Sunday, December 27, 2009

Oracle Corporation: The Road to Recovery

As the economic rebound further develops, the technology sector will play a leading role. Oracle Corporation, a bellwether in the tech sector will be a prominent leader. We believe there are a number of value drivers for the coming year:

• The acquisition of Sun Microsystems will be completed. This will expand Oracle’s product line to include not only hardware that is optimized to run Oracle databases but also Sun’s open source software products.
• Oracle continues to introduce new product such as the recently announced Communications Marketing and Advertising product.
• Analysts are placing too much emphasis on 3Q10 revenue and currency adjustments. Given economic constraints and currency fluctuations, short term results are inconsequential.

For a detailed financial analysis of Oracle, go here.

Summary

We believe Oracle is currently mispriced. We believe the company is trading at a discount to its intrinsic value of $37.79.

• The P/E TTM of 21.7 is in line with the company’s seven year average P/E of 21.8X and below the industry median of 23.2X
• Though sales are down about 1.3% for the TTM as compared to FY09, sales for 3Q10 are up about 4.5% over 3Q08.
• Gross margin, at 81.1% are higher than those in any year since FY05. Similarly, both operating and net margins are currently higher than in previous years.
• Oracle’s financial condition is strong with a current ratio of 3.0X, interest coverage at 13X and long-term debt to equity at a manageable 49.9%.

Sunday, December 20, 2009

Stryker Corporation: Opportunity or Trap?

Stryker Corporation is one of the world’s leading medical technology companies with the most broadly based range of products in orthopedics and a significant presence in other medical specialties. Stryker works with respected medical professionals to help people lead more active and more satisfying lives. The Company's products include implants used in joint replacement, trauma, craniomaxillofacial and spinal surgeries; biologics; surgical, neurologic, ear, nose & throat and interventional pain equipment; endoscopic, surgical navigation, communications and digital imaging systems; as well as patient handling and emergency medical equipment


Click here for a detailed analysis of Stryker

Notable Developments

Stryker Corporation announces that its Board of Directors has authorized the Company to repurchase up to $750 million of its common stock.

Reuters reports, Stryker Biotech LLC and top management were indicted on federal charges they conducted a fraudulent marketing scheme for bone-growth products.

Bloomberg reports Stryker Corp. agreed to acquire privately held Ascent Healthcare Solutions Inc. for $525 million in an all-cash transaction.

John Dorfman, at Bloomberg, writes:

Another intriguing GARP stock is Stryker Corp. The company, based in Kalamazoo, Michigan, makes orthopedic implants and medical equipment. Its profits have risen every year from 2000 through 2008, and its five-year earnings growth rate is almost 20 percent.

While the stock isn’t cheap at 17 times earnings, the earnings rate is higher than the price-to-earnings ratio, which is always nice to see.

One cloud on Stryker’s horizon is that last month a grand jury in Boston indicted its Stryker Biotech LLC unit, which makes bone surgery products, and the unit’s former president and three others on charges of fraud.

The indictment charges that Stryker Biotech promoted the use of some of its products in a manner contrary to that approved by the Food & Drug Administration.

After the Scandal

Stryker Corp. issued a statement saying it was “disappointed” and hopes to reach “a fair and just resolution of this matter.” I think the adverse development is serious, but over the years I have seen numerous scandals blow over, after a time.

I also love the parent company’s balance sheet, with debt less than 1 percent of equity.

VALUATION CONCLUSIONS

We place a target price of $41.25 on the common shares of Stryker Corporation. We recognize this implies a discount to current and historic multiples to forecasted earnings and sales. However, we feel this target is justified. Though future earnings are the chief determinant of value, we also take into consideration a number of other factors. These factors are considered in determining a capitalization rate.

We consider the long-term prospects of a company. We do not know what the future will be but there are disconnects between the value of individual companies and an industry. In the case of Stryker, we believe the Company’s ability to sustain margins superior to the industry is questionable when considering the Company’s legal problems and uncertainty surrounding healthcare reform.

The role of management is one of those qualitative factors that are difficult to measure. However, if past is prologue, then a company’s past performance provides some indication of what we can expect in the future. Stryker has consistently reported growing profits and free cash flow.

There is something to be said for a company that is financially strong and has a sound capital structure. Stock of a company with surplus cash and nothing ahead of the common is clearly a better purchase than another one with the same per share earnings but large bank loans and senior securities.

One measure of quality is a company’s ability to provide a safe dividend. Stryker pays a dividend well covered by earnings as the payout ratio is a low 14.7 percent. The current dividend yield is about 1.2 percent.

Disclosure: The author has no position in SYK.

Sunday, December 6, 2009

Patience Will Be Rewarded

The patient, long term investor would rather be early to the party than late to it. The economy is struggling through the early stages of recovery. Looking out beyond the next quarter or even the next year, the reindustrialization of America will come. With this in mind, we are initiating coverage of Reliance Steel & Aluminum Company with a buy opinion. Our target price is $87.56.

For a detailed analysis of Reliance Steel and Aluminum, go to http://measuredapproach.wordpress.com.

Highlights
· For 3Q09, Reliance reported diluted earnings of $41.8 million, or $0.57 per diluted share as compared to $152.5 million ($2.07/share) in 3Q08. Sales in 3Q09 were $1.24 billion, down from $2.57 billion in 3Q08.
· For the nine months ending September 30, 2009, net income amounted to $56.1 million ($0.76/share), compared with net income of $416.5 million ($5.65/share) for the same period in 2008.
· Reliance Steel and Aluminum (RS) Upgraded By UBS
· Reliance Steel & Aluminum Co. announced that on October 21, 2009, the Board of Directors declared a regular quarterly cash dividend of $0.10 per share of common stock. The dividend is payable on January 6, 2010 to shareholders of record December 4, 2009.

In spite of the above, we anticipate future growth of 38.85%. Our target price of $87.56 reflects a free cash flow multiple of 17.96X our estimate of $4.87 in free cash flow twelve months out.

Disclosure: The author has no position in Reliance Steet & Aluminum Company.

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