OK, starting to look further into these.

First up: Lamar Advertising (LAMR).

This company owns and advertises on tens of thousands of billboards, over a thousand digital billboards, and many thousands of transit placards (sides of buses, inside trains) around the U.S., Canada and Puerto Rico.

Pluses:
     • Throws off cash like crazy. Both CFFO and FCF greater than net income for the past decade and more.
     • Net losses are decreasing and if the trend continues, it has a good chance of being profitable this year.

Negatives:
     • Has a ton of debt (2.75-times equity).
     • Interest coverage ratio is less than one and has not been above 1.8 back through 2000.
     • This is reflected in the very low net margin compared to operating margin -- in the last profitable year, 2008, it had operating margin of 14.3% and net margin of 0.2%, mostly due to interest payments.
     • This is also holding down its ROE and ROA numbers to low single digits (when profitable).
     • Very dependent on economic activity, with net income decently profitable during economic growth periods and losing money during recessions.
     • Revenue growth has not been outstanding, rarely topping 10% YoY and not showing 5-year average >10% since 2004.

Verdict:
Pass, mostly because of the debt, but also because of obvious ties to economic cycles in earnings. I'd be more interested if it were clearer we were strongly coming out of a recession and the market hadn't quite caught up on that with this one, but that debt load still bothers me.

Cheers,
Jim

That seems like a stock priced with "not unreasonably low expectations"

"not unreasonably low expectations"

Nicely put! :-)

Second up: CF Industries Holdings (CF)

This company produces nitrogen and phosphate fertilizers, primarily to mid-American fertilizer distributors for farmers. It generates 85% of its revenue from the U.S. and another 7.8% from Canada, with the rest coming from overseas.

Pluses:
     • Throws of cash. For all but one year of past 9.5 years (all the data I have), CFFO > net income. Also, for all but one year of past 9.5, CFFO has been growing. FCF has grown in the majority of the past 9.5 years.
     • Margins remain high, even after the recession hit. Last year, net margin was <10%, but that was acquisition related. Net margin has remained above 13% outside of that for the last 3.5 years and has climbed to a high of 19.8% TTM.
     • Took on debt to make acquisition last year, but already paying it down and moving strongly back to a net cash position. Interest coverage ratio is 10x.

Negatives:
     • Made a large acquisition last year of Terra Industries for cash and stock. Share count increased by 46.7% as a result.
     • The company hasn't raised its dividend in over three years and current payout ratio is less than 1%.

Verdict:
Look further into this one. See how well its Terra acquisition is going. Look at fertilizer prices and likelihood of sustaining them at this profitable level. I'm sure other questions will come as I dig deeper.

Cheers,
Jim

Next up: Freeport McMoRan Copper & Gold (FCX)

This company is a gold and copper miner with mines in South America (Peru) and Indonesia, with some properties in Africa and North America as well. It also sells molybdenum, a component of alloys of steel.

Pluses:
     • Lots of FCF -- about $4.5 billion TTM.
     • Lots of Cu and Au reserves.
     • Lots of cash on the books, some $4.4 billion, up over $700 million in just the past 6 months.
     • Took on $7.2 billion in debt back in 2007 to help finance its purchase of Phelps Dodge. That now sits at $3.5 billion, so it's now in a net cash position.

Minuses:
     • Labor disputes in Peru and Indonesia, though Chris Barker (TMFSinchiruna and our online mining expert) says the Peruvian labor issues are yearly events.
     • Facing a tax / tariff from Indonesia on exporting unprocessed ore (along with other miners) in a bid by that government to create more processing in the country.
     • Worries about Cu and Au pricing, especially at elevated levels.

Verdict:
Definitely look at this one more closely. It's doing things right by paying down its debt so aggressively, metal prices are unlikely to drop precipitously (though if Chinese demand for Cu dries up...), and it has plenty of cash to do some nice acquisitions of some of the "junior" miners and their properties. And then there's potential for organic growth from further exploration of its own properties. Concern about prices and China demand is quite possibly the reason for the price weakness which could turn into a great opportunity.

Cheers,
Jim

Outlook for metal especially copper looks grim

BHP might be a good one to sreen. Way down off its 52-week high


A Good Year for Metal Bashers

http://online.wsj.com/article/SB1000142405311190426550457656...

By LIAM DENNING

Hear that crash? It's the sound of falling metal.

Base metals, the hard end of the industrialized economy, are feeling the sharp end of economic uncertainty. Cash copper prices on the London Metal Exchange have dropped 6% since the end of August, a dreadful month itself, and now sit just above mid-May's low point for the year.

Industrial metals have spent 2011 trying to outrun deteriorating economic growth in the Western world and monetary tightening—or at least an end to loosening—pretty much everywhere. The first setback came in the spring, when the Libyan-inspired spike in energy prices emerged to threaten consumers. Aluminum and especially smaller markets such as tin, nickel and lead picked up again, but quickly ran into early May's broad rout in commodity markets.

In the latest sell-off, the euro-zone's travails dominate. Amid such nervousness a newspaper report saying clients of Chile's Codelco, the world's largest copper producer by volume, were cancelling orders forced renewed selling this week. While the Dow Jones-UBS Commodity index is about flat for the year, held up by oil and grains, all the major industrial metals are now down since December.

Yeah, I had seen that article.

Putting some miners through this reverse DCF:

BHP Billiton comes out as 10.9% / 5.5% / 0% at 15% discount rate, off of $17,773 ttm FCF.

Southern Copper is worse, at 21.3% / 10.7% / 0% off of $1,392 ttm FCF.

So is Newmont Mining, at 26.5% / 13.2% / 0% off of $1,306 ttm FCF.

Alcoa's not so bad, at 7.8% / 3.9% / 0% off of $1,272 ttm FCF.

Which goes toward a question I had for myself earlier: Why is Freeport McMoRan down so far on expectations, yet none of the other miners are even close? If the same metal price drops will affect all miners (and the four above would also be hit), why is it only Freeport that sees low expectations (currently 1.6% / 0.8% / 0% off of $5,533 ttm FCF)?

Cheers,
Jim

I have been holding FCX for over 3 years and it is IMHO one of the best managed companies I have ever been invested in. They have by far the most detailed and informative CC of anyone that I listen to regularly.

They are the low cost producer of copper at around $1.70. As I found out in the last recession, if anyone is going to make money on copper in any market, it is going to be FCX. Look for them to be the first to rebound after any macro pullback.

At the last recession, everyone cut back on production and new projects. Coming out of the recession, China was buying like a banshee and copper prices and the stock rocked.

Latest report I read was that China was not necessarily buying copper for production alone but also stockpiling using their worthless $$ to convert into real value. It is clear that China is going to need a lot of copper for the next decade. But now China is trying to rein in inflation and discussions are afoot that they are going to cut back the investment in the stockpile and do some shoring up in capital departments.

Right now, going through the number of copper mines in the world, available supply is less than expected demand and that is with the US housing market still in reverse. The copper price may fluctuate but FCX will just continue to build its cash flow, pay down its debt and reimburse shareholders with special dividends when they are cash heavy and no takeovers on the horizon.

They are a very volatile stock that can fluctuate as much as 3-5% on a given day. But they have reinvested a lot of money in their projects in the last 3 years and are in an even better position today should the world get rocked than they were for the last great recession.

But one has to look past the cycles. If you buy now, it could easily go down to 35. But when the cycle turns they have the ability to shoot back up to $60 in a matter of weeks.

And as far as catalysts go, SHOULD the US housing market ever recover AND China and emerging markets continue to grow, they will start making a lot of money.

Great company, great management, world class assets, shareholder friendly, excellent balance sheet. I learned with this company to truly tune out all of the analysts.

Oh, and they also sell a lot of gold and molbydenum, both of which have seen nice price appreciation over the last 12 months and are projected to remain in demand.

When Greece defaults, the price should go nicely below $40 where I intend to pick up my next batch at close to 3% dividend (which is really safe for the foreseeable future).

Look forward to hearing more from your research.

G'day mate.

aitraders

this is excellent ai--wealth of information. Thanks much. FCX goes in my pile of to do

Thanks Kit. If you listen to a CC, there is a guy that always seems to be in the background that then chimes in when they start talking about mining details. His name is Bob Moffet. Google him. This guy has been around FOREVER. You get the feeling that he knows everything and everyone in the mining business. I mention him, because he is the one that gave me the confidence to believe FCX knows exactly how to maximise the efficiency in mining their assets. They dont go into "gold mining overdrive" when gold shoots up to $1800. They are very, very focused on efficiently mining the resources that they have so that they last for the maximum time possible. And given that they have some of the best resources in the world, that makes FCX viable for a very long time.

One additional point about current state of affairs - the miners at the Grasberg complex are demanding a huge increase in wages and this is perhaps also influencing current opinion.

But having followed them, they deal with such issues all of the time, they deal with the governments of the Congo and Papua who constantly want more of the pie. Having said that, it is reassuringFCX has a terrific track record at working with all parties under what must be difficult circumstances to achieve win/win compromises. I believe it is because in the end, the countries know they are one of the best miners in the world and with the infrastructure they have built it is impossible to replace them without losing millions. FCX has tremendous patience and perspective. That being said, I did read last year that they had military type security at the Grasberg mine when some miners tried to stir up trouble, so they are definitely not naive.

And lastly, but worth considering - the Phelps/Dodge acquisition was what propelled them to "Nr. 1". It is worth looking at how they integrated that acquisition, their ability to properly assess assets, the manner in which they have paid down the debt (in one of the great recessions of our time).

I beleive they are very good at acquisitions and I would not be surprised to see more down the road.

just a run on mouth at this point. But it is nice to know that someone is listening other than just the government :))

Jim, Have you considered MT for your MUP? It appears the stock price is completely messed up and astonishingly cheap by every metric...

beleive they are very good at acquisitions and I would not be surprised to see more down the road.

I think an ROIC might be a good idea

Thanks again ai. The importance of good management cannot be stressed enough. I like people who know that they are doing and then do it well.

It's amazing they are so far down since they do gold. The copper must be weighing on them.

Working on a soon to be IPO FracTech and some retail margins to see just how bad ARO is compared to the competition. Then I should have time for Freeport Mac

Thanks for giving me some additional info that makes them look worth some further research. Hard to come by good cheap companies in this environment

Hi aitraders,

Thanks a bunch for the additional detail. I should have time this week to really dig into the company.

Cheers,
Jim

Hi FoolFan,

I haven't looked at them before. Why do you think it's a messed-up expectation? In other words, if the price is down a lot (I mean it, I really haven't looked :-) ), what do you think is driving that and can the company overcome it?

Cheers,
Jim

Jim,

I believe the share price of MT is down because of mess in Europe (MT headquarters are in Europe). MT is largest steel manufacturer in the world. Due to European mess, the stock has taken a beating and trading at 52 wk low. Here are some numbers (from yahoo finance) -

Trailing PE - 8.2 Industry PE - ~13
Forward PE - 5.3
Price/sales - 0.34
price/book - 0.47
PEG - 0.3

As economy improves or Europe settles down, we may see an easy double from here, if not more...

Cheers,
Amit

Worries about Cu and Au pricing, especially at elevated levels.

That was one of the minuses I listed out for Freeport a couple of weeks ago. Since then, gold has dropped from $1,820 / oz to $1,608 (last spot price), about 11.6%. Copper is down from $3.99 / lb to $3.29 (last spot price), about 17.5%.

Among other things, I've been modeling out some FCF projections using those prices along with prices and sensitivities provided by the company. On slide 23 of http://sec.gov/Archives/edgar/data/831259/000083125911000047..., the company projects about $6.1 billion in CFFO for $3.50 Cu, $12 Mo, and $1,200 Au. On the next slide, they give sensitivities (up and down) for changes in CFFO from changes in realized average prices for those three metals. E.g. for every $0.10 movement in the price of copper, CFFO goes up or down by $270 million.

Taking the above CFFO value, an average of $1.9 billion in capex spending, and the above spot prices (and $14.74 spot for Mo), I get $4.13 billion in FCF for the next 4 quarters (ending 6/30/12). Then I let it grow at one rate for 4 more years, another rate for the next five years, and then a terminal rate (very similar to my "standard" model). Discount the FCF values by 15% and divide by the 948 million shares outstanding to get a projected share price.

Using those starting values and metal prices, current expectations are for 2% growth through 6/30/2021, and then 1% growth thereafter. If terminal rate is 2% instead, then you get a slightly higher share price ($33.48 instead of $32.67 which is 30 cents above last night's close).

I can then play around with starting prices for Cu, Mo, and Au and also growth rates to see what projected prices are. Here's a table showing some possibilities.

                            6/30/12
Line   Cu     Mo      Au      FCF   Yr 2-5  Yr 6-10   Term   Price/sh     Notes
  1  $3.29  $14.74  $1,608  $4,126   2.0%    2.0%     2.0%   $33.48   Current spot prices
  2   3.50   12.00   1,200   4,202   2.0%    2.0%     2.0%    34.10   Mgmt model prices for CFFO projection
  3   3.00   13.00   1,300   2,992   2.0%    2.0%     2.0%    24.28   Lower Cu, slightly higher Mo & Au
  4   3.25   13.50   1,300   3,697   2.0%    2.0%     2.0%    30.00   Slightly higher Cu & Mo
  5   3.25   13.50   1,300   3,697   4.0%    3.0%     2.0%    32.51   Line 4 + slightly higher growth
  6   3.25   13.50   1,300   3,697   6.0%    3.0%     2.0%    34.47   Line 5 + slightly higher growth
  7   3.25   13.50   1,400   3,777   6.0%    3.0%     2.0%    35.22   Au price sensitivity from Line 6
  8   3.50   13.50   1,300   4,372   6.0%    3.0%     2.0%    40.77   Cu price sensitivity from Line 6
  9   3.50   13.50   1,300   4,372  15.0%    7.5%     2.0%    58.96   Line 8 + analyst 5-yr estimates on EPS growth
 10   3.00   12.00   1,200   2,852  15.0%    7.5%     2.0%    38.46   Lowest Cu, Mo, Au, analyst estimates

(Prices are Cu and Mo in $$/lb, Au in $$/oz, FCF in millions, price/sh in dollars.)

As you can see, the price is somewhat sensitive to Au price (Lines 6 and 7), but very sensitive to Cu price (Lines 6 and 8). Note that the % increase in Au and Cu for Lines 7 & 8 from Line 6 are the same. This result certainly makes sense given that Freeport is much more a copper miner than a gold miner.

Now the question to ask is, is the current price reflecting reasonable expectations for metal prices and FCF growth or messed-up expectations? Still need to think on that for a bit. Though, based on lines 7 and 8, I'm leaning toward the latter.

Cheers,
Jim

Next up: General Electric (GE)

This company is the conglomerate that has its hands in just about everything from light bulbs to medicine. It's a big player in energy (nuclear, wind, oil), makes engines for airplanes, and has medical equipment in hospitals all over the world. Lots and lots of parts.

Pluses:
     • P/TBV is near a historical low (at least since 2000), trading at 3.5-times
     • It generates nearly 3-times CFFO as net income.
     • It's interest coverage ratio is a healthy 11-times.
     • It's ROE seems to be recovering from dipping into single digits in 2009.

Minuses:
     • Lots of debt. Current D/E is 3.6 (down from 4.6 a few years ago). Of the $471 billion in debt, only $70 billion is from the finance arm.
     • It has not grown revenue YoY for the past 2.5 years.
     • There are claims that it has gamed its financial statements in order to please Wall Street in the past.

Verdict:
I'm going to keep this one on my radar. There are several reasons to think it is undervalued right now (P/TBV being one) and the market is probably wrong on its current expectations of -4.2% / -2.1% / 0% growth (at 15% discount). I don't like that debt level, but the company has gone for years (at least the past decade) at a similar D/E without blowing up.

The one part I truly dislike is how consistently GE meets or slightly exceeds analyst expectations. The last time GE missed by more than a penny was Q1 2008 and the time before that it was Q1 2005. It's only missed expectations once going back to the beginning of 2006, right through a brutal recession. Really?

Cheers,
Jim

Next up: Dell (DELL)

The company that revolutionized how computers got built and sold. Still selling desktops and laptops to lots of people.

Pluses:
     • YoY revenue growth has turned positive after a couple of years of pretty big declines. TTM YoY growth not as good as the last fiscal year's YoY numbers.
     • ROE has recovered back up to about 50% after bottoming out in the recession.
     • Interest coverage ratio is over 19.
     • Except for the year ending 1/30/09, CFFO has been healthily above net income.

Minuses:
     • D/E has ramped up from 15% for the year ending 2/1/08 to over 93% TTM.
     • That's because the company has been issuing debt -- a lot -- over the past several years, going from total debt of $587 million on 2/1/08 to over $7.7 billion on 7/29/11.
     • Over the past 5 fiscal years, it's spent $10.7 billion to repurchase just 308 million shares of stock, for an effective average price of over $34. The shares of the company actually haven't seen that share price since Sep 2005, showing everyone the power of stock-based compensation to transfer wealth from shareholders to option holders.

Verdict:
Pass. I don't like the big ramp up in debt over the last several years and I certainly don't like the amount spent on share repurchases just to hold the share count down.

Cheers,
Jim

I am anxiously awaiting your GE write up. If you can get your head around them, then my hat is off to you. I say that mainly because of their financial business which is so hard to assess without more information.

Having said that, I already bought some GE around 14 back when. If GE goes down, we all go down. To heck with the banks, GE is into absolutely everything, have been around forever, has leadership succession programmed as well as meeting analysts expectations AND they are going green. I love this company and believe that Immelt will do his darndest to get that dividend back up to where it belongs as soon as humanly possible.

I think the DOW chemical company share price is even more messed up at today's $ 21.58. I would love to hear your take on them as well and they are more transparent than GE. I believe DOW is a lot more exciting and has more short and long term potential than GE. Their dividend yield is up to around 4,5% at current price with only a 32% payout ratio (yahoo, CAP ID)

Love reading your stuff.

Hi aitraders,

Thanks!

My last point in the GE post really slows me down and makes me less willing to purchase it. It's a great company and all that, but fiddling around with the books to meet analyst expectations (not proven as far as I know, but, in my opinion, very likely) really is a red flag for me. Given the complexity of the business (especially the financial arm) and that flag, don't hold your breath for a deeper dive.

I'll have to look at Dow. It's looking tempting and if it comes down some more, will flip into the area I want to operate in. Current numbers off of $2,790 TTM FCF at 15% discount: 6.4% / 3.2% / 0%. At or below $20 per share it gets below the 5% threshold, but I'll give it a look anyway.

Cheers,
Jim

Next up: General Dynamics (GD)

This company is into business aviation (Gulfstream), military hardware (it builds ships and subs, tanks, rockets, etc.), and information technology. It is heavily dependent on the Depts. of Defense and Homeland Security, as well as the various intelligence agencies.

Pluses:
     • It has maintained ROE right around 20% for the past several years, as well as steady margins of 12% (operating) and 8% (net).
     • CFFO is consistently greater than net income and FCF tracks net income fairly consistently (sometimes real close, sometimes greater than).
     • D/E is a very reasonable 23% and is down from 40% at the end of 2008.

Negatives:
     • Cash conversion cycle has increased from 80 days in 2006 to over 95 days now.
     • This is from a slow down in how often it's been turning its inventory (from 15.4x in 2006 to 12.1x TTM) and its accounts receivables (from 4.2x in 2006 to 3.7x TTM). These slow downs have been fairly even over the years. In other words, this is a long term trend.
     • Revenue growth over 1-year, 3-year, and 5-year periods has dramatically slowed down and is now just 2.6% over the past year. If the military cuts back on its spending, this will worsen.

Verdict:
This is a company that's almost entirely dependent on military and intelligence spending (with some contribution from private aviation). That's been fairly steady or increasing over the last several years, though the future of growth is unknown. It seems to me to be more likely than before that military spending will get cut as Congress is under pressure to pull back spending.

I'll add this to my watch list, as it seems to be in a better position than Oshkosh (which is much more reliant on a single platform and is struggling to transition to a new one) because it has a broader base of products. If the price comes down further (it's down about 25% from its 52-week high), I'll be more interested. However, I might be interested enough, even at this price, to replace Oshkosh with it, though that would increase exposure to private aviation (Textron and Cessna).

Cheers,
Jim

Next up: Gap (GPS)

The apparel company, operating under its own name, Banana Republic, Athleta, Piperlime and Old Navy. It operates approximately 3,100 stores world wide (including Europe, Asia, Middle East, and Latin America). The co-founder still owns 7.6% of the company and she and her family own over 15.5% of the company. My colleague Jason Moser bought some shares for his own Rising Stars portfolio: http://www.fool.com/investing/general/2011/06/20/rising-star....

Pluses:
     • The company has repurchased over 37% of its shares in the last 5.5 years. Holding these shares as treasury stock has slowly lowered total equity, which has helped ROE climb from the mid-teens to the mid-20s.
     • The company's CFFO (and almost always FCF) is greater than net income.
     • Debt is just 55% of tangible book value and is of very recent issuance. Management decided to lever the company up a bit in the last couple of quarters to take advantage of really cheap debt. This lowers cost of capital and with an interest coverage ratio over 70x, there's no worries that it will get into trouble doing this.

Minuses:
     • Management misjudged the direction of cotton prices and is currently stuck with high costs as it is entering the holiday season. This is a primary reason why the stock was hammered after the first quarter was reported in mid-May.
     • Clothing retail has a tough time of it as the economy limps along.
     • Consumers are fickle, with fashion tastes always changing. This is always a risk in clothing retail.

Verdict:
Put on the watch list and look deeper. This is the first company I can remember seeing in a long time that passed a value screen of James Montier's:
     1) Earnings yield >= 2x AAA bond yield (10.22% vs. 5.14%; AAA bond = 2.57%)
     2) Dividend yield >= 2/3 AAA bond yield (2.5% vs. 1.71%; AAA bond = 2.57%)
     3) Total debt <= 2/3 TBV ($1,646 MM vs. $1,980 MM; TBV = $2,970)
     4) G/D PE <= 16 (15.63)

Cheers,
Jim