Sony Corporation (SNE) appears to have learned its lesson from the Betamax/ VHS format war. As some already know, Sony was the primary backer of the Betamax format introduced in 1975 that competed with--and eventually--lost market share to VHS. The VHS format was introduced in 1976 by JVC and it proceeded to wear down Sony to the point where .png)
Sony began producing a VHS player in 1988, effectively ending that format battle. There is a similar battle for high definition (HD) movie disc technological supremacy today between Sony’s Blu-ray and Toshiba’s HD DVD formats. This format battle has been going on for almost two years but it is all but determined that Sony’s Blu-ray will win this one.
Wal-Mart (WMT) announced today that they will exclusively carry Blu-ray discs, as they join a chorus of retailers who have made their final decision, including Netflix and Blockbuster rentals. Even more telling, amost all of the major movie studios have made the switch to Blu-ray. HD DVD is losing both content and retail allies in quick succession. The game console market could also make a difference in the format war. Sony’s PlayStation3, which includes a Blu-ray player, has begun to see sales increase dramatically after a recent price cut. Conversely, Microsoft’s Xbox 360--equipped with an HD DVD--fights for those same consumers and has experienced a slip in sales recently. There is realistically no way for the HD DVD format to compete with the exclusive network that Sony has built around Blu-ray. Surely, this defeat will hurt the bottom line at Toshiba, an unpleasant feeling that Sony remembers well from the 1980’s.
Sony did not want to make a huge investment in developing a new technology just to lose again, and it appears this time it will have the last laugh. This victory will surely give the stock a shot in the arm. Speaking strictly from a numbers perspective, we have a positive outlook on Sony as it is selling slightly below its rational expected range that we calculate as $46-$80. This range is based on looking at what valuations the market has been willing to buy Sony in the past. So, with the future of HD movies at its fingertips and having many other successful and diversified electronics business lines, Sony’s stock should command a higher valuation in the months ahead.
Comcast: A Stock We Love, a Company Most Hate
CURRENT RATING: Strong BUY
February 14, 2008 1:42pm
Comcast (CMCSA), the cable television and internet provider is generally a company that is loathed by most consumers. For Comcast customers, it is easy to forget about them when their services are working, but it is when service is interrupted that many form unpleasant opinions on the giant. From personal experience, somehow or another you will inevitably become entangled in a web of customer service people that read from a script of predetermined solutions until finally you reach someone who can operate independently of the script. Comcast is a great example of a company that is easy to hate, but a stock that is very attractive. Some would postulate that the fortunes of a company and its stock are inexorably linked, but as a fundamental research shop we see an opportunity where the two perceptions diverge.
The catalyst for Comcast’s great performance today was that the country’s largest cable provider reported that fourth .png)
quarter profits increased 54% aided by an increase in consumer spending for cable TV services. There is more good news as Comcast reinstated its quarterly dividend and also reaffirmed its intent to buy back nearly $7 billion worth of shares. Comcast will not be entertaining rumors of merging with either Yahoo or Sprint, and will instead focus on building on its existing cable TV, high speed internet, and phone platforms. Sales in each of those segments increased; cable TV increased 6%, internet revenues increased 14%, and the relatively new phone service saw revenue gains of 73%.
Comcast is facing increased competition for consumer’s dollars as the economic slowdown churns on, but the services that Comcast provides should be resistant to an economic downturn. Furthermore, in many areas Comcast has a monopoly on cable TV with the only other option being satellite. So, Comcast has forecast revenue and operating cash flow growth in the range of 8-10%. This would be strong growth for a company that is currently (using a price of $18.55) selling at a discount of 22% to the low end of the normal range for price-to-sales, and a 32% discount to the low end of the normal range for price-to-cash flow. Given the undervalued nature of this stock, Ockham has placed a rational price target on Comcast of about $32 per share.
Coke's Strategy Moves Away from the Fizz
CURRENT RATING: BUY
February 13, 2008 | 2:14 PM
Coca-Cola Company (
KO) is the world’s largest soft drink maker and undoubtedly one of the most recognized brands throughout the world. Coke’s worldwide brand strength was instrumental in their successful quarterly report released today, which included sales gains of 24% over last year. Much of the increased revenues were a result of gains in emerging markets, especially Mexico and China. Global sales by volume increased 5% last quarter compared to a 6% gain over the previous three quarters combined. Interestingly, sales were boosted by a rising consumer class in
emerging markets combine with the cheaper Coke products because of foreign exchange fluctuations. The weakness of the dollar—down 10% in the last year-- could be a real strength for KO which can attribute about three quarters of their revenue to sales outside of the U.S., compared to Pepsi that sells 60% of its products in the United States.
Coke has adjusted its strategy to accommodate for a shrinking domestic market for carbonated drinks, which are still Coke’s principal products. Coke management shrewdly noticed that domestic sales by volume have been falling since 2005, as many consumers prefer healthier alternatives. In 2007 Coke introduced Coke Zero, a zero calorie alternative that is designed to taste the same as Coca-Cola. They have been pleased with the development in sales and have targeted the young male market segment to pull them back to soda from sports and energy drinks.
Coke is diversifying its product mix to include non-carbonated juices and teas, which is an area that Pepsi has taken a greater market share with its Gatorade and Nestea lines. Coke acquired Glaceau; makers of Vitamin Water, for $4.1 billion and these quarterly results are the first to include sales of this new acquisition. To take a gulp of the tea market, Coke added a 40% stake in Honest Tea.
The broad stock market is up today but the Coke report has been received slightly negatively even as they beat estimates. Coke has been a really solid stock for the past few years and we continue to have it rated very positively. It is trading near the low end of its normal ranges of price-to-sales and price-to-cash, which in and of itself does not make it a buy. Coke’s management has proven itself to be more than capable as evidenced by consistently very strong ROE that has stayed above 30% for the last 6 years. The Ockham rationally expected price range lies in the $60-$79, so we believe it still has room to grow.
Cisco Offers "Lumpy" Guidance
CURRENT RATING: BUY
February 7, 2008 | 3:12 PM
Cisco (CSCO) can be seen as a bellwether for the Technology sector, as they provide the backbone for so many internet systems. CEO John Chambers reported 2nd quarter earnings basically in line with Wall Street expectations in a conference call Wednesday evening. Net income rose 7.2 percent and sales increased nicely by 16.5%. This result would have been even better but sales slowed in January after a solid December. However, it was his forecast of “lumpy” sales growth in the 3rd quarter that caused the stock to plummet 7% in after-hours trading. What exactly does “lumpy” sales growth mean? Cisco is projecting sales growth of about 10% over the 3rd quarter a year ago, which falls short of Cisco’s long term growth forecast of 12%-17%. 
Chambers is now famous for having had his head buried in the sand before the tech bubble burst in 2001. Back then, he continued to project 50% sales growth after it was apparent the tech sector was going down hard. In this case, he is clearly concerned that the slowing economy will hurt sales of Cisco products as customers try to get by with older equipment or buy products from lower priced, less proven competitors such as Juniper and Extreme. While that is a valid concern, we would like to point out that Cisco enjoyed revenue growth of 53% in Emerging Markets, particularly China, India and the Middle East. An economic slowdown in the U.S. could certainly hurt their bottom line, but the trend in internet and IT spending in those emerging markets shows little sign of slowing greatly. Also, businesses at home and abroad will need to upgrade equipment in order to support the more data-intensive internet usage of video conferencing and other large file sizes that are becoming more common.
From a value investing perspective Cisco is quite attractive. Price to cash flow is currently 13.58, but the historical range is significantly higher, 20.61-34.14 dating back to 1999 with more recent years given more weight. Price-to-sales is likewise below its normal ranges, albeit to a lesser extent. Given what we already understand about Cisco’s cash, sales, etc. our methodology rationally expects a low-end price target of $33.11. Sales growth has been particularly good for Cisco and even after reducing expectations for the next quarter, 10% is nothing to scoff at.
It's Not Just the New York Giants that are Going to Disney World
CURRENT RATING: BUY
February 6, 2008 | 1:42 PM
The stock market has benefited from the impressive earnings release for their first quarter 2008 from The Walt Disney Company (DIS). Disney’s earnings news counters more recessionary data that lead to an ugly sell-off yesterday, which was sparked by an unexpectedly large plunge in service sector growth as reported by ISM Group. DIS earned 9.1% more revenue than last year, which has carried the stock into positive territory today. This is impressive considering that strong sales growth in late 2006 made for a tough year-over-year comparison and accounted for a 27% decline in Disney’s reported net income.
Conventional wisdom had maintained that sluggish consumer spending would threaten Disney’s theme parks division greatly. But in reality, theme park attendance was resilient and actually increase 3% over first quarter a year ago. Revenue for the theme parks was up 11%, with much of that growth coming from the flagship park, Walt Disney World in Orlando, Florida. Furthermore, Disney was not hit as hard as expected by the now 3-month-old-writer strike. Ad sales remained strong and revenue for the media division, including ABC television, was up more than 10%.
Disney continues to relate well to the younger generation and has benefited from two hugely successful franchises, Hannah Montana and High School Musical. Both of these multimedia vehicles sell extremely well and propelled the consumer products division to revenue growth of 29%. While the trendy kids shows of today are not guaranteed to be “in” tomorrow, Disney will surely benefit from their popularity as long as they can.
Disney shares are up more than 5% at the time of this posting and they were a catalyst for the short-lived stock market advance this morning. Ockham has rated this stock a “Buy” since mid-November and it is just now reaching our rationally expected low, given current levels of earnings, cash, and sales. Given those current valuation measures we expect it to trade between $32 and $48. While DIS is still undervalued by our valuation methodology, it is by no means the most undervalued stock in our coverage universe. We will continue to monitor the stock closely, but we hesitate to advocate buying it aggressively after today’s run up.
Take a Close Look at Amgen
CURRENT RATING: BUY
February 4, 2008 | 4:42 PM
At Ockham Research, our methodology focuses on historical price levels that the market was willing to pay for a stock, with the more recent years weighted more heavily. Based on these metrics, Amgen’s historical norm for Price-to-Cash Flow average annual low was 19.37 and average annual high was 27.99, but the current level is just 9.57. Furthermore, current price-to-sales is about 3.5, but that is a far cry from the average range of 6.68-10.15. For additional evidence, look at the price-to-earnings which is 16.8 and near the low end of its historically normal range of 14.6-61.6.
Ockham Research is not only positive on AMGN, but there are also significantly undervalued peers in the sector. AMGN is part of the Healthcare sector and is compared each week, along with its peers, against all of the other sectors that Ockham Research follows. This week, there has been an overall decline in the sector rating for the Healthcare sector reflecting higher valuations. However, this change has not been sufficient on its own to alter the ranking of the overall Healthcare sector. The Healthcare sector still ranks 1st place out of 10 sectors followed.
So, AMGN is undervalued by our methodology and we rate the Healthcare sector as the most attractive sector. Amgen stock has been beaten down over the last 12 months, but as is often the case, the best long term value buys are those that are selling at such cheap levels because of rocky performance. Also, it was announced today that Amgen will sell drug rights to Takeda, a Japanese pharmaceutical company. This should provide cash to assist Amgen during a restructuring where cost cutting is the big emphasis. As Amgen continues to cut costs and jobs, look for their price to come in line with more historically normal levels.