Monday, May 25, 2009

Are there opportunities in today's ma...

Are there opportunities in today's markets? I believe there are if you know where to look. A distinguishing aspect of American culture is how we react to adversity. Many people see the turmoil in the markets as a sign of gloom and disaster. Certainly, people have seen their 401K's shrink in value and retirement dreams dashed. Others, however, see opportunities in this chaos.

We believe greater opportunities exist among small cap stocks rather than in the large or mega-cap segments of the market. To test this thesis, we examined the Standard & Poors 1500. This composite index is representative of the the overall market. Our examination presents our findings for both the median value within the index and the mean value for a variety of measures. Admittedly, a fuller study would have segmented this index into deciles. Neither time nor resources allows me that luxury.

Summary

The median stock price of the S&P 1500, as of May 22, 2009 is $20.09 and the mean stock price is $24.52. The median EPS (TTM) is $1.18 and the mean EPS (TTM) is $0.37 which provides us with a median P/E of 17X and a mean P/E of 66X, respectively. Using another measure, Enterprise Value to EBITDA, we find the median EV/EBITA to be 12.5X and the mean -5.8X; indicating the market weighted mean has a negative EBITDA.

Data


MedianMean
Price$20.09$24.52
Shares Outstanding (Average Q1)71.80237.10
Equity (common) Q1$843.40$3,162.43
Average Net Income (5 Yr)$74.30$383.02
Market Value of Invested Capital$3,261.88$20,700.61
Total Assets Q1$2,429.80$17,847.26
Average EBITDA (5 Yr)$154.98$785.34
Sales (TTM)$1,683.60$7,061.77
Number of Employees4,704.0018,757.39
Operating Margin (TTM)7.85%3.00%
Return on Equity (TTM)9.80%2.39%
Free Cash Flow (TTM)$0.98$1.05
Goodwill & Intangibles Q1$201.70$1,829.37
Average Return on Assets (5 Yr)5.14%5.87%
Total Liabilities Q1$1,369.30$14,460.02
Earnings Per Share (TTM)$1.18$0.37
Cash From Operations (TTM)$194.80$1,028.29
Net Income (TTM)$59.50$112.70
Sales (TTM)$1,683.60$7,061.77

Multiples


MedianMean
PE14.3022.73
PE - Average 3 Years19.4026.04
PE - Average 5 Years20.1025.71
PE - Average 7 Years20.2024.41
Price/Book1.512.50
Price/Book - Average 3 Years2.353.27
Price/Book - Average 5 Years2.393.13
Price/Book - Average 7 Years2.322.91
Price/Sales0.861.37
Price/Sales - Average 3 Years1.492.23
Price/Sales - Average 5 Years1.552.31
Price/Sales - Average 7 Years1.512.27
Price/CFPS11.6516.78
Price/CFPS - Average 3 Years16.6019.91
Price/CFPS -Average 5 Years17.0019.75
Price/CFPS - Average 7 Years17.1019.27
Price/FCFPS13.7028.49
Price/FCFPS - Average 3 Years22.7033.52
Price/FCFPS - Average 5 Years24.1532.53
Price/FCFPS - Average 7 Years22.9030.96

Ratios


MedianMean
Gross Margin (TTM)37.75%41.25%
Gross Margin - 5 Year Average37.60%40.85%
Operating Margin (TTM)7.85%3.00%
Operating Margin - 3 Year Average10.50%12.35%
Operating Margin - 5 Year Average10.50%13.48%
Return on Equity (TTM)9.80%2.39%
Return on Equity - 5 Year Average12.60%13.52%
Return on Equity - 7 Year Average11.80%11.86%
Return on Invested Capital (TTM)8.20%5.84%
Return on Invested Capital - 5 Year Average9.20%8.50%

Growth


MedianMean
Cash Flow - Growth 12M-11.70%-53.67%
Cash Flow - Growth 1 Year0.00-38.12%
Cash Flow - Growth 3 Years5.85%-1.67%
Cash Flow - Growth 5 Years9.40%6.33%
Cash Flow - Growth 7 Years9.60%7.05%
Free Cash Flow - Growth 12M1.20%15.88%
Free Cash Flow - Growth 1 Year-0.95%1.09%
Free Cash Flow - Growth 3 Years5.90%6.43%
Free Cash Flow - Growth 5 Years4.40%5.04%
Free Cash Flow - Growth 7 Years8.05%6.68%
Net Income - Growth 12M-19.55%-57.09%
Net Income - Growth 1 Year-7.10%-44.07%
Net Income - Growth 3 Years2.05%-2.80%
Net Income - Growth 5 Years 8.65%6.06%
Net Income - Growth 7 Years10.60%8.16%
Sales - Growth 12M2.90%4.51%
Sales - Growth 1 Year7.20%8.65%
Sales - Growth 3 Years10.20%12.28%
Sales - Growth 5 Years11.30%14.43%
Sales - Growth 7 Years9.70%12.20%

My analysis of the above referenced data draws me to conclude that smaller companies represent better investment opportunities than the large and mega-cap components of the S&P 1500. Important measures of growth, most particularly cash flow and net income, show that small companies, as presented in the median, show better prospects than their big brothers. These smaller companies also show strong measures of profitability over the long term. Not insignificantly, the smaller companies are selling at significant discounts to the large companies and do so for both short time periods and over the long haul.

Disclosure: At the time of writing this article, the author holds positions in small cap, mid-cap and large cap companies.

Sunday, May 17, 2009

Under the radar. Turkcell Iletisim Hi...

Under the radar. Turkcell Iletisim Hizmetieri (TKC) is a cell phone provider in Turkey. The company also has investments in several of the central Asian republics and other areas formally part of the old Soviet empire. The company's profile states

"Turkcell Iletisim Hizmetleri A.S. (Turkcell), incorporated on
October 5, 1993, is a provider of mobile services in Turkey. The
Company provides mobile voice and data services over its global system
for mobile communications network. As of December 31, 2008, Turkcell
provided service to its subscribers in 202 countries through commercial
roaming agreements with 607 operators. The Company provides wireless
and value-added mobile communications services to subscribers
throughout Turkey. Subscribers can choose between its postpaid and
pre-paid services. As of December 31, 2008, Turkcell had approximately
29.5 million pre-paid subscribers and 7.5 million postpaid subscribers.
The Company has investments in Azerbaijan, Georgia, Kazakhstan,
Moldova, and also in the Turkish Republic of Northern Cyprus, Ukraine
and Belarus. In August 2008, Turkcell announced that it had completed
the acquisition of an 80% stake in Belarusian Telecommunications
Network (BEST).


The Company’s subscribers can choose
between its postpaid and prepaid services. As of December 31, 2008,
postpaid subscribers signed a subscription contract and receive monthly
bills for services. Prepaid subscribers must purchase a starter pack
which consists of a Simcard and includes airtime ranging from 20 to 250
counters. Scratch cards can be purchased in increments of 25 to 1000
counters."

Turkcell posted its 1Q09 results recently. While revenues were in-line with expectations, EBITDA, operating income and adjusted net income were above expectations. In 1Q09, revenues declined on a year-over-year basis due to a decline in blended Average Revenue per User (ARPU). This decline was further accentuated by a decline in the value of the Lira against the US dollar.

Earnings plunged in 1Q09 by 18.5% with declines from several revenue streams across the board. The exceptions were revenues from call centers. Net income declines to $0.16 pershare for the quarter as compared to $0.22 per share in the prior year's quarter. These results were dramatically less than consensus estimates.

On a positive note, the subscriber vase increased to 36.40 million. ARPU dropped 21.2% to $10.40 from $13.20.

Short-term, the outlook for TKC is not so good. Macroeconomic forces will negatively impact both domestic and non-Turkish operations. The recent strengthening of the Turkish Lira vs. the dollar is a positive and will help the long term. The investment horizon for TKC is twelve to twenty-four months. Within that time, we expect to see a return a reversal of the latest set-backs and a return to growth. Our target value for TKC is $18.00. It may take a while but we expect to see the shares trading at that level.

Disclosure: The author holds no position in TKC.

Sunday, May 3, 2009

Why buy Check Point Software Technolo...

Why buy Check Point Software Technology (CHKP)? Check Point is the gorilla of pure-play security software. The company is a global leader in cyber security software with products deployed in virtually every major global corporation including all Fortune 100 companies and its technology dominates the global market for perimeter defenses such as firewalls and virtual private networks. The company describes itself as:

"Check Point Software Technologies Ltd. (www.checkpoint.com) is the leader in securing the Internet. Check Point offers total security solutions featuring a unified gateway, single endpoint agent and single management architecture, customized to fit customers' dynamic business needs. This combination is unique and is a result of our leadership and innovation in the enterprise firewall, personal firewall/endpoint, data security and VPN markets.
Check Point's pure focus is on information security. Through its NGX platform, Check Point delivers a unified security architecture to protect business communications and resources, including corporate networks and applications, remote employees, branch offices and partner extranets. The company also offers market-leading endpoint and data security solutions with Check Point Endpoint Security products, protecting and encrypting sensitive corporate information stored on PCs and other mobile computing devices. Check Point's award-winning ZoneAlarm solutions protect millions of consumer PCs from hackers, spyware and identity theft. Check Point solutions are sold, integrated and serviced by a network of Check Point partners around the world and its customers include 100 percent of Fortune 100 companies and tens of thousands of businesses and organizations of all sizes."
Securing the network has always been a critical issue in both the corporate and government worlds. The recent reports of Chinese and Russian hackers breaching security at Pentagon and defense contractor networks and hacking the power grid and air traffic control systems just reinforces the need to vigorously protect our networks. The Obama administration's intention to digitize health records for all Americans raises a more challenging problem for the health care industry. The growing use of cloud computing grows the market for cyber security products.

The expansion in the threat posed by IT vulnerabilities has already had a profound effect on the security industry - encouraging growth in IT security spending which has produced a parallel proliferation of niche security technology vendors. This, in turn, has awoken the interest of major vendors who now see security as an essential requirement in their broader IT infrastructure portfolios - a requirement they have met by acquiring IT security specialists, including almost all of Check Point's significant former competitors.

Check Point made the strategic decision to broaden its own portfolio of technologies beyond the perimeter. The company has made several acquisitions to expand their core offerings to include end-point solutions, VPN, firewall, data security and intrusion prevention systems. These acquisitions form a foundation for Check Point to offer single-agent endpoint security covering everything from the network edge to core information assets.

On a fundamental basis, Check Point is a well run company. Even with the global recession, in the first quarter of 2009, the company grew revenues by 1.8% to $195 million and grew earnings by 3.4% to $80.9 million (0.38 per share). It has more than $1.0 billion of cash and no long term debt.

Multiples..........Current..........12/08.....12/07.....12/06.....12/05.....12/04
Price/Earnings..................15.5........................14.2...............18.9...............16.9................17.7...............23.0
Price/Book..........................2.3...........................2.2.................2.8.................2.7...................3.1.................3.3
Price/Sales...........................6.1..........................5.6..................7.1.................8.0..................9.5...............10.6
Price/Free Cash Flow......11.0........................10.9...............14.9...............14.5................16.1...............19.1

Ratios
Gross Margin%................88.8........................88.5...............88.7...............93.7................94.7...............94.6
Operating Margin%........44.2........................42.7...............38.3...............47.8................57.2...............50.5
Net Margin%....................40.2........................40.1...............38.5...............48.3................55.2...............48.2
ROE%................................16.4........................16.7...............15.8...............15.9................18.8...............16.1
ROA%................................12.9........................13.1...............12.6...............13.3................15.9...............13.7
Liabilities to Assets%.....21.4........................22.3...............21.6...............17.7................15.1...............15.1

Growth...............TTM..........................3 Year..................5 Year
Sales...................................7.0%...........................................11.7.....................................13.3
Gross Income....................7.5.................................................9.3.....................................11.6
Net Income........................4.6................................................0.4........................................5.8
EPS Basic..........................8.5.................................................5.1.......................................9.0
Free Cash Flow..............23.0...............................................11.9.....................................11.6

The current consensus earning estimate for 2009 is $1.89, with a range of $1.68 to $1.95. EPS estimates for 2010 ranges from $1.73 to $2.18 with a consensus of $2.06. Measured Approach provides an EPS estimate of $2.04 for FYE 2010. We also estimate free cash flow in FYE 2009 at $1.93 and for FYE 2010 of $2.70. Based on our own EPS estimates, CHKP is selling at 11.6x our estimate of $2.04. On a free cash flow multiple basis, Check Point is selling at 12.25x our estimate of $1.93 and 8.75x our 2010 estimate of $2.70.

The average P/E multiple for CHKP is about 18x-19x. Using this multiple, the target price for Check Point is about $38.

Disclosure: Author is long Check Point Software Technology.



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