Streetwise
Lauren Rudd
Sunday, October
26,
2008
Can't Make A Silk Purse From A Sow's Ear
According to financial disclosure statements, a major
political party spent $150,000 on a candidate’s clothing and accessories,
despite advisories from the Federal Election Commission on using campaign
funds to purchase items for personal use. It would appear that when it comes
to window-dressing, politicians have copied Wall Street’s playbook.
Trying to make a silk purse out of a sow’s ear is not a new
idea, especially on Wall Street. Portfolio managers and mutual funds attempt it
at the end of every quarter. Yet, the degree to which it was carried out by the
major credit rating agencies was heretofore unheard of. By dressing up complex
and toxic mortgage backed securities with their “good-as-gold” AAA ratings,
these firms managed to place in jeopardy the financial security of individual
investors across the globe in return for obscene profits.
As the ensuing credit crisis unfolded, Standard & Poor’s was
forced to downgrade more than two-thirds of its AAA-rated securities, while at
Moody's the number of downgrades hit 5,000. The result was that the market for
mortgage-backed debt imploded and the resulting financial tsunami enveloped the
world.
As is the case with any financial upheaval, it was and still
is impossible to forecast the full impact on the equity markets. Despite
numerous opinions to the contrary, forecasting short-term economic trends and
their effect on Wall Street is like trying to herd cats, a great idea but one
with little probability of success.
To make matters worse, when Fed Chairman Ben Bernanke, a
recognized scholar in the field of monetary policy and Depression era economics,
testified before a congressional hearing recently, he was lambasted for implying
political favoritism.
Summoned before Congress to help elucidate possible solutions
to the current economic crisis, Bernanke expressed a view that was interpreted
by a few, including a major financial paper, as favoring one party’s political
agenda. Now suddenly Bernanke is a political partisan and hack. Perhaps it is
the paper, rather than Bernanke, that should be the subject of some serious
introspection.
Meanwhile, with stock prices dropping to five-year lows,
investors are becoming increasingly panicky as they watch their financial nest
eggs being crushed. On that point there is some hope. Despite all the political
machinations and the dislocation of various markets, both the economy and Wall
Street will recover. That is not to say the path will be an easy one.
The recession that was discussed here a year ago as a strong
possibility is now inevitable. However, every cloud has a silver lining and the
bargains available on the Street today will result tremendous gains going
forward if you dollar cost average your quality holdings.
A good example is Toro. When I last discussed the company a
year ago, the shares were trading at about $55. My earnings estimate for fiscal
2007 was $3.35 per share and Toro reported $3.40. For its fiscal third quarter
that ended Aug. 1, the company reported $0.99 per share, as compared to $1.02 a
year ago. For the past nine months, net earnings were $3.06 per share, as
compared to $3.23 a year ago.
Looking ahead, Toro said it expects earnings for its fiscal
year ending Oct. 31 to decline 6 - 9 percent from a year ago, while sales are
expected to be unchanged at about $1.87 billion.
The intrinsic value of the shares, using a discounted
earnings model and an earnings growth rate of only 4.7 percent, is $45. A free
cash flow to the firm model produces an intrinsic value of $66. My earnings
estimate for this fiscal year is $3.18 and $3.35 per share in fiscal 2009, with
a 12-month projected share price of $35. That represents a gain of 14 percent
over the recent price of $30.75. There is also a 1.80 percent dividend yield. In
two years, the shares should approach the $54 price we saw a year ago.
