The Long View

Based on a quick scan of the beer market, I don’t like any of the breweries at this point. What prompted me to jot down this note was an article at thestreet (via stockpickr).

When viewed in isolation sure Molson might look appetizing but lets just see how the stock has done over the last 2 years.

You see that lone blue line at the bottom ? Yeah that’s Molson. The article does not provide any indication as to what exactly has changed in the last few months or quarters to justify a change in stock price.

Now lates take a look at Molson on a relative basis:

Based on just one ratio : price/book it does look like Molson is cheaper, but given the negative revenue growth over the last 3 years — it seems cheap for a reason. There needs to be more evidence supporting a buy.

And finally my favorite little graph, stock price versus EPS. There is generally a strong correlation between movement in EPS and stock price and right now that signal doesn’t look to good for Molson.

Long term I don’t see any competitive advantage for TAP. If you are looking for a dividend play there are better opportunities out there.

I don’t like any of the breweries at this time, but will take a sip of SAM if I must.

Cheers 

Recommendation: Wait for a couple of quarters to see if Nokia handset sales stabilize (they seem to be in free fall right now) and if customers are adopting the Windows mobile platform.

Fair value Estimate:  $3 - $5 

See valuation details below

Stephen Elop has been in charge for over 2 years now and has seen the stock slide over 70% during his tenure. Ten’s of thousands of jobs have been lost and more to come in the near future. But then the seeds for Nokia’s current woes were sowed more than 5 years ago when it failed to recognize the huge tidal wave of smartphone adoption across the world. Samsung (KR:005930) is a good example of a company that hung in there with Apple and has really adopted a fast follower approach .

5 Years Total Return

005930 - Samsung Electronics; TW:2498 – HTC Corp. Not traded on US exchanges

1 Year Total Return

005930 - Samsung Electronics; TW:2498 – HTC Corp. Not traded on US exchanges

Nokia’s current strategy of betting its future on the Windows ecosystem is a risky one, though one could argue its choices were limited. The reality is that even if Windows mobile is a success there is going to be competition from other manufacturers. In fact a quick glance at the picture below shows that the Lumia 920 has strong competition starting right out of the gates.

Another avenue for growth though not discussed widely is potential for enterprise mobility devices in partnership with MSFT.

Valuation Details:

2012, 2013 estimated revenues of roughly 37 billion USD with negative margins and then a slow recovery in 2014. This is a conservative forecast. For example, negative earnings will help reduce tax outlays for the years ahead and increase free cashflows.  

Recommendation: Sell/Avoid

Fair Value Estimate:  ~ $150 

IBM is on track to cross over $100 bn in revenues again this year and will continue to lead the enterprise IT services space as it introduces new services and products in the white hot fields of big data, cloud computing and analytics. The danger though is that in a competitive marketplace, they will often have a few years of market leading services before competitors catch.

IBM’s other strategy has been acquiring promising startups that service the enterprise sector. A quick scan from wikipedia reveals almost 10 - 15 publicly announced acquisitions per year. Effectively buying future growth but there is the cost of integrating new companies (a lot of folks often leave the startup post-acquisition) and the risk of significantly overpaying.

Another concern though is that even as it adds new revenue streams at over 430K global employees (mostly white collar, so these are not always easily replaceable like lower skilled staff) its difficult to see how IBM can continue to grow at over 10 - 15 % clip.

See valuation details below

Valuing Best Buy – November 2013

Recommendation: Wait for clarity on Q4 performance (quarter results will be announce in Feb 2013) before initiating any change in stock position.

Fair value estimate: $20 - $24.

See valuation grid below for how the numbers stack up.

Turnarounds are hard and the vast majority of companies fail.  For BBY a lot of the bad news seems to be priced in.  Failing any evidence of a sustained recovery in top line growth this stock should be avoided – however on the flip side if they do manage to beat low market expectations there is tremendous upside.

Management:

The leadership team at BBY is in turmoil. The current CEO has been in office for a few months now, the search is on for a new CFO and there is a large degree of uncertainty regarding the strategy for the company going forward. An ousted founder who owns 20% of the stock and is putting together a bid from private players is certainly not going to help in the short term.

Stock Performance:

Total Returns over 2 years

The chart above says it all. BBY investors have been taking a bath. In 2 years the total return on the stock is down 60% while competitors like Amazon and Walmart are up 40%. Just in the last month the stock has lost 10% to move below $16. This despite talks about a buyout offer valuing the stock at roughly $24 . Clearly the market has given up on this stock.

Fundamentals:

This is where it gets interesting. A dcf analysis with conservative estimates of negative/low growth for the next few years still prices the stock above its current price. See details below. Particularly with a worst case  estimate of ~ 45B in revenues for the next 7-8 years.

Relative Measure:

Low growth stocks typically have lower multiples and BBY is no exception. Based on EV/EBITDA it’s trading below radio shack.

Bottom Line:

Tread with caution.

Additional Reading:

http://seekingalpha.com/article/949451-mapping-out-best-buy-s-q3-warning

http://www.startribune.com/business/176694571.html?refer=y