Medtronic, Inc. (NYSE: MDT) is a global leader in medical technology that helps to alleviate pain, restore health and extend life for millions of people.
The company was founded in 1949 and incorporated as a Minnesota corporation in 1957. Today the company serves physicians, clinicians and patients in more than 120 countries worldwide and functions in seven operating segments that manufacture and sell device-based medical therapies.
These operating segments are Cardiac Rhythm Disease Management, Spinal, CardioVascular, Neuromodulation, Diabetes, Surgical Technologies, and Physio-Control. The companies primary customers include hospitals, clinics, third party healthcare providers, distributors and other institutions, including governmental healthcare programs and group purchasing organizations.
Basis
Financial information presented in this report for Medtronic, Inc., is based on the company’s most recent SEC Form 10-K filing for year ending April 30, 2010, as filed with the Securities and Exchange Commission on June 29, 2010.
Liquidity
Both the company’s Current Ratio at 1.92, and Quick Ratio at 1.39, are below what we consider investment quality, while the company’s Cash Ratio at 0.74, slightly exceeds our investment quality threshold. Additionally, the company’s Goodwill and Intangibles comprise almost 40% of the company’s Total Assets, well above our 15% investment quality threshold.
Profitability
The company’s FY10 Gross Margin was almost 82%, its Operating Margin was almost 33.5%, its Net Margin (NOPAT) was almost 28%, and its Return On Invested Capital was just short of 33%.
The company’s FY10 Effective Tax Rate was almost 22%, while for prior tax years its effective tax rate was 23% for FY08 and 23% for FY09. With an average effective corporate tax rate at between 28%-35%, we think a better understanding of the company’s effective tax results is warranted prior to considering the company for investment.
Debt
The company increased its Total Debt during FY10, from $7.3 billion to $9.5 billion, an almost 30% increase. Not surprisingly, we believe the company’s debt level far exceeds its earnings capability and is gaining little for the additional debt management is adding to the company’s balance sheet.
We simply do not see FY11 earnings being much improved over FY10 earnings even though the company spent $620 million on acquisitions during FY10, not including providing an avenue for an additional spend of $150 million.
We see FY10 acquisition spending much the same as FY09 spending, a year in which the company spent approximately $1.25 billion during on acquisitions that lead to an increase in FY10 Total Debt of 30% and an increase in FY10 Earnings of 6%.
Cash
The company ended FY10 with $1.4 billion in Cash and $2.375 in Marketable Securities, putting available Cash at $3.40 per share. In addition, the company had Operating Cash Flow for FY10 of $5.05 per share, a year over year increase of 2%, generated Free Cash Flow of $3.66 per share, a year over year increase of 2%, and increase their Annual Dividend by 9%, from $0.75 in FY09 to $0.82 in FY10.
Short-Term Investment
The stock closed recently at $40.31, with first First Resistance at $40.66, a 1% increase from the recent close, Second Resistance at $43.33, 7% increase from the recent close, and First Support at $37.07, an 8% decline from a recent close, and Second Support at $30.80, 24% decline from the recent close.
With a Relative Strength Indicator near 40, we assumed the stock would be setting up for a jump in price. However the stock price seems to us to be vacillating, with no real movement up or down. Since we believe there is currently greater downward price volatility, we have no short-term interest in this stock at the present time.
Earnings Growth Investment
Our earnings growth valuations are based on the spread between year over year earnings growth and the current PE.
In the case of Medtronic, Inc., the company had year over year earnings growth of 6%, ending FY10 with earnings of $3.99 per share. With a current PE of 10, the spread between earnings growth and the PE is about 0.6, meaning that for an investor focusing on earnings growth, a current fair value for the stock is about $43.00, a $2.39 increase from a recent close.
Long-Term ( 5 Year Hold) Investment Valuation
Based on our review of the company’s latest annual financial information we think a Reasonable Value Estimate for the company is in the $43-$44 range. Assuming all due diligence was performed prior, we would set a Buy Target at about $26, a First Sell Target at about $51, and a Close Target at about $54.
In addition, based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 54. Accordingly, for the more risk averse value investor, we think a reasonable Buy Target is in the $14-$16 range.
Final Thoughts
Considering a recent close of $40.31, the financial information that we reviewed, an estimated Merger and Acquisition payback of 9.3 years (assuming EBITDA remains the same), year over year earnings growth of 2%, as well as year over year free cash flow growth of 2%, we think the stock is currently fairly valued, and not a candidate for the Wax Ink Portfolio.
Wax
Disclaimer
We have no position in Medtronic, Inc. and no plans to initiate a position in the next 72 hours. Additionally, we have received no compensation to write about a specific stock, sector, or theme.
Aeropostale, Inc. (NYSE: ARO) is a primarily mall-based, specialty retailer of casual apparel and accessories, targeting 14 to 17 year-old young women and men through its Aéropostale stores and 7 to 12 year-old kids through its P.S. from Aéropostale stores.
The Aéropostale brand was established by R.H. Macy and Company, Inc., as a department store private label initiative, in the early 1980’s. Macy’s subsequently opened the first mall-based Aéropostale specialty store in 1987. Over the next decade, Macy’s, and then Federated Department Stores, Inc. (now Macy’s, Inc.), expanded Aéropostale to over 100 stores. In August 1998, Federated sold its specialty store division to Aéropostale management and Bear Stearns Merchant Banking. In May of 2002, Aéropostale management took the company public through an initial public offering and listed its common stock on the New York Stock Exchange.
The company maintains control over its proprietary brands by designing, sourcing, marketing and selling all of its own merchandise and its products can only be purchased in Aéropostale stores and online.The company operates 965 Aéropostale stores and 47 P.S. from Aéropostale stores. In addition, pursuant to a licensing agreement, one of the company's international licensees operated 10 Aéropostale stores in the United Arab Emirates. The company also recently announced a second licensing agreement which will allow the licensee to operated 25 stores in Singapore, Malaysia and Indonesia over the next five years.
Basis
Financial information presented in this report for Aeropostale, Inc., is based on the company's most recent SEC Form 10-K filing for year ending January 31, 2011, as filed with the Securities and Exchange Commission on March 28, 2011.
Short-Term Investment Considerations
The stock closed recently at $21.57, with first Resistance at $24.43, a 13% increase from the recent close, second Resistance at $24.59, 14% increase from the recent close, and final Resistance at $31.31, a 45% increase from a recent close. First Support for the stock settled at $20.50, a 5% decline from the recent close.
Long-Term (5 Year Hold) Investment Considerations
In review of the company's latest annual financial information we note that the Current Ratio at 2.17, and the Cash Ratio at 1.23 were both what we consider investment quality. While close to where we like to see it, the Quick Ratio at 1.23 was not at what we consider investment quality levels. One very bright spot for the company was Return On Invested Capital at 94%. While down from FY10, given the very tough economic conditions retailers have faced over the past several years, we were pleased with this metric. We were also very pleased to see year over year growth in Free Cash Flow of 7%, and year over year earnings growth of 20%.
Earnings Growth Valuation
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates. However, we have come to realize that many investors focus on earnings growth, basing investment decisions on the spread between year over year earnings growth and the current PE.
In the case of Aeropostale, Inc., the company had year over year earnings growth of 22%, ending FY11 with earnings of $3.06 per share. With a current PE of 7, the spread between earnings growth and the PE is about 3, meaning that for a value investor considering earnings growth, a fair value for the stock is about $31.00, if the stock were purchased at its recent close.
Finanical Statement Valuation
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $34-$35 range.
Assuming all due diligence was performed prior, we would set a Buy Target in the $20-$21 range, a First Sell Target in the $40-$41 range, and a Close Target in the $42-$43 range.
Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $16-$17 range.
Considering a recent close of $21.57, an estimated Merger and Acquisition payback of 4 years (assuming EBITDA remains the same), and Free Cash Flow of $2.61, we think the stock is currently undervalued, and a candidate for additional research for the Wax Ink Portfolio.
Wax
Disclaimer
We have no position in Aeropostale, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.
Kraft Foods, Inc. (NYSE: KFT) is the world’s second largest food company. The company manufactures and markets packaged food products, including biscuits, confectionery, beverages, cheese, convenient meals and various packaged grocery products, selling to consumers in 170 countries. The company has operations in 75 countries, employing approximately 127,000 people, and operating 223 manufacturing and processing facilities.
Because the company is a holding company, their principal source of funds is from their subsidiaries, none of which are currently limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.
Basis
Financial information presented in this report for Kraft Foods, Inc., is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 28, 2011.
Short-Term Investment
The stock closed recently at $33.85, with first Resistance at $34.00, a 0% increase from the recent close, first Support at $32.05, a 5% decline from the recent close, and second Support at $31.14, an 8% decline from the recent close. Should the stock price fall through second support, the next support level is currently $27.49, 19% decline from a recent close.
Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information we note that the Current Ratio at 1.04, the Quick Ratio at 0.58, and the Cash Ratio at 0.16, were all well short of what we consider investment quality. We also note that Total Debt at 4 times EBITDA and 2 times Net Fixed Assets, and Goodwill and Intangibles making up 67% of the company's Total Assets are additional metrics that were well below what we consider investment quality.
On the positive side, Return On Invested Capital at 21%, Free Cash Flow at $2.05 per share, an 18% year over year increase, and year over year Earnings Growth of 14% all exceeded our investment quality metrics.
Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.
However, we realize that many investors focus on earnings growth, basing investment decisions on the spread between year over year earnings growth and the current PE.
In the case of Kraft Foods, Inc., the company had year over year earnings growth of 14%, ending FY10 with earnings of $2.38 per share. With a current PE of 14, the spread between earnings growth and the PE is about 1, meaning that for a value investor considering earnings growth, a fair value for the stock is about $36.00, if the stock were purchased at its recent close.
Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $28-$29 range.
Assuming all due diligence was performed prior, we would set a Buy Target in the $17 range, a First Sell Target in the $34 range, and a Close Target in the $35-$36 range.
Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 72. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $12-$13 range.
Considering a recent close of $33.85, an estimated Merger and Acquisition payback of 12 years (assuming EBITDA remains the same), and Free Cash Flow of $2.05, we think the stock is currently fairly valued, and a not a candidate for additional research for the Wax Ink Portfolio.
Wax
Disclaimer
We have no position in Kraft Foods, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.
USA Mobility, Inc. (Nasdaq: USMO) is a provider of wireless communications solutions to the healthcare, government, large enterprise and emergency response markets.
As a single-source provider, the company’s strategy is to focus on the business-to-business marketplace and to offer wireless connectivity solutions. The company operates nationwide networks for both one-way paging and advanced two-way messaging services. In addition, the company offers mobile voice and data services through third party providers, including BlackBerry® devices and global positioning system (“GPS”) location applications.
The company’s product offerings include customized wireless connectivity systems for healthcare, government and other campus environments. USA Mobility also offers M2M (“machine to machine”) telemetry solutions for numerous applications that include asset tracking, utility meter reading and other remote device monitoring applications on a national scale.
Basis
Financial information presented in this report for USA Mobility, Inc., is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 24, 2011.
Short-Term Investment
The stock closed recently at $15.45, with first Resistance at $15.90, a 3% increase from the recent close, second Resistance at $19.21, a 24% increase from the recent close, first Support at $14.64, a 5% decline from the recent close and second Support at $12.10, a 22% decline from the recent close.
Even though the stock price is trending upward, there does not appear to be any near term price breakout on the horizon, making a short-term investment impractical at this time.
Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information we note that the Current Ratio at 4.48, the Quick Ratio at 4.28, and the Cash Ratio at 3.74, were all what we consider investment quality.
In addition, Debt to EBITDA at 0.01, and a Cash Conversion Cycle of 13 days, were well within our investment quality parameters. Additional bright spots were ROIC at 131% and Free Cash Flow at $3.25. Although year over year free cash flow declined from $3.97, or about 18%, at this time we do not see the decline as the beginning of trend.
We also note that the company ended FY10 with Debt of $0.03 per share, and paid an annual dividend of $1.96 per share.
Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.
However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.
In the case of USA Mobility, Inc., the company had year over year earnings growth of (7%), ending FY11 with earnings of $4.52 per share. With a current PE of 3, the spread between earnings growth and the PE is about (2), meaning that for a value investor considering earnings growth, a fair value for the stock is about $6.50.
Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $48-$50 range.
Assuming all due diligence was performed prior, we would set a Buy Target in the $29-$30 range, a First Sell Target in the $56-$57 range, and a Close Target in the $60-$62 range.
Based on our assessment of the company financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $22 to $23 range.
Considering a recent close of $15.45, an estimated Merger and Acquisition payback of 2.6 years (assuming EBITDA remains the same), and Free Cash Flow of $3.25, we think the stock is currently under valued, and a candidate for additional research for the Wax Ink Portfolio.
Wax
Disclaimer
We have no position in USA Mobility, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.
Bed Bath and Beyond, Inc. (Nasdaq: BBBY) and its subsidiaries, are a chain of retail stores, operating under the names Bed Bath and Beyond, Christmas Tree Shops, Harmon and Harmon Face Values, and buybuy BABY. In addition, the company is a partner in a joint venture which operates two stores in the Mexico City market under the name Home and More.
The company sells a wide assortment of domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and certain juvenile products.
The company believes that it is the nation’s largest operator of stores selling predominantly domestics merchandise and home furnishings while offering a breadth and depth of selection in most of its product categories that exceeds what is generally available in department stores or other specialty retail stores.
Basis
Financial information presented in this report for Bed Bath and Beyond, Inc., is based on the company's most recent SEC Form 10-K filing for year ending February 26, 2011, as filed with the Securities and Exchange Commission on April 26, 2011.
Short-Term Investment
The stock closed recently at $56.13, with Resistance at $57.90, a 3% increase from the recent close, First Support at $50.15, an 11% decline from the recent close and Second Support at $45.38, a 19% decline from the recent close. Should the stock price break through Second Support, the next support level is $26.50, a 53% decline from a recent close.
Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information, we note that the Current Ratio at 3.08 and the Cash Ratio at 1.35, were what we consider investment quality, while the Quick Ratio at 1.35 was slightly below our investment quality target. In addition, Debt to EBITDA at 0.13, Debt to Equity at 0.05, and Free Cash Flow at $3.76, a 22% year over year increase, were also within our investment quality parameters.
Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.
However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.
In the case of Bed Bath and Beyond, Inc., the company was had year over year earnings growth of 39%, ending FY11 with earnings of $3.76 per share. With a current PE of 15, the spread between earnings growth and the PE is about 3, meaning that for a value investor considering earnings growth, a fair value for the stock is about $66.
Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $51-$53 range.
Assuming all due diligence was performed prior, we would set a Buy Target in the $31-$33 range, a First Sell Target in the $61-$63 range, and a Close Target in the $65-$66 range.
Based on our assessment of the company's financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $25 to $27 range.
Considering a recent close of $56.13, an estimated Merger and Acquisition payback of 9.2 years (assuming EBITDA remains the same), and Free Cash Flow of $3.76, we think the stock is currently fairly valued, and have no interest in adding the company to the Wax Ink Portfolio at this time.
Wax
Disclaimer
We have no position in Bed Bath and Beyond, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.
Landec Corporation (Nasdaq: LNDC) and its subsidiaries design, develop, manufacture and sell polymer products for food and agricultural products, medical devices and licensed partner applications that incorporate the company's patented polymer technologies.
The company has two proprietary polymer technology platforms: 1) Intelimer® polymers, and 2) hyaluronan (“HA”) biopolymers.
The company’s HA biopolymers are proprietary because they are formulated for specific customers to meet strict regulatory requirements. The company’s polymer technologies, along with its customer relationships and trade names, are the foundation, and a key differentiating advantage upon which the company has built its business.
The company sells specialty packaged fresh-cut vegetables and whole produce to retailers and club stores, primarily in the United States and Asia through its Apio, Inc. subsidiary, Hyaluronan-based biomaterials through its Lifecore Biomedical, Inc. subsidiary, and Intellicoat® coated seed products through its Landec Ag LLC subsidiary.
Basis
Financial information presented in this report for Landec Corporation, is based on the company's most recent SEC Form 10-K filing for year ending May 30, 2010, as filed with the Securities and Exchange Commission on August 12, 2010.
Short-Term Investment
The stock closed recently at $6.48, with Resistance at $7.08, a 9% increase from the recent close, First Support at $6.16, a 5% decline from the recent close and Second Support at $6.15, a 5% decline from the recent close. Should the stock price break through Second Support, the next support level is $5.30, an 18% decline from a recent close.
Long-Term (5 Year Hold) Investment
In review of the company's latest annual financial information, we note that the Current Ratio, the Quick Ratio, and the Cash Ratio, we all what we consider investment quality. In addition, Debt to EBITDA, and Debt to Equity, were with in our investment quality parameters.
What we found lacking was the company's Free Cash Flow, at ($1.15). As value investors, negative free cash flow is just a huge red flag. Accordingly we checked our FY09 valuation worksheet and found free cash flow of $0.32, meaning a year over year growth in free cash flow of (460%).
Certainly negative free cash flow growth is not always cause for alarm. But it is something the average investor should investigate prior to considering a position in this stock.
Earnings Growth
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.
However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.
In the case of Landec Corporation, the company was had year over year earnings growth of 13%, ending FY10 with earnings of $0.38 per share. With a current PE of 17, the spread between earnings growth and the PE is a bit less than 1, meaning that for a value investor considering earnings growth, a fair value for the stock is about $7.
Valuations
Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $13 to $15 range. Assuming all due diligence was performed prior, we would set a Buy Target in the $8 to $9 range, a First Sell Target in the $15-$16 range, and a Close Target in the $17-$19 range.
Based on our assessment of the company's financial information that we reviewed, we believe a reasonable financial risk multiplier is 48. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $4 to $5 range.
Considering a recent close of under $6.50, the potential for growth, an estimated Merger and Acquisition payback of 11.1 years (assuming EBITDA remains the same), and Free Cash Flow of $(1.15), we have no interest in adding the company to the Wax Ink Portfolio at this time.
Wax
Disclaimer
We have no position in Landec Corporation at this time, and have received no compensation to write about a specific stock, sector, or theme.
