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Strategies & Market Trends : Fundamental Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: bruwin who wrote (1892)	7/14/2012 10:18:52 AM
From: E_K_S	1 Recommendation Read Replies (2) \| Respond to of 4719

Measuring Total Return - The Buffet challenge I think you should add the annual income from dividends to the total return calculation. Although it is a bit more complicated, it (to me) provides a better picture of the total return obtained through owning the company. One pick I would like to add as a candidate stock to our Buffet portfolio challenge is: Verizon Communications Inc. (VZ) -NYSE VZ and AT&T, Inc. (T) are core holdings in my portfolio. I believe VZ will be the better performer in the next 3, 5 and 10 years. In the next three years (36 months), I expect to see a capital gain of at least 65% along w/ the distribution of a 4% annual dividend. Annualized, this return comes out to a 22% capital gain and a 4% dividend or 26% annual return. My measure of value: 1) The leader in wireless service connectivity in the U.S. that generates significant monthly cash flow $6.74/share. The company shares the market w/ a few wireless competitors and is the largest of the group. I expect the overall market to grow significantly as "smart phone" devises expand, all will require some type of wireless service. 2) When looking at the typical value metrics, you really need to look at the 5 year historical values rather than the annual figures. The trailing annual numbers make this company look over valued w/ a 48 PE. Their forward PE is estimated to be 16 w/i value range. At current measures, VZ's forward PE is 45% lower than it's historical 5 year average. According to the fiver year average PE, VZ's price should be $87.00/share. 5-Y High P/E Ratio 47.4 5-Y Low P/E Ratio 9.5 5-Y Average P/E Ratio 29.2 3) The company's Return on Equity (ROE) - 5YEAR AVRG. 16.1. That's a good number especially if one expects significant future growth in services. 4) As a Buffet candidate stock (to me) it's all about riding the wave of future growth (ie growing revenues) w/ a company that is the leader in the industry and owns and/or can maintain their market share. VZ has accomplished this in spades in the previous five years and I expect them to do this in the next five. Revenues 5) My pick does break the Net income to total LT debt rule of less than 4x. It's just under 19x. However annual EBITDA is 70% of the LT debt, so the company does generate sufficient cash to cover it's debt but must reinvest a large sum into new technologies to build out and update their service infrastructure. Although the company makes huge annual capital investments, it really does not add to over all BV in the same proportion as old hardware and obsolete systems are replaced w/ new. So, Buffet might look at this type of ROI as quite low (ROA around 5%) but it's necessary for the company to make these large capital investments in order to lock in new service subscribers and generate all that free cash flow. 6) This pick goes into a portfolio of 10 value stocks. The value proposition for VZ is GARP (Growth at A Reasonable Price). VZ will still be in business in 3,5 and 10 years. The company generates at least a 4% dividend annually that can be reinvested in other value/growth opportunities. In the past 5 years, the company has increased their dividend five times. Management has set a policy to increases the dividend as revenues increase. The big long term investment question to me is how will VZ do if/when interest rates increase? I am going w/ their better than expected future growth in revenues vs the potential higher cost of capital (w/ higher interest rates). The disruptive technology of wireless data usage in the next five years leads me to pick VZ as one of the 10 stocks that should be in our challenge portfolio. EKS P.S. If you do not include the annual dividend stream into the return calculations, then VZ is not that compelling of a candidate stock. It's all about the risk/reward equation and coming out of the gate w/ at least a 4% annual return puts VZ ahead of many of the other candidate stocks.