Buybacks Mean Better Times Ahead for These Stocks

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Markets are witnessing some selling pressure leading to a correction, owing to fears regarding the early phase out of quantitative easing. While this will likely set a cat among pigeons, investors can use the opportunity to get into solid plays at discounted prices. Texas Pacific Land Trust (NYSE: TPL), EMC (NYSE: EMC), and NetApp (NASDAQ: NTAP) are some such companies whose shares have come down a bit in recent days. Here is a closer look:

Texas Pacific business model simplified

Investors may find the business model of Texas Pacific overly simplified and they are not wrong in assessing this. Texas Pacific is primarily engaged in the sale and lease of land owned by it which runs into approximately 920,000 acres in 18 counties in west Texas. In addition, the company also owns acreage across the Permian Basin region which forms the basis of any investor’s investment thesis in this company. Texas Pacific Land Trust earns oil and gas royalties from about 50% of its acreage which allows the company to continue with its regular stock buyback program.

While royalty revenue stream is very solid, the company keeps selling some of its land holdings as a strategic step which brings some degree of variance in overall revenue. Nevertheless, the company is a hugely profitable entity with operating and net profit margins of 87% and 61.5%, respectively, in the first quarter. This was despite the fact that revenue dropped 29.8% to $6.7 million, reflecting lower land sales partially offset by higher royalties. For obvious reasons, the trust is a debt free entity and even though its valuations are very high in traditional sense, earnings per share are likely to continue growing for a long period.

Beyond royalties

Massachusetts-based EMC offers information technology infrastructure solutions and services to companies. Its products include enterprise storage systems and software deployed in storage area networks. The stock has hardly moved over the last quarter as the gains were pared after the company’s first-quarter earnings disappointed investors.

EMC reported a 5.7% growth in revenue to $5.4 billion during the three months but profit dropped slightly to $580 million, sending the shares down. However, a spate of encouraging development has again revived the stock. Initiation of quarterly dividend is among these developments and so is the expansion of its share repurchase program.

The company increased the size of its buyback program to $6 billion, which will be carried out through 2015. EMC also intends to change its capital structure to include more debt without affecting its strong investment grade profile. This will be beneficial in taking advantage of lower interest rates as its debt equity ratio currently stands at a mere 0.07. Forward price earnings multiple of 11.8 indicates the stock is not expensive.

NetApp’s attractive valuation

Similarly, NetApp is a solid play available at an attractive valuation of 12.2 times its future earnings. The company’s latest quarterly results were ahead of Street expectations, following which analysts raised their target prices on the stock. NetApp had a net profit margin of 10.1% in the most recent quarter and a forward price earnings ratio of 12.2. NetApp’s price target was raised to $45 from $39 by analysts at Piper Jaffray.

Another important factor in boosting the price target for the stock by analysts is the company’s bigger and aggressive share buyback plan. The company now plans to repurchase shares worth $3 billion over the next 12 months. On the profitability front, the decision to eliminate 900 jobs in coming months would help. This has been complemented with the newly implemented quarterly dividend of $0.15 per share. This flurry of shareholder friendly decisions, coming under pressure from activist shareholder Elliott Management, has the potential to take the stock higher.

Foolish bottom line

Overall, the companies represent a healthy variety of robust business models but given its simplicity and future earnings visibility, Texas Pacific Land Trust appears to be a good pick. EMC and  NetApp, while attractive, may witness a correction with wider markets.

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Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool owns shares of EMC. 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!

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