Streetwise
Lauren Rudd
Sunday, August 10,
2008
Wall Street Is Not Las Vegas
You often hear
the comment that Wall Street is Las Vegas dressed in pin stripped suits.
Needless to say, I adamantly disagree with that statement. While speculating is
certainly high risk, and could therefore be viewed as sophisticated gambling,
investing is not gambling. Ironically, right now Las Vegas
would rather portray itself as an investment Mecca rather than a gambling emporium.
Several casino developers are
folding their cards as the mortgage markets deal them a losing hand. The
building boom that turned much of the Las Vegas Strip into a construction zone
is disappearing with a sleight of hand equivalent to the one that initiated the
expansion.
Unfortunately, many of you have
been tempted to fold your investment hands, a desire tempered only by the recent
rally on Wall Street. Before you take such a step, remember that the market’s
performance over the past 40 years clearly indicates that fluctuations occur and
occasionally become dramatic. Nonetheless, there is also an undeniable upward
trend. Furthermore, you invest in individual stocks, not the market.
However, a decline in the value
of any asset inflicts pain. And just as you would seek medical help to remedy
pain, there is an effective salve for an ailing portfolio...and that is time. As
Warren Buffett has said repeatedly, "In the short run, the market is a voting
machine and sometimes people vote unintelligently. However, in the long run, it
is a weighing machine and the weight of business and how it does determine its
value."
Therefore, investing is simply a
straightforward task of finding under priced companies with winning records of
accomplishment whose product lines you understand. Procter & Gamble (PG) is an
excellent example. Everyone understands toothpaste and laundry detergent.
In terms of accomplishment, P&G
recently reported fourth quarter revenues of $21.27 billion, a 10 percent
increase over the same period a year ago. For the year, revenues increased 9
percent to $83.5 billion. Organic sales, which exclude the impacts of
acquisitions, divestitures and foreign exchange, were up 5 percent, for both the
quarter and the year.
Breaking down the increase in
quarterly sales, higher volume contributed 3 percent, while price increases
contributed 3 percent and foreign exchange 4 percent. The company’s gross profit
rose 7 percent, with sales, general and administrative expenses (SG&A) growing
only 3 percent.
P&G was impacted by rising
commodity and energy costs, which it mitigated with price increases, cost
savings and economies of scale. The company’s operating margin improved by
50-basis points for the quarter and 30-basis points for the fiscal year.
Earnings in the fourth quarter
increased 33 percent to $3.02 billion. For the year, earnings increased 17
percent to $12.1 billion. Net earnings per share increased 37 percent for the
quarter to $0.92. A tax benefit of 12 cents per share left an adjusted EPS
number of 80 cents per share. For the year, earnings rose 20 percent to $3.64
per share.
Operating cash flow was $15.8
billion for the year and free cash flow was $12.8 billion. Capital spending came
in at 3.6 percent of net sales, well below the company’s 4.0 percent annual
target.
The recent price of $67.77 has
the stock trading at 19.88 times trailing 12 month earnings. When I last wrote
about the company a year ago, the share price was $63.48, producing a one-year
capital gain of 6.8 percent. The intrinsic value of the shares, using a
discounted earnings model, is $99 per share, while a more conservative free cash
flow to the firm model produces an intrinsic value of $100 per share.
My earnings estimate for 2009 is $3.88 per share with a 12 month target price on
the shares of $75, for a capital gain of 10.7 percent. There is also a current
2.44 percent dividend yield.