Twenty percent of the S&P 500 have current year PEs greater than 30. Many of these are large, not cyclical, and haven't provided much recent growth. Examples: Gillette, Coke, Disney, Robert Half, Wrigley, Costco, Walmart, Harley Davidson, Bausch and Lomb, Home Depot, Allergan, Starbucks, Hasbro, Quintiles, JC Penney.
I always feel like a fool making a "call" on the market. I tend to believe it's not callable. This is based on greed, not fear... I'm within 1% of a new high. It's perplexing because there has been so much carnage and still so few bargains. I don't see any earnings bounce on the horizon (not that you usually can). It is tempting to believe more bargains may be ahead.
I am buying Owens Illinois (ticker: OI). At $5.50, it's trading at 4.5x 12/2001 $1.20 and 3.8x 12/2002 $1.44. They are the global leader in glass containers and that's based I think both on technology and market share. They are a large player in plastic containers.
The two knocks against OI are asbestos and the degree of financial leverage. I think the market is discounting the asbestos primarily. The way management discusses their exposure is comforting: the average claim size is $10,000; The average claimant is in their 70s; They got out of the asbestos related business in 1950 sharply limiting the ability of trial lawyers to find clients; insurance has covered the bulk of their exposure to date; and the expense has begun to decline. I think the market may soon recognize that the asbestos exposure is receding for OI.
OI has more than $5 billion in debt and that is uncomfortable enough that management is not buying back its preferred (currently yielding almost 16%). Last fall the preferred bottomed at over 40% yield. The company is proceeding with acquisitions because many global competitors are stressed and looking to exit.
Here's a writeup by Standard & Poors which has their credit rated 'B+'. Moody's has them rated a knotch lower.
standardandpoors.com
I think the financial leverage is adequately discounted by its valuation. Also, I think this company can grow. Third world consumption of containers will continue to grow and OI is as well positioned as anyone.
The company has not put through energy and materials price increases. They plan to do this in January, and they act like they will have the pricing power. We will see.
Not only do the normal caveats apply (I've closing in on 100 companies I've been wrong on)... but I've been wrong several times on OI. I bought at $25, $11, $3, $7.50 and $5.50.
Here is a link to more information:
yahoo.marketguide.com |
