Streetwise
Lauren Rudd
Sunday, March 8,
2009
Benefit from the Mayhem on Wall Street
President Obama said recently, "Profit-and-earning ratios are
starting to get to the point where buying stocks is a potentially good deal."
I could not agree more. As a result of the recent economic
turmoil, Wall Street is offering up share prices at levels we have not seen for
many years. And I totally disagree with the gist of a recent interview given by
Bill Gross, the head of PIMCO Total Return, one of the country’s largest bond
funds.
Gross basically said that stocks are dead for the rest of
your life. What utter nonsense, not to mention self-serving. For the record,
Gross's PIMCO advises the government on its $500 billion fund to buy
mortgage-backed securities. And let’s not forget that Gross's Fannie and Freddie
bonds were enhanced in value by the government's decision to put Fannie Mae and
Freddie Mac into conservatorship, in part because of his advice.
However, Gross is not the only one benefiting from the crisis
on Wall Street. A recent article in the New York Times detailed how a dozen
former Countrywide Financial executives stand to be richly rewarded as a result
of the home mortgage chaos that was partially orchestrated by them.
Former Countrywide president Stanford L. Kurland and his team
have been buying up delinquent mortgages from the government for prices as low
as pennies on the dollar. One attorney said it reminded him of an arsonist who
burns down a home and then sells the charred remains. Although such actions may
strike you as being unfair, we had basically the same situation in aftermath of
the savings and loan crisis of the 1980s. Vultures are always drawn to carrion.
Nonetheless, the mayhem on Wall Street has resulted in
numerous investment bargains in the form of absurdly low share prices.
Unfortunately, for many investors the concerns resulting from a major market
decline readily foment paranoia and a subsequent investment paralysis. Get over
it. Investing is about under priced fundamental value. Emotion should not play a
role.
Consider, for example, CenturyTel (CTL). The company operates as an
integrated communications company providing a range of services, including local
and long distance voice, Internet access, and broadband services in the
continental United States. Its services include local exchange and long distance
voice telephone services, as well as enhanced voice services.
Free cash flow, excluding nonrecurring items, was $114.0
million in fourth quarter 2008 and a record $584.1 million for all of 2008. For
its fiscal year ended Dec. 31, CenturyTel reported net income of $365.7 million,
or $3.56 per share, as compared to $418.4 million, or $3.72 per share in 2007.
In it 2009 guidance, the company indicated that it expects earnings to be in the
range of $3.20 to $3.30 per share.
What is interesting is that Monroe, La.-based CenturyTel
serves much of southern Missouri, and that federal stimulus funding could help
the company push its network into more thinly populated areas. For example,
approximately one-fifth of the Louisiana's residents live in areas without
access to high-speed Internet, according to a 2007 study from the Missouri
Public Service Commission, and $7.2 billion of the federal economic stimulus
package is aimed at rural areas without Internet service. The broadband funding
would come in the form of competitive grants and loans.
CenturyTel’s intrinsic value, using a discounted earnings model with an earnings
growth rate of 4.50 percent and a discount rate of 10.00 percent, is $46. The
more conservative free cash flow to the firm model yields an intrinsic value of
$47 per share. The shares recently closed $25.45. My earnings estimate for this
fiscal year is $3.40 per share with a 12-month target price on the shares of $28
for a capital gain of 10 percent. In addition, there is a 10.6 percent dividend
yield.
