Buybacks........
Attention Skeptics: Buybacks Do Work
Analyst: Bob Hirschfeld
Do share buybacks help boost stock prices? Lately, a number of skeptics
have concluded they don't. These folks argue that buybacks represent a
public relations gesture more than a genuine vote of confidence in the
company. Well, we apologize to the contrarians who wish to defy
conventional wisdom, but the truth of the matter is that buyback
programs really work.
85% Success Rate
With the strong cash flows that firms have been generating this decade,
balance sheets have never been stronger, indicating that more buybacks
are in the offing. Using data provided by Richard Peterson of Securities
Data, we looked at the 40 biggest buybacks announced in 1998. We checked
price per share on the date of announcement and compared that with
current share price. As of October 28, only six of 40 (15% of the
companies) that announced share buybacks fell. Not bad at all.
In other words, if you bought stock when the company did, you would have
done all right 85% of the time. Too bad more portfolio managers didn't
utilize this simple strategy during August and September when the house
cardiologists were working overtime.
But just to show that you can't always believe management, here are the
exceptions. The six issues that declined since their buybacks were
announced: CBS Corp. (NYSE: CBS), down about 15%, BankAmerica Corp.
(NYSE: BAC), down about 8%, AlliedSignal Inc. (NYSE: ALD), down about
7%, Media One (NYSE: UMX), down about 10%, Starwood Hotels & Resorts
(NYSE: HOT), down about 25%. Most surprisingly, Toys R' Us (NYSE: TOY),
has dropped a sharp 39% since announcing a $1 billion buyback, its
second such, on January 8, 1998.
Still, of the top 10 buyback announcements in terms of transaction size,
only one, BankAmerica, turned out a loser.
Several blue chip firms have brought their cash-rich balance sheets into
play -- and to good effect. Dell Computer (NASDAQ: DELL) and IBM Corp.
(NYSE: IBM) are up more than 20% since announcing buybacks. And Intel
Corp. (NASDAQ: INTC), Merck & Co. (NYSE: MRK), American Express (NYSE:
AXP) and even McDonalds (NYSE: MCD) have posted double-digit gains
post-announcement. The obvious implication: Companies are pretty good at
valuing their own stocks.
Two Stocks We Like
Let's assume the reliability of the "85% rule." What stocks should we
buy now? Two companies announced significant share buybacks the past
week. In both cases, analysts had been steadily boosting estimates
before the announced buybacks. That makes those increases even more
likely to stick once the accretive effects of the buybacks get factored
into forecasts.
Gap
On October 28, Gap Inc. (NYSE: GPS) announced the repurchase of as many
as 30 million shares, an amount representing about 7.7% of total shares
outstanding. That massive buyback comes on the heels of a just-completed
45 million share buyback that is now complete. Given recent prices, the
new buyback will cost about $1.65 billion.
Gap has beaten estimates the past two quarters. During its second
quarter, the company reported EPS of $0.34 per diluted share, twice the
$0.17 a share earned a year ago. Banc Boston Robertson Stephens, which
rates Gap a 'Buy,' considers the company to be the best managed
specialty apparel retailer, and, noting its strength during the 1990-91
recession, considers the company capable of delivering consistent
earnings growth in the 25-28% range.
Amgen
Amgen Inc. (NASDAQ: AMGN) also appeals. With a market cap of $19
billion, Amgen is the world's largest biotech company. In reporting
third quarter earnings, management said it was initiating a new $1
billion buyback, to be completed by the end of 1999. Amgen's third
quarter earnings increased 168%, to $0.83, from $0.31 in the year-ago
period.
PaineWebber analysts note that Amgen eclipsed their estimates by three
pennies a share and were four cents ahead of Street estimates.
PaineWebber revised 1999 estimates upward to $3.50, from $3.45, and
raised its 12-month target. Noting that drug companies are valued about
32 times earnings, compared to the 22 multiple Amgen currently receives,
the analysts argue that the company deserves at least a 26 multiple on
year-ahead earnings. That establishes a 12-month target price of $90 per
share. Amgen was recently quoted at $78.88.
Bottom Line:
So keep an eye out for buyback announcements. If the market slips
further, many other quality firms may step up to the plate and buy their
shares while they're on sale.
iionline.com
iionline.com
Regards,
R.T |
