Streetwise

Lauren Rudd

Sunday, November 28, 2010

Thanksgiving is but a Pleasant Memory

In last week’s column, I wrote that each year about this time I offer up 12 investment ideas, the performance of which I then review a year later. The list is not intended to be an instant portfolio where you simply add water and stir. On the contrary, it is designed to be a catalyst to stimulate ideas and thinking on your part about possible sectors and companies you might want to investigate.

While I appreciate the interest and value many of you seem to place on the list, to those who requested a copy of the list in advance; you know that would not be fair or ethical. Even Diane, my better half, never knows what stock(s) will be talked about in a column prior to publication.

So continue with your own research and after the Thanksgiving holiday, in the first column of December, we will see how my picks of last year performed. At the same time, I will offer up another list of 12 companies for your investing pleasure.

Thanksgiving dinner is but a pleasant memory and the world has officially kicked-off the holiday shopping season. Yet, for many there is little respite from the repercussions of the financial hell ensuing from the Great Recession. Meanwhile, Wall Street returns to its ebullient swagger in celebration of the holiday season.

To take a page from Economics 101, a country has to decide how it wants to allocate its resources between guns and butter. When the decision was made to undertake conflicts abroad there was no tax increase to fund the effort. Neither was there a reduction in domestic expenditures. Instead, we cut taxes and exploded the deficit. The economic cost of that policy has exceeded a trillion dollars.

Want to correct current economic problems? Reverse the Bush tax cuts and add in a war surcharge on incomes over a million dollars. Then double the fiscal stimulus, or perhaps triple it. Oh, if Congress objects, remind them that they were elected to serve the people, all of the people, not just the wealthiest.

While you are on your own with Congress, you can overcome Wall Street’s malaise with a well thought out portfolio. Now I know what you are thinking...how about an investment idea you can think about as you eat leftover turkey.

A company that I have not talked about for two years, at which time the shares were trading at about $23, but one that was able to achieve a 19 percent share price appreciation year-to-date, is Cubic Corporation (CUB). With fiscal year 2009 sales of $1.017 billion, the corporation operates three major business segments, military mission support services, defense systems and transportation systems. Currently over 50 countries utilize its services.

For its fiscal third quarter ended June 30, the company posted sales of $331.3 million, as compared to $248.2 million the prior year. Net income increased by 52 percent to $22.7 million or 85 cents per share as compared to $14.9 million or 56 cents per share a year ago. Sales for the third quarter exceeded Cubic’s previous quarterly record high as did net income.

Operating income increased in the third quarter by 50 percent to $32.6 million this year, up from $21.7 million during the same period a year ago. Cash flow from operations was $11.1 million for the quarter. The company’s overall backlog was $2.387 billion as of June 30. At the end of the quarter, Transportation Systems had a backlog of $1.1 billion, Mission Support Services’ backlog was $774 million, and Defense Systems’ backlog was $514 million.

The intrinsic value of the shares using a discounted earnings model with an earnings growth rate of 8.45 percent and a discount rate of 10 percent is $63 per share. The more conservative discounted free cash flow to the firm model offers up an intrinsic value of $67 per share. The shares recently closed at $44.47 per share.