Analyzing 3 Large Cap Stocks With Good Momentum

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Year 2013 has just begun. However a few large cap stocks have aleady made it a good year for the their shareholders. In this article, I have discussed three large cap stocks which have shown excellent run up since the beginning of 2013. These stocks are Infosys, Dell and Transocean.

<table> <tbody> <tr> <td> <p>Name of Company</p> </td> <td> <p>YTD price increase</p> </td> </tr> <tr> <td> <p><strong>Infosys </strong><span class="ticker" data-id="204031">(NYSE: <a href="http://caps.fool.com/Ticker/INFY.aspx">INFY</a>)</span><strong></strong></p> </td> <td> <p>19.00%</p> </td> </tr> <tr> <td> <p><strong>Dell </strong><span class="ticker" data-id="203298">(NASDAQ: <a href="http://caps.fool.com/Ticker/DELL.aspx">DELL</a>)</span><strong></strong></p> </td> <td> <p>18.00%</p> </td> </tr> <tr> <td> <p><strong>Transocean </strong><span class="ticker" data-id="205219">(NYSE: <a href="http://caps.fool.com/Ticker/RIG.aspx">RIG</a>)</span><strong></strong></p> </td> <td> <p>18.00%</p> </td> </tr> </tbody> </table>

The run up in Infosys was because of the positive quarterly results and ramp-up in deals, Dell is possibly up for a buyout and Transocean had a new investor and it also settled Macando case at lower than expected penalty. Now let’s discuss these stocks in detail:

Infosys

After some disappointing quarters, the recently declared 3Q13's result is the first sign of Infosys’ strategic initiatives of organizational realignment paying off. The company's revenue was up by ~5.8% on year-over-year basis. The growth was mainly driven by the Consulting & Systems Integration segment which was up by ~15%. This segment was benefited by the Switzerland based Loadstone which was acquired by the company in fall of October, 2012 and was responsible for ~7% of this segment's growth. Loadstone advises international companies on strategy and process optimization and also provides business transformation solutions based on SAP. The deal helped Infosys to expand its Consulting & SI segment. Infosys added 89 clients during the quarter out of which 36 were from Lodestone alone.

The growth was also aided by some of the new deals entered into by the company. Infosys signed eight new outsourcing deals with Total Contract Value (TCV) of ~$731 million. Four of these were from US, three from Europe and one from India. Along with that it entered into 14 contracts through its Products and Platforms business with a TCV of ~$100 million. The company had ~20 transformational deals over the last three quarters and will witness ramp-ups over the next 2-3 quarters. I expect that the company will maintain the performance and the momentum in FY14 as well.

I also believe that these deals lead to the first phase of revenue recovery for Infosys. The second phase will be led by a strong recovery from the top 50 customers where the company’s revenue increase has been low. Infosys seems well-aware of this issue and is now creating a client engagement model with dedicated client partners for these customers. This model has worked well for the companies like Accenture and Cognizant and if Infosys is able to replicate it then this should put the company back on track to gain a significant market share. 

Dell

Earlier last week, the news about an imminent buyout by Dell resulted in a ~13% increase in its stock price in just one day. Dell is considering a leveraged buyout (LBO) for the company and is talking with two private equity firms namely Silver Lake and TPG capital.

In my opinion the timing may just be right for an LBO. According to the latest Gartner's preliminary C4Q12 PC market report, Dell has again lost some of the market share and its PC business is also struggling. Its PC shipment is flat quarter-over-quarter and has declined by ~21% year-over-year. I believe it will be better for the company to restructure the PC business when it is private rather than public.

As far as the financial feasibility goes, I think there are some hurdles in the LBO, but on papers it is possible. I assume that for a LBO Dell will repatriate its offshore cash and will finance the deal with debt. I feel that the interest expense from the deal will be ~$820 million and the company's cash return will be ~$860 million thereby covering the interest exposure. Although as a result of this Dell won't be able to make any major acquisitions in the near future.

In addition to this, I feel that the weak PC segment is going to drag the stock price furthermore in the near future so I expect that the share price for the buyout of ~$16 at around 20% premium from the current market price is a good reason to buy the stock right now.      

Transocean

The company recently reported that Carl Icahn, a famed activist investor, acquired ~1.56% of its issued shares and a synthetic long position representing another ~1.7% of issued shares. This made Icahn the second largest shareholder of the company.

Along with that the long overdue case of the company with the Department of Justice (DOJ) regarding the deep water oil spill at Macondo came to a settlement. Theoretically the company was exposed to a maximum penalty of ~$17.6 billion, but looking at the past Clean Water Act penalties the company estimated a contingency of ~$2 billion. However, the DOJ settled for ~$1.4 billion which comes as favorable news for the company. In 2013 the company has to pay ~$560 million and the rest over the period of 5 years. 

With Icahn's introduction in the management and the settlement with DOJ, a few things are expected from the company. Prior to the Macondo settlement, the company paid ~$1 billion in the form of dividend annually. But, since the company has sufficient funds now it is expected that Mr. Icahn may push the management to present the shareholders with the option to restart the dividend in May, 2013. Another potential outcome from the introduction of Icahn is to form a Master Limited Partnership (MLP) for Transocean as he did for CVR Energy Incorporated. Several offshore drillers have examined the possibility of entering ultra-deep water assets in long-term contracts with MLPs aiming to achieve the premium valuation for these offshore drilling locations which have strong and visible cash flow. It is believed that this is feasible for Transocean as it has around a dozen rigs including 6 newly built ones that may qualify for the same. 

Keeping all this in mind I expect that Infosys will keep up the strong performance it showed in the last quarter, Returns for shareholders of Transocean will improve because of Carl Icahn's involvement and if Dell pulls off the buyout not only it will be one of the largest in history it will be beneficial to the investors as well.    


 


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