Digging Deeper into Cramer's Dec. 5 Lightning Round
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
First aired in 2005, CNBC's Mad Money show is certainly a fruitful way to get investment ideas. Jim Cramer, the host and former hedge fund manager, presents all manner of investment advice in a unique style. During the Lightning Round, he accepts viewers' challenges and makes a call on their picks. Here, I review three stocks discussed on the Dec. 5 Lightning Round.
First on the list is Michael Kors (NYSE: KORS). Cramer was bullish on this one, and I think he was right to be. Over the last five years, the firm has had a robust sales growth of almost 44%. Over the same time, the stock rewarded its faithful investors by returning more than 100%. However, the main question is if is there any room left for more growth. Based in Hong Kong, Michael Kors engages in the design and distribution of apparel, sportswear, footwear, and accessories. Michael Kors is a rapidly growing lifestyle brand. The company has stores located in almost every capital city around the world. Fundamentally, the stock is performing impressively. Compared to its direct peers, Micheal Kors can be considered a profitable investment.
For the past five years, Michael Kors' EPS has been growing by an average rate of more than 29%. For 2013, EPS growth is expected to continue at this accelerating pace. In addition, ROE stands above the industry's median and reaches almost 45%. The firm had an excellent second quarter of fiscal 2013. For the first six months of 2012, Michael Kors achieved an increase in total revenue of 73% on a year-to-date basis. Over the same period and despite the tight demand environment, retail net sales increased by almost 80%. The firm opened 66 new stores since last year, enhancing its already strong store sales.
Looking ahead for the next quarter, the company expects total revenue to be in the range of $525-535 million. This translates into a mid-twenty percent comparable store sales increase. At the moment, the stock is trading with almost 14% distance from its 52-week range of $58.62. The current P/E ratio of 39.52 is quite pricey. Nevertheless, based on analysts' mean target price, Michael Kors has at least a 28.5% upside potential.
Next on the list is International Paper Co (NYSE: IP). When a viewer mentioned it, Cramer immediately pushed a button and a huge bull appeared on the screen. Cramer clearly likes this stock, but I would suggest a “hold” rating. International Paper is an essential player in the packaging and paper industry. The major stream of its income derives from sales in North America. In addition, the company has operations in Asia, Latin America, North Africa, and Europe.
For about seven years, International Paper has been making serious restructuring efforts, which led to a significant business transformation. While back in 2005, the firm had twelve operating units, today it has only four. In addition, the company is committed to following an aggressive growth strategy. Last year it acquired Andhra Paper Mills, and the company is in negotiations for a possible acquisition of West Coast Paper.
Overall, International Paper managed to sustain a competitive position within the industry and establish a strong foothold. In North America, International Paper claims about one third of the packaging market and about 25% of the paper market. On the other hand, the restructuring process, as well as the company's latest investments, have been quite expensive, leading to some meaningful cash outflow. For the period from 2005 to 2012, the free cash flow year-over-year growth rate has been negative.
In the most recent earning release, the firm reported over $10 billion in long-term debt. This amount indicates a long-term debt-to-equity ratio of 1.43, slightly higher than the industry's median. Nevertheless, I believe that the company's new business model will result in increased shareholder value in the long-term. At the moment, the stock is trading with comparably attractive valuation metrics that could suggest a value opportunity. EPS for 2013 is projected to increase substantially. Thus, I believe International Paper is worth adding it to your watchlist.
Cramer was also bullish on American Electric Power (NYSE: AEP). He thinks it has limited downside potential. Out of 21 analysts tracked by the Wall Street Journal, nine indicate a “hold” rating, while twelve suggest it is worth buying. With a market cap of over $20 billion, Ohio-based American Electric Power is one of the most valuable companies within the electric utilities industry. The company serves over five million U.S. customers in more than 11 states. It has about 38,000 megawatts of generating capacity and operates a 39,000- mile electricity transmission network.
American Electric Power offers a juicy dividend yield of 4.3%, making it a rather intriguing investment. It generated $1.25 billion in total operating earnings on a year-to-date basis, which should be enough to sustain the current yield. However, operating margin from utility operations marked a relatively concerning decline compared to last year. Retail sales margin, as well as Off-Systems sales margins, dropped by $38 million and $20 million, respectively. In addition, total operating earnings for the first nine months of 2012 were about 12% lower than last year. The company earns a vast amount of its revenues from regulated operations. At the moment, ongoing Ohio regulatory proceedings are imposing serious order delays. Overall, I think that now might not be the right time to place a bet on this stock. American Electric Power needs to strengthen its ability to support a healthy earnings performance.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach. Motley Fool newsletter services recommend Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!