The Buckle Picked Up By Reuters (And Now Motley Fool)

Maybe I'm lucky, or maybe it's coincidence, but a stock I provided a rudimentary analysis for has made it into a Reuters "Buy Or Sell" feature. The stock is The Buckle, Inc., and my analysis is here. The Reuters feature on it does add some detail missing from my own work, such as the fact that the company depends on price increases to keep its margins growing. This point was made by the bear-side analyst cited in the feature. That analyst, Adrienne Tennant of FBR Capital Markets, downgraded The Buckle to "udnerperform" right after its disappointing same-store sales results for July.

The bull-side analyst is Laura Champine, chief financial analyst at Cowen and Co. She pointed to the valuation, noting that its P/E is well below its peers. Each analyst's arguments can be found in the feature.

This is the second time I've lopped into a stock before the pros did. The first was Compass Minerals: after my own rudimentary jobbie, a J.P. Morgan analyst upgraded it on more thorough grounds. To be frank, I'm just glad of the coverage regardless of any influence I have. Time constraints, plus my own dearth of intellectual capital, means that any analysis I undertake will be little more than a poke-through of the financials. Having pros take notice of the same company gives me information I can't scarf out on my own.

So, thanks. Thanks to Reuters; thanks to Nivedita Bhattacharjee, the author of the feature; thanks to both analysts; thanks to J.P Morgan and the analyst for the Compass analysis; thanks to the iStockAnalyst.com reporter who wrote it up...


Update: The Motley Fool has published a bullish analysis on The Buckle by Alyce Lomax, which has gotten three supportive comments so far. On the other hand, this fellow went into a Buckle store and didn't like what he saw.

Disclosure: I'm holding both Compass and The Buckle in the actively-managed Marketocracy mock fund I run.

What's Up With Spanish Banks?

Banco Santander stock was up 4.92% in Friday's regular trading, even though it was down 1.67% in after-hours trading. The news on the company wasn't that good: one of the items in Reuter's Key Developments for the bank was the notice that Santander, Spain's largest bank with a presence in South, Central, and even North America, was increasing its capital so as to be able to pay a dividend. It's selling 15% of its Brazil division in an IPO, after expanding said division by 600 branches. These last two items can be seen as unambigously good, even if a positive spin can be put on the dividend-payment item.

The reason it went up so much doesn't seem company-specific, though. Bancolumbia was up 4.65%, with no backtrack in after-hours trading. The reason could be the banks with Latin American presence are coming into fashion.

If so, then there was an exception: Banco Bilbao Vizcaya Argentaria. This bank, Spain's second-largest, was up only 1.68% on Friday; it too has a presence in Latin America and even the U.S. The stocks of all three banks, however, have been climbing since about mid-July.


Disclosure: I'm holding Bilbao in the actively-managed Marketocracy mock fund I run.

Barron's Pans Oil Refiners...

...and later claims that the drops in their stock shows the panning was sound. The original article claimed that there was more to the gasoline consumtion drop than hard times: Americans are trading in less fuel-efficient cars for more fuel-efficient ones, a trend that the author claims is a long-term one.

The two stocks mentioned as evidence were Sunoco Inc. and Tesoro. The former dropped 1.86% in regular trading, but the latter only dropped 0.78% Tesoro's decline was about in line with the overall market, and Sunoco's was fairly gentle compared to some other oil stocks. Both were up in after-hours trading, too. Perhaps Barron's Online was a little eager to showcase the work, although time will tell.

Interestingly, another Bin stock in refining got slaughtered today, but was not mentioned by Barron's. Recent high-flyer Holly Corp. was down 4.07%, and was unchanged in after-hours trading.


Update: Perhaps I spoke too soon. Sunoco was slaughtered the following day, with a 4.68% plummet in its stock. On the other hand, Tesoro was down only 0.85%. Its two-day drop was less than the S&P 500's one-day September 1st drop.


Update 2: Tesoro's being hammered now. So, it seems I did speak too soon.

Whither GE?

General Electric is the second-biggest Bin stock in terms of market cap, and probably the one best known. Like so many stocks that rocketed up in the past few months, it's been hammered recently. Today, it closed down 4.03% to reach $13.34.

On the one hand, "GE exec sees another 12-18 tough months ahead." That statement comes as part of its new "framework" approach to guidance, which has replaced specific targets. On the other hand, Sanford & Bernstein analyst Steven Winoker sees the reduction of uncertainty - which GE itself called a flattening of the downtreand - as good for the stock; his target price is currently $16.

I can't presume to forecast what GE stock will do in the near future, but I believe there's a near-term downtrend in place. I'll stipulate that there were downtrends in place for many industrial stocks in June that were sharply reversed. This time, though, there isn't any plausible catalyst in place to do so (except for company-specific items.) I don't see any in GE's near future that might do so; today's overall market drop in the face of good economic news suggest that the previous catalyst - discounting recovery - is spent.

My own hunch says that GE is going to keep dropping. It peaked at about the time when near-troubled banks like CVB Financial and United Bankshares have. Even though there's more to GE than its financial arm, there's no replacement for the recovery catalyst which would help the overall company reverse the stock's current downtrend.

Welcome to September, after which follows October.


Disclosure: I'm holding CVB Financial in the actively-managed Marketocracy mock fund I run.

Cracker Barrel Old Country Store: Example Of A Muted Response To Upgrade

Cracker Barrel Old Country Store, the operator of a chain of restaurants and retail stores, was the beneficiary of an upgrade eight days ago. The upgrader, Bryan C. Elliott of Raymond James, reclassified it to "Market Perform" from "Underperform." Since then, the stock has moved from $27.59 to today's $29.13. The response has been muted, but it could be argued that the upgrade was muted too. Suffice it to say that Cracker Barrel has moved up, but not by much.

The company hasn't done all that badly in the last ten years, despite some restructurings that lopped a fair bit of earnings from its continuing-operations record. Absent discontinued operations, 10-year 1999-2008 EPS growth (as calculated by logarithmic regression) was 12.62%; the current P/E is 10.35. Return on equity over the same time period, as calculated by a 10-year sum of net incomes divided by a 10-year sum of shareholder's equities, was 15.23%. Quarterly EPS for the latest reported quarter, which ended May 31st of this year, was up 13.0% from the EPS of the same quarter a year previously. Operations cash flow for the nine months ending May 31st was up 7.47% from the same period last year, and free cash flow was up almost 75% due to a large drop in capital expenditures. EPS growth hasn't slowed down.

The company's balance sheet would give a value investor pause, though. Its current ratio, as of May 31st, was only marginally above 1. The quick ratio was below 0.5. The debt-equity ratio is 6.77 to 1; debt as a percentage of total capitalization is an eye-opening 87.1%. If this company does stumble, it could get itself into a repayment crisis. Shifting to the earnings side, its earnings before interest and taxes was 2.28 times interest expense as of May 31st. The high leverage has likely been justified by earnings power, as 2.28 isn't a very uncomfortable margin. Provided the company doesn't stumble on the earnings front.

The upgrade itself, and its effect on Cracker Barrel's stock price, shows one of the weak points of technical analysis. A downtrend on the chart shows a stock getting lower-priced over time. If the fundamentals have't changed, then said downtrend shows a stock getting cheaper over time. The reason given for the upgrade was Cracker Barrel moving into fairly-valued territory.

The Buckle: A Significant Slamdown

Fashion footware and casual-clothes retailer The Buckle, Inc. reported 2Q '09 earnings that were not only above expectations, but were also about 12% above 2Q '08's. That growth didn't come from cost-cutting, either. Revenues were up 18% in the same period, and comparable same-store sales were up smartly too. Other details can be found in this write-up.

With an earnings report such as this one, common sense says that Buckle should have gained today. Instead, it dropped 3.90% in today's trading. The reason given in that write-up was disappointing July same-store sales.

Today's performance doesn't give all of the story: The Buckle's stock was up 3.02% yesterday, closing at $27.93, and the earnings news kicked it up to about $29 in early-morning trading. Today's close of $26.84 still puts it above last Monday's close of $26.52.

Still, the later-day plummet suggests that The Buckle is a company that's expected to have no blots on its reports in order for the effect of good news to stick. That says the company is being watched by people looking for something to go wrong, whose influence swamps optimists.

One company does not an industry make, but The Buckle is a pretty good one, comparatively. Their boots and clothes aren't intended to be discount items, and they've avoided the fate that all-too-many full price stores have endured. It's only a single indicator in and of itself, but the stock indicates that retail is out of favour. The bad-news crowd is getting the better of the good-news optimists.

Of course, industries that are out of favour can stay that way for years: some are outright value traps. The Buckle's dividend is only 2.98%, even though it's been raised smartly since October 2003. It's selling at more than three times book, according to GuruFocus, and about 1.4 times sales. As of 1Q '09, its 12-month trailing free cash flow was well in the red. Based on its year-to-date chart pattern, a technical analyst would say "avoid." It being out of favour does not necessarily make it a good value or a good buy at this time.

Dilution's Becoming A Worry...

...at least for the oil and gas sectors. Enerplus Resources Fund, a Canadian oil and gas income trust, announced last night that it's planning to issue an additional 9.25 million trust units at a price of C$21.65 per unit. At today's exchange rate, it amounts to US$19.88 for each unit. This financing will provide cash to acquire 30% of three companies' interests in their Marcellus shale natural gas property. The terms of the deal require US$162 million on closing, and US$243.6 million as a shouldering of half of the three companies' drilling and completion costs. Since the three companies' interest in the property amount to about 72%, Enerplus will have a 21.5% interest in the property itself. It's already a producer: the driling costs are to open up new wells to capture more of the underground gas.

It sounds like a good deal, but all the market saw was "dilutive." As of June 30th, Enerplus has 166.02 million units outstanding. The additional 9.25 million units will add about 5.6% to the total shares outstanding, assuming that the 166.02 million figure is also current.

At the open this morning, after the deal was announced, Enerplus units were down 4.36%: they were slightly below the offering price. The trust units did lumber back up somewhat, but couldn't breach the $20 level with any conviction. Enerplus closed at $20.01 on the NYSE today.

There's a real resemblance between the fate of Enerplus's stock and the knock-down that Suburban Propane Partners took last week. For whatever reason, energy trusts that issue additional units for either debt repayment (Suburban) or expansion (Enerplus) are seeing their units punished by the stock market for doing so. Both stocks dropped below the decided-upon offering price.

In Enerplus' case, this leaves the underwriters in a bit of a spot. This financing's a "bought deal," where the underwriter commits to buy the issued shares at the specified price. In Enerplus' case, as noted above, it's US$19.88 per unit. That's ver-y close to $20.01.

At any rate, this is the second time a secondary offering's shot down the price of an energy-related income trust. This slam-down applies even to a funding that have a good chance of being accretive to earnings. I'm making this point more as a warning than a tip, even if it results in said units going on sale. These income trusts ain't banks, that's for sure.


Disclosure: I'm holding both Enerplus and Suburban Propane Partners in the actively-managed Marketocracy mock fund I run.

Sometimes (Presumed) Dilution Does Kick In

Suburban Propane Partners announced that it will be offering 2.2 million limited partner interest units, priced at $41.50 per unit. That price would have made for an adequate discount as of yesterday's close, but today's doesn't. The stock dropped 7.47% in regular trading to close at $40.75. Given this drop, the secondary is going to be a difficult sell. It may be undersubscribed.

The proceeds are being used to buy back some of its 6.875% senior notes due in 2013: up to $175 million of them by tender offer. If the secondary offering is completely sold, then the gross proceeds will be $91.3 million. (Net proceeds could be $90 million.) Those notes are being bought around face value: anyone who tenders before 5 PM ET on Aug. 21st gets 101.25% of face, and anyone who tenders after that time but before 9 AM ET on Sept. 8th gets 98.25% of face.

At those prices, the secondary offering may be dilutive to earnings. Suburban pays 8.10% at $40.75. At $41.50, it pays about 7.95%. With net proceeds, it might be about 8.05%. The yield to maturity of any bonds picked up for 101.25% of face will be about 3%. Clearly, for this part of the bond buyback, Suburban's going to be paying more.

2.2 million extra shares of Suburban, with an 83 cent quarterly dividend, is going to mean an extra payment of $1.826 million each quarter if the dividend stays the same. Given Suburban's pattern of dividend increases, that's not likely. It seems prudent to bump up the indicated annual dividend expense of $7.304 million to an even $7.5 million. I'm assuming that the secondary offering will be completely sold, and the net proceeds of such will be $90 million.

If Suburban gets $175 million of bonds at 101.25% of face, for a net bill of $178.06 million, and $90 million from the secondary, then it will be required to pony up an additional $88.06 million in cash plus any after-deal fees for the tender offer. I'm assuming that those fees will be an extra $2 million, which would bump up the cash commitment to $90.06 million. As of June 27th, it had $256.1 million in cash and cash equivalents, which is more than enough. The annual interest savings on the bonds will be $12.031 million. As noted above, the added dividends will be about $7.5 million. Increasing that $7.5 million estimate to $7.531 million leaves a gross cost savings of $4.5 million. Assuming that the cash-and-equivalents can yield 2%, then the annual cost of the foregone cash would be $1.801 million. This figure leaves Suburban with a net savings of about $2.69 million annually, or 7.7 cents per share after dilution. If the offering is fully subscribed, and all else remains equal, then it will be accretive to earnings.

On the other hand: if the offering isn't fully subscribed, then it may be dilutive. If $117 million or less of the bonds are tendered, given the above assumptions, then it will be. At that level, the dividend cost of the new limited partnership units exceeds the interest-savings gain on the bonds.

There is a chance that the tender offer will pull in all of the bonds, As noted above, the yield to maturity is about 3% at the higher tender price, and the use of a time-competitive tender structure may encourage a lot more tendering. Nevertheless, the "judgment of the market place" says that the buyback of the bonds will be dilutive. If the market is wrong in this judgment, then Suburban units have gone on sale.

There's also the other side to consider, from a balance-sheet perspective. What if all of the bonds are tendered at the higher price and no shares are sold in the secondary? That would produce maximum accretion to earnings, but it would also subtract $178.06 million from Suburban's cash balance. As of June 27th, the company has $400.49 million in curent assets and $146.53 in current liabilities for a current ratio of 2.73. Having to pay $178 million would reduce Suburban's cash balance to about $78 million, if all else current-related remains equal, and its current assets to $222.43. That outcome would leave a current ratio of 1.52. Consequently, this possibility would leave the company fairly strapped, even if its debt-equity ratio would end up well below 1.


Disclosure: As of the time of this post, I have a live buy order for some Suburban in my actively-managed Marketocracy mock fund.

Olin Corporation, GE Shake Off Bad Days

Olin Corporation, a company that makes chlor alkili products and owns Winchester Small Arms as a division, lowered its guidance on July 27th after the bell. The stock plummeted the next day. As of now, though, it's closed at above its July 27th high. That high was $14.26; today's close was $14.59.

I offer this follow-up as grist for thought. Olin is the second Bin stock to take an earnings-related tumble; General Electric was the first. GE announced its 2Q earning before the bell on July 17th. On July 16th, the stock closed at $12.40. The day of the announcement, GE stock got hammered down to $11.65 and drifted lower for a couple of days. Today's close was $13.99.

Olin's was a guidance tumble; General Electric's was an earnings tumble. Both ended up shaking off their respective slam-downs in less than two weeks.

There's a time to dump a stock that's disappointed and a time not to. My little experience with the Low P/E Bin suggests that, at this stage in the market, selling a low-P/E, high-yield stock because of a near-term disappointment is usually a bad idea. Even Tesoro, a refining stock that got pummeled for more than a week in early July because its crack spreads were being squeezed, eventually recovered to the level it was at before a Goldman Sachs analyst had panned it. As I noted earlier, the stock's took quite a pounding that caught me flat-footed. Currently, Tesoro is fluctuating around the price it was at when Goldman disseminated the report.

I hesitiate to offer a definitive conclusion, because we're in an expected-recovery market. I have no experience of a bear market as a Bin watcher, nor have I even experienced a full-fledged bull market. So, I'll confine myself to this observation: I had all three of the above stocks in my actively-managed Marketocracy mock fund. I still have GE, which I don't regret. I don't have Olin anymore, as I sold it the day after the guidance lowering, and I regret having done so. I got rid of Tesoro at a loss, and I have some grounds for regret.

It's sometimes a good idea to think twice before letting go of a stock that's run into some near-term difficulty. I offer the opinion that, for low-P/E high-yield stocks, now is one of those times when thinking twice is called for.


Note: I am not licensed to offer investment advice in my home jurisdiction of Ontario in Canada, nor an I qualified to become licensed.

What's Up With The REITs?

The Low P/E Bin has two REITs, one a newcomer. Both have shot up recently, as has a Canadian commercial real estate company that's also a Bin member.

The two REITs are Cousins Properties, the newcomer, and Entertainment Properties Trust. The former was up 6.14% today, and there wasn't any earnings or other good news to account for it. Cousins' portfolio is a mixed bag of commercial, muti-family residential, retail and industrial properties. After going above $10 in early June, it sunk down to below $8. After spending some time at that level in early-mid July, it's shot back up to almost $10: $9.85, to be specific.

Entertainment Properties owns and manages movie theatres. It didn't have the June spill that Cousins had; it's been in a range since mid-May. Like Cousins, though, it's shot up recently although Entertainment Properties started in mid-July. From lower than $20 back then, it got to to $31.65 today in regular trading; it gained 7.32%. That gain was largely wiped out in after-hours trading, but it's still significant when paired with Cousins.

The Canadian company, which does own a substantial amount of American commercial real estate, is Brookfield Properties Corporation. After hitting a low of about $7, at about the time that Entertainment Properties did, Brookfield has climbed up to yesterday's close of $10.66.

These companies may have been pushed up by optimism, hopes, or dreams, but the rises in their stocks suggest that the commercial real estate collapse may have been exaggerated. Brookfield does have a lot of liquidity at its command; it could be the beneficiary of a continued fall provided that its own properties aren't affected. According to its latest earnings release, it still has a relatively low vacancy rate. So, Brookfield's rise could be opportunistic.

The other two stocks make me wonder, though. Stipulating that the market may have gone recovery-manic, I still suggest that the commercial real estate sector deserves a re-look. Things may not be as bad as advertised as of now, if only because the U.S government's bailouts are now trickling through to the sector.


Warning: Betting on government bailouts is a lot more hazardous than it looks.

Titanium Metals Reports A Not-So-Stellar Quarter

Titanium Metals released its second-quarter results this morning, and reported an EPS drop of 80.8% from the same quarter a year ago. The main reason was a drop in demand for its titanium products, which lowerd both the prices fetched and the volume sold. Demand diversion from scrap recycling was partly to blame. The company also attributed the drop to the delay in the introduction of the Boeing 787 and similar delays by Airbus.

The company won't be facing any liquidity or solvency crises soon. As of June 30th, according to its latest 10Q, its current ratio is 6.57 to one, and its quick ratio is an unusually high 2.14. Its quick assets, or its current assets minus inventory, are higher than all of its liabilities: the former is $264.6 million, and the latter is $245.9 million. Titanium Metals has no long-term debt, so its capital structure is all stockholders' equity. There's a miniscule amount of preferred outstanding; far less than 1% of shareholder's equity. Book value available to common equity is $6.27 per share; the stock is at $8.87.

On the other hand, it doesn't have much of a history of dividend payment; its dividend has been suspended as of the first quarter of '09. Its free cash flow for the first half of '09 was more than twice the amount needed to support its '08-level dividend of 8 cents per share, but that potential coverage ratio came from a slashing of capex spending by more than 75%. Had capex been the same level as it was in the first half of '08, free cash flow would have been less than half of the amount required for dividend payment. Interestingly, free cash flow in the first half of '08 was less than the amount needed to pay the dividend back then. Free cash flow was only 1.4 times dividend requirement in 2008.

Perhaps the lack of a free cash flow cushion, plus the recession, is what made Titanium Metals pass its dividend in the first quarter. Resuming the dividend at 8 cents, which seems unlikely for this quarter, would amount to saying that capital expenditures aren't going back to the old levels until earnings do.

Bladex Wakes Up With The Rest Of Them

There are four banks in the Low P/E Bin with significant exposure to Latin America. Two of them, Banco Bilbao Vizcaya Argentaria and Banco Santander, are headquartered in Spain and also have exposure to the Spanish economy. Those two banks are commercial rivals in Spain, with Santander having the bigger presence, and both stocks have taken off recently.

The third is headquartered in Columbia, and has operations largely in Latin America. Bancolumbia, though, also has some exposure to Spain and even has a presence in the United States. It's been up as well, although in a rise more jagged than either Bilbao's or Santander's.

The final bank has been in a tight trading range until today. Banco Latinoamericano de Comercio Exterior, or Bladex, had been hovering around $13 while its compadres above have been either racing or spurting up. Today, it shot up 6.45% to close at $13.70. Bladex used to be owned by the central banks of several Latin American and Caribbean countries, and its reason for being used to be trade facilitation. Now privatized, its a bank that almost solely lends to businesses, government-owned export organizations, and other banks. In keeping with its former life, most of its commercial loans go to exporters. It makes a likely candidate for an investor hoping to profit from growth in the Latin American region.

It certainly shares the risks of loss in the region. In 2002, when the Uruguayan bank crisis hit and the Argentinian currency crisis came to a head with convertibility suspension, Bladex lost $12.62 per share. Although it did recover in 2003, that year's earnings of $3.88 were the highest of all the subsequent years. 2008's EPS was $1.51, and 12-month trailing EPS is currently $1.58. The bank's 10-year return on equity, as calculated by dividing the sum of net incomes over 10 years by the sum of shareholder's equities over the same period, is only 6.99%. Thanks largely to the crisis-related gutting at the beginning of this decade, its 10-year average EPS is only 44 cents.

Bladex stock may be waking up because its 2nd quarter earnings portend better times for the bank in 2009, as indicated by its 12-month trailing being above its 2008 full-year results. My own hunch, though, tells me that it's leapt up because others with Latin American exposure are. Unlike the last recessionary episode, this one has not accompanied a real Latin American economic crisis or any definite sign of one.

Compass Minerals Leaps Up On Upgrade

Compass Minerals closed up 5.22% today, on the strength of an upgrade from J.P Morgan. That was the same stock I analyzed night before last. I concluded that it was a speculative low P/E growth stock that could be attractive if the winter weather co-operates and farmers become more prosperous.

It would take a bit of brass on my part to say that I influenced that report. It would also be somewhat improbable, as professional-level research reports usually aren't whipped up over a day and a night. This summary of it shows an attention to the details of the company and its markets that I can't really muster.

So, even if I did have an influence, I have to concede that I was definitely bettered by analysts' standards.

On the other hand, I can brag about my timing. That's one advantage to being in the amateur league: I can put 'em out quicker.


Disclosure: Despite its speculative nature, I did put Compass in the actively-managed Marketocracy mock fund I run. I'm one of those who think that the winter weather will be bad and earnings on the farm will be good.

Another Barron's Pan

In its "Weekday Trader" feature, written by Naureen S. Malik, Barron's has panned the Low P/E Bin stock BHP Billiton. The line of reasoning goes something like this: the prices of the commodities Billiton mines and sells have been shooting up lately. So has oil, which Billiton extracts too. They've been rallying on anticipation of returning growth in world demand, as well as China stockpiling, but the latter source of demand is temporary and the former isn't showing up yet. The last time metals had sustained rallies, there was real world growth and a real demand increase underpinning them. Now, there isn't; only expectations have shot them up. Consequently, given the high expectations, there's a real anticipation air pocket in those commodities and the stocks of companies who extract and sell them. If the recovery doesn't go as well or smoothly as the market's currently expecting, both metals and metals companies will fall - perhaps fall hard. There's no guarantee that will be so, but the risk/reward dyad has tilted towards low reward and high risk at these levels.

The argument makes sense, and Billiton has been on a real tear until recently. There's an additional cautionary factor relating to cyclicals in general: commodity, oil and cyclical stocks rarely show up in the Low P/E Bin when they're bottoming. [Peter Lynch made this point in One Up On Wall Street.] That's because the bottom is typically a time when earnings have turned into outright losses for those stocks. They tend to be hustled out of the Bin by then.

In a time like this, it may be a good long-term risk to take in a commodity Bin stock because reflation is clearly the order of the day. Except for the off chance that there'll be deflation this cycle, which the authorities may have overcompensated for, there's a good chance that a commodity stock currently in the Low P/E Bin will show a real long-term gain because the growth-inflation mix benefit industrial metals. Billiton's primary earnings generators are those kind of metals.

Actually, BHP Billiton is a bit of an oddity: had last year seen the top of a long-term commodity bull market, the Bin would have had lots of them. With the exception of Anglo-American, which has currently suspended its dividend, Billiton is the only mining stock in the Bin. On the other hand, oil and gas producers, including income funds and integrateds, outnumber the utilities. Had there not been a clear push towards reflation, I would be worried about that particular subsector.

Perhaps I'm being too easygoing. BP has reported a drop in earnings that's going to shove it out of the Bin. The stock sunk 2.61% in regular trading. [The company beat expectations, though.]

American Bank Stocks In The Bin

There are currently four American bank stocks in the Low P/E Bin. All of them are TARP-related, but only two have actually taken TARP funds; the other two refused. These banks are:

- Bank of Hawaii (refused);
- CVB Financial Corp. (has applied to return TARP funds);
- International Bancshares Corporation;
- United Bankshares Inc. (refused).

Although each company's banking operations are in different areas of the U.S., and each has different financials, their trading patterns show a distinct similarity. All of them are stuck in ranges; each bank save one has recently broken to the downside only to return to the original range. The bank that's been spared is Bank of Hawaii, whose recent slips have bordered its current range.

There's also another pattern. Of the three than have broken their ranges downwards, two have had repairs that were explicitly earnings-related. These are also the two stocks of the four above that leapt up the most today. CVB Financial was up 6.67%, and ex-Bin stock United Bankshares was up 8.90%. Both of them had 2Q EPSs that were down with respect to 2Q '08's, but were also better than expected. The former has recently announced a stock offering to get itself out of TARP, and the terms of the offering are now even sweeter for the investors fortunate enought to get a piece of it.

International Bancshares has shown the same pattern, but with no news to explain why. As far as I can tell, its break-and-repair pattern is speculative.

Whirlpool And Trading Ranges: A Cautionary Tale

Whirlpool was one of five stocks I highlighted as trading-range breaking in a post made a week ago. From mid-May to early this month, it hovered in a range of about $40.50 to about $44. Then, it began shooting upwards, peaking at $56.34 yesterday. Today, though, it dropped 9.92% in regular trading and a further 0.49% in after-hours trading. When evening trading ended, it was at $50.50. The fact that its narrowed its 2009 EPS guidance range to the upside, from $3.00-$4.00 to $3.50-$4.00, didn't help even though the consensus estimate is only $3.52. Its revenues were down, which is currently frowned on.

Whirlpool is no longer in the Low P/E Bin, now because its 12-month trailing earnings have dropped to $4.70 as a result of its 2Q '09 earnings coming in at $1.04, but it was a mainstay. It was also a stock that a chart-oriented person might have bought when the excitement was ramping up.

That 10+ percent drop, when after-hours trading is factored in, clearly shows the risk inherent in being swept up by the bandwagon effect. Playing the earnings game doesn't always work, as the GE reversal last Friday also showed.

There seems to be only one way to play the earnings game with ranges. Buy a stock with good fundamentals while it's still in its range (preferably near the bottom of the range), sit back, and wait. Even the earnings effect isn't very reliable: Sunoco Logistics Partners' 2Q EPS jumped, which led to a brief leap-up in yesterday's after-hours trading, but that gain was more than reversed as of market open this morning. It's still in its tight range - perhaps because its revenues plummeted along with its expenditures - even though its 2Q EPS and revenues both beat the Street by a significant margin.

Once again, the vagaries of the market trump even a sensible trader's rule.

There's a more serious risk in range trading: buying in at the bottom of a range only to see the stock sink below it. Recently, the only Bin stocks that have done so are some banks: United Bankshares, and CVB Financial until its latest Street-beating report reversed the range-busting downtrend. Ironically, CVB was a TARP bank while United refused its allotment.

As is often the case, the market surprises and confounds. If there's any meaning to United and CVB's recent troubles, it would be that Mr. Market is still pessimistic about TARP-related banks. Fundamentals have the last say, though, and each bank's are different.

Electric Utlities And Political Discounting

The cap-and-trade bill is being hurried through Congress; as might be expected, two electric utilities are spending millions each to lobby for changes. The Low P/E bin has six electric utilities, not including a company that's misclassified as one. All of them will potentially take a hit from the coal tax provision, although the size of the hit will vary. These six companies are:

- Alliant Energy Corporation. P/E: 10.09. Yield: 5.76%.
- Ameren Corporation. P/E: 8.61. Yield: 6.26%.
- American Electric Power Company. P/E: 10.42. Yield: 5.52%.
- CenterPoint Energy Inc. P/E: 10.19. Yield: 6.60%.
- Edison International. P/E: 8.89. Yield: 3.98%.
- First Energy Corp. P/E: 10.53. Yield: 5.40%.

With the notable exception of Edison, all of these stocks yield between 5 and 7%. CenterPoint has the higest payout ratio; Edison has the lowest.

All of these six stocks dropped today in regular trading. Alliant was down 0.19%, Ameren was down 0.69%, American Electric was down 1.72%, CenterPoint was down 0.35%, Edison International was down 0.95%, and First Energy was down 1.04%. Interestingly, all six stocks were either unchanged or up in after-hours trading. Ameren and Edison managed to either eliminate or reverse their day's losses.

It's no secret that the carbon-tax component of the cap-and-trade bill will affect the electric utilities, even if they have the right to pass the added cost on to their consumers. People can still reduce their electricity consumption if the price gets jacked up.

Some of these companies can be expeditiously handicapped; others don't explicitly break down their power-generation percentage by source. Of the latter, Ameren seems to have the highest percentage of generating capacity powered by coal. Given American Electric's lobbying efforts, though, it might be the highest - although its position as the industry's lobbying co-leader could result from it being one of the biggest in the industry.

Alliant gets about 55% of its electricity from coal. First Energy gets about 53.5% from coal. Edison International has the highest proportion of nuclear, hydro-electric and natural-gas-fired electricity generation sources. Therein lies a disappointment: Edison is also the company with the lowest yield, by far, of all six. Its operations are located in southern California.

If the cap-and-trade bill does pass and get signed into law with the coal-tax part unaltered, then this is one of the sectors to watch for panic bargains. It would be ideal if Edison were slammed down along with the rest of them, but a panic drop seems unlikely for it. Of the six, the long-term financials show Edison with the highest 10-year return on equity - 12.12% - but American Electric with the highest EPS growth rate: 9.78%, as calculated by logarithmic regression.

My own hunch says to watch the ones with the highest amount of coal generation. Although the cap-and-trade bill will impact their fundamentals, a panic sell might very well overdiscount them. Ameren has the lowest P/E and highest yield, with a not immodest payout ratio of 53.9%. Its operations are in Missouri and Illinois. As noted above, it seems to be the most coal-saddled of the six.

Of course, if nuclear- and hydroelectric-rich Edison is beaten down simply because it's an "electric utility"...


Postscript: The natural gas utilities didn't show that pattern. If cap-and-trade is currently being discounted, then this article explains why. [Note: the article's pro-AGW.]

What A Change A Difference Of Opinion Makes

A week ago, I pointed to two stocks that shrugged off bad news. Both of them have not plummeted subsequently; in fact, both are up. One of them, Barnes Group, had gotten its earnings estimate slashed by a KeyBanc analyst. It didn't react all that much to the news, although it sunk slightly the next trading day. Today, however another analyst upgraded it. That news was enough to send Barnes up 6.80% on the day.

The second analyst's conclusion is an interesting one. His case is made on undervaluation - specifically, that the stock's "'valuation now fully discounts expected weakness in the company's transportation and industrial end markets and uncertainty in aerospace markets'" At yesterday's price, Barnes met his free-cash-flow yield target.

Barnes' dividend yield is currently 4.97%. Two other companies with similar yields, Caterpillar and Eaton, have both shot up recently in part because it was feared they would cut their dividends. They haven't, and it's likely that they won't. Barnes' dividend was likely questioned earlier.

I won't put words in the analyst's mouth, but I supect that the upgrade is a dividend play.

A Barron's Pan, And Pick

The latest issue of Barron's contains an analysis of General Electric that doesn't see much good in GE's 2Q report. Entitled "General Electric Loses Spark," it digs into GE's ostensibly Street-beating earnings and discloses that it only beat the Street through a GE Finance tax credit. Had that credit not been there, GE would have missed on earnings as well as revenues.

Another stock in the Low P/E Bin was mentioned by Barron's, but favorably: the Spanish bank Banco Santander. It was praised in a subscriber's-only article entitled "The Best Bank You've Never Heard Of." [Reuters' summary here.] Santander could be called a diamond in the rough: unlike many other banks, its FY 2008 earnings were flat with respect to FY 2007's. Its 10-year EPS growth, as measured by logarithmic regression, is 15.65%: that's well above its current P/E of 7.83. EPS growth is also slightly above its P/E ratio as derived by using 10-year average earnings, translated from Euros to US$. Using Santander curent closing price of 11.37, 10-yr average earnings of 0.79 Euros, and the current Euro/US$ exchange rate of 1.4172, the resultant P/E is 10.2.

I can think of five reasons why a foreign bank, despite it seeming a real grower, would sell at a P/E (not to mention a 10-year-average-earnings P/E) that's well below its ten-year growth rate:

1. The one that the Barron's article intimated: it's not widely known, Consequently, there's little new demand for the stock to push it up to a P/E level more reflective of its growth.

2. One that was discussed in the final section of the current edition of Security Analysis: accounting and reporting standards are different for a foreign company like Santander, leading to some uncertainty about what it's really earning. Foreign companies that file 20Fs are no longer obliged to report what their earnings would have been in U.S. GAAP. In addition, home GAAP was abandoned in 2005 for the new IFRS standards. The switch-over, which was not carried back to previous years, may very well have inflated earnings. A proper reconciliation may very well require an ouside auditing team. So, as Thomas Russo emphasized in the "International Value Investing" section of the current Security Analysis, an old value-investing rule is invoked: when in doubt, discount!

3. Currency effects: A foreign investor has to bear the added risk of the euro sinking with respect to the U.S dollar. That risk may seem more like "opportunity" given the current U.S. government's fiscal state, but the US$ had risen a fair bit against the Euro in the past. Shortly after it was introduced in 1999, at about $1.20 per euro, there were many currency analysts glad to welcome it with a bullish recommendation. Instead, it fell to reach 0.843 US$ per. The Euro has actually trended up against the U.S dollar for most of the last ten years, but those intermittent falls do add a timing risk...not to mention the risk that the Euro's overall good fortune with respect to the US$ may reverse.

4. Economists' common-sense factor: if it were undervalued, then why haven't domestic investors picked up on it? They face none of the above-mentionend risks. It could be that their investment standards are old-fashioned and inappropriately conservative, but a lot of foreign-policy mistakes have been made by assuming that foreigners are dumb or backward. So have a lot of investing mistakes, as well as speculating mistakes. It could be that the needed catalyst - a group of activist value investors - is missing. Once the question "why?" is asked, though, another reason surfaces:

5. "This is not America": This line is meant in the sense it was used in an old movie, The Falcon and the Snowman. If you ever have a chance to see it, watch for that line and you'll really see what I'm about to point out (especially if you imagine the character saying it to an activist investor.) The United States, as a jurisdiction, is one of the world's most shareholder-friendly. Others aren't. Japan is well known for putting management ahead of shareholders, and Spain might be too. Mr. Russo also discussed this risk and recommended adding an extra discount to compensate for it.

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The above-mentionend risks do not apply specifically or solely to Banco Satander. They apply to any foreign company, even one domiciled in my own country of Canada. Shareholders are treated fairly well in Canada, but this point doesn't speak to most of the items above.

The above list also applies to the first stock discussed in my earlier post, "Five Stocks That Leapt Out Of A Near-Term Trading Range...And One That Hasn't." Banco Bilbao Vizcaya has a long-term EPS growth rate that's almost as high as Santander's, and has a significantly lower 10-year-average-earnings P/E. And yet, its long-term chart shows a stock that hasn't done all that much, despite the favorable earnings growth combining with an overall bull market in the Euro from 2000 to 2008.

So, it's uncertain whether or not Santander, Bilbao and their likesake are unknown treasures or value traps. Their stocks' performance over the last decade, although respectable until the credit crisis, suggest that companies' performance is not adequately reflected in their stock price. I can't say that they are value traps, as they haven't gone nowhere over the last decade, but I do note a long-term discounting that a comparable U.S. company would not face.

[H/T: I found out about the Barron's article on Santander courtesy of TheStreet.com]

Five Stocks That Leapt Out Of A Near-Term Trading Range...And One That Hasn't

Over the last several trading days, there have been five companies in the Low P/E Bin that have ramped up after some time spent in a trading range. Below is a list of them, with a capsule description for each. I should note that the stats I've calculated for any foreign company uses its home GAAP for the raw numbers.


Banco Bilbao Vizcaya Argentaria SA: This bank has operations centered in Spain, Portugal and Latin America. Followers of the world economy know how bad the Spanish economy's had it recently, but things may be finally turning around in that country. Bilbao is classified as a money center bank. As of Mar. 31st, its book value was 7.27 euros per share, or $10.24 at today's exchange rate. It closing price today is $13.60, pricing Bilbao at about 133% of book value. Its 1Q '09 earnings were 36.5% below 1Q '08's. Despite a 2008 earnings slump, Bilbao's 9-year EPS growth, in Euros as calculated by logarithmic regression, is 14.83% for the years 2000 to 2008. Its nine-year ROE is 21.49%. Nine-year average EPS is 1.01 euro, or about $1.42, making Bilbao's adjusted P/E ratio (for 9-yr average earnings per share) 9.58. The fact that this company is in the Bin indicates that the market expects Bilbao to fall off the growth track for one more year. As the 1Q results above indicate, it already is doing so to some extent.

Barclays plc: After rallying from March to early May, and continuing to rally after mid-May, this company was hit by Abu Dhabi's SWF's announced sale of a large stake in the company. As of today, the stock managed to close above the pre-sale high for the first time. Barclays is another foreign money center bank, one whose earnings growth is more modest than Bilbao's. Barclay's 10-year EPS growth rate, in pounds as also done by logarithmic regression, is 9.03% for the years 1999 to 2008. Its 10-year return on equity, also in pounds, is 17.29%. Its 10-year average EPS is 0.42 pounds, or 69 US cents. So, its P/E ratio, using 10-year average EPS for the 'E', is a rather high 30.0. Its cash flow position for 2008 was much better than for 2007: free cash flow was 30.769 billion pounds. Operations cash flow net of all investing-cash-flow expenditures was 24.961 billion pounds, or more than eight times the dividend requirement. Despite this cushion, Barclay's CEO has announced that dividends will be less certain in the future than in the past because of the financial crisis. Barclays has slipped from its growth track before, in 2001 and 2002, but the total fall on EPS from 2000 to '02 was only a 17.5% drop over those two years. Although 2008's second-half income was slightly above the second half of '07's, 2009's may contain a less-then-cheery surprise.

Cal-Maine Foods Inc.: This stock leapt up in mid-June after a fund manager praised it in Barron's. Since then, it's edged upwards to $25: the price action settled on an increasingly narrow range until today's solid breakout to $27.00. Cal-Maine produces shell eggs, the regular kind and the more premium free-range variety. Its earnings in the last ten years have been very volatile, with four years of losses between 1999 and 2008, but its 10-year return on equity is 21.00%. Cal-Maine's ten-year average EPS is an even dollar, making its P/E ratio for its 10-year average EPS a rather high 27. As an example of that earnings volatility, FY 2008's EPS was more than four times FY 2007's. The diluted EPS for 3Q FY '09, which ended Feb. 28th, dropped 46.5% with respect to 3Q FY '08's. Owners' earnings, though, were 2.87 times dividend requirement for the first three quarters of '09. Although its earnings seem ripe for a fall to a more normal level, its 6.40% dividend still has a large margin of safety with respect to free cash flow.

Deluxe Corporation: This one, I've mentioned in a few earlier posts. Of all the stocks in this list, Deluxe is the one whose stock price got rolling the earliest: five trading sessions ago. It's also the one whose leap is the greatest: 33.6% in that week. What got it rolling was a favorable analyst's report, incorporating upwardly-revised earnings guidance from the company. Prior to that announcement, from mid-June, Deluxe was in a trading range that was lower than the one established from the beginning of May to June 15th. Deluxe specializes in paper products for office use, primarily custom-printed cheques. It's one of those companies that seems to be addicted to share buybacks, to the point where its return on shareholder's equity is often in the triple digits. Despite that practice, Deluxe's 10-year continuing-operations EPS growth rate from 1999 to 2008 was below zero: -1.75%. On the other hand, its 10-year average EPS (including discontinued operations) is $2.81. Even at today's elevated price of $16.55, its P/E ratio using that 10-year average is 5.89. Its standard deviation for its 1999-2008 annual earnings is 64 cents; its lowest annual EPS in that timeframe was 2006's $1.95, a fall of 37.1% from 2005's $3.10. Its diluted EPS for 1Q '09 was 53.7% lower than 1Q '08's, but its guidance suggests that 2Q '09's drop will be about 14% from 2Q '08's. Deluxe's cash from operating activities for 1Q '09 was actually more than double 1Q '08's; so was free cash flow. 1Q '09's cash flow from operations net of all investing cash flow was about four times the dividend requirement for the quarter. Its current yield is 6.04%, and its 25 cents/quarter dividend has stayed steady since 3Q '06's cut from 40 cents. This is the same stock I've been pooh-poohing as it shot up, as I believe it will retrench in the near future.

Whirlpool Corporation: This company also has erratic earnings, although its 10-year EPS growth (as measured, like all of the above, by logarithmic regression) is a respectable 12.19%. Whirlpool is the well-known appliance maker; its presence in the Low P/E Bin is because of housing-crash- and recession-related fears for its earnings. Like all of the above companies save Cal-Maine, Whirlpool's annual EPS for 2008 was below 2007's. It also has the longest-lasting trading range of all five. It hovered between $40.50 and $44 from mid-May until the beginning of July, when its closing price snuck up to $44.79. The trading range held, though, until two days ago when it closed above $45. Since then, it's been steadily rising to today's close of $49.87. Its 10-year-average EPS, counting discontinued operations, is $4.16; using those earnings in the denominator gives a P/E ratio of 11.99. Like Bilbao, Whirlpool's 10-year-average P/E ratio is below its 10-year EPS growth rate. Its 1Q '09 earnings did drop 25.4% from 1Q '08's; its 1Q '09 cash flow from operations was negative, even if less so than 1Q '08's. Even though a full 43-cent dividend was paid in each quarter of 2008, free cash flow for the entire year was negative. It had recourse to the debt market to the tune of $515 million for that year, although more than that amount was borrowed in 1Q '08. 1Q '09's net borrowings was less than 1Q '08's, suggesting that Whirlpool may be slowly getting over its cash squeeze. Nevertheless, there is no free-cash-flow margin of safety for its dividend at present.


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Now that the roster of leapers is finished, I would like to call attention to a stock that did the opposite last Monday, from which it has not recovered. The company is Sabine Royalty Trust; it's an express trust that collects income from its owned royalty interests in various oil and gas properties ranging from Florida to New Mexico (and some in Oklahoma.) Distributions are paid out monthly. Given that it's a royalty trust, it's return on unitholder's equity is meaningless - but its net distributable earnings have grown at a 13.1% rate over the last ten years. Its 10-year average for same is $3.16; at today's price of $40.17, its 10-year-average-earnings P/E is 12.71. I mention this stock because it closed at $45.44 last Friday, making for a 3-day drop of 11.6% since then. Almost all of the drop took place on Monday, the same day that it went ex-distribution. July's payout was 29 cents, a jump of 37.9% from June's 18 cents, so it could be argued that the market's been discounting a return to a more normal payout given the fate of oil's price recently. There's been no news on (or from) the company to explain the recent drop in its share price. I point to this company because its stock endured a similar plummet in mid-May, when it went from $42.92 to $37.27 in a week. Within a subsequent week, though, the stock rebounded to $41.45 and it kept rising to $43.05 two days later. Since then, it's hovered between about $43 and $45 until three days ago. The May drop was mysterious then, and the current one is mysterious now. Although a stock should not be bought solely because it's on sale, I offer the opinion that it is on sale as of now. Sabine's current yield is 8.67%, although the assumption that the average distribution over the last five months will be equal to the average for the next year gives a much smaller suggested yield of 6.75%.


Disclosure: I put some Sabine into the actively-managed Marketocracy mock fund I run. As should be indicated by my grousing about one of them, none of the other five are currently in that mock fund.