Christmas Sounds Like This
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bouncing around the investment blogosphere lately I’ve encountered “stocking stuffer” ideas, “letters to Santa” asking for the perfect stock, and even ways to play the “Santa Claus Rally.” From all this coverage it seems as if a Christmas themed post is in order. The companies I want to discuss, however, really have nothing substantial to do with Christmas and even less to do with each other. There aren’t any ideas linked to the shopping season, none that appeal to our sense of Christmas nostalgia, nor any that promise relief from the demands of this busy time of year. Instead, these are a few companies whose names or ticker symbols just sound like they belong to the holidays. So in the spirit of the season, here is my obligatory contribution, as cheesy as it might be.
First, because this is a season of joy, consider Joy Global (NYSE: JOY), the $6.4 billion market cap mining equipment manufacturer with exposure to iron ore, copper, and coal markets. The company on Dec. 12 reported better than expected earnings and revenue for both the fourth quarter and full year but gave guidance for lower revenue and earnings for 2013. In giving its guidance, the company indicated that a sustainable recovery in demand for commodities must materialize before its customers commit to significant capital expenditures to drive Joy’s results. Currently, the PE ratio is at 8.4x and the forward 2014 PE ratio is at 8.7x. This comes after the earnings announcement and subsequent downward adjustment of the analysts’ consensus EPS estimate to $6.89.
This forward PE ratio is very low relative to the company’s historical average PE ratio at 15.2x but, given the weak 3.3% estimated growth, the price to earnings to growth (PEG) multiple is at a very unattractive 2.6x, especially for a cyclical company expecting declining revenue and earnings next year. Year to date, shares have shed more than 23% of their value and next year does not yet seem to have a great deal of upside, in part because around 25% of Joy's business comes from U.S. coal markets which will likely continue to be hurt by low natural gas prices. Longer term, Joy is a good stock to watch because of its worldwide scope, but the minimal 1.2% dividend yield isn’t enough of an incentive to stick around waiting for the world economy to rebound.
Next on my list of seasonal sounding companies is Tree.com (NASDAQ: TREE), the small cap ($188 million) owner of LendingTree.com and Done Right!, among other brands. The company matches consumers with mortgage, auto finance & sales, education, and home service business. Tree.com has performed spectacularly this year, rising more than 200%, and also over the past 3 years when it has risen by about 25% annually. There are several factors driving this performance, the biggest of which is the announcement and successful divestment of its Home Loan Center (HLC) mortgage loan origination/processing business. This move has allowed the company to become a pure play lead generation company and since June 7, when the sale completion was announced, the share price has risen from $9.05 to more than $17 recently.
Other moves by management that have contributed to this outstanding share performance include the resumption of a $10 million share repurchase plan after the HLC sale and a special dividend declared in December. The share buyback plan was initiated in 2010 but no shares were repurchased in 2011. The program was resumed in June and approximately $3.5 million remains on the buyback plan after 24,815 shares were repurchased in October. As a sign of its confidence (and to avoid higher taxes after the fiscal cliff), the company will pay a special dividend of $1.00 per share which yields a big 5.7%. That’s a nice Christmas present for shareholders. Finally, the consensus EPS estimate has swung to $0.63 for 2013 which would be the first positive EPS since being spun off from IAC/InterActive Corp. in 2008. Tree.com shares are likely due for a breather after such strong gains this year but the company appears poised for continued operating improvement next year and with no long term debt, aggressive investors might be interested.
Santa wouldn’t be able to do his thing every year without his favorite red-nosed reindeer leading the way so Rudolph Technologies (NASDAQ: RTEC) is the third and most amusing name on my Christmas stock idea list. Rudolph is a small cap ($400 million) supplier to semiconductor device manufacturers. Rudolph competes against the much larger KLA-Tencor (NASDAQ: KLAC) at $7.8 billion market cap and the much smaller Camtek at $44 million market cap. The industry players compete to a great degree on intellectual property that is developed through research and development programs. As such, Rudolph spends more than 20% of its revenue on R&D which exceeds KLA-Tencor at more than 17% and Camtek at just under 17%. As a share of operating expenses, KLA-Tencor spends the most on R&D at just under 49% while Rudolph spends more than 42% and Camtek only about 35%.
Of course, spending on R&D is only advantageous if it leads to sustainable cash flow. On this point Rudolph has produced long term operating cash flow and free cash flow that have averaged 7.4% and 5.5% of revenue, respectively. This pales compared to KLA-Tencor’s record of operating cash flow and free cash flow that have averaged 22.3% and 19.1% of revenue, respectively. Camtek has a history of minimal operating cash flow and negative free cash flow.
Rudolph is reasonably priced at a recent $12.20 which yields a forward PE ratio of 13.7x and PEG multiple of 0.8x based on 2013 EPS estimated to grow by about 17% to $0.89. Kla-Tencor appears to be the best of breed and the better long term holding, while Rudolph may be a better speculative trade at this PEG and given that the company’s EPS have surprised to the upside in three of the past four quarters.
Finally, because Rudolph wouldn’t be half as good without his fellow furry, four legged, flying friends, Deere & Co. (NYSE: DE) rounds out our list. All groans aside, Deere ($33.5 billion market cap) is a leading agricultural and construction equipment maker that currently trades at a trailing PE ratio of 11.5x and a forward 2014 PE ratio of less than 10x. These are significant discounts to the long term average PE ratio of around 18x. As a cyclical company, Deere has a wide range of historical PE ratios between 8x and 34x and has on average traded at a premium of about 1.9x above the average S&P 500 PE ratio. The largest premium over the S&P 500 PE ratio was 14.8x and the largest discount was 5.8x below the S&P 500. Currently, Deere trades at a 3.6x discount as the S&P 500 ratio is at 15.1x so Deere shares appear to be favorably priced.
Incorporating a growth component into the analysis yields a 2014 PEG multiple of 1.2x based on consensus estimates of 7.8% annual growth from 2012. This reasonable PEG multiple agrees with the PE ratio analysis and, considering Deere’s iconic brand, strong dealer network, and roughly 50% share of the North American farm equipment market, tells me that Deere shares would definitely be better than a lump of coal this Christmas.
56Steve has no positions in the stocks mentioned above. The Motley Fool owns shares of Joy Global. 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!