Wax Ink

Monsanto - A Wax Ink Worksheet

2012-01-25T03:29:00.016-06:00

Monsanto Company, along with its subsidiaries, is a leading global provider of agricultural products for farmers. Their seeds, biotechnology trait products, and herbicides provide farmers with solutions that improve productivity, reduce the costs of farming, and produce better foods for consumers and better feed for animals.

To enlarge the worksheet, please click on the image.

Value Thoughts - Sanderson Farms, Inc.

2011-08-26T03:52:00.000-05:00

Sanderson Farms, Inc. (Nasdaq: SAFM), incorporated in Mississippi in 1955, is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products.

The company sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, primarily under the Sanderson Farms® brand name to retailers, distributors, and casual dining operators principally in the southeastern, southwestern, northeastern and western United States, and to United States based customers who resell frozen chicken into export markets.

During its fiscal year ended October 31, 2010 the company processed 405.0 million chickens, or approximately 2.57 billion dressed pounds.

Basis

Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending October 31, 2010, as filed with the Securities and Exchange Commission on December 14, 2010.

Short-Term Investment Valuation

The stock closed recently at $40.34, with First Resistance at $44.50, a 10% increase from the recent close, and Second Resistance at $44.86, an 11% increase from the recent close. Should the stock price breakout above second resistance, the next resistance level is $49.47, a 23% increase from the recent close.

The stock should find Support at $38.177, a 5% decline from the recent close.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Sanderson Farms, Inc., the company had a year over year earnings growth of 53%, ending FY10 with earnings of $8.45 per share.

With a trailing twelve month PE currently at 5, the spread between earnings growth and the PE is 11.4, meaning that for an investor focusing on earnings growth, the stock should be trading at $136.47, a $96.13 increase from a recent close.

Fundamental Investment Valuation

Liquidity: The company ended FY10 with a Current Ratio of 3.23, a Quick Ratio of 1.55, a Cash Ratio of 0.69, and a Cash Conversion Cycle of 42 days. In addition, with Goodwill and Intangibles comprising 0.0% of Total Assets, and the company ended the year with a Book Value of $29.22 and a Tangible Book Value of $29.22.

Profitability: FY10 found the company with a Gross Margin of 18%, an Operating Margin of 13.5%, a Net Operation Margin After Taxes (NOPAT) of 9.7%, a Return On Invested Capital (ROIC) of 28%, and an Effective Tax rate of 35%.

Debt: The company ended FY10 with Total Debt of $65.2 million, a year over year decrease of 43%. Additionally, the company paid an average annual Interest Rate 4.14%, a year over year decrease of 4.3%, had a Debt to Cash Ratio of 0.89, and a Debt to Equity Ratio of 0.10.

Cash Flow: The company's FY10 Operating Cash Flow was $10.58 per share, a year over year increase of 19%. The company also ended FY10 with Free Cash Flow of $3.39 per share, a year over year decrease of 52%.

Dividends: During FY10 the company paid a $0.63 per share dividend, a 9% year over year decline.

Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $67-$72 range. To download a free copy of our Raw Value worksheet for this company, please click here.

Value Thoughts

Considering a Recent Close of $40.34, an estimated Merger and Acquisition payback of 3.5 years (assuming EBITDA remains the same), and year over year earnings growth of 53%, we think on a fundamental investment basis, the stock is currently UNDER PRICED, and a candidate for additional research for the Wax Ink Portfolio..

Wax

Disclaimer

We have no position in Sanderson Farms, Inc., and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

The Downgrading of Americans

2011-08-06T10:30:00.000-05:00

Yesterday evening, the S&P credit rating service downgraded the debt of the United States from AAA to AA+.

The financial websites have gone ballastic, blaming the rating agency for playing politics. Many websites are reminding visitors that S&P missed the entire housing bubble, that there was a mistake in the company's rating data, and on and on.

The government's response has been accusatory. CNN and Fox News are attempting to find any evidence they can about who knew what when. Rupert Murdock is probably at this very moment hacked into Blackberry's across the country.

The Republicans are blaming the Democrats and the Democrats are blaming the Republicans. It is complete and utter stupidity!

The simple fact is that the credit rating of the United States was not downgraded yesterday, the American people were downgraded.

It is the American people that for decades have simply bent over, stuck their collective rear ends in the air, and ask the politicians for more.

We, ALL of the eligible voters in America, we, have allowed every bit of what is happening to happen.

We have allowed government to spend us into the poor house. We have allowed government to "borrow" all of the money from the Social Security Trust Fund. We have allowed governent, to do the things they have done, and we have gladly accepted it all.

Now that the demise of Uncle Sam has begun, the politicians are jumping up and down blaming one another, the cost of money will probably increase, any economic recovery will probably come to a halt, and the American voter will remain completely uninterested in the process.

Oh!, we American's will bitch, since Americans' view being able to bitch as a fundamental right. But that is all we will do, bitch, because we simply will not put for the effort to hold government accountable.

And so it will continue, until eventually...America is no more.

Wax

Value Thoughts - Lawson Products, Inc.

2011-08-01T03:33:00.000-05:00

Lawson Products, Inc. (Nasdaq: LAWS), is a North American distributor of products and services to the industrial, commercial, institutional, and governmental maintenance, repair and operations marketplace.

The company also manufactures and distributes production and specialized component parts to the original equipment marketplace including the aerospace, off-road equipment, military, and oil and gas exploration industries.

During 2010, the company discontinued operations of two of its subsidiaries, Assembly Component Systems, Inc. (ACS) and Rutland Tool & Supply Company (Rutland).

The company was incorporated in Illinois in 1952, and re-incorporated in Delaware in 1982.

Basis

Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 17, 2011.

Short-Term Investment Valuation

The stock closed recently at $18.67, with First Resistance at $19.51, a 4% increase from the recent close, and Second Resistance at $21.51, 15% increase from the recent close. Should the stock price push through Second Resistance, the next point of resistance is $27.21, a 46% increase from the recent close.

Negatively, First Support for the stock price is currently at $13.41, a 28% decline from the recent close.

The 13-week Relative Strength number is 20, with the stock price trending downward. However, the daily Relative Strength number is near 40 and seems to be indicating a slight upward bounce in the stock price. The upward shift could keep the stock price out of over sold territory for the immediate future.

Quarterly earnings, announced 07/28/2011, were $0.12 per share, an $0.08 decline from the same year over year period.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Lawson Products, Inc., the company had year over year earnings growth of 150%, ending FY10 with earnings of $1.18 per share.

With a trailing twelve month PE currently at 16, the spread between earnings growth and the PE is 10, meaning that for an investor focusing strictly on earnings growth, the stock should be trading at $29.22, an $11.25 increase from the recent close.

Fundamental Investment Valuation

Liquidity: The company ended FY10 with a Current Ratio of 2.43, a Quick Ratio of 1.49, a Cash Ratio of 0.73, and a Cash Conversion Cycle of 140 days. In addition, Goodwill and Intangibles comprised slightly less than 12% of Total Assets. When adjusted to compensate for these items, the company's Book Value of $16.81, drops to $13.48.

Profitability: FY10 found the company with a Gross Margin of 63.5%, an Operating Margin of 5.4%, a Net Operation Margin After Taxes (NOPAT) of 3.16%, a Return On Invested Capital (ROIC) of 8.77%, and an Effective Tax rate of 42.5%.

Debt: The company ended FY10 with no Debt.

Cash Flow: The company's FY10 Operating Cash Flow was $1.96 per share, a year over year decrease of 16%. The company also ended FY10 with Free Cash Flow of $0.53 per share, a year over year decrease of 69%.

Dividends: The company paid dividends of $0.26 per share during FY10, a year over year decline of $0.06 per share.

Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $34-$40 range.

Our Thoughts

Needless to say, the company is not in one of the glamor industries, and while we agree that selling nuts and bolts may be a bit boring, we also recognize that without nuts and bolts, little, if anything, is going to be manufactured or assembled.

But selling nuts and bolts does have it's perils. In August 2008, the company entered into a Deferred Prosecution Agreement (DPA) with the U.S. Attorney’s Office in connection with representatives of the company improperly providing gifts or awards to purchasing agents through the company’s customer loyalty programs.

Pursuant to the DPA, the company agreed to a $30.0 million penalty. The company paid $10.0 million in 2010, 2009, and 2008 in accordance with this agreement and continues to comply with the terms of the DPA which expires in August 2011.

In addition, during 2009, the company identified that it had shipped a limited number of products in violation of certain state environmental regulations and reported its findings to appropriate regulatory agencies. The company also recalled a limited number of products and is working with state regulators to take appropriate remedial actions to comply with these environmental regulations.

As of December 31, 2010, the company has accrued $0.2 million for penalties and expenses related to environmental matters and at this time, the company cannot determine if any further expenses may be incurred.

Portfolio Thoughts

Considering a Recent Close of $18.67, an estimated Merger and Acquisition payback of 6.7 years (assuming EBITDA remains the same), year over year earnings growth of 150%, year over year free cash flow growth of (69%), and our reasonable value estimate of $34-$40, we believe that on a fundamental investment basis the stock is currently UNDER PRICED, and a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer

We have no position in Lawson Products, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Netflix, Inc.

2011-07-11T04:49:00.000-05:00

Netflix, Inc. (NYSE: NFLX), according to the company, is the world’s leading Internet subscription service for TV shows and movies with 20 million current subscribers.

Subscribers can instantly watch unlimited TV shows and movies streamed over the Internet to their TVs, computers and mobile devices and, in the United States, subscribers can also receive standard definition DVDs and Blu-ray discs, delivered to their homes.

The company's core strategy is to grow its streaming subscription business within the United States and globally, with a focus on expanding its streaming content, enhancing its user interfaces, and extending its streaming service to even more Internet-connected devices, while staying within the parameters of its operating margin targets.

Basis

Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 18, 2011.

Short-Term Investment Valuation

On the positive side, the stock closed recently at $295.14, with Resistance at $297.35, a 1% increase from the recent close.

On the negative side, First Support can be found at $254.66, a 14% decline from the recent close, with Second Support at $210.68, 29% decline from the recent close. Should the stock break through Second Support, the next support level is $95.33, a 68% decline from the recent close.

The 13-week Relative Strength number is currently 37, with the stock price trending upward. More importantly the daily Relative Strength number is near 76 and it is also trending higher, putting the current stock price well into the overbought category.

Quarterly earnings, currently scheduled for release after the markets close on 7/20/2011, are expected to be $1.11 with the current whisper number at $1.17.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Netflix, Inc., the company had a year over year earnings growth of 99%, ending FY10 with earnings of $9.05 per share.

With a trailing twelve month PE currently at 33, the spread between earnings growth and the PE is 3.0, meaning that for an investor focusing strictly on earnings growth, the stock should be trading at $322.66, a $27.52 increase from the recent close.

Fundamental Investment Valuation

Liquidity: The company ended FY10 with a Current Ratio of 1.65, a Quick Ratio of 0.90, a Cash Ratio of 0.90, and a Cash Conversion Cycle of less than 1 day. In addition, Goodwill and Intangibles comprised 18.6% of Total Assets. When adjusted to compensate for these items, the company's Book Value of $5.34, drops to $1.98.

Profitability: FY10 found the company with a Gross Margin of 53%, an Operating Margin of 28%, a Net Operation Margin After Taxes (NOPAT) of 23%, a Return On Invested Capital (ROIC) of 142%, and an Effective Tax rate of 39.9%.

Debt: The company ended FY10 with Total Debt of $236.2 million, a year over year increase of 7%. Additionally, the company paid an average annual Interest Rate 8.30%, a year over year increase of 5.57%. The company had a Debt to Cash Ratio of 0.67, and a Debt to Equity Ratio of 0.81.

Cash Flow: The company's FY10 Operating Cash Flow was $10.11 per share, a year over year increase of 45%. The company also ended FY10 with Free Cash Flow of $7.20 per share, a year over year increase of 148%.

Dividends: During FY10 the company did not pay a dividend.

Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $56-$60 range.

Our Thoughts

We think the stock is ridiculously overpriced. What's more, we think that at the current pace the vast majority of individual short-term investors, and those that have recently taken a position in the stock, are going to get smoked, waking up one morning and asking the dog what just happened.

It is not that we don't like the company, far from it. We just believe investors are listening to all of the hype and cow paddies that is Wall Street, and once the parade has passed, there simply will be no available shovels for them to use to clean up the mess.

As impressive as 99% year over year earnings growth may be, we simply do not believe such growth is sustainable, making us wonder why investors are willing to pay such an incredible premium to own a stock that currently has more downside than upside.

Portfolio Thoughts

Considering a Recent Close of $295.14, an estimated Merger and Acquisition payback of 26 years (assuming EBITDA remains the same), year over year earnings growth of 99%, year over year free cash flow growth of 148%, and our reasonable value estimate of $56-$60, we believe that on a fundamental investment basis the stock is currently OVER PRICED, and not a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer

We have no position in Netflix, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Whole Foods Market, Inc.

2011-06-24T04:51:00.001-05:00

Whole Foods Market, Inc. (Nasdaq: WFM) is the world’s leading natural and organic foods supermarket and America’s first national “Certified Organic” grocer whose core mission is devoted to the promotion of organically grown foods, food safety concerns, and the sustainability of the world's entire ecosystem.

The company has one operating segment, natural and organic foods supermarkets, currently operating 299 stores in the United States, Canada, and the United Kingdom. The company is based in Austin, Texas.

Basis

Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending September 26, 2010, as filed with the Securities and Exchange Commission on November 24, 2010.

Short-Term Investment Valuation

The stock closed recently at $61.17, with Resistance at $66.87, a 9% increase from the recent close.

The stock price should find First Support at $60.47, a 1% decline from the recent close, and Second Support at $52.29, a 15% decline from the recent close. Should the stock price break through Second Support, the next level of support is $33.96, a 44% decline from the recent close.

Daily Relative Strength is currently 61, with the stock price nearing an oversold condition.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Whole Foods Market, Inc., the company had a year over year earnings growth of 40%, ending FY10 with earnings of $2.99 per share.

With a trailing twelve month PE currently at 20, the spread between earnings growth and the PE is about 2, meaning that for an investor focusing on earnings growth, the stock should be trading near $67.01, a $5.84 increase from a recent close.

Fundamental Investment Valuation

Liquidity: The company ended FY10 with a Current Ratio of 1.55, a Quick Ratio of 0.80, a Cash Ratio of 0.62, and a Cash Conversion Cycle of 0.62 days. In addition, Goodwill and Intangibles comprised 18.4% of Total Assets, and the company ended the year with a Book Value of $13.80 and a Tangible Book Value of $9.53.

Profitability: FY10 found the company with a Gross Margin of 38%, an Operating Margin of 7.5%, a Net Operation Margin After Taxes (NOPAT) of 5.7%, a Return On Invested Capital (ROIC) of 19%, and an Effective Tax rate of 40%.

Debt: The company ended FY10 with Total Debt of $508.7 million, a year over year decrease of 44%. Additionally, the company paid an average annual Interest Rate 6.49%, a year over year increase of 1.5%, and had a Debt to Cash Ratio of 1.1, and a Debt to Equity Ratio of 0.21.

Cash Flow: The company's FY10 Operating Cash Flow was $4.79 per share, a year over year decrease of 6%. The company also ended FY10 with Free Cash Flow of $1.12 per share, a year over year increase of 21%.

Dividends: During FY10 the company paid a $0.05 per share dividend, a 65% year over year decline.

Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $40-$44 range.

Value Thoughts

In May of this year the company announced its trading symbol had changed from WFMI to WFM, an event the markets seemed to appreciate. A few weeks later, the company announced it had retired all of its long-term debt, an event we thought was a very big deal. Apparently nobody else did. Sorta boring, huh?

Considering a Recent Close of $61.16, an estimated Merger and Acquisition payback of 15 years (assuming EBITDA remains the same), year over year earnings growth of 40%, as well as year over year free cash flow growth of 21%, we think, on a fundamental investment basis, the stock is currently OVER PRICED, and not a candidate for additional research for the Wax Ink Portfolio..

Wax

Disclaimer

We have no position in Whole Foods Market, Inc., and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Costco Wholesale Corporation

2011-06-14T04:20:00.000-05:00

Costco Wholesale Corporation (Nasdaq: COST) operates membership warehouses based on the concept that offering its members low prices on a limited selection of nationally branded and selected private-label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover.

This turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables the company to operate profitably at significantly lower gross margins than traditional wholesalers, mass merchandisers, supermarkets, and supercenters.

The company currently operates 581 warehouses, 425 in the United States and Puerto Rico, 80 in Canada, 22 in the United Kingdom, seven in Korea, six in Taiwan, eight in Japan, one in Australia and 32 in Mexico. The company also operates Costco Online, an electronic commerce web site.

Basis

Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending August 29, 2010, as filed with the Securities and Exchange Commission on October 15, 2010.

Short-Term Investment Valuation

The stock closed recently at $78.30, with first First Resistance at $79.37, a 1% increase from the recent close and Second Resistance at $83.95, a 7% increase from the recent close.

The stock price should find First Support at $70.96, a 9% decline from a recent close, and Second Support at $53.41, a 32% decline from a recent close.

Daily Relative Strength is currently 42, with the stock price continuing to correct from an oversold condition.

Earnings Growth Valuation

Our earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Costco Wholesale Corporation, the company had a year over year earnings growth of 30%, ending FY10 with earnings of $4.52 per share.

With a trailing twelve month PE of 17, the spread between earnings growth and the PE is about 1.8, meaning that for an investor focusing on earnings growth, the stock should be trading near $86.25, a $7.95 increase from a recent close.

Fundamental Investment Valuation

Liquidity: The company ended FY10 with a Current Ratio of 1.16, a Quick Ratio of 0.56, a Cash Ratio of 0.47, and a Cash Conversion Cycle of 2.5 days. In addition, Goodwill and Intangibles comprised less than 1% of Total Assets, and the company had a Book Value of $24.28 and a Tangible Book Value of $24.28.

Profitability: For FY10, the company had a Gross Margin of 14%, an Operating Margin of 3.5%, a Net Operation Margin After Taxes (NOPAT) of 2.6%, a Return On Invested Capital (ROIC) of 16%, and an Effective Tax rate of 35.6%.

Debt: For FY10 the company had Total Debt of $2.17 billion, a year over year decrease of 7%. Additionally, the company paid an average annual Interest Rate 5.12%, a year over year increase of 0.43%, had a Debt to Cash Ratio of 0.46, and a Debt to Equity Ratio of 0.50.

Cash Flow: The company's FY10 Operating Cash Flow was $6.60 per share, a year over year decrease of 11%, and its Free Cash Flow was $3.48, a year over year decrease of 43%.

Dividends: During FY10 the company paid a dividend of $0.76 per share, a 13% year over year increase. Based on a recent close of $78.30, the Dividend Yield is 0.97%.

Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $50-$52 range.

Value Thoughts

In late April 2011, the company announced that the Board of Directors had authorized a stock repurchase plan of up to $4 billion, and that the plan would expire in April 2015. It should come as no surprise that we are not fans of this plan.

The main reason we are not fans of this plan is because the company has debt that we believe should be eliminated first. While we are aware that the vast majority (about $1.9 billion) of the company's debt is in the form of Senior Notes, half of which are due in March 2012 and half of which are due in March 2017, we simply feel such plans are an unnecessary drain on company cash, and serve no real business purpose.

Instead of a stock repurchase plan, we believe management should consider the shareholders by paying off the company's debt and then dramatically increasing dividends. Once those things are done, then consider a share repurchase plan.

With all of that said, considering a Recent Close of $78.30, an estimated Merger and Acquisition payback of 12 years (assuming EBITDA remains the same), year over year earnings growth of 30%, as well as year over year free cash flow growth of 43%, we think, on a fundamental investment basis, the stock is currently OVER PRICED, and not a candidate for additional research for the Wax Ink Portfolio..

Wax

Disclaimer

We have no position in Costco Wholesale Corporation, and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Insituform Technologies, Inc.

2011-06-06T09:44:00.000-05:00

Insituform Technologies, Inc. (NYSE: INSU) is a worldwide provider of proprietary technologies and services for rehabilitating sewer, water, energy and mining piping systems and the corrosion protection of industrial pipelines.

Business activities include research and development, manufacturing, distribution, installation, coating and insulation, cathodic protection and licensing. Its products and services are currently utilized and performed in 70 countries across six continents.

Incorporated in Delaware in 1980, under the name Insituform of North America, Inc. the company's business model has evolved from purely licensing technology and manufacturing materials to performing the entire Insituform® CIPP (cured-in-place pipe) process and other trenchless technologies and rehabilitating and performing corrosion protection services for industrial pipelines in most geographic locations.

As of December 31, 2010 the company held 59 United States patents relating to the Insituform® CIPP process, the last of which will expire in 2027, and had 12 pending United States non-provisional patent applications relating to the Insituform® CIPP process.

In addition, the company has obtained and is pursuing patent protection in its principal foreign markets covering various aspects of the Insituform® CIPP process. As of December 31, 2010, there were 152 issued foreign patents and utility models relating to the Insituform® CIPP processes, and 104 applications pending in foreign jurisdictions.

Basis

Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 28, 2011.

Short-Term Investment Considerations

The stock closed recently at $24.14, with first First Resistance at $25.08, a 4% increase from the recent close and Second Resistance at $25.63, a 6% increase from the recent close. Should the stock price breakthrough second Resistance, it should find a ceiling near $30.00, 24% increase from the recent close.

The stock price should find Support at $18.52, a 23% decline from a recent close.

Relative Strength is currently 40, correcting from an oversold condition. With a ceiling and support at essentially the same levels, we have no short-term interest in this stock at the present time.

Fundamental Investment Considerations

Liquidity: The company ended FY10 with a Current Ratio of 2.69, a Quick Ratio of 1.69, a Cash Ratio of 0.66, and a Cash Conversion Cycle of 13 days. In addition, Goodwill and Intangibles comprised 28% of Total Assets. The company had a Book Value of $15.38 and a Tangible Book Value of $8.90.

Profitability: For FY10, the company had a Gross Margin of 28%, an Operating Margin of 12%, a Net Operation Margin After Taxes (NOPAT) of 9%, a Return On Invested Capital (ROIC) of 21%, and an Effective Tax rate of 27%.

Debt: For FY10 the company had Total Debt of $105 million, a year over year decrease of 10%. Additionally, the company paid an average annual Interest Rate 8.3%, an 1.04% year over year increase, had a Debt to Cash Ratio of 0.91, and a Debt to Equity Ratio of 0.17.

Cash Flow: The company's FY10 Operating Cash Flow was $3.14 per share, a year over year decrease of 52%, and its Free Cash Flow was $2.13, a year over year decrease of 65%.

Dividends: During FY10 the company paid a dividend of $0.01 per share, a 66% year over year decrease. Based on a recent close of $24.14, the Dividend Yiels is 0.04%.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Insituform Technologies, Inc., the company had a year over year earnings decline of 50%, ending FY10 with earnings of $2.11 per share.

With a trailing twelve month PE of 11, the spread between earnings growth and the PE is about (4.4), meaning that for an investor focusing on earnings growth, the stock should be trading near $14.87, a $9.27 decrease from a recent close.

Fundamental Valuation

Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $39-$41 range.

Value Thoughts

Considering a recent close of $24.14, an estimated Merger and Acquisition payback of 8.1 years (assuming EBITDA remains the same), a year over year earnings decline of 50%, as well as a year over year free cash flow decline of 65%, we think the stock is currently UNDER PRICED, and a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer

We have no position in Insituform Technologies, Inc., and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Medtronic, Inc.

2011-05-31T03:54:00.000-05:00

Medtronic, Inc. (NYSE: MDT) is a global leader in medical technology that helps to alleviate pain, restore health and extend life for millions of people.

The company was founded in 1949 and incorporated as a Minnesota corporation in 1957. Today the company serves physicians, clinicians and patients in more than 120 countries worldwide and functions in seven operating segments that manufacture and sell device-based medical therapies.

These operating segments are Cardiac Rhythm Disease Management, Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies, and Physio-Control. The companies primary customers include hospitals, clinics, third party healthcare providers, distributors and other institutions, including governmental healthcare programs and group purchasing organizations.

Basis
Financial information presented in this report for Medtronic, Inc., is based on the company’s most recent SEC Form 10-K filing for year ending April 30, 2010, as filed with the Securities and Exchange Commission on June 29, 2010.

Liquidity
Both the company’s Current Ratio at 1.92, and Quick Ratio at 1.39, are below what we consider investment quality, while the company’s Cash Ratio at 0.74, slightly exceeds our investment quality threshold. Additionally, the company’s Goodwill and Intangibles comprise almost 40% of the company’s Total Assets, well above our 15% investment quality threshold.

Profitability
The company’s FY10 Gross Margin was almost 82%, its Operating Margin was almost 33.5%, its Net Margin (NOPAT) was almost 28%, and its Return On Invested Capital was just short of 33%.

The company’s FY10 Effective Tax Rate was almost 22%, while for prior tax years its effective tax rate was 23% for FY08 and 23% for FY09. With an average effective corporate tax rate at between 28%-35%, we think a better understanding of the company’s effective tax results is warranted prior to considering the company for investment.

Debt
The company increased its Total Debt during FY10, from $7.3 billion to $9.5 billion, an almost 30% increase. Not surprisingly, we believe the company’s debt level far exceeds its earnings capability and is gaining little for the additional debt management is adding to the company’s balance sheet.

We simply do not see FY11 earnings being much improved over FY10 earnings even though the company spent $620 million on acquisitions during FY10, not including providing an avenue for an additional spend of $150 million.

We see FY10 acquisition spending much the same as FY09 spending, a year in which the company spent approximately $1.25 billion during on acquisitions that lead to an increase in FY10 Total Debt of 30% and an increase in FY10 Earnings of 6%.

Cash
The company ended FY10 with $1.4 billion in Cash and $2.375 in Marketable Securities, putting available Cash at $3.40 per share. In addition, the company had Operating Cash Flow for FY10 of $5.05 per share, a year over year increase of 2%, generated Free Cash Flow of $3.66 per share, a year over year increase of 2%, and increase their Annual Dividend by 9%, from $0.75 in FY09 to $0.82 in FY10.

Short-Term Investment
The stock closed recently at $40.31, with first First Resistance at $40.66, a 1% increase from the recent close, Second Resistance at $43.33, 7% increase from the recent close, and First Support at $37.07, an 8% decline from a recent close, and Second Support at $30.80, 24% decline from the recent close.

With a Relative Strength Indicator near 40, we assumed the stock would be setting up for a jump in price. However the stock price seems to us to be vacillating, with no real movement up or down. Since we believe there is currently greater downward price volatility, we have no short-term interest in this stock at the present time.

Earnings Growth Investment
Our earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Medtronic, Inc., the company had year over year earnings growth of 6%, ending FY10 with earnings of $3.99 per share. With a current PE of 10, the spread between earnings growth and the PE is about 0.6, meaning that for an investor focusing on earnings growth, a current fair value for the stock is about $43.00, a $2.39 increase from a recent close.

Long-Term ( 5 Year Hold) Investment Valuation
Based on our review of the company’s latest annual financial information we think a Reasonable Value Estimate for the company is in the $43-$44 range. Assuming all due diligence was performed prior, we would set a Buy Target at about $26, a First Sell Target at about $51, and a Close Target at about $54.

In addition, based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 54. Accordingly, for the more risk averse value investor, we think a reasonable Buy Target is in the $14-$16 range.

Final Thoughts
Considering a recent close of $40.31, the financial information that we reviewed, an estimated Merger and Acquisition payback of 9.3 years (assuming EBITDA remains the same), year over year earnings growth of 2%, as well as year over year free cash flow growth of 2%, we think the stock is currently fairly valued, and not a candidate for the Wax Ink Portfolio.

Wax

Disclaimer
We have no position in Medtronic, Inc. and no plans to initiate a position in the next 72 hours. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Aeropostale, Inc.

2011-05-15T15:46:00.001-05:00

Aeropostale, Inc. (NYSE: ARO) is a primarily mall-based, specialty retailer of casual apparel and accessories, targeting 14 to 17 year-old young women and men through its Aéropostale stores and 7 to 12 year-old kids through its P.S. from Aéropostale stores.

The Aéropostale brand was established by R.H. Macy and Company, Inc., as a department store private label initiative, in the early 1980’s. Macy’s subsequently opened the first mall-based Aéropostale specialty store in 1987. Over the next decade, Macy’s, and then Federated Department Stores, Inc. (now Macy’s, Inc.), expanded Aéropostale to over 100 stores. In August 1998, Federated sold its specialty store division to Aéropostale management and Bear Stearns Merchant Banking. In May of 2002, Aéropostale management took the company public through an initial public offering and listed its common stock on the New York Stock Exchange.

The company maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise and its products can only be purchased in Aéropostale stores and online.The company operates 965 Aéropostale stores and 47 P.S. from Aéropostale stores. In addition, pursuant to a licensing agreement, one of the company's international licensees operated 10 Aéropostale stores in the United Arab Emirates. The company also recently announced a second licensing agreement which will allow the licensee to operated 25 stores in Singapore, Malaysia and Indonesia over the next five years.

Basis
Financial information presented in this report for Aeropostale, Inc., is based on the company's most recent SEC Form 10-K filing for year ending January 31, 2011, as filed with the Securities and Exchange Commission on March 28, 2011.

Short-Term Investment Considerations
The stock closed recently at $21.57, with first Resistance at $24.43, a 13% increase from the recent close, second Resistance at $24.59, 14% increase from the recent close, and final Resistance at $31.31, a 45% increase from a recent close. First Support for the stock settled at $20.50, a 5% decline from the recent close.

Long-Term (5 Year Hold) Investment Considerations
In review of the company's latest annual financial information we note that the Current Ratio at 2.17, and the Cash Ratio at 1.23 were both what we consider investment quality. While close to where we like to see it, the Quick Ratio at 1.23 was not at what we consider investment quality levels. One very bright spot for the company was Return On Invested Capital at 94%. While down from FY10, given the very tough economic conditions retailers have faced over the past several years, we were pleased with this metric. We were also very pleased to see year over year growth in Free Cash Flow of 7%, and year over year earnings growth of 20%.

Earnings Growth Valuation
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates. However, we have come to realize that many investors focus on earnings growth, basing investment decisions on the spread between year over year earnings growth and the current PE.

In the case of Aeropostale, Inc., the company had year over year earnings growth of 22%, ending FY11 with earnings of $3.06 per share. With a current PE of 7, the spread between earnings growth and the PE is about 3, meaning that for a value investor considering earnings growth, a fair value for the stock is about $31.00, if the stock were purchased at its recent close.

Finanical Statement Valuation
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $34-$35 range.

Assuming all due diligence was performed prior, we would set a Buy Target in the $20-$21 range, a First Sell Target in the $40-$41 range, and a Close Target in the $42-$43 range.

Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $16-$17 range.

Considering a recent close of $21.57, an estimated Merger and Acquisition payback of 4 years (assuming EBITDA remains the same), and Free Cash Flow of $2.61, we think the stock is currently undervalued, and a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer
We have no position in Aeropostale, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Kraft Foods

2011-05-06T03:45:00.000-05:00

Kraft Foods, Inc. (NYSE: KFT) is the world’s second largest food company. The company manufactures and markets packaged food products, including biscuits, confectionery, beverages, cheese, convenient meals and various packaged grocery products, selling to consumers in 170 countries. The company has operations in 75 countries, employing approximately 127,000 people, and operating 223 manufacturing and processing facilities.

Because the company is a holding company, their principal source of funds is from their subsidiaries, none of which are currently limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.

Basis
Financial information presented in this report for Kraft Foods, Inc., is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 28, 2011.

Short-Term Investment
The stock closed recently at $33.85, with first Resistance at $34.00, a 0% increase from the recent close, first Support at $32.05, a 5% decline from the recent close, and second Support at $31.14, an 8% decline from the recent close. Should the stock price fall through second support, the next support level is currently $27.49, 19% decline from a recent close.

Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information we note that the Current Ratio at 1.04, the Quick Ratio at 0.58, and the Cash Ratio at 0.16, were all well short of what we consider investment quality. We also note that Total Debt at 4 times EBITDA and 2 times Net Fixed Assets, and Goodwill and Intangibles making up 67% of the company's Total Assets are additional metrics that were well below what we consider investment quality.

On the positive side, Return On Invested Capital at 21%, Free Cash Flow at $2.05 per share, an 18% year over year increase, and year over year Earnings Growth of 14% all exceeded our investment quality metrics.

Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.

However, we realize that many investors focus on earnings growth, basing investment decisions on the spread between year over year earnings growth and the current PE.

In the case of Kraft Foods, Inc., the company had year over year earnings growth of 14%, ending FY10 with earnings of $2.38 per share. With a current PE of 14, the spread between earnings growth and the PE is about 1, meaning that for a value investor considering earnings growth, a fair value for the stock is about $36.00, if the stock were purchased at its recent close.

Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $28-$29 range.

Assuming all due diligence was performed prior, we would set a Buy Target in the $17 range, a First Sell Target in the $34 range, and a Close Target in the $35-$36 range.

Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 72. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $12-$13 range.

Considering a recent close of $33.85, an estimated Merger and Acquisition payback of 12 years (assuming EBITDA remains the same), and Free Cash Flow of $2.05, we think the stock is currently fairly valued, and a not a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer
We have no position in Kraft Foods, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - USA Mobility, Inc.

2011-05-02T04:10:00.000-05:00

USA Mobility, Inc. (Nasdaq: USMO) is a provider of wireless communications solutions to the healthcare, government, large enterprise and emergency response markets.

As a single-source provider, the company’s strategy is to focus on the business-to-business marketplace and to offer wireless connectivity solutions. The company operates nationwide networks for both one-way paging and advanced two-way messaging services. In addition, the company offers mobile voice and data services through third party providers, including BlackBerry® devices and global positioning system (“GPS”) location applications.

The company’s product offerings include customized wireless connectivity systems for healthcare, government and other campus environments. USA Mobility also offers M2M (“machine to machine”) telemetry solutions for numerous applications that include asset tracking, utility meter reading and other remote device monitoring applications on a national scale.

Basis
Financial information presented in this report for USA Mobility, Inc., is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 24, 2011.

Short-Term Investment
The stock closed recently at $15.45, with first Resistance at $15.90, a 3% increase from the recent close, second Resistance at $19.21, a 24% increase from the recent close, first Support at $14.64, a 5% decline from the recent close and second Support at $12.10, a 22% decline from the recent close.

Even though the stock price is trending upward, there does not appear to be any near term price breakout on the horizon, making a short-term investment impractical at this time.

Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information we note that the Current Ratio at 4.48, the Quick Ratio at 4.28, and the Cash Ratio at 3.74, were all what we consider investment quality.

In addition, Debt to EBITDA at 0.01, and a Cash Conversion Cycle of 13 days, were well within our investment quality parameters. Additional bright spots were ROIC at 131% and Free Cash Flow at $3.25. Although year over year free cash flow declined from $3.97, or about 18%, at this time we do not see the decline as the beginning of trend.

We also note that the company ended FY10 with Debt of $0.03 per share, and paid an annual dividend of $1.96 per share.

Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.

However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.

In the case of USA Mobility, Inc., the company had year over year earnings growth of (7%), ending FY11 with earnings of $4.52 per share. With a current PE of 3, the spread between earnings growth and the PE is about (2), meaning that for a value investor considering earnings growth, a fair value for the stock is about $6.50.

Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $48-$50 range.

Assuming all due diligence was performed prior, we would set a Buy Target in the $29-$30 range, a First Sell Target in the $56-$57 range, and a Close Target in the $60-$62 range.

Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $22 to $23 range.

Considering a recent close of $15.45, an estimated Merger and Acquisition payback of 2.6 years (assuming EBITDA remains the same), and Free Cash Flow of $3.25, we think the stock is currently under valued, and a candidate for additional research for the Wax Ink Portfolio.

Wax

Disclaimer
We have no position in USA Mobility, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Bed Bath and Beyond, Inc.

2011-05-01T06:29:00.000-05:00

Bed Bath and Beyond, Inc. (Nasdaq: BBBY) and its subsidiaries, are a chain of retail stores, operating under the names Bed Bath and Beyond, Christmas Tree Shops, Harmon and Harmon Face Values, and buybuy BABY. In addition, the company is a partner in a joint venture which operates two stores in the Mexico City market under the name Home and More.

The company sells a wide assortment of domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and certain juvenile products.

The company believes that it is the nation’s largest operator of stores selling predominantly domestics merchandise and home furnishings while offering a breadth and depth of selection in most of its product categories that exceeds what is generally available in department stores or other specialty retail stores.

Basis
Financial information presented in this report for Bed Bath and Beyond, Inc., is based on the company's most recent SEC Form 10-K filing for year ending February 26, 2011, as filed with the Securities and Exchange Commission on April 26, 2011.

Short-Term Investment
The stock closed recently at $56.13, with Resistance at $57.90, a 3% increase from the recent close, First Support at $50.15, an 11% decline from the recent close and Second Support at $45.38, a 19% decline from the recent close. Should the stock price break through Second Support, the next support level is $26.50, a 53% decline from a recent close.

Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information, we note that the Current Ratio at 3.08 and the Cash Ratio at 1.35, were what we consider investment quality, while the Quick Ratio at 1.35 was slightly below our investment quality target. In addition, Debt to EBITDA at 0.13, Debt to Equity at 0.05, and Free Cash Flow at $3.76, a 22% year over year increase, were also within our investment quality parameters.

Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.

However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.

In the case of Bed Bath and Beyond, Inc., the company was had year over year earnings growth of 39%, ending FY11 with earnings of $3.76 per share. With a current PE of 15, the spread between earnings growth and the PE is about 3, meaning that for a value investor considering earnings growth, a fair value for the stock is about $66.

Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $51-$53 range.

Assuming all due diligence was performed prior, we would set a Buy Target in the $31-$33 range, a First Sell Target in the $61-$63 range, and a Close Target in the $65-$66 range.

Based on our assessment of the company's financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $25 to $27 range.

Considering a recent close of $56.13, an estimated Merger and Acquisition payback of 9.2 years (assuming EBITDA remains the same), and Free Cash Flow of $3.76, we think the stock is currently fairly valued, and have no interest in adding the company to the Wax Ink Portfolio at this time.

Wax

Disclaimer
We have no position in Bed Bath and Beyond, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

Value Thoughts - Landec Corporation

2011-05-01T05:06:00.000-05:00

Landec Corporation (Nasdaq: LNDC) and its subsidiaries design, develop, manufacture and sell polymer products for food and agricultural products, medical devices and licensed partner applications that incorporate the company's patented polymer technologies.

The company has two proprietary polymer technology platforms: 1) Intelimer® polymers, and 2) hyaluronan (“HA”) biopolymers.

The company’s HA biopolymers are proprietary because they are formulated for specific customers to meet strict regulatory requirements. The company’s polymer technologies, along with its customer relationships and trade names, are the foundation, and a key differentiating advantage upon which the company has built its business.

The company sells specialty packaged fresh-cut vegetables and whole produce to retailers and club stores, primarily in the United States and Asia through its Apio, Inc. subsidiary, Hyaluronan-based biomaterials through its Lifecore Biomedical, Inc. subsidiary, and Intellicoat® coated seed products through its Landec Ag LLC subsidiary.

Basis
Financial information presented in this report for Landec Corporation, is based on the company's most recent SEC Form 10-K filing for year ending May 30, 2010, as filed with the Securities and Exchange Commission on August 12, 2010.

Short-Term Investment
The stock closed recently at $6.48, with Resistance at $7.08, a 9% increase from the recent close, First Support at $6.16, a 5% decline from the recent close and Second Support at $6.15, a 5% decline from the recent close. Should the stock price break through Second Support, the next support level is $5.30, an 18% decline from a recent close.

Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information, we note that the Current Ratio, the Quick Ratio, and the Cash Ratio, we all what we consider investment quality. In addition, Debt to EBITDA, and Debt to Equity, were with in our investment quality parameters.

What we found lacking was the company's Free Cash Flow, at ($1.15). As value investors, negative free cash flow is just a huge red flag. Accordingly we checked our FY09 valuation worksheet and found free cash flow of $0.32, meaning a year over year growth in free cash flow of (460%).

Certainly negative free cash flow growth is not always cause for alarm. But it is something the average investor should investigate prior to considering a position in this stock.

Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.

However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.

In the case of Landec Corporation, the company was had year over year earnings growth of 13%, ending FY10 with earnings of $0.38 per share. With a current PE of 17, the spread between earnings growth and the PE is a bit less than 1, meaning that for a value investor considering earnings growth, a fair value for the stock is about $7.

Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $13 to $15 range. Assuming all due diligence was performed prior, we would set a Buy Target in the $8 to $9 range, a First Sell Target in the $15-$16 range, and a Close Target in the $17-$19 range.

Based on our assessment of the company's financial information that we reviewed, we believe a reasonable financial risk multiplier is 48. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $4 to $5 range.

Considering a recent close of under $6.50, the potential for growth, an estimated Merger and Acquisition payback of 11.1 years (assuming EBITDA remains the same), and Free Cash Flow of $(1.15), we have no interest in adding the company to the Wax Ink Portfolio at this time.

Wax

Disclaimer
We have no position in Landec Corporation at this time, and have received no compensation to write about a specific stock, sector, or theme.

Goodyear Tire and Rubber - Look Mom, No Rails

2011-03-21T03:27:00.000-05:00

I like Warren Buffett. I think he is a very shrewd investor and an uncommonly astute business person. Do I think he is the be all end all when it comes to investing? Sorry, no.

What irritates me is his blatant self-promotion. Sure everyone in business has to promote what they do, but when they do so by leaving stuff out, well, it just grates on me.

From the Berkshire Hathaway 2010 Shareholder Letter..."Both of us are enthusiastic [Mr. Buffett and Mr. Munger] about BNSF’s future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits."

What Mr. Buffett failed to mention is that Berkshire Hathaway owns a trucking company, McLane, which Berkshire purchased from Wal-Mart Stores, Inc. (NYSE: WMT). This, at least to me, sort of skews the relevance of Berkshire wanting to be a "green" company that benefits society. Raspberries to you Mr. B!!

In the end, the stuff that Mr. Buffett moves on his new train set, can't walk to it's final destination. To get there requires a truck, a big truck, usually one with 18 wheels, which made me realize that I don't see trains broken down on the side of the railroad track, but I often see trucks broken down on the side of the road, and most of the time the reason they are there is because one of those 18 tires has become what the truckers call...an alligator.

What surprised me as I started poking around for information to use in this article was that one of the leading roadside service companies in the world, was a company that I used to hear about regularly growing up, The Goodyear Tire and Rubber Company, (NYSE: GT). Curious, I thought, why not?

Basis

Financial information presented in this report for The Goodyear Tire and Rubber Company, is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 10, 2011.

What They Do

The company is an Ohio corporation organized in 1898, and today is one of the world's leading manufacturers of tires, engaging in operations in most regions of the world. The company develops, manufactures, markets and distributes tires for most applications. The company also manufactures and markets rubber-related chemicals for various applications, manufacturing its products in 56 facilities in 22 countries, including the United States.

Goodyear has marketing operations in almost every country in the world, employing approximately 72,000 world-wide full-time and temporary associates. In addition, the company is also one of the world’s largest operators of commercial truck service and tire retreading centers operating approximately 1,500 tire and auto service center outlets where their products are sold at retail and where they provide automotive repair and other services.

Short-Term Investment

The stock closed recently at $14.82, with Resistance at $15.45, a 4% increase from the recent close, First Support at $13.35, a 10% decline from the recent close, and Second Support at $11.54, a 22% decline from the recent close. Should the stock price fall beyond second support, the next support level is the 52 week low of $9.10, a 39% decline from its recent price.

The stock price has been trending upward since bouncing off of its December lows, recently running through days of slightly higher highs and slightly higher lows, events that may bode well for the longer-term investor along with the short-term investor.

While we are not short-term investors, it just seems to us that there isn't any reason to put take a short-term position with more immediate downside risk, 10%, than upside reward, 4%. As a result, we are not currently interested in a short-term position.

Long-Term (5 Year Hold) Investment

With Debt at more than three times EBITDA, we were not really to excited as we began our cursory review of the company's financial metrics, only to end up...pleasantly surprised.

The company's Current Ratio at 1.5, Quick Ratio at 0.9, and Cash Ratio at 0.4, while not what we consider investment quality, were not really too bad.

Additional bright spots we noticed was the company's Inventory Turnover at just shy of 5 times a year, and that the company's Receivables were actually collected before their bills were paid, with Receivables outstanding an average of 53 days and Payables outstanding an average of 77 days.

Things like this lead us to conclude that management understands the needs of the company's customers as well as what is happening in the economies the company serves.

While the company generated Free Cash Flow during FY10 of $3.97 per share, a 26% year over year increase, net Debt also increased year over year by almost 5%, a potential trend that we would like to see reversed going forward.

Overall, we felt that the company's financial statements were in fairly decent shape.

Growth

We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.

However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.

In the case of Goodyear, the company was able to grow year over year earnings by 56%, ending FY10 with earnings of $3.66 per share. With a current PE of 4, the spread between earnings growth and the PE is 14, meaning that when for a growth investor, fair value for the stock is about $51.

Valuation

Based on our review of the company's latest annual financial information, we think a Reasonable Value Estimate for the company is between $27-$30 per share, and based on that valuation have set an initial Buy Target at $16.50, an initial First Sell Target at $32, and an initial Close Target at $34.

Considering a recent close of under $15, the potential for growth, an estimated Merger and Acquisition payback of less than 5 years (assuming EBITDA remains the same), and Free Cash Flow of almost $4, we believe taking a position at this time is prudent, and have added the company to the Wax Ink Portfolio.

Final Thoughts

Okay so Mr. Buffett is touting his genius at his purchase of Burlington Northern Santa Fe. Obviously, based on the information in his shareholder letter, it was a very prudent move and simply reinforces why he is such a formidable investor. But with that said, what about the rest of us, what about the little folks, the investors with a few extra dollars to invest, what do we do?

Perhaps for us, we should practice something I believe Mr. Buffett has done all his investing life. Perhaps we should spend more time seeing what isn't there.

Instead of becoming enamored with the money Berkshire made in FY10 thanks to their train set purchase, we should ask ourselves simply, does that make sense?, our maybe we should ask how does it end?, or what comes next?, or something along those lines.

In the case of the Berkshire letter to shareholders, whether intentioned or not, it made me feel as if trucks that haul freight were simply not going to be needed in the future because trains would be doing the job so much more efficiently. What a load!(pun intended)

Sure rail can move the most amount of freight per gallon of fuel used, but it simply can't finish. I don't think I have ever seen a train unloading items at a Target or a Wal-Mart store, and I know trains don't deliver supplies to my local grocery store. But miracle of miracles, the shelves still manage to get restocked! How can that be with no train tracks?

It's questions like those that many of us as small time equity investors simply fail to ask ourselves, and because we don't, we miss out on what may become great longer-term investments.

So Mr. Buffett enjoy being able to blow the horn of your new engines as they pass through America, you certainly earned the right. As for me, I think I'll just stick to investing in companies that complete the job your trains can only begin.

Wax

Disclaimer

We have a long-term position in The Goodyear Tire and Rubber Company. We have received no compensation to write about a specific stock, sector, or theme.

Food For Thought

2011-02-07T19:34:00.000-06:00

At Wax Ink, our goal is to try and provide individual investors with information about a few stocks they may want to research. There is no particular reason we suggest the stocks we suggest, though for the most part, we attempt to focus on stocks that are soon to announce earnings instead of what happens to be the hot stock on that particular day.

Admittedly, we aren't very interested in diversification or portfolio rebalancing, relying instead not only on our ability to buy great companies at reasonable prices, but on our ability to hang on to them for very long periods of time.

Simply put, we took all of the rules about investing, and replaced them with rules that we felt made better sense, ending up with a portfolio that consists of individual equities, cash, and nothing else. Gone are any type of bond, mutual fund, ETF, option, limited partnership, or insect.

When it comes to putting our capital at risk we simply found that anything other than cash, and equities held for extended periods, was only making our discount broker money. So we wised up and decided instead of hedging our risk, why not get well paid for taking the risk in the first place.

The first thing we decided as we reinvented our investing universe, was that investment returns should be based on a lifetime of investing, not just a few years. We also decided that since we could not control the weighting of companies that made up an index, anything which compared investment returns to an index was simply an attempt at showmanship. So, you guessed it, we don't use the SP 500 for anything.

Many of today's popular investment websites offer newsletter subscription services. For $150 or so, a subscriber ends up with an annual subscription to a newsletter that generates a couple of investment ideas a month. Some of our clients use these newsletter services to generate investment ideas, so we have had occasion to see some of them. And while most of them are very well done, we have to wonder about the investment value of some of the selections.

What made us wonder about some of these newsletter investment selections was we noticed in several instances, the investment selections for a particular month were repicks, meaning the company producing the newsletter just regurgitated something from prior months and repackaged the information.

Another of the things we found interesting not just about newsletters but investment services generally, was that none of them provided an estimate of the value of the investment. Nor did they provide a buy target, a sell target, or even a breakdown of a company's financial metrics. Instead they seemed to provide lots of charts and graphs, which made us wonder whatever happened to the power of independent thought?

Wax

Disclaimer

We have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours, nor do we receive any compensation to write about a specific stock, sector or theme.

Basis

Our valuation work is based on audited or annual financial information as taken from a company's most recent SEC Form 10-K filing. Unaudited, or quarterly financial information as taken from a company's SEC Form 10-Q filing, is not used unless otherwise noted.

The Entrees

Sysco Corporation, Inc. - (NYSE: SYY) The company markets and distributes a range of food and related products primarily to the food service industry in the United States. The stock closed recently at $29.85, with Resistance at $31.99, First Support at $29.60 and Second Support at $29.525. Should the stock price fall below second resistance, the next stopping point would be at the 52 week low of $26.99.

Our Reasonable Value Estimate for the stock at this time is $35.00, with a Buy Target of $21.00, a First Sell Target of $41.00, and a Close Target of $43.50, based on a minimum 5 year hold. The stock currently has a trailing PE of 15.3 and forward PE of 14.

Earnings are scheduled to be announced the bell on Monday, with analysts expecting earning of $0.47, $0.02 better than one year ago.

Flowers Foods, Inc. - (NYSE: FLO) The company is a producer and marketer of bakery products in the United States. The stock closed recently at $25.65, with First Resistance at $26.17, Second Resistance at $27.58, First Support at $25.43 and Second Support at $22.97.

Our Reasonable Value Estimate for the stock at this time is $33.00, with a Buy Target of $19.50, a First Sell Target of $38.50, and a Close Target of $40.50, based on a minimum 5 year hold. The stock currently has a trailing PE of 17.3 and forward PE of 15.4.

The company will announce earnings this week with consensus estimates of $0.39 versus $0.33 from one year ago.

Sara Lee Corporation - (NYSE: SLE) The company manufacture and marketing of a range of branded packaged meat, bakery, and beverage products worldwide. The stock closed recently at $17.02, with First Resistance at $17.06, Second Resistance at $20.26, First Support at $15.14, Second Support at $12.09.

Our Reasonable Value Estimate for the stock at this time is $21.00, with a Buy Target of $12.50, a First Sell Target of $24.75, and a Close Target of $26.00, based on a minimum 5 year hold. The stock currently has a trailing PE of 22.7 and forward PE of 15.8.

The company is scheduled to announce earnings next week of $0.25, $0.11 worse than one year ago.

Whole Foods Market, Inc. - (Nasdaq: WFMI) The company owns and operates natural and organic food supermarkets. The stock closed recently at $53.00, with Resistance at $53.46, First Support at $50.20, and Second Support at $41.54. Should the stock price slip below second support, expect it to fall to its 52 week low of $26.88.

Our Reasonable Value Estimate for the stock at this time is $36.50, with a Buy Target of $22.00, a First Sell Target of $42.75, and a Close Target of $45.00, based on a minimum 5 year hold. The stock currently has a trailing PE of 37 and forward PE of 27.5.

The company should announce earnings this week of $0.45, $0.13 better than the same period last year.

Waldo Thinks Ahead

2011-02-01T03:16:00.000-06:00

They speak with incredible clarity, with candor, and with conviction. Their target audience being the average investors just like me and you. Many of us follow along like sheep, hoping against hope that if we take their advise, nothing bad will befall our investment.

You would think our lesson, by this time, would be learned. But no, we back up time and time again to repeat the same mistakes, to believe the same silliness, to fall yet again for the same sales pitch.

The markets have been moving ever higher of late, and this upward movement has again brought sensational investment articles carrying headlines like Dow Above 12000 In The Next Ten Seconds, or Buy These Stocks Before You Put Your Pants On. But the reality, at least in our opinion, is that the vast majority of stocks are simply overpriced.

Curious, we decided to take a peak at five stocks highlighted by Zacks as the ones to own.

Basis

At Wax Ink, our valuation work is based on audited or annual financial information as taken from a company's most recent SEC Form 10-K filing. Unaudited, or quarterly financial information as taken from a company's SEC Form 10-Q filing, is not used unless otherwise noted.

The Nimble Five

ADTRAN, Inc. - (Nasdaq: ADTN) The company designs, manufactures, markets, and services network access solutions that enable voice, data, video, and Internet communications across wireline and wireless networks. The stock closed recently at $41.72, with Resistance at $43.60, First Support at $36.15 and Second Support at $31.85. Should the stock price fall below second resistance, the next stopping point would be at the 52 week low of $20.76.

Our Reasonable Value Estimate for the stock at this time is $32.00, with a Buy Target of $19.00, a First Sell Target of $37.50, and a Close Target of $40.00, based on a 5 year hold. The stock currently has a trailing PE of 23.5 and forward PE of 18.5.

The company announced earnings of $0.56 a couple of weeks ago, beating consensus estimates by $0.16, which was $0.29 better than the same period last year.

Bed Bath and Beyond, Inc. - (Nasdaq: BBBY) The company operates a chain of retail stores that sell any manner of completely and utterly worthless stuff for the home. The stock closed recently at $48.60, with Resistance at $50.95, First Support at $47.473 and Second Support at $43.20. Should the stock price break below second support, the toilet for this one is $26.50.

Our Reasonable Value Estimate for the stock at this time is $48.00, with a Buy Target of $29.00, a First Sell Target of $56.50, and a Close Target of $59.50, based on a 5 year hold. The stock currently has a trailing PE of 17.3 and forward PE of 14.5.

The company announced earnings in December of $0.74, $0.08 better than consensus estimates, and $0.16 better than one year ago.

Fairchild Semiconductor International, Inc. - (NYSE: FCS) The company designs, develops, and markets power analog, power discrete, and certain non-power semiconductor solutions. The stock closed recently at $17.61, with Resistance at $18.45 and First Support at $15.53, Second Support at $11.21. After that, the next support level is at $7.71.

Our Reasonable Value Estimate for the stock at this time is $33.00, with a Buy Target of $20.00, a First Sell Target of $39.00, and a Close Target of $41.00, based on a 5 year hold. The stock currently has a trailing PE of 14.6 and forward PE of 9.9.

The company announced earnings last week of $0.45, $0.06 better than conscensus estimates, and $0.22 better than one year ago.

Haliburton Company, Inc. - (NYSE: HAL) The company provides various products and services to the energy industry for the exploration, development, and production of oil and natural gas.The stock closed recently at $43.88, with Resistance at $44.00, First Support at $39.67, Second Sup[port at $32.33, and the end of the support line at $21.10.

Our Reasonable Value Estimate for the stock at this time is $34.50, with a Buy Target of $21.00, a First Sell Target of $40.50, and a Close Target of $43.00, based on a 5 year hold. The stock currently has a trailing PE of 22 and forward PE of 12.6.

The company announced earnings about a week of $0.68, $0.05 higher than consensus, and $0.40 better than the same period last year.

Korn/Ferry International, Inc. - (NYSE: KFY) The company provides provides executive recruitment, leadership, and talent consulting and talent acquisition solutions. The stock closed recently at $22.74, with Resistance at $24.00, First Support at $21.49, Second Support at $16.96, with the bottom of the barrel at $12.78.

Our Reasonable Value Estimate for the stock at this time is $24.50, with a Buy Target of $14.75, a First Sell Target of $28.75, and a Close Target of $30.00, based on a 5 year hold.The stock currently has a trailing PE of 25.5 and forward PE of 16.6.

Earnings of $0.30 were announced back in early December, beating consensus estimates by $0.06.

Final Thoughts

Without exception, all of the nimble five have more downside than upside, and based on current PEs, all of them, at least to our mind, are overpriced. Yet analysts and websites alike continue to tout these and similar companies as must haves going forward. Going forward to what, investment losses?

Perhaps individual investors, instead of talking about the stocks mentioned in an article, or as seen on CNBC, should take the time ask the simplest of questions.

What's it worth?

We have a feeling if more investors asked that question, substance, not content, would become the order of the investing day.

Wax

Disclaimer

We have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. We receive no compensation to write about any specific stock, sector or theme.

Harley Yahoos for Beans and Bags

2011-01-24T04:46:00.000-06:00

The earnings merry-go-round continues this week with several fan favorites set to announce. Look for analyst upgrades for many of the companies announcing earnings, after they "shatter" analyst's expectations, as well as lots of hype about how America's economy is improving.

Basis

At Wax Ink, our valuation work is based on audited or annual financial information as taken from a company's most recent SEC Form 10-K filing. Unaudited, or quarterly financial information as taken from a company's SEC Form 10-Q filing, is not used unless otherwise noted.

Caveats

Admittedly, we provide investors with information in a bit of an irreverent style. We do that so the data won't appear to be as boring as it really is.

In addition, we support our valuation considerations, with our Raw Value Worksheets. Each listed company has an associated worksheet which can be viewed, printed, or downloaded by clicking on the associated link.

This Week's Earnings Darlings

Coach, Inc. - (NYSE: COH) The company sells handbags, accessories, and other worthless stuff that consumers believe they cannot live without. The stock closed recently at $53.00, with Resistance at $55.06 and Support at $44.46. Should the stock price fall below resistance, the next stopping point would be at the 52 week low of $32.96.

Our Reasonable Value Estimate for the stock at this time is $40.00, with a Buy Target of $23.50, a First Sell Target of $46.00, and a Close Target of $48.50.00, based on a 5 year hold.

Analysts are anticipating earnings of $0.97, a 29% year over year increase.

Yahoo, Inc. - (Nasdaq: YHOO) The company provides on-line properties and services to users; and marketing services to advertisers, and prays that Google will send it some business. The stock closed recently at $15.97, with Resistance at $16.56 and Support at $15.50.

Our Reasonable Value Estimate for the stock at this time is $25.00, with a Buy Target of $15.00, a First Sell Target of $29.00, and a Close Target of $31.00, based on a 5 year hold.

Consensus earnings are listed at $(0.22) compared to year ago earnings over the same period of $(0.22).

Starbucks Corporation - (Nasdaq: SBUX) The company purchases and roasts whole coffee beans. In addition, the company brews coffee in it's retail outlets and then sells the brewed coffee to chumps like us for $5 a cup. The stock closed recently at $33.20, with Resistance at $33.72 and Support at $32.02.

Our Reasonable Value Estimate for the stock at this time is $30.00, with a Buy Target of $18.00, a First Sell Target of $35.50, and a Close Target of $37.00, based on a 5 year hold.

The garrulous gabbers of CNBC think earnings should come in at $0.39 compared to year ago earnings over the same period of $0.33.

Harley-Davidson, Inc. - (NYSE: HOG) The company produces and sells heavyweight motorcycles that for a while, every accountant, lawyer, and dentist, believed they needed to own so they could ride up and down the same 6 miles of highway in an attempt to say "look at me". The stock closed recently at $35.99, with Resistance at $37.22 and Support at $33.95.

Our Reasonable Value Estimate for the stock at this time is $35.00, with a Buy Target of $21.00, a First Sell Target of $41.00, and a Close Target of $43.00, based on a 5 year hold.

Talking head earnings estimates for the company are listed at $0.87 compared to year ago earnings over the same period of $0.91.

Final Thoughts

Eventually, the spin coming from Wall Street, the White House, and The Wall Street Journal, about the economy, the markets, and the weather, may actually come true.

Personally we don't believe it will, but the law of averages being what they are, not to mention computerized trading platforms, well who knows. It could happen.

Until it does, we want to remind everyone of two things. First, companies are buying iPads, and second, Oprah Winfrey has a family secret. Now if that isn't groundbreaking investing news, we don't know what it is.

Wax

Disclaimer

We have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. We receive no compensation to write about any specific stock, sector or theme.

Tuba Ted Buys an Apple

2011-01-17T03:53:00.002-06:00

Earnings reports continue this week, with several notable companies reporting. We call them notable for a couple of reasons.

First they are notable, at least to us, because their current price levels far exceed their ability to create viable investments returns. In other words, they are just to expensive.

The other thing that makes them notable is that investors are simply unable to resist owning them. They tell their co-workers they own them just so they can watch their reactions.

Never mind that the word notable has really become the words not able, as in not able to make a penny owning these stocks because they over paid for them. That's just a mere formality. No sir they own the big Kahunas and that's that.

In the past when we have mentioned that an investment in these notable stocks may not be a wise choice, mainly because of their high prices, it was as if we had desecrated the Wall Street Bull.

Not surprisingly when we have been less than enthusiastic about the prices being paid for some of these companies, we discover new found authorities that will argue almost vehemently that our valuations are ridiculously conservative, while offering nothing to support their valuation positions.

It seems that last time some flap developed it was over our valuation of Netflix, Inc. (Nasdaq: NFLX) What surprised us the most was the number of number of comments we received from the newsletter analysts.

We aren't exactly sure why, but the newsletter analysts remind us of television evangelists. While the information the produce may indeed be of some benefit to the true believer, the greater benefit it seems to us, is for the producer of the information.

At any rate, since we do not produce a newsletter, we were a bit surprised when the newsletter analysts also commented that we were clueless boobs that had no idea what we were talking about.

After all these were notable companies and as such, worthy of investment. We tried to point out that we were valuing the entire business, not just the company's most recent earnings, and that at current price levels we felt they were quite a poor investment, but the newsletter evangelists were not real interested in what we had to say.

Finally we decided that although we didn't produce a newsletter, we did produce an investment worksheet, which from a risk capital perspective was probably more valuable than a newsletter, something we will never know since most people that loose money with an investment never want to admit that their only research was to read a newsletter, or ask a cabbie.

Basis

At Wax Ink, our valuation work is based on audited or annual financial information as taken from a company's most recent SEC Form 10-K filing. Unaudited, or quarterly financial information as taken from a company's SEC Form 10-Q filing, is not used unless otherwise noted.

This Week's Notable Companies

Fastenal Company - (Nasdaq: FAST) The company sells industrial and commercial construction supplies at wholesale from approximately 2400 stores located throughout North America, Europe, and Asia. The stock closed recently at $59.89, with Resistance at $61.53 and Support at $56.76.

Our Reasonable Value Estimate for the stock at this time is $34.00, with a Buy Target of $20.50, a First Sell Target of $40.00, and a Close Target of $42.00, based on a 5 year hold.

Consensus earnings scheduled to be announced on Tuesday are listed at $0.45 compared to year ago earnings over the same period of $0.30.

***

Apple, Inc. - (Nasdaq: AAPL) The company designs, manufactures and markets a range of personal computers, mobile communication and media devices, and portable digital music players. The company also develops and markets software. The stock closed recently at $348.48, with Resistance at $348.48 and Support at $320.84.

Our Reasonable Value Estimate for the stock at this time is $100.00, with a Buy Target of $60.00, a First Sell Target of $117.00, and a Close Target of $123.00, based on a 5 year hold.

Consensus earnings scheduled to be announced on Tuesday are listed at $5.31 compared to year ago earnings over the same period of $3.67.

***

Amphenol Corporation - (NYSE: APH) The company is a designer, manufacturer and marketer of electrical, electronic and fiber optic connectors, interconnect systems, and coaxial and high-speed specialty cable. The stock closed recently at $52.56, with Resistance at $54.07 and Support at $52.08.

Our Reasonable Value Estimate for the stock at this time is $36.26, with a Buy Target of $22.00, a First Sell Target of $42.50, and a Close Target of $45.00, based on a 5 year hold.

Consensus earnings scheduled to be announced on Wednesday are listed at $0.73 compared to year ago earnings over the same period of $0.52.

***

Google, Inc. - (Nasdaq: GOOG) The company maintains an index of Websites and other on-line content, and makes this information freely available through its search engine to anyone with an Internet connection, generating revenue primarily through advertising. The stock closed recently at $624.18, with Resistance at $630.85 and Support at $598.70.

Our Reasonable Value Estimate for the stock at this time is $126.00, with a Buy Target of $75.00, a First Sell Target of $147.00, and a Close Target of $155.00, based on a 5 year hold.

Consensus earnings scheduled to be announced on Thursday are listed at $8.06 compared to year ago earnings over the same period of $6.79.

Final Thoughts

Our goal continues to be what it has always been, to provide reasonable valuation information for the average working class investor in hopes that they will use the information to create a baseline for their own investment research.

What we are not interested in becoming are investment pundits, soothsayers, scuba divers, or tuba players on parade, just as we are not interested in becoming mango farmers, learning to speak a foreign language, putting lipstick on a pig, or that Brittany Spears' doesn't wear underwear.

Over the last several weeks, the stock market has factored in to current prices all sorts of hopeful information. And as has happened in the past, many investors, afraid they are missing the next big rally, are jumping into the market with no understanding of what they are buying or what they intend these investments to do for their portfolio.

Certainly we wonder how many of the investments these folks are buying will become 10 baggers, just as we wonder if the yellow brick road really lead to Oz.

Wax

Alcoa, Intel and Lemmings on Parade

2011-01-10T03:11:00.000-06:00

For some reason, we have been getting quite a few requests for valuation worksheets that center on companies about to release earnings. Maybe just ahead of earnings is the right time to begin researching a stock, who's to know?

At Wax Ink, we seldom pay much attention to earnings announcements, basically because while important, the earnings that are announced are for the most part not audited, and therefore subject to adjustment. And because they are subject to adjustment, we simply don't believe we should use them in our valuation work.

So while we maintain a very lengthy watch list, we simply cannot maintain current investment research or stock valuations for all of the 2500+ stocks in our investment universe.

Which is why last week when we were asked to build worksheets for several companies, were pleasantly surprised to find that two of the requests were for companies we knew nothing about.

Basis

Our valuation work is based on audited financial information as taken from a company's most recent SEC Form 10-K filing. Quarterly financial information is not used unless otherwise noted.

The Companies

Alcoa, Inc. (NYSE: AA) The company manufactures aluminum products for use in aircraft, automobiles, commercial transportation, packaging, building and construction, oil and gas, defense, and industrial applications. Management recently announced that it was restarting three of its idled smelters, and adding 260 jobs.

The stock closed recently at $16.42 with resistance at $17.60 and support at $14.05. Our Reasonable Value Estimate for the stock at this time is $15.00, with a Buy Target of $8.50, a First Sell Target of $17.00 and a Close Target of $18.00. Earnings are slated to be announced next week with consensus earnings estimates pegged at $0.19 compared to one year ago earnings of $0.01.

Synnex Corporation (NYSE: SNX)The company is a business process services company, serving resellers, retailers and original equipment manufacturers worldwide, providing services in IT distribution, supply chain management, contract assembly and global business services. The company recently announced an agreement with Symantec Corporation (Nasdaq: SYMC) for distribution of Symantec's storage and security products in North America.

The stock closed recently at $31.82 with resistance at $32.66 and support at $30.20. Our Reasonable Value Estimate for the stock at this time is $53.00, with a Buy Target of $32.00, a First Sell Target of $63.00 and a Close Target of $66.00. Earnings are slated to be announced next week with consensus earnings estimates pegged at $0.96 compared to one year ago earnings of $0.87.

CLARCOR, Inc. (NYSE: CLC) The company is a diversified marketer and manufacturer of mobile, industrial and environmental filtration products and consumer and industrial packaging products sold in domestic and international markets. Management has recently announced an increase in its annual dividend of almost 8%, from $0.39 to $0.42.

The stock closed recently at $43.19 with resistance at $44.55 and support at $41.73. Our Reasonable Value Estimate for the stock at this time is $37.00, with a Buy Target of $23.00, a First Sell Target of $44.00 and a Close Target of $46.00. The company is scheduled to announce earnings next week. Consensus earnings estimates are $0.56, compared to one year ago earnings of $0.49.

Intel Corporation (Nasdaq: INTC) The company is a diversified designer and manufacturer of the essential technologies that serve as the foundation for the world’s computing devices. Management recently announced, well...absolutely nothing.

The stock closed recently at $20.66 with resistance at $20.80 and support at $17.60. Our Reasonable Value Estimate for the stock at this time is $31.00, with a Buy Target of $18.50, a First Sell Target of $36.50 and a Close Target of $38.50.The company is scheduled to announce earnings next week with consensus estimates at $0.53, compared to one year ago earnings of $0.40.

Final Thoughts

As we noted, of late there have been more frequent requests for worksheets just ahead of earnings announcements.

Certainly we hope that the investors and investment managers that purchase our worksheets use them wisely and as we intend them to be used, which is as a basis for additional research.

But for those that couple our value estimates with earnings estimates in hopes of making a very short-term gain, we offer something we learned about the markets a very long time ago.

While the stock PRICE may always be fairly valued, the stock VALUE may not always be fairly priced.

Wax

Dow Dogs - Time for Soup

2011-01-03T04:42:00.000-06:00

Over the last couple weeks, we have noticed a several articles about the Dogs of the Dow, an investment strategy in which, on the first trading day of the new year, the ten stocks from the Dow Jones Index that had the highest dividend yield during the prior year are purchased and held for one year.

The next year, the same thing is done, with any stocks not in the top ten for the year, being replaced with the stocks that were.

The focus here is on the dividends the company pays rather than the earnings growth or price appreciation. In simple terms, the idea is to buy stocks that will not only pay good dividends, but will maintain pricing levels over the course of the coming year.

If followed the way it is designed, we think the strategy is silly. Why would investors want to invest in a strategy that requires the stock price to fall for their investment objective to increase?

While not the sharpest pencils in the drawer, we just think such an investment strategy is flawed from the get go.

By way of example, we took the stocks we found listed in the 24/7 Wall St. site article titled Meet the 2011 Dogs of the Dow, and sort of worked through them.

Basis

At Wax Ink, all of our valuation work is based on audited financial information as taken from a company's most recent SEC Form 10-K filing, which, in the case of the companies listed here, means the FY09 data, is the latest audited data available.

The Suggested Stocks

Chevron Corporation (NYSE: CVX) The stock closed recently at $91.60.

Based on unaudited FY10 financial information, the dividend yield was 3.2%, and the stock has a target price of $94.88. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 2.88%, and a reasonable value of $68.00. The stock price also increased 14% during 2010.

E.I. DuPont de Nemours and Company (NYSE: DD) The stock closed recently at $49.69.

Based on unaudited FY10 financial information, the dividend yield was 3.3%, and the stock has a target price of $54.80. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 3.3%, and a reasonable value of $37.00. The stock price also increased 46% during 2010.

General Electric Company (NYSE: GE) The stock closed recently at $18.25.

Based on unaudited FY10 financial information, the dividend yield was 3.1%, and the stock has a target price of $21.00. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 4.6%, and a reasonable value of $32.00. The stock price also increased 1% during 2010.

Johnson and Johnson (NYSE: JNJ) The stock closed recently at $61.95.

Based on unaudited FY10 financial information, the dividend yield was 3.5%, and the stock has a target price of $67.84.Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 3.1%, and has reasonable value of $52.00. The stock price also decreased 5% during 2010.

Kraft Foods, Inc. (NYSE: KFT ) The stock closed recently at $61.95.

Based on unaudited FY10 financial information, the dividend yield was 3.5%, and the stock has a target price of $67.84.Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 3.1%, and a reasonable value of $52.00. The stock price also increased 15% during 2010.

McDonald's Corporation (NYSE: MCD) The stock closed recently at $76.76.

Based on unaudited FY10 financial information, the dividend yield was 3.2%, and the stock has a target price of $86.00. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 2.6%, and a reasonable value of $48.00. The stock price also increased 22% during 2010.

Pfizer, Inc. (NYSE: PFE) The stock closed recently at $17.51.

Based on unaudited FY10 financial information, the dividend yield was 4.6%, and the stock has a target price of $21.23. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 3.9%, and a reasonable value of $27.00. The stock price also decreased 8% during 2010.

ATT, Inc. (NYSE: T) The stock closed recently at $29.38.

Based on unaudited FY10 financial information, the dividend yield was 5.9%, and the stock has a target price of $30.93. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 5.5%, and a reasonable value of $38.50. The stock price also increased 3% during 2010.

Verizon Communications, Inc. (NYSE: VZ) The stock closed recently at $33.24.

Based on unaudited FY10 financial information, the dividend yield was 5.5%, and the stock has a target price of $33.24. Based on audited FY09 financial information, and our valuation worksheet, the stock had a dividend yield of 5.0%, and a reasonable value of $43.50. The stock price also increased 8% during 2010.

Final Thoughts

As we said earlier, we think the Dogs of the Dow investing strategy is silly. Where would investors in Johnson and Johnson, and Pfizer, be had these companies not been among the top 10 dividend yielders during 2010?

According to the strategy, investors would sell these stocks, and replace them with other Dow stocks. But they would have sold them at a loss.

Also, considering the price gains for many of these stocks during 2010, it seems to us that investors are simply betting that at the end of the year, stocks like DuPont for example that had an increase in price during 2010 of 46%, will at the very least maintain all of their 2010 price gains, and end 2011 among the highest dividend yielding stocks in the Dow Index.

Somehow we don't think the odds are real favorable for that to occur, but then who knew Kibbles and Bits would be such big seller?

Wax

Raymond James Financial - Fruit for Thought

2010-12-19T08:27:00.000-06:00

I went with my friend Cobb last weekend to an "investor breakfast". If you have never been to one, they are usually put on by a brokerage or money management firm and are geared towards seniors.

While technically a senior, I'm 58, I like to go to these things because the breakfast is free. So when Cobb, who's 67, invited me, I was all over it.

The one I attended with Cobb, was put on by Raymond James Financial (NYSE: RJF), and just like the one I had attended several months earlier, the food was cold and the coffee was weak. The words "you get what you pay for" came to mind, but I'm a senior, and seniors like free.

At any rate, we ate, and then because we were a room full of seniors, we all had to head to the can.

It was kind of funny actually, because the local Raymond James broker was trying to talk about all of the wonderful investment products Raymond James had and how those products could help our investment returns, and all the while folks were getting up and heading to the can.

One of the nice things about being a senior is that when you get up to go to the can, everyone in the room knows where you're going and they try to time it so they are heading to the can about the time you are coming back from the can.

It's not the same when you're younger and just the saying "heading to the can" makes you laugh. I guess that's what the guy that invented Beavis and Butthead was thinking...hehehehehe, he said can.

So this Raymond James cat drones on and on, and folks are starting to squirm because they're thinking they're gonna be late for their tee times, or their bridge club tournament is getting ready to start, or they need to be at the hair dresser to collect their wives, or whatever. They just know it's time to wrap this up and get on with their day.

Just as the silverware rattling and glass clinking starts to end, the shifting starts. You know, shifting from one cheek to the other. Seniors do that a lot it seems to me, especially when they are sitting in a chair that really wasn't very comfortable to start with. I know that once the shifting starts, things are gonna go downhill fast for the Raymond James broker and so does he.

At any rate, the speakers words are now just one metronomic sound, the geezers are shifting and clinking and just about to stand and start for the exits when in a moment of complete genius on the part of the Raymond James broker, in walks the temp hired to help with the "breakfast".

Since I've seen this act quite a few times, instead of watching the pretty girl in the very short skirt work the room, I'm watching all of the old duffers (as I said I guess I'm in that category) watching the cute young girl.

Her job for the moment is to hand out information packets, but I know that in a few minutes her job is going to change. Like I said, I've seen this act before.

As I rescan the room I realize she could be handing out used paper towels and it wouldn't have mattered. Here was a room full of old geezers with cash and that cash was just about to part from their pockets to Ms. Sweet Young Thing's purse, and it was going to happen faster than you could reseat your dentures.

So the information packets are being distributed and the Raymond James guy is wrapping up his talk and nobody appears to be listening because they are all watching the cutie pie, when all of sudden the Raymond James dude says that if anyone needs help completing their information packet just raise their hand and Vera, Miss Kumquat Valley of 2007, will be happy to help them.

Here's a hint. While we all think we get along pretty good, seniors don't really move to fast. I'm not sure just why that seems to be true, it just does. Maybe your feet flatten out as you get older, sort of like a tire on a car that's never driven.

So like I said, old folks don't move real fast, but brother let me tell you, when the Raymond James guy said Miss Kumquat Valley would help them, hands went up around the room so fast that it generated a breeze! Made me wonder if the Space Shuttle had just been launched.

If you think I'm kidding about how much air was moved, the geezer guy across the table from me damn near lost his hair piece and the guy next to him with the comb over suddenly had three feet of hair hanging over his left ear.

All of a sudden going to the can could wait, and I found myself in a room watching potbellies being sucked in so tight personal emissions were wafting towards the air conditioning return air. I knew that in a few minutes this was not going to be a fun to place to try and breath!

True to form, Miss Kumquat Valley just keep smiling and offering assistance, and, oddly enough, collecting checks. Hell, Miss Kumquat Valley could have gotten most of these old birds to swap dentures, trade supphose, and sing Amazing Grace if she'd wanted to.

Finally the information packets were complete, the breakfast was over, Miss Kumquat Valley 2007 was no doubt thinking about the commission she just made, the air has finally cleared up enough to take a deep breath, and we're leaving.

I notice Cobb is trying to wipe the drool off of his face as we head to the parking lot, which gets me to wondering if the old adage a bird in the hand is worth two in the bush may apply as soon as he gets home. I mean old Cobb looks like he just ran a marathon. Personally, I'm hoping his heart holds out long enough to get me home.

Finally he pulls up in front of my house to let me get on with my Saturday, and as I get out the car, I hand him my information packet. He gives me a questioning look as I explain that the information packet is the same one that Charles Schwab (Nasdaq: SCHW) uses.

He tells me he isn't interested in Charles Schwab, and really wasn't interested in Raymond James for that matter, but he had heard that the breakfast was okay. I chime in and remind him that Vera wasn't bad either, which makes Cobb grin.

But as I start to get out of his car, he reaches out and slides the unused information packet from my hand saying I may be right, may be Vera wasn't that bad. I just grinned and I as slipped out of his car I reminded him that neither were her kumquats.

Wax

Microsoft Corporation - Andy Gets Wet

2010-12-12T16:51:00.000-06:00

It seems that everywhere we turn these days, the buzz is on about cloud computing. There are commercials that send people "to the cloud", and never ending radio spots that refer to cloud computing.

Get a grip folks! There is nothing special about using the internet to create and access computer files. The ability to do that has been around a pretty good while.

Ever heard of Google Docs? Or how about this? Have you ever accessed an e-mail account via the internet from a computer that was not your own? Welcome to cloud computing.

The point we are trying to make is that it’s all a bunch a hooey, intended to make the consumer, or in this case the investor, think they on the cutting edge of some new and unique technology, when the truth is, they aren’t.

Noted investor Arnold Van Den Berg mentioned cloud computing in his recent newsletter to investors, as did much less noted investor Whitney Tilson in his recent presentation to investors.

But what really made us wonder about cloud computing was not that investment advisors were talking about it, but it seemed to us it was being used to justify putting their client’s money in Microsoft Corporation (Nasdaq: MSFT).

Certainly we think Microsoft is a great company. We simply believe, cloud or no cloud, the company’s stock is currently trading at fair value.

Basis

Financial information for Microsoft Corporation is based on the company’s most recent SEC Form 10-K filing, for year ending June 30, 2010, as filed with the Securities and Exchange Commission on July 30, 2010.

What They Do

The company develops and markets software, services, hardware, and solutions that they believe deliver new opportunities, greater convenience, and enhanced value to people’s lives, doing business around the world with offices in more than 100 countries.

Revenue is generated through the development, manufacture, licensing, and support, of a wide range of software products and services for many different types of computing devices.

The company’s software products and services include operating systems for personal computers, servers, and intelligent devices; server applications for distributed computing environments; information worker productivity applications; business solutions applications; high-performance computing applications; software development tools; and video games.

In addition, the company provides consulting and product and solution support services, as well as trains and certifies computer system integrators and developers.

And Here It Is

Normally we would not include the following, but having read the tomes of several investment advisors that think cloud computing is the greatest thing since sliced bread, we just couldn’t resist this little ditty from the Microsoft 10-K.

“We earn revenues from customers paying a fee to license software; that will continue to be an important part of our business, even as we develop and deliver “cloud-based” computing services. Cloud-based computing involves providing software, services and content over the Internet by way of shared computing resources located in centralized data centers. Consumers and business customers access these resources from a variety of devices. Revenues are earned primarily from usage fees and advertising.”

Short-Term Investment

The stock had a recent close of $27.16 with Resistance at $31.58 a 16% increase from a recent close and Support at $26.59, a 2% decline from a recent close.

The current stock trend appears to be upward, recently peaking in overbought territory, and it appears at least to our untrained eye, that the stock should continue to move upward over the near term.

Long-Term (5 Year Hold) Investment

The company certainly has impressive financials, with a Current Ratio of 2.13, an Acid Test Ratio of 1.9, and a Cash Ratio of 1.41, there is little to dislike.

Couple these ratios with a negative Cash Conversion Cycle, Return On Invested Capital of 34%, and Free Cash Flow of $1.86 per share, and an inventory turnover of 13 times a year, and it’s easy to see why investment managers are keen on sticking their client’s money in the stock.

Valuations

Based on our review of the company’s latest annual financial statements, we think the company currently has a Reasonable Value of $36, and have set a Buy Target at $22, a First Sell Target at $42, and a Close Target at $45.

The company has an Enterprise Value of $27, an Equity Value of $27, and for FY10 earned $2.25 per share.

Given the stock’s recent close and the company’s FY10 earnings, provides an Earnings Yield of 8.23%, a yield about 4 times greater than the recent 2.01% 5 Year AAA Corporate Bond Yield.

Final Thoughts

As we mentioned earlier, cloud computing is really nothing new. What does seem to be new is that today, someone has provided a name for this method of accessing computer files remotely.

While the buzz surrounding this method of computer file accessibility will no doubt be perpetuated by almost everyone with something to gain by its use, we simply don’t believe that is going to add any great increase to the current value of Microsoft.

In fact, sorting through all the spaghetti that has become cloud computing, we believe the company with the most to gain from the use of cloud computing is Google, Inc. (Nasdaq: GOOG), via their already in place Google Docs applications.

Accordingly we think new investors in Microsoft are going to be sitting underneath a bit of a dark cloud for the foreseeable future. We just hope they have their umbrellas handy.

Wax

Enova Systems, Inc. - Power Trains for Alice

2010-11-28T05:18:00.001-06:00

The origin of the saying good food, good whiskey, good gamble is not entirely certain. Many attribute it to Las Vegas casino operator Benny Binion, but for our part, we simply have no idea.

Regardless of it's origin, the term gamble and the term investing, certainly don't seem to go hand in hand. Yet, when given equal consideration, often times, all investors are actually doing is gambling.

Several years ago, we stumbled on Maxwell Technologies, Inc. (Nasdaq: MXWL). We understood the technology the company was developing, but try as we might we simply couldn't get our collective heads around what the market for an ultracapacitor might be.

Our reasoning at the time was why would anyone have a need to charge a battery that fast?

But we thought that at $7, it seemed like a pretty good gamble so we to a position and today at $16, it appears that our gamble is paying off.

Enter Enova Systems, Inc. (AMEX: ENA), another of those companies that at first made us wonder, and then made us ask why not?

Basis

Financial information for Enova Systems, Inc., is based on the company's most recent SEC Form 10-K filing, for year ending December 31, 2009 as filed with the Securities and Exchange Commission on March 26, 2010.

What They Do

The company believes it is a leader in the development, design and production of proprietary, power train systems and related components for electric and hybrid electric buses and medium and heavy duty commercial vehicles and stationary power generation systems.

It's focus is powertrain systems including digital power conversion, power management and system integration, focusing chiefly on vehicle power generation.

Specifically, the company develops, designs, and produces drive systems and related components for electric, hybrid electric and fuel cell powered vehicles in both the new and retrofit markets.

Company management believes medium and heavy-duty drive system sales offer it the greatest return on investment in both the short and long term.

In addition, management believes the medium and heavy-duty hybrid market’s best chances of significant growth lie in identifying and pooling the largest possible numbers of early adopters in high-volume applications.

By aligning the company with key customers and integrating with original equipment manufacturers (“OEMs”) in its target markets, management believes that alliances will result in the latest technology being implemented and customer requirements being met, with an optimized level of additional time and expense.

During 2009, the company continued to develop and produce electric and hybrid electric drive systems and components for First Auto Works of China, Navistar Corporation, Tanfield Engineering Plc, and the United Stares military.

The company was also successful in introducing its technology to Freightliner Custom Chassis Corporation in 2009.

Short-Term Investment

The stock closed recently at $1.06 with Resistance at $1.09, a 3% increase from its recent close, and Support at $0.83, a 22% decline for its recent close.

The Stochastic indicator is currently showing the stock to be oversold with the 13 day moving average starting to trend downward and the 50 day moving average seeming to plateau, indicating to us that the stock price may be close to a bit of downtrend.

All in all, there doesn’t seem and short-term advantage to a position at this time.

Long-Term (5-Year Hold) Investment

While we think the company’s Current Ratio at 8.5, Quick Ratio at 6, and Cash Ratio at 5.5 are all what we consider investment quality, we cannot say the say about the company’s Cash Conversion Cycle at 522 days.

Granted, the company is operating in an emerging industry that hasn’t quite caught on, but in the end, this metric needs improvement. Holding inventory for a year while perhaps necessary certainly doesn’t help.

On of the downsides to hanging on to inventory for so long is that it often times requires the holder to process its Accounts Payable well in advance of collecting its Accounts Receivable.

Such is the case with Enova, with Accounts Payable outstanding on average 33 days while Accounts Receivable are outstanding an average of 91 days. In effect, the company is providing its suppliers 60 day interest free loans.

The company ended FY09 with debt of $1.4 million paying an average annual interest rate of 14%. While not uncommon for an emerging market company, to us it is something that investors should keep a watchful eye on.

Valuations

Based on our review of the company’s latest annual financial information, we think the company currently has a Reasonable Value of about $4, with a Buy Target of $2.50, a First Sell Target of $4.75, and a Close Target of $5.25.

The company has a Market Cap of about $33 million, with an Equity Value of about $1.50 and Tangible Book Value of about $0.55, and negative Free Cash Flow.

Final Thoughts

As we said at the outset, sometimes things just seem like a good gamble. We think that is true of Enova Systems. Certainly none of the company’s financial metrics are that glowing. Still we can’t help but ask ourselves, what if?

The company has recently partnered with Smith Electric Vehicles, to provide drive systems for Smith’s Newton truck, part of a Department of Energy initiative, and back in May the company announced an order for Navistar's hybrid school buses, part of a large scale deployment of federal stimulus dollars.

Granted, these recent company announcements don’t mean the company will ever become profitable. Nor do these announcements mean that the company will even remain an on-going concern.

But at a 75% discount to our reasonable value estimate, we happen to think taking a long-term position in the stock is pretty good gamble, besides what else are we gonna do with a buck, buy a lottery ticket?

Wax

CenturyLink, Inc. – A Qwest for Growth

2010-11-22T03:22:00.002-06:00

Back in April, CenturyLink, Inc. (NYSE: CTL) announced that the company and Qwest Communications International, Inc. (NYSE: Q) had agreed to merge, subject to regulatory and shareholder approval.

At the time, we didn’t think much about the announcement, nor have we paid much attention to how things are progressing, in the last 7 months.

Truth be told, had one of our clients not sent us a Worksheet Request for Qwest, we probably would not have thought about the proposed merger again.

But as we began to build the requested worksheet, we came across a Raw Value Report we had written in September 2009 for what was, at the time, CenturyTel, Inc., known today as CenturyLink.

Since our CenturyTel report, we have completed our proprietary valuation model, and curious, we applied our model to both CenturyLink and to Qwest.

What we found was, to us, good news for Qwest stockholders but not such for CenturyLink stockholders.

Basis

Financial information presented in this report for CenturyLink, Inc. is based on the company’s most recent SEC Form 10-K filing for year ending December 31, 2009, as filed with the Securities and Exchange Commission on March 01, 2010.

Financial information presented in this report for Qwest Communications International, Inc. is based on the company’s most recent SEC Form 10-K filing for year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 16, 2010.

Debt

The merger of these two companies is being called “compelling”, with many “synergies”, providing the merged companies with greater “scale”, “scope”, and “expertise”.

Quite frankly the first thing we do when we hear words like these is grab our wallets and head for the exits, having learned over the years that these words generally mean something is going to cost us.

Once the merger is complete, CenturyLink, Inc. which we think should be renamed CQ, Inc., may indeed have lots of synergies, executive washrooms, and gold inlaid water closets, we have no idea.

Nor do we have any idea if the new company will be able to provide more, better, or more far reaching services that current customers, will want to buy.

But one thing we do know, is that after the merger, Century will have a mountain of debt so vast we believe once interest rates start to increase, the company will simply not be able to service its debt and will have to seek protection through the courts.

We admit that $22 billion worth of debt may not seem like a big deal to many investors, especially considering that only $0.085 out of every Sales dollar goes to pay the interest on that debt.

But look around.

The current prime interest rate is 3.25%. Yet based on the combined companies FY09 financial statements, we estimate the interest rate for Century will be close to 6.5%, not the 4.75% that Century paid in FY09.

Why do we think this will be the case? First off, there will be a good deal more debt. Secondly, we think the merger at the very least will temporarily weaken the financial position of Century.

Accordingly, we think the company’s lenders will increase the company’s interest rate to compensate for the initial increase in risk.

Of course there is no guarantee that the company’s lenders will reduce the company’s interest rate once the company has completed integrating its new purchase.

As the matter of fact, we think that by the time Century has finished assimilating Qwest into its business model, the days of cheap interest rates will have ended.

So we seen no we see no potential decrease in interest rates for the company, maybe ever.

Other Metrics

Based on our review of both company’s current annual financial information, we think that after the merger, Century will have a Current Ratio of 0.84, a Quick Ratio of 0.69, and a Cash Ratio of 0.38, none of which are to us, investment quality.

We also believe that after the merger, at least 30% of the company’s Total Assets will be made up of Goodwill and Intangibles, and that Total Debt will exceed EBITDA by an almost 3.5:1 ratio.

Certainly there are potential bright spots such as Free Cash Flow, which we think will level out in the $3 per share range, and Return on Invested Capital which we believe will consistently be in the 20%-25% range.

Valuation

Based on our review of both company’s latest annual financial information, our Reasonable Value Estimate for the stock based on a 5-Year hold once the merger has been completed is $25, with a Buy Target of $15, a First Sell Target of $29, and a Close Target of $31.

We also believe that after the merger, Century will have an Enterprise Value of about $52 per share, an Equity Value of about $33 per share, and an Earnings Value of about $35 per share.

In addition, we estimate that EBITDA will run about 38% of sales, meaning that when our Enterprise Value estimate is considered, and assuming EBITDA stays at or near current levels, it should take Century approximately 16 years to pay for its investment in Qwest.

Final Thoughts

We said at the outset that we believed the merger with Qwest would be good for Qwest stockholders but not so good for Century stockholders.

Certainly we have no idea what the basis is for the current stockholders of Qwest, but coupling an entry point in the stock sometime in the past 5 years with an acquisition price of $6.02, the company’s current stockholders should recoup the vast majority of their investment.

In addition current stockholders of Qwest would be left with shares in CenturyLink, which we estimate will have a value of about $25 after the merger.

The same cannot be said for the current shareholders of CenturyLink. Considering our valuation estimate, many of them that took a position in the stock within the last 5-years are simply going to end up underwater.

In the end, Century must grow, and to do that they need access to additional markets, so merging with Qwest makes good business sense.

Our issue comes down to the assumption of more than $11 billion of debt, making us wonder if this merger is a Qwest for growth or grope for Qwest.

Wax