numbers:
As you can see the numbers are pretty good. The management was somewhat subdued at the latest earnings call. They expect growth to fall, but still be positive. At todays PE of about 12 this stock looks reasonably cheap. One risk is that one chains is about 50% of income. Dividend yield at today’s price at 3.75 is 4.2%. Dividend has increased from 6 pence to 16 pence per share over the last 10 years.
Future fuel (FF)
The name of FutureFuel is slightly misleading: It produces alternate energy fuel, biodiesel, but it also has a large chemical operation. The company has a short history only back to 2005 when it was created as a “special purpose acquisition vehicle” to make an impact in the biofuel business. However, its first acquisition was Eastman SE in Arkansas. The chemical division produces custom chemicals on demand from customers.
At today’s price of 10.5 PE is about 10. The balance sheet is rock solid with almost no debt. Dividend yield is 2.2%.
The US government gives a tax credit of about 1 USD a gallon. This has just been decided carried on for 2016. If this credit gets revoked, this will have a big impact on revenue and profits.
I own shares in CSCO and are short 25 puts strike 25 in GPS.