Streetwise for Sunday May 3, 2009

Streetwise

Lauren Rudd

Sunday, May 3, 2009

Long-Term Does Not Mean Forever

The uncertainty over the direction and health of the economy will continue to reign supreme during the months ahead. It will also result in bargains on Wall Street as companies, caught in the mandibles of diminishing economic activity, report lower earnings. The consequence of which is a spawning of lower share prices and the ensuing shrill cries of discontent from a cadre of shareholders.

Many of those who complain the loudest are not only of the nervous and twitchy variety, but are also enjoying a brief moment in the sun as they espouse the vileness of poor management. Consider instead the wisdom found in Ecclesiastes 11:1-12, “Cast your bread upon the waters...for you do not know which will succeed, whether this or that, or whether both will do equally well.”

In other words, the world of commerce can be depicted as an ocean capable of increasing your wealth...if you undertake the risk of casting your investment dollars upon its waters and have the patience to wait for the associated returns. Therefore, ignore the inflammatory rhetoric and instead use share price declines as an opportunity to strengthen your portfolio.

However, I want to clarify a misunderstanding held by some readers, including one who is a former student. Although I remain a strong proponent of long-term investing, Wall Street and the economy have undergone a rather dramatic upheaval. Call it an epiphany of sorts if you like but you can no longer assume that the share prices of even the highest quality companies will continue to increase uninterrupted over the years. On the other hand, day-trading is also not a viable solution.

Rather, you need to manage your investments with an eye towards both fundamental corporate performance and the direction of the economy. Simply put, you need to align your portfolio with current economic and market trends and not be bashful about taking profits and regularly repositioning your portfolio if necessary. To quote the proposed title of an upcoming book I am writing, “Roundtrips Are For Trains and Planes, Not Stocks.”

The other key issue concerns dividends. When possible, dividends are the preferential avenue of choice, all other factors being equal. Unfortunately, other factors are usually not equal and often the potential for capital appreciation sans dividends can make for a compelling story.

Nevertheless, if you only want dividend paying investments and capital appreciation, consider Suburban Propane Partners LP (SPH). Although technically a publicly-traded master limited partnership with common units instead of shares, those units trade like common stock. Meanwhile, the company has an enviable earnings and dividend track record.

Suburban distributes propane, fuel oil, kerosene, diesel fuel, gasoline, and refined fuels, as well as selling natural gas and electricity in deregulated markets. It serves approximately 900,000 customers with about 300 locations in 30 states. The company also sells, installs, and services various home heating products, air cleaners, humidifiers, de-humidifiers, hearth products and space heaters.

Earnings for its fiscal first quarter ended December 27 were $80.7 million, or $2.46 per common unit, compared to $85.4 million, or $2.61 per common unit a year ago. The partnership ended the quarter with more than $130.0 million in cash on hand. Second quarter numbers are due out on about May 6.

A discounted earnings model, with a 7 percent earnings growth rate and a 10 percent discount rate, yields an intrinsic value of $80 per share, while the more conservative free cash flow to the firm model produces an intrinsic value of $61. The shares recently closed at $40.54.