A Chance to Win Dinner with Southeastern Guide Dogs

Streetwise for Friday, June 16, 2017

Ok, I will admit that I have been a bit critical of the auction carried out each year for a lunch with Warren Buffett where the highest bidder and seven friends receive a private audience with the ìMaster.î Lunch is donated by Smith & Wollensky, along with a charitable contribution, for the privilege of hosting the event and receiving the inevitable publicity.

An online bidder on eBay, who was not named, will fork over $2,679,001 to break bread with the investment guru. All proceeds will be donated to the Glide Foundation, an organization that fights poverty and assists the homeless.

Anyone who contributes seven figures to charity is to be commended, no argument. Yet, I have always had this uneasy feeling that the winners hoped to gain more than just the good feeling that comes from donating a substantial chunk of disposable income to a worthwhile cause.

Surely anyone successful enough to have amassed the resources required for such generosity must realize that Buffett is not about to let slip some tidbit of information that would put him in violation of the full disclosure rule. Furthermore, any expectation of uncovering some previously undisclosed key to Buffett’s prodigious investment skill would be naïve to the point of ridiculous.

Buffett does not harbor some holy grail. He simply uses a modicum of common sense, backed by solid fundamental analysis that when combined with a very large piggy bank enables him to deftly put in place a desired investment with little fanfare and no need of financing.

Furthermore, every year in his annual letter to shareholders, Buffett reports his holdings, discusses their merits and shortcomings and details why they were selected. And many investment web sites claim to utilize the so-called Buffett selection criteria, a methodology that has been meticulously analyzed in countless books and articles.

I have been taken to task for being narrow minded and directing supposedly ‘humorous wit’ to cast disparaging annotations upon good hearted philanthropists. The implication being that I was too dense to see unadulterated idolatry at its finest.

A low blow came when I was told that nobody would pay a dollar to have lunch with me. I am not sure if I would pay a dollar to have lunch with me. However, in self-defense over the years I have raised thousands of dollars for various charities pro bono.

Am I being overly cynical? After nearly 50 years on Wall Street, I do find it difficult to†believe in altruism. Egos and puffery run rampant on the Street, along with an insatiable desire for personal gain. Barron’s once wrote that success or failure on Wall Street is measured only by how much money you make or lose.

In an attempt at redemption and salvation, I will again step up the plate, no pun intended. Be the first person to notify me that you have donated a minimum of $2,000 to Southeastern Guide Dogs (a tax-deductible charity), specifying your donation as votes for Happy Returns, one of SGD’s Puppies on Parade sculptures and I will treat you, a companion and four friends to dinner at a local restaurant of your choice. (Full disclosure: my firm sponsored Happy Returns.)

I will also invite both the artist who created the Puppies on Parade sculptures and the artist whose work created Happy Returns, along with one or more people from SGD.

During dinner, we can discuss my best investment ideas (many unpublished) for the sole purpose of increasing your investment acumen and success, along with anything you might like to know about SGD.

Make it a $3,000 donation and after dinner we will take in a performance at the Asolo Repertory Theatre or similar venue. If you are not a full or part-time resident of Sarasota, we will work out a suitable alternative.

Are there any conditions? Yes, but only two. You must have a receipt showing the donation was made during August of this year and only one donation per person or family unit.

Of course, the only publicity you are likely to receive is a tip of the hat in my column. However, you just might come out ahead financially and I know Southeastern Guide Dogs will.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

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A Study of Verizon (VZ)

Streetwise for Sunday, June 11, 2017

Trying to forecast short-term trends on Wall Street is like trying to herd cats, a great idea but one with little probability of success. However, being patient will alleviate market volatility and enable you to benefit from a continual compounding of earnings.

Two companies requiring a high degree of patience are Verizon (VZ) and AT&T (T). When I last wrote about Verizon a year ago, my earnings target for 2016 was $3.95 per share, with a projected 12-month share price of $58. I have not written about AT&T for many years.

How has Verizon done? Earnings for the year came in at $3.87, a bit light of my estimate, while the shares recently closed at $46.44, also a bit light of my forecast.

Verizon’s market position is its key quality. As of the end of the first quarter of this year, Verizon was the leading wireless provider with just over 35 percent of all domestic wireless subscriptions.

And Verizon has always been a cash cow. Although Verizon’s capital expenditures are often quite large, in the past the company’s free cash flow generation has been impressive. On the negative side, its debt load is well over the $116 billion mark and its free cash flow is now negative.

Compounding the bad news, this year Verizon has been the worst-performing stock in the Dow Jones Industrial Average, declining 13 percent.

Nonetheless, Verizon has managed to grow its quarterly dividend for 12 consecutive years, showing a current dividend yield of 4.97 percent and a 12-year average dividend growth rate of 3.44 percent.

Verizon faces challenges from AT&T’s launch of DirecTV Now, an offshoot of AT&T’s 2015 purchase of Direct TV. There is also AT&T’s pending acquisition of content powerhouse Time Warner.

Verizon did acquire AOL in 2015, and is in the process of acquiring Yahoo. The company also launched its own ad-supported mobile video service go90. But it’s facing some hurdles in evolving its digital media offerings. It pushed back the closing date of its Yahoo acquisition, announced in July 2016 for $4.8 billion, to the end of the second quarter of this year.

While it does live a bit on the edge, let’s be clear that Verizon is not facing any short term financial problems, although its long-term debt level could become a concern if the Federal Reserve continues to raise interest rates.

Verizon’s total debt totals $221 billion, which is over 90 percent of its $244 billion in total assets. Yes, telecommunication companies usually carry a large debt load compared to other companies, which could impede its growth going forward.

For example, Verizon could potentially have trouble adding a new major debt offering needed to acquire companies or start new projects. The alternative is to issue new equity in future financing, thereby diluting current shareholders.

One carefully looked at statistic in evaluating companies is economic profit, a measure of corporate performance computed by taking the spread between the return on invested capital and the cost of capital, and multiplying by the invested capital.

Verizon’s economic profit increased from 2014 to 2015, coming in at $15.005 billion as of December 31, 2015. However, it then declined significantly to $5.124 billion as of December 31, 2016.

This past February, Verizon resurrected its unlimited data plan. The move, an about-face after Verizon largely sat out the industry’s price wars, caters to customers who are spending more time watching videos on their mobile devices.†

Days later rival AT&T, the second-largest domestic telecommunications group by number of customers, quickly matched it. As a result, Street analysts have trimmed earnings expectations for both companies, fearing a possible price war.

The intrinsic value of the shares using the ValuePro.net free cash flow to the firm model, with zero percent revenue growth, is $78.68. My 2017 earnings estimate for Verizon is $3.78 per share, with a projected 12-month share price of $51 for roughly a 10 percent annual gain. We will analyze AT&T in an upcoming column.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

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Can You Predict Market Moves?

Streetwise for Friday, June 9, 2017

You must give those denizens of Wall Street credit; at least they show consistency; bulls and bears locked in a perpetual struggle each convinced the other is wrong.

Meanwhile, as I write this the S&P 500 has closed at 2,433.14, six points below its all-time high, while the Dow Jones Industrial Average closed at 21,173.69. Yet, it was not until May 15, of this year that the S&P 500 finally closed above 2,400, with a record of 2,439.07 chalked up on June 2, seven days ago. It was on that same day that the Dow hit its record high of 21,206.29.

Could anyone have predicted the markets’ recent moves? And if he or she could would they spill the beans to the rest of us? Not likely. Instead, they would be comfortably ensconced on a yacht somewhere with a direct line to some discount brokerage house.

Unfortunately, with no small amount of encouragement from the media, this predicting nonsense often gets out of hand. Take, for example, several recent divinations predicting a Dow of 6,000. That would be a 71 percent drop. Let’s get real. The worst bear market of my lifetime (72 years), was October 2007 to March 2009. A 17-month period during which the S&P 500 lost 56.4 percent, all of which has been subsequently recovered.

That decline was brought about by a long-feared bursting of the housing bubble, resulting in a rising mortgage delinquency rate that quickly spilled over into the credit markets. By 2008, Wall Street giants like Bear Stearns and Lehman were toppling and the financial crisis erupted into a full-fledged panic. By February the markets had fallen to their lowest levels since 1997.

As you peer into the black abyss of what lies ahead, keep in mind two of Wall Street’s key axioms. The first is that the performance of individual securities is uncertain at any moment in time. Second, the performance of a portfolio of securities is uncertain in the short-term.

Yes, I realize that no amount of prose can counter the emotions resulting from a loquacious news announcement about a day’s tumultuous treading activity. Therefore, consider once again the wise words of Wall Street legend Lucien O. Hooper, so often repeated here.

“What always impresses me,” he wrote, “is how much better the relaxed, long-term owners of stock do with their portfolios than the traders do with their switching of stocks. The relaxed investor is usually better informed and more understanding of essential values; he is more patient and less emotional; he does not incur unnecessary brokerage commissions; and he avoids behaving like Cassius by ‘thinking too much.’ ”

The thunderheads that roll over Wall Street are often dramatic but generally pass quickly, leaving behind clear blue skies that will once again invite one and all to come out and frolic in the sun. However, lest you become too complacent and leave the old umbrella at home, remember you are still faced with the dilemma of what constitutes fair and reliable value.

One often talked about way to investigate market valuation is to study an index’s historic price-to-earnings (P/E) ratio using trailing twelve months (TTM) earnings.

As of June 7, the trailing 12-month P/E was 24.08, a reading virtually unchanged from a year ago but considered to be too rich for bottom feeders. By the same token, the dividend yield on S&P 500 index stood at about 1.95 percent as compared to 2.18 percent a year ago and the index trades at about 2.75 times book value, as compared to 2.85 a year ago.

So, are the financial markets headed towards new highs during the remaining months of this year? Or are stock prices likely to remain under pressure due to what some believe to be over valuation, potentially higher interest rates and political uncertainty.

While only time will tell, it is dangerous to chase stocks simply because their prices are rising, it is also risky to conclude that they are attractive simply because prices have fallen. What’s cheap today could get even cheaper tomorrow and what is expensive today could become even more expensive tomorrow.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

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Selling and a Somber Thought for Memorial Day

Streetwise for Sunday, May 28, 2017

Memorial Day is upon us once again and for many it will simply be a day off from work and a time to drag out the barbecue grill. Yet, as I point out each year, the day should be a somber reminder of those who sacrificed their lives to ensure our freedom.

Unfortunately, as you age the devastating impact of armed conflict has a way of fading from memory. Few are left who can recount the untold horrors of the Holocaust. A younger but graying generation pushes remembrances of the sickening sweet smell of Napalm and burning flesh ever deeper into the dark recesses of their minds.

Nonetheless, the jarring impact of seeing young soldiers with missing limbs should not only unleash a gushing torrent of emotion, but hopefully will act as a constant reminder of the seemingly never-ending violence that takes place across the globe in the name of peace…oh and yes religion. And as the recent horror in Manchester, England showed, the violence knows no limits.

You are probably wondering how those comments relate to investing on Wall Street. They do not…except to point out that Memorial Day is an excellent time to once again reflect on the phrase, “Not what your country can do for you but what you can do for your country.”

That would be excellent advice for Wall Street. Unfortunately, the Street’s supercilious attitude is only upended only by its unvarnished self-indulgence. Moreover, the financial largess that now floats freely within the Temples of Wall Street is unlikely to ever make its way to Main Street.

Which brings us to the more germane topic that I address this time of the year, when and what to sell. Too often the subject is exploited with generalized and often erroneous terms such as, “the market is going up, sell,” or “the market is going down, sell.” Or even worse, idiocy such as, “Sell in May and go away.”

Deciding when and what to sell is an investor’s most vexing decision. Given that it is Memorial Day weekend, may I once again suggest you contemplate the words penned over a century ago by Catherine Lee Bates in “America the Beautiful.” She wrote, “Confirm thy soul in self-control.” In other words, keep your investment decisions unemotional.

One time-proven approach is to ask yourself if you would buy the stock today. In answering that question consider whether the company has been increasing dividends for 10 or more consecutive years and has an intrinsic value per share (using a program such as ValuePro.net) that is 10 to 15 percent above the market price.

For example, using those criteria General Electric (GE) continues to be a sell candidate. GE has an intrinsic value, using the ValuePro’s discounted cash flow to the firm model, of $3.95. The shares recently closed at $28.28. And this year I am going to add IBM to my list. A future column will describe in detail why, but for now just go along with what Warren Buffett has said.

Next on my sell list would be bonds and bond funds. Interest rates are going to move higher this year, maybe as soon as June but almost certainly by September. The result will be a drop in the price of bonds and bond funds. Furthermore, the drop could be precipitous.

My final sell idea is my least favorite investment; all mutual funds (401k plans exempted). While most funds do not exceed the S&P 500, the nasty issue is fees and expenses.

According to the Investment Company Institute, the mutual fund trade group, mutual fund fees average 1.44 percent on equity funds, 1.02 percent on bond funds and 0.24 percent on money market funds. Fees for emerging-market funds or alternative-investment funds can be more than 2 percent.

Mr. John Bogle, who founded Vanguard, has pointed out that a mutual fund expense ratio understates the total costs investors pay. In addition to the expense ratio, investors need to look at transaction fees, sales charges and the “drag” of a fund manager who holds assets in cash.

If you feel you need professional assistance, select a fee-based manager that does not receive commissions on what he or she proposes. And no mutual funds unless you want to pay two management fees plus fund expenses and sales charges.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

Here Is How Benjamin Graham Would Do It

Streetwise for Friday, May 26, 2017

If the rarefied air of today’s stock market has you wondering if or how or when to invest then this is a good time to revisit the underpinnings of value investing as it originated in the 1930s through the comprehensive research carried out by Benjamin Graham.

Graham was very straight forward in his advice. His mantra was that if you invest in a profitable, low-debt company, whose shares were trading below the value of its assets, then over time you will achieve a superior return on your investment.

Moreover, Graham directed his ideas at investors, not speculators. He felt that speculation, while fascinating and enjoyable, remained so only while you were ahead. If you wanted to speculate, set aside a small portion of your capital for this purpose. Never mingle your speculative and investment funds…even in your mind. This sound advice is applicable in any investment climate.

Graham studied the historical patterns of various financial markets, sometimes going back several decades. He was a firm believer that if you did not pay attention to the past then you would fail to correctly grasp future opportunities. He pointed out that the art of investing has a characteristic that is not generally appreciated. Specifically, a creditable but perhaps unspectacular return can be achieved with a minimum of effort and capability.

To improve upon that easily attainable return requires substantial effort and more than a trace of wisdom. A little extra knowledge and cleverness is unlikely to produce the expected increase in performance. Ironically, just the opposite may occur. Moreover, there are no sure and easy paths to riches on Wall Street, or any other Street. Graham would often illustrate that point with the following bit of history.

John J. Raskob, a former head of finance for General Motors, gave an interview to Samuel Crowther for the Ladies Home Journal in which he extolled capitalism in an article titled, “Everybody Ought to be Rich.” His thesis was that $15 per month invested in good quality common stocks, combined with dividend reinvestment, would produce an estate of $80,000 in twenty years, against total contributions of only $3,600. The article arrived at newsstands just two months before the Crash of 1929.

If the General Motors tycoon was right then he had indeed found the Holy Grail of investing. How right was he? Graham made a rough calculation based on an assumed investment in the 30 stocks comprising the Dow Jones industrial average.

If Raskob’s prescription had been followed during the period of 1929 to 1949, the portfolio would have been worth approximately $8,500. That is a far cry from the promise of $80,000. However, as Graham pointed out, the return over those 20 years would have exceeded an 8 percent compounded annual rate of return, even though the Dow Jones industrial average began the evaluation period at 300 and ended in 1948 at a closing level of 177.

While Wall Street is unlikely to make you rich, Graham’s investment methodology should provide you with a sufficient degree of enjoyment, profit and excitement. For anyone wanting to follow in Grahams’ footsteps, here are eight key characteristics of his investment philosophy:

1. A price-to-book ratio less than or equal to 1.

2. Substantial working capital, defined as current assets minus current liabilities

3. Free cash flow-per-share greater than earnings-per-share

4. A solid profit margin

5. Debt less than 33 percent of total capital

6. A share price below net-net value, which is working capital minus long-term debt divided by the number of shares outstanding

7. A five-year per-share profit growth rate divided by the five-year per-share revenue growth rate greater than 1

8. Stocks that trade at the lower half of their five-year high P/E ratio

Always remember that desired stock parameters can only produce investment candidates. From there, you will have to burrow into the depths and crevices of the available data to find the true gems you are looking for.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

A Recent Article is Grist for the Column

Streetwise for Sunday, May 21, 2017

Grist is grain that has been separated from its chaff in preparation for grinding. A recent article detailing an academic study of stock prices is providing the grist for being ground up in this week’s column.

A recent study by Hendrik Bessembinder, a finance professor at Arizona State University, begins with the theme that that while investing in the overall stock market makes sense, the obstacles facing individual stock pickers are formidable.

According to Bessembinder, individual stocks resemble lottery tickets. A very small percentage of stocks have done splendidly, but when gains and losses are tallied up over their lifetimes, most stocks have earned zero.

What’s more, Bessembinder claims that 58 percent of individual stocks since 1926 have failed to outperform one-month Treasury bills over their lifetimes. That is a low bar given the returns on one-month Treasury bills.

Bessembinder states that only four percent of the stocks in the entire market – headed by Exxon Mobil and followed by Apple, General Electric, Microsoft and IBM – accounted for all the net market returns from 1926 through 2015. By contrast, the most common single result for an individual stock over that period was a return of a nearly negative 100 percent – almost a total loss.

Using a database developed at the University of Chicago’s Center for Research in Security Prices (CRSP), Professor Bessembinder surveyed virtually every stock listed on the broad American market from July 1926 through December 2015.

He compared their returns with those of one-month Treasury bills over periods as short as one month and for the entire time. Viewed as single units, Professor Bessembinder reported that the typical stock does not outperform Treasury bills.

Yet the overall stock market certainly does exceed the performance of bonds and Treasury bills by very wide margins. Data posted by Aswath Damodaran, a New York University finance professor, whose work I admire, indicated that since 1928, stocks returned about 9.5 percent, annualized, compared with only 4.9 percent for 10-year Treasury bonds and 3.5 percent for three-month Treasury bills.

There is no debating that statistically the stock market has a positive skew – meaning, a relatively small number of outliers like Exxon or Apple have such great returns that they pull up the average return. Put another way, the average return is higher than the median or typical return. However, this does not suggest that stock selection cannot be successful.

“People who pick the right stocks can have lottery-like returns,” Bessembinder said. “They may want to take that risk and do so.”

However, he does strongly imply that those individuals picking stocks are basically heading for failure.

I am not going to argue with Bessembinder’s findings or his interpretation of those findings. I also use the CRSP data base among others. Where I take issue, is the generalization that the markets are so efficient, meaning that all available information has already been incorporated into the price of a stock and therefore it is not possible to exceed an index such as the S&P 500.

My own research, including that being incorporated into my doctoral dissertation, shows quite succinctly and with statistical significance that the utilization of such key factors as increasing dividends and intrinsic value, i.e., discounted cash flow modeling, can enable the construction of portfolios capable of outperforming the S&P 500 index over a 3, 5 and 10-year timeframe.

What is even more galling to me is the suggestion that the way to invest is via index based mutual funds, often of the exchange traded fund (ETF) variety. Not only can you not beat the market if you buy the market, it is an abdication of your investment responsibilities. And there is the issue of fees.

Some advice. While they are not the easiest reading, books by Aswath Damodaran are excellent and will provide you with solid investment knowledge and direction. An easier read, and should be mandatory for any investor, is Benjamin Graham’s, “The Intelligent Investor.”

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

Pilgrimage to The Mecca of The Financial World

Streetwise for Sunday, May 14, 2017

They came by the hundreds, by the thousands, by the tens of thousands, about 40,000 in all, to the Mecca of the financial world, Omaha, Nebraska, to hear the Oracle of Omaha preach to them of financial wisdom. And this year I joined in.

Yes, I made this year’s annual pilgrimage to hear Warren Buffett and Charlie Munger spend nearly seven hours answering countless questions as to both the philosophy and decision processes that drive them as they steer Berkshire Hathaway to ever greater success.

While ostensibly the Berkshire Hathaway annual stockholders meeting, the first 6Ω hours was devoted to answering questions, of which neither Warren or Charlie had any prior knowledge. The actual business part, which entailed the reelection of the board of directors, was left to the last half hour.

With the meeting covered in detail by virtually every major news outlet, I will not regurgitate what has already been said and written, rather I will supply some anecdotes of what impressed me the most.

This was the first time I had an opportunity to attend what the locals refer to as, “The Meeting,” and what can best be described as a financial convention dedicated to one company and two people, with a definite celebratory atmosphere comparable in some ways to a carnival or your average state fair.

If asked what impressed me the most, it would have to be a statement made by Buffett resulting from a discussion about the Wells Fargo debacle. Berkshire Hathaway is the single largest Wells Fargo shareholder.

To paraphrase from the movie, The Godfather, Buffett said that if a person or division loses money that he can forgive. Not every investment or undertaking will always be a winner.

However, tarnish the sterling reputation of Berkshire Hathaway and that he cannot forgive. From Buffett’s perspective, as I interpret it, Wells Fargo’s missteps were inexcusable. Moreover, the blame should fall squarely on the shoulders of the bank’s executive management.

Yes, Buffett made it clear that in any large organization there will always be employees who put their personal interest ahead of the organization they work for. In fact, Buffett said that while he was discussing the issue there was probably someone within the Berkshire Hathaway family who was guilty of it at that very instant.

My suggestion to that individual would be to never let Buffett find out about it. My impression was that such actions would mean immediate dismissal and that if Wells Fargo had been a wholly owned division of Berkshire Hathaway, Buffett would be recruiting a new management team after firing those he felt were directly responsible. To Buffett, loyalty cannot be questioned.

Another interesting point, and one that has been bothering me for some time is the seemingly conflicting statements between Buffett’s passion for index funds versus his investment strategy. It is a question I would have asked given the opportunity.

Buffett explained it this way. Yes, the wealth he will leave to his wife upon his passing is to be invested in an S&P 500 index fund. His reasoning is that it would provide her with ample funds for the rest of her life without her having to worry about the what and whys of Berkshire Hathaway shares.

Buffett also believes that many in the investment world are guilty of charging exorbitant fees with considerably less than commensurate returns.

This was followed up by John Bogle, founder of the Vanguard funds, as to the question; if everyone owned index funds there would be no financial markets.

Yes, this is true Bogle said. However, index funds currently represent less than 25 percent of the equity markets and the danger point would only come if that number climbed to 75 percent, which Bogle did not see happening for many years, if ever. Bogle thought that there would always be a demand for individual securities, particularly by large investors.

Mere words cannot do justice to ìThe Meeting.î My suggestion would be to purchase a class B share (BRK.B), recent price $164.86, attend next year’s festivities and immerse yourself in Buffett’s wisdom.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

Looking To Do Some Bargain Hunting? Consider Celgene (CELG)

Streetwise for Friday, May 12, 2017

With alternating tides of enthusiasm and pessimism roiling the financial markets, there is no better time than now to do some bargain hunting. For example, you might want to consider Celgene Corporation (CELG).

The pharmaceutical giant discovers, develops, and commercializes therapies to treat cancer and inflammatory diseases. When I wrote about the company a year ago, my earnings estimate for 2016 was $5.70 per share, with a projected 12-month share price of $135.

So how did the company do? Earnings well exceeded my forecast, coming in at $5.94 per share. However, the shares recently closed at $119.68. So now the question is what doe Celgene’s future look like?

Unfortunately, the recent earnings announcement was a disappointment. While first quarter earnings per share (EPS) of $1.68 exceeded the $1.60 the Street was expecting, revenue fell short, coming in at $2.96 billion, versus Street expectations of $3.04 billion.

However, the company did raise its full-year EPS number from $7.15 to $7.30, due to the strong commercial performance of their current pharmaceuticals and better-than-expected operating leverage. Net product sales grew 18 percent year over year (YOY), and EPS grew 27 percent YOY.

Revlimid, Celgene’s most profitable drug, saw sales increase 20 percent YOY. In the US, Revlimid sales increased 24 percent YOY, while internationally the increase was 13 percent.

More importantly, Revlimid has some unrealized potential in that it received approval from both the FDA and EU to be used in maintenance therapy for post autologous stem cell transplantation. Currently, there are many patients who do not receive Revlimid for this maintenance therapy. At the same time, Revlimid sales show no signs of slowing down in the foreseeable future.

Abraxane and Pomalyst also continue to see growth in YOY sales. Pomalyst sales are up 33 percent YOY, with Abraxane sales growing at a more modest 5 percent YOY.

The key reason Celgene’s revenue miss was Otezla not meeting expectations. Otezla reported $242 million in sales versus an expected $337 million. However, the miss was likely a one-time occurrence. An unexpected contraction within the psoriasis marketplace, along with insufficient inventory levels, led to the miscue.

On a more positive note, Celgene now has three agreements in place that remove the restriction of having to try other treatments before using the more expensive Otezla.

Looking at the company’s pipeline of future offerings, the key Phase 3 candidates include Ozanimod, a drug currently in phase 3 clinical trials for the therapy of relapsing multiple sclerosis and ulcerative colitis. There have been extensive words said about its upside sales potential.

Mongersen, licensed from Nogra after a successful Phase 2 study, is in Phase 3 for Crohn’s and Phase 2 for ulcerative colitis. Celgene is also looking to market this product for inflammatory bowel disease.

CC-486 (oral Vidaza) is not only more convenient than Vidaza, an important product for Celgene before it went generic, it may have some superiority over it.

Otezla is in a new Phase 3 program for the spine disease ankylosing spondylitis and for the rare Behcet’s disease.

The intrinsic value of the shares, using the ValuePro.net free cash flow to the firm model with updated numbers, produces an intrinsic value of $230 per share. My earnings estimate for 2017 is $7.30 per share, with a projected 12-month share price of $140.

Note to Readers: Rudd International has sponsored a Superhero Puppy sculpture to raise funds for Southeastern Guide Dogs. The unveiling will take place on May 24th at The Met on St. Armand’s Circle, 5:30 to 7:00 P.M. If you would like to meet myself, sculptor Scott Moore, along with artists and friends of Southeastern Guide Dogs, please RSVP to Fran Marinaro at frances.marinaro@guidedogs.org or at 941-400-7884. I will be there to solicit votes for our entry, “Happy Returns,” and our artist Louis Pak. You can vote for your favorite sculpture, $1.00 per vote, with all funds going to Southeastern Guide Dogs.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

What Is the Value Of a Company?

Streetwise for Friday, May 12, 2017

Regular readers of this column know that I espouse dividends as a key factor to consider when evaluating a possible equity investment because over time companies that consistently raise dividends tend to outperform the market.

However, dividends should not be used alone. You need to utilize one or more of the financial ratios that incorporate earnings and/or earnings growth. Those two factors are the hallmark of any corporation. And as important as dividends are, they are not possible without earnings and earnings growth.

For example, one important but underutilized ratio is the enterprise multiple. It measures a company’s valuation based on the ratio of its enterprise value (EV) to earnings before interest and taxes or EBIT. In my opinion this ratio is preferable to the more common ratio of market capitalization (share price multiplied by the number of shares outstanding) divided by net earnings.

Whereas market capitalization is the equity value of a business, the enterprise value includes not only equity but also debt less cash. It can be thought of as the cost to acquire a company.

In other words, EV/EBIT answers the question, “What is the value of a company per each dollar of EBIT?” A high (low) EV/EBIT means the company is potentially overvalued (undervalued).

Using EBIT in place of net earnings provides a clearer picture of a company’s operating profits. By not including interest or taxes, the metric compares the operational structure of the business, rather than letting a company’s financing and tax statuses affect its profitability.

Enterprise ratios are often used by analysts to quickly ascertain and compare potential corporate valuations. All things being equal, the lower a ratio such as EV/EBIT is, the better.

Consider for example American Airlines(AAL). Berkshire Hathaway, i.e., Warren Buffett, recently raised its stake in American during the first quarter of this year. Berkshire now owns 49,278,854 shares or 10.2 percent of the American.

The enterprise value of American is $40.86 billion, with an EBIT number of $5.29 billion. Dividing EV/EBIT yields and enterprise multiple of 7.72. Is this a good ratio or a bad ratio? Obviously, Buffett must like it.

However, as with any financial ratio or number, a single value is of minimal use. To forecast accurately, you need to establish a trend over a 3 to 5-year period and then compare the numbers against those of companies in similar businesses.

Looking at Delta Airlines (DAL), the enterprise value is $42.25 billion and EBIT is $7.024 billion, producing an enterprise multiple of 6.44, a number that is smaller, and theoretically better, than that of American. Keep in mind that Buffett just reduced his stake in Delta, although it is still substantial, to 55,025,995 shares or a 7.6 percent ownership.

Another helpful parameter is a below average capitalization ratio. This ratio compares long-term debt to the sum of long-term debt and shareholder equity. A general guideline is a ratio of less than 30 percent.

For American, long-term debt is $22.489 billion, while shareholder equity is $3.785 billion, yielding a capitalization ratio of 14.4 percent. Delta’s long-term debt is $6.201 billion, while shareholder equity is $12.287 billion. The capitalization ratio is 33.5 percent. Now see if you can replicate some of the rationale behind Buffett’s decision.

Screening simply separates the wheat from the chaff. Your final selection process needs to utilize subjective factors such as management strength, franchise in the marketplace, potential earnings and dividend growth.

Note to Readers: Rudd International has sponsored a Superhero Puppy sculpture to raise funds for Southeastern Guide Dogs. The unveiling will take place on May 24th at The Met on St. Armand’s Circle, 5:30 to 7:00 P.M. If you would like to meet the artists and friends of Southeastern Guide Dogs, please RSVP Fran Marinaro at frances.marinaro@guidedogs.org or at 941-400-7884. You can vote for your favorite sculpture, $1.00 per vote, with all funds going to Southeastern Guide Dogs.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.

Buy, Hold, or Sell Apple (AAPL)

Streetwise for Sunday, May 7, 2017

Given the many facets of uncertainty facing the financial markets, does Wall Street still make sense? Absolutely. The opportunities to invest in the shares of quality companies are abundant in any economic or financial environment.

However, to seize the moment requires a willingness to make decisions with prodigious confidence and the fortitude to stick to those decisions despite the entreaties of others.

At the same time, do not make your life unnecessarily difficult. Combine determination with a sense of confidence and you will be successful. Or to quote George Zimmer, founder and former CEO of the Men’s Wearhouse, “I guarantee it.”

Consider Apple (AAPL). I cannot recall when I have had so many phone calls and email messages asking whether this is the time to buy, hold or sell Apple’s shares. Moreover, perusing a variety of news and financial websites brings forth a cornucopia of bullish articles on the company as well as comparable number of bearish ones. The confusion is no surprise.

Let’s cut through the Gordian knot. There are approximately 47 analysts who write about Apple, of which 35 have a “buy” recommendation, while 10 have a “hold.” Meaning that there is a 75 percent majority who feel Apple presents a buying opportunity.

Moreover, the mean share price estimate for Apple from among 41 analysts is $149 with the shares recently trading at $147.51. So, is there potential for significant future gains? I believe answer is yes, although many might not agree.

Apple reported a surprise fall in iPhone sales for its second quarter, indicating that customers may have held back in anticipation of the 10th-anniversary edition of the iPhone to be released later this year.

Under pressure from shareholders to return more of its $250 billion-plus cash hoard, Apple raised its capital return program by $50 billion, increased its share repurchase authorization by $35 billion and raised its quarterly dividend by 10.5 percent.

For its fiscal second quarter ended April 1, Apple sold 50.76 million iPhones. That was down from 51.19 million a year earlier. The Street had expected iPhone sales of 52.27 million, according to FactSet, while iPhone revenues rose 1.2 percent during the quarter, due in part to a higher average selling price.

For the second quarter, the company’s net income rose to $11.03 billion, or $2.10 per share, compared with $10.52 billion, or $1.90 per share, a year earlier. Analysts on average had expected $2.02 per share, according to Thomson Reuters I/B/E/S. Revenue rose 4.6 percent to $52.90 billion in the quarter, compared with analysts’ average estimate of $53.02 billion.

The company forecast total revenue of between $43.5 billion and $45.5 billion for the current (fiscal third) quarter, while analysts on average are expecting $45.57 billion, according to Thomson Reuters I/B/E/S.

Apple’s gross margin hit 38.9 percent, slightly ahead of analysts’ average expectation of 38.7 percent, despite higher prices for memory chips. The company said it expects gross margins next quarter between 37.5 percent and 38.5 percent, versus analysts’ expectation of 38.3 percent, according to FactSet.

Yet, expectations are rising ahead of Apple’s 10th-anniversary iPhone release this fall, with the expectation that the launch will help bolster sales. Apple typically launches its new iPhones in September.

A big jump in sales usually follows in the holiday quarter, before demand tapers over the next few quarters as customers hold back ahead of the next launch. Apple’s 10th-anniversary iPhone range might sport features such as wireless charging, 3-D facial recognition and a curved display.

The intrinsic value of the shares, using the ValuePro discounted free cash flow to the firm model with corrected numbers, is $164.67. My fiscal 2017 earnings estimate is $8.90 per share, with the share price likely to appreciate to $160 over the next 12 months. Given the potential for record sales of the next generation products out this fall, I would not be surprised if my numbers are conservative.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.