The holiday season brought a new annual report from Starbucks. Anybody care to read it?
Fiserv has run up and insiders are selling. I'm not that familliar with the company but I'd like to raise the question of whether shares in Fiserv are now fully valued.
In two separate meetings, someone asked how big HSBC is and what their profile is. The answer will probably suprise some people. They are one of the world's largest banks with over $1.7 trillion dollars in assets. This is no typographical error. They employ over 280,000 people in 76 countries and over 60% of their business is in the US and Europe. Read more facts here.
Friday, December 29, 2006
Saturday, December 23, 2006
Pulp industry
My last three investments this year have been Canadian income trusts that I picked up in November. Indeed these have been my only purchases this year. These trusts act like US REITs, in that they do not pay taxes to the Canadian government. On Haloween day, the Canadian government announced that they were proposing to collect corporate tax from the trusts. The ensuing meltdown left many trusts down 30 or 40 percent from their year ago levels.
I picked up units of SFK Pulp and Canfor Pulp funds. As their name indicates they produce pulp, which is a the raw material for paper. Business had been very bad toward the end of 2005, and had resulted in SFK Pulp suspending distributions. In the past year, roughly one sixth of Canadian pulp production has been eliminated. Prices have taken a decided turn for the better, with SFK Pulp and Canfor Pulp reinstating or raising their distributions. Canfor Pulp (CAD$12.60) pays out CAD$.12 monthly, while SFK Pulp (CAD$4.13) pays CAD$.03 monthly. US residents are subject to a 15% witholding on distributions. Both of these are available on the pink sheets under symbols cfxuf and sfkuf and as such do not need to file reports with the SEC. They do file in Canada, and their filings are accessible at www.sedar.com.
Since my initial purchases, I found a pretty good writeup from the CIBC brokerage that might be interesting.
The other purchase was Pengrowth (PGH on the NYSE), which is an oil and gas developer. This is more of a short term holding, and I already flipped it once. It pays out 16% or so on a trailing basis, although how much of it is sustainable depends on energy prices. If it goes up, I'll probably be inclined to sell, otherwise I'll hold and collect the (possibly lower) distribution. Other ideas along similar lines are PWE, FDG, and coswf.
I picked up units of SFK Pulp and Canfor Pulp funds. As their name indicates they produce pulp, which is a the raw material for paper. Business had been very bad toward the end of 2005, and had resulted in SFK Pulp suspending distributions. In the past year, roughly one sixth of Canadian pulp production has been eliminated. Prices have taken a decided turn for the better, with SFK Pulp and Canfor Pulp reinstating or raising their distributions. Canfor Pulp (CAD$12.60) pays out CAD$.12 monthly, while SFK Pulp (CAD$4.13) pays CAD$.03 monthly. US residents are subject to a 15% witholding on distributions. Both of these are available on the pink sheets under symbols cfxuf and sfkuf and as such do not need to file reports with the SEC. They do file in Canada, and their filings are accessible at www.sedar.com.
Since my initial purchases, I found a pretty good writeup from the CIBC brokerage that might be interesting.
The other purchase was Pengrowth (PGH on the NYSE), which is an oil and gas developer. This is more of a short term holding, and I already flipped it once. It pays out 16% or so on a trailing basis, although how much of it is sustainable depends on energy prices. If it goes up, I'll probably be inclined to sell, otherwise I'll hold and collect the (possibly lower) distribution. Other ideas along similar lines are PWE, FDG, and coswf.
Wednesday, December 20, 2006
L3 downgrade
By TSC Staff12/19/2006 12:32 PM EST
L-3 Communications (LLL - commentary - Cramer's Take - Rating) shrugged off a Credit Suisse downgrade Tuesday, a day after the New York defense contractor was hit by a big government contract loss.
Credit Suisse said Tuesday it is downgrading the stock to neutral from outperform, based on Monday's surprise loss of an Iraqi linguist contract with the U.S. Army. Credit Suisse cut its target price to $83 from $88.
L-3 dropped nearly 6% Monday after cutting financial targets to adjust for the lost translation contract. The company said the Army didn't renew a deal to supply the military with translators and linguists in Iraq, Afghanistan and Guantanamo Bay, Cuba.
Without the contract, L-3 says it now expects 2007 sales to be about $13 billion, down from the $13.5 billion originally planned. Analysts had been looking for revenue of $13.5 billion.
L-3 rose 61 cents Tuesday to $79.61.
L-3 Communications (LLL - commentary - Cramer's Take - Rating) shrugged off a Credit Suisse downgrade Tuesday, a day after the New York defense contractor was hit by a big government contract loss.
Credit Suisse said Tuesday it is downgrading the stock to neutral from outperform, based on Monday's surprise loss of an Iraqi linguist contract with the U.S. Army. Credit Suisse cut its target price to $83 from $88.
L-3 dropped nearly 6% Monday after cutting financial targets to adjust for the lost translation contract. The company said the Army didn't renew a deal to supply the military with translators and linguists in Iraq, Afghanistan and Guantanamo Bay, Cuba.
Without the contract, L-3 says it now expects 2007 sales to be about $13 billion, down from the $13.5 billion originally planned. Analysts had been looking for revenue of $13.5 billion.
L-3 rose 61 cents Tuesday to $79.61.
Tuesday, December 19, 2006
Portfolio Recovery Associates (PRAA)
Looking around the web, I've found a few links on Portfolio Recovery Associates. Here's a quick rundown:
In a recent article, Jason Kelly prefers competitor Asset Acceptance Capital:
here
Some brief numbers from July 2006:
here
Jim Gillies of Motley fool presents a nice breakdown from April 2006:
here
Phil Zucchi, a manager of the Zebra hedge fund, dislikes PRAA. From April 2006:
here
Random Roger mentions a Barron's roundup from November 2005. This might be useful in digging up some background on the industry:
here
Most recent quarterly report is here. It's an interesting read (as such things go), with charts which make the information easier to comprehend. The summarized information includes data on how long accounts continue to generate revenue and how their past revenue projections have panned out. I think the supplemental section is worth reading, particularly the supplemental section near the end which contains the charts.
In a recent article, Jason Kelly prefers competitor Asset Acceptance Capital:
here
Some brief numbers from July 2006:
here
Jim Gillies of Motley fool presents a nice breakdown from April 2006:
here
Phil Zucchi, a manager of the Zebra hedge fund, dislikes PRAA. From April 2006:
here
Random Roger mentions a Barron's roundup from November 2005. This might be useful in digging up some background on the industry:
here
Most recent quarterly report is here. It's an interesting read (as such things go), with charts which make the information easier to comprehend. The summarized information includes data on how long accounts continue to generate revenue and how their past revenue projections have panned out. I think the supplemental section is worth reading, particularly the supplemental section near the end which contains the charts.
Saturday, December 16, 2006
Calling all members
I've sent invitations to all email addresses that I have. If I've missed you, please respond to my email. Send me your email address and I will send you an invitation that will let you post new messages. Or leave a comment to this post and I will respond to it.
Friday, December 15, 2006
Is P/E useful?
P/E is probably the most widely used valuation tool. But how useful is it when comparing companies? P/E is of course price divided by earnings. But is each dollar of earnings equal? My answer is no. Other factors are also important, especially return on equity, or ROE.
ROE is the ratio of earnings to stockholder equity. It measures how effective the business is at turning investment into earnings. It's not rocket science - would you rather own a company that requires $100 to produce an extra $5 annually of earnings, or one that can produce $25 of earnings for the same $100 of investment?
The difference between companies A and B are apparent over time. Company A has doubled its earnings by year 8. In contrast, company B has doubled its earnings by year 4. After ten years, company B has expanded its earnings by a factor of 6, while company A has not yet tripled its earnings.
This is why an investor can often pay more for shares of a high ROE company than a low ROE company. The caveat being that the company must be able to reinvest its earnings. Companies in dying industries probably do not have an opportunity to reinvest in their business this way. My experience is that companies in growing industries with high ROE can be good investments provided that you do not overpay. The overpaying part is often a problem as these are frequently the type of companies that command very high P/Es. However paying a market P/E multiple for such a company is often not a bad purchase.
ROE is the ratio of earnings to stockholder equity. It measures how effective the business is at turning investment into earnings. It's not rocket science - would you rather own a company that requires $100 to produce an extra $5 annually of earnings, or one that can produce $25 of earnings for the same $100 of investment?
As an example, take two companies. Each starts with the same earnings and reinvests it. One earns 10% on it's equity, the other 20% on equity.
| Company A | Company B | |||||
| Equity | Earnings | Equity | Earnings | |||
| 10.00% | 2000 | 200 | 20.00% | 1000 | 200 | |
| 10.00% | 2200 | 220 | 20.00% | 1200 | 240 | |
| 10.00% | 2420 | 242 | 20.00% | 1440 | 288 | |
| 10.00% | 2662 | 266.2 | 20.00% | 1728 | 345.6 | |
| 10.00% | 2928.2 | 292.82 | 20.00% | 2073.6 | 414.72 | |
| 10.00% | 3221.02 | 322.1 | 20.00% | 2488.32 | 497.66 | |
| 10.00% | 3543.12 | 354.31 | 20.00% | 2985.98 | 597.2 | |
| 10.00% | 3897.43 | 389.74 | 20.00% | 3583.18 | 716.64 | |
| 10.00% | 4287.18 | 428.72 | 20.00% | 4299.82 | 859.96 | |
| 10.00% | 4715.9 | 471.59 | 20.00% | 5159.78 | 1031.96 | |
| 10.00% | 5187.48 | 518.75 | 20.00% | 6191.74 | 1238.35 |
The difference between companies A and B are apparent over time. Company A has doubled its earnings by year 8. In contrast, company B has doubled its earnings by year 4. After ten years, company B has expanded its earnings by a factor of 6, while company A has not yet tripled its earnings.
This is why an investor can often pay more for shares of a high ROE company than a low ROE company. The caveat being that the company must be able to reinvest its earnings. Companies in dying industries probably do not have an opportunity to reinvest in their business this way. My experience is that companies in growing industries with high ROE can be good investments provided that you do not overpay. The overpaying part is often a problem as these are frequently the type of companies that command very high P/Es. However paying a market P/E multiple for such a company is often not a bad purchase.
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