Wednesday, July 31, 2013

The Gaming Company Everybody Is Gunning For

The console wars have nothing on the software skirmish that shaping up against Activision Blizzard (NASDAQ: ATVI  ) . At the gaming industry's big conference this week, Activision's rivals showed off the titles they intend to use to attack the company's prime market position.

Disney (NYSE: DIS  ) plans to hit first with its Infinity game this summer, aimed directly at Activision's profitable Skylanders franchise. Next up will be Electronic Arts' (NASDAQ: EA  ) new game Battlefield 4, which looks like it will match up well against Activision's Call of Duty title this fall.

In the following video, Fool contributor Demitrios Kalogeropoulos argues that all of this competition will make for a tough year for Activision, which set new records on sales and profitability in 2012. The company may be able to keep its dominant position in these tentpole franchises, but it will have to sacrifice some profits to do it.

While Activision and Microsoft have been taking the headlines when it comes to console gaming, Fools following the gaming sector would do well to also keep tabs on Electronic Arts. The Motley Fool's new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.

Tuesday, July 30, 2013

Is Tesla Motors Valuation Getting out of Hand?

When it comes to valuation, Tesla Motors' (NASDAQ: TSLA  ) stock price premium is second to none among auto manufacturers. The company trades at 142 times forward earnings estimates and about 15 times its trailing-12-month revenue. As if the six-month run-up of 188% since Jan. 1 wasn't enough, the stock has appreciated another 21% on top of that in the last month and a half. When is enough enough?

Tesla runs a lucrative operation
First, the positive. As Tesla Motors ramps up production, the company's manufacturing process benefits from greater economies of scale. This, of course, is no surprise -- it's a basic rule of thumb in business. But to what degree will Tesla benefit?

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Already, the company has "reduced the hours required to build a car by almost 40% from December to March," asserts Tesla's first-quarter letter to shareholders.


Tesla Model S undergoing assembly. Source: Green Car Reports.

This, along with a number of other benefits associated with scale and $68 million in sales (12% of revenue) of its zero-emission vehicle credits, or ZEVs, helped the company double its gross margin from last quarter, to 17%.

In the first quarter, Tesla's gross margin of 17.15% outperformed a number of auto manufacturers. Ford (NYSE: F  ) , for instance, reported a gross profit margin of 16.21% during the same period -- and that was on sales of about 1.5 million vehicles. To make this comparison fair, however, it's important to note that Tesla's core auto business' gross margin was just 2% in the quarter, according to Morgan Stanley's Adam Jonas. ZEV credits were a major contributor to the company's 17% gross margin, says Jonas.

But here is where things get really interesting. In the first-quarter letter to shareholders the company reaffirmed its guidance for a gross margin of 25% by the fourth quarter of 2013, "assuming zero ZEV credit revenue".

Valuation
Can Tesla's improving gross profit margin save the company from the Street's lofty expectations? Probably not by itself, but it's definitely a start.

A gross margin of 25% is about 1.46 times the company's current gross margin of 17.15%. Taking Tesla's first-quarter gross profit of 96 million and multiplying it by 1.46, Tesla could earn a gross profit of 140 million every quarter at today's revenue levels and with a gross profit margin of 25% -- that's 560 million annually. In other words, Tesla trades at 25 times a very conservative estimate of 2014 gross profit. Conservative or not, 25 times 2014 gross profit is a significant premium. Ford trades at just three times its trailing-12-month gross profit. 

It's about expectations
Tesla will need far more than gross margin improvements to grow into its valuation. Fortunately, gross margin improvements are not the end of the story for Tesla. Last quarter alone the company's sales increased by 83% from the prior quarter. Can sales growth and gross margin improvement combined save the stock from its valuation?

The average analyst estimate for Tesla's 2014 revenue is 2.32 billion. Assuming a gross margin of 25%, Tesla's gross profit would equal 580 million in 2014. At today's price, that means Tesla is trading at about 23 times its 2014 gross profit, assuming a 25% gross profit margin and 2.32 billion in revenue (146% higher than Tesla's trailing-12-month revenue of 945 million). This is definitely a lofty expectation.

As Tesla's stock continues to rise, I'm withdrawing my buy recommendation. Importantly, however, I don't believe this means current investors should sell. I'm a big believer in holding onto companies as long as they are meeting or exceeding my original thesis -- and Tesla hasn't failed me on that front. In other words, I don't sell good businesses (no matter the valuation), but I do consider valuation when I make an initial buy decision.

As price increases relative to the underlying fundamentals, risk increases too. Tesla is too expensive to buy, but as a business firing on all cylinders I wouldn't sell it and pay taxes on my gain yet either.

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Monday, July 29, 2013

Perrigo to Buy Elan for $8.6 Billion

After months of fighting off the advances of unwanted suitor Royalty Pharma, Irish biotech Elan (NYSE: ELN  ) finally got an offer it couldn't refuse -- from drugmaker Perrigo (NYSE: PRGO  ) .

The OTC drugmaker based in Michigan said  today that it would buy Elan for  $6.25 per share in cash plus $10.25 per share in stock for a total of $16.50 per share, or around $8.6 billion. That's a premium of 10.5% to Elan's closing price prior to the acquisition announcement. Royalty Pharma's final bid was $13 in cash per share plus a "contingent value right" valued at an additional $2.50 per share if Elan's  multiple sclerosis drug Tysabri achieved certain sales milestones, and the investment firm recently penned an open letter to the biotech essentially saying good luck with finding a better offer than that.

Stating his belief that the union of Perrigo and Elan would create an industry-leading health care company with the financial wherewithal to grow and capitalize on international opportunities, Perrigo Chairman and CEO Joseph C. Papa said, "We believe this transaction is compelling for Elan shareholders and fully takes into account the value of Elan's assets, including a large cash balance and a double-digit royalty claim on Tysabri, a blockbuster product that generated revenues of $1.6 billion last year and has been growing at a compound annual growth rate of 19%."

The transaction has been unanimously approved by the boards of directors of both companies and is expected to close by the end of 2013. It is subject to regulatory approval and needs approval from shareholders.

Perrigo and Elan would combine into a new company incorporated in Ireland, which is expected to be called Perrigo Company plc or something close to that, but will be led by Perrigo's current management team. Perrigo, which has been headquartered in the small western Michigan town of Allegan since 1887, said it would move its tax residence to Ireland and hopes to cut its tax liabilities nearly in half as it grows non-U.S. sales.

Under the terms of the agreement, Elan shareholders will receive $6.25 in cash and 0.07636 shares of the new Perrigo company for each share of Elan they own. The transaction values Elan at approximately $8.6 billion based on Perrigo's closing share price on July 26, or net of cash, at $6.7 billion.

Elan Chairman Robert A. Ingram said, "This is an excellent transaction for Elan shareholders and provides them with cash consideration as well as the opportunity to benefit from the potential upside value of the new company. Joe Papa and his team have demonstrated exceptional capability and delivery of results in building a premier health care company over the past number of years. We have the confidence in Joe and his leadership team to continue to grow and expand its presence on a global scale."

Royalty had made three bids for Elan, each one of which was rejected as being too low. By incorporating the new Perrigo in Ireland, it will gain significant tax advantages for doing so, cutting its effective tax rate to 17% in the first 12 to 18 months from around 30% now, according to a Reuters report.

The combination is expected to result in more than $150 million of recurring after-tax annual operating expense and tax savings. 

Perrigo is already the largest maker of generic drugs for major retail chains in the United States, including Walgreens and Wal-Mart. It has rapidly expanded overseas since 2005 with acquisitions in Israel, Britain, Mexico and Australia.

-- Material from The Associated Press was used in this report.

link

Sunday, July 28, 2013

Does The Street Have ConocoPhillips Figured Out?

ConocoPhillips (NYSE: COP  ) is expected to report Q2 earnings on Aug. 1. Here's what Wall Street wants to see:

The 10-second takeaway
Comparing the upcoming quarter to the prior-year quarter, average analyst estimates predict ConocoPhillips's revenues will shrink -11.2% and EPS will expand 6.6%.

The average estimate for revenue is $12.42 billion. On the bottom line, the average EPS estimate is $1.30.

Revenue details
Last quarter, ConocoPhillips logged revenue of $14.17 billion. GAAP reported sales were 3.6% lower than the prior-year quarter's $15.14 billion.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
Last quarter, non-GAAP EPS came in at $1.42. GAAP EPS of $1.73 for Q1 were 24% lower than the prior-year quarter's $2.27 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Recent performance
For the preceding quarter, gross margin was 48.5%, 110 basis points worse than the prior-year quarter. Operating margin was 26.2%, 150 basis points better than the prior-year quarter. Net margin was 14.7%, 470 basis points worse than the prior-year quarter.

Looking ahead

The full year's average estimate for revenue is $54.37 billion. The average EPS estimate is $5.88.

Investor sentiment
The stock has a five-star rating (out of five) at Motley Fool CAPS, with 5,657 members out of 5,807 rating the stock outperform, and 150 members rating it underperform. Among 1,356 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 1,329 give ConocoPhillips a green thumbs-up, and 27 give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on ConocoPhillips is hold, with an average price target of $64.25.

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A New Uptrend for the Gold Sector

On Monday, the gold sector did something it hasn't done since last November: It traded above its 50-day moving average (DMA) line.
 
Most technical analysts view the 50-DMA as the line in the sand separating intermediate-term uptrends from intermediate-term downtrends. Stocks trading above the 50-DMA are in bull mode, while stocks trading below the line are in bear mode.
 
So Monday's action is a BIG deal. And the rally should have folks looking to buy...
 
Last month, I explained how the failure of the sector to rally above its 50-DMA – when it was set up almost perfectly to do so – created a firestorm of selling pressure. I also told you that I believed the disappointing action in the gold sector could be setting up for an even more violent rally in the coming months. Here's what I wrote...
 
This is the type of oversold condition you only see once or twice in a generation. Other than the liquidation event of 2008, we haven't seen anything similar to today's conditions since 1976.
 
Gold stocks, as measured by the Barron's Gold Miners Index (the "BGMI") – the most popular gold index in the 1970s – declined 67% from their 1974 highs to their 1976 lows. The index bottomed 44% below its 200-DMA.
 
Using 1976 as a guide, there's still room for gold stocks to move slightly lower here. But by that same guide, gold stocks rallied more than 600% in the years following the 1976 bottom. So the sector could explode violently higher once the bottom is in.

Of course, it won't be a one-way move higher. The sector will have plenty of selloffs and back-and-forth action as it starts its new uptrend. Traders should look at any declines as buying opportunities – especially any declines that come back down and retest the 50-DMA – like the one we got Wednesday...
 
 
You can see how the Market Vectors Gold Miners Fund (GDX) broke above its 50-DMA (the blue line) on Monday. It extended that rally on Tuesday. Then Wednesday, it came back down and is now testing the 50-DMA as support.
 
That support should hold. I don't expect GDX to decline much more than a couple percentage points below its 50-DMA. If that turns out to be the case, Monday's action will prove to be the start of a new intermediate-term uptrend for the mining sector. And GDX should work higher toward its 200-DMA (the red line) over the next several months.
 
Best regards and good trading,
 
Jeff Clark


Saturday, July 27, 2013

Why This Philip Morris Earnings Report Is Crucial

Philip Morris International (NYSE: PM  ) will release its quarterly report on Thursday, and projections suggest that it will manage to deliver decent results for investors. But shareholders don't seem convinced about Philip Morris earnings, as they've recently sent the stock down substantially from its May highs.

Many investors have gravitated to Philip Morris in the belief that by doing all of its business overseas, it won't ever have to worry about cigarette warnings and other regulatory measures that its U.S. peers face. But increasingly, it's becoming evident that other countries are looking for ways to control tobacco in the same way the U.S. does. Let's take an early look at what's been happening with Philip Morris over the past quarter and what we're likely to see in its quarterly report.

Stats on Philip Morris

Analyst EPS Estimate

$1.41

Change From Year-Ago EPS

3.7%

Revenue Estimate

$8.19 billion

Change From Year-Ago Revenue

0.9%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Will Philip Morris earnings go up in smoke this quarter?
Analysts have cut back on their earnings calls about Philip Morris lately, cutting their June-quarter estimates by $0.08 per share and their full-year 2013 consensus by double that amount. The stock has also reflected that uncertainty, falling 5% since early April.

Ever since its spinoff from Altria (NYSE: MO  ) , Philip Morris has benefited from higher growth prospects from its international sales. At the same time that Altria, Lorillard, and (NYSE: LO  ) other U.S. tobacco companies have struggled to keep their revenues moving higher, the argument is that other countries with less regulation offer better environments to foster sales growth for Philip Morris. That's true to an extent, although the edge that Philip Morris has had over its peers has narrowed considerably in recent years and is slated to continue to shrink in the future.

But Philip Morris has its own challenges to face. Last quarter, the company reported considerable underground cigarette trading in areas of southeastern Asia that cut into its overall sales volumes. Moreover, although the U.K. government delayed a decision on a potential ban on putting branding images on cigarette packs, the company nevertheless faces increased regulatory threats. The U.K. said that it wanted to see the effects of a similar measure in Australia before moving forward, suggesting that if the measure proves successful, Philip Morris could see it come up in other countries around the world. The European Union also imposed a ban on menthol cigarettes recently, upping the pressure on tobacco companies generally.

The other area where Philip Morris earnings could take a hit is in currency impacts. With all of its revenue coming from overseas, Philip Morris suffers when the dollar is strong, as adverse currency exchange rates can produce a substantial hit to its bottom line. Currency impacts tend to even out over time, but not being prepared for short-term fluctuations can result in a nasty surprise for unaware investors.

When Philip Morris reports earnings, be sure to watch the status of ongoing regulatory activity around the world, especially Australia. If results are starting to get hurt due to labeling regulation, it could be just the first step toward similar regulations elsewhere -- and that could pull the stock further downward in the quarters to come.

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Friday, July 26, 2013

Ford To Fund Its Pension Fully By Mid-Decade

Ford (F) is one of the most popular stocks covered by analysts, journalists and online contributors. Much of the research conducted on Ford is overly simplistic and rarely talks about important points beyond looking at the company's P/E ratio. There are many articles that look at Ford and try to determine whether the company is buy, hold or sell by using only at its P/E ratio. This is why I decided to write this series on the company to cover many aspects of it. In this article, I'll talk about one of the most important items in Ford's balance sheet: its pension obligations.

Those interested can find the previous six articles here: 1) When Will People Understand Ford's Debt?, 2) The Ford Story Continues In Europe, 3) Ford: Opportunities Exist In South America, Asia And Africa, 4) Ford Credit Is An Important Part Of Ford, 5) Digging Deeper Into Ford Credit and 6) So How Can Ford Steal Market Share From Competitors? (Bonus: Connectivity Is The Next Big Thing For Cars).

So, what's going on with Ford's pension plan and why is it so important for the investors? As of the end of last year, Ford had an outstanding pension obligation to its retirees totaling $83 billion. The company spent $3.4 billion during 2012 in order to fund some of the obligations and there is a shortfall of $18.7 billion. The company plans to meet all its obligations by the mid-decade. As you can see, the pension obligations are one of the biggest items in Ford's balance sheet and they eat a big chunk of Ford's earnings right now. On a positive note, when the company is done with paying these obligations off, its balance sheet will be very healthy and it will be able to spend this money on its investors in shape of dividends and buybacks.

Currently, the policies of the Fed have created a low-interest environment which is hurting pension funds across the world. Pensions can't put all their money in stocks because it would be too risky. After all, millions of retirees and their families will have to rely on pe! nsion funds to support a living. When the interest rates are low, companies have to make larger contributions to their pension funds in order to close the gap.

In 2012, Ford's pension plan's asset return was $7.0 billion and its obligation growth was $5.2 billion, resulting in a net return of $1.8 billion. The contributions totaled $3.8 billion, which added $5.6 billion to the funds when combined with the net return. Unfortunately, the lower discount rate was $8.9 billion, which increased the funding gap by $3.3 billion ($8.9 billion minus $5.6 billion). The discount rate is a direct function of interest rates.

According to the company's calculations, if the interest rates were higher by 1%, the funding gap would have narrowed by $2.3 billion in 2012. Similarly, if the interest rates were lower by 1%, this would have widened the funding gap by another $2.8 billion. As you can see, the funding status of Ford's pension plan will be heavily dependent on the interest rates. In fact this is true for most companies with pension plans. The good thing is that the interest rates will be almost always higher than how they are right now because they are artificially pulled back by the policies of the Fed until the economy improves.

In January of this year, Ford issued new debt of $2 billion with a yield of 4.75%. Part of this debt (i.e., $600 million) was used to retire an older debt that used to yield 7.50% and the rest of this amount ($1.4 billion) will be used to make pension payments. This debt will mature in 30 years.

Ford is funding its pension plans at a higher rate each year. In 2011, the contribution was $2.3 billion, followed by $3.4 billion in 2012. This year, the plan is to contribute $5.4 billion to the plan, which will be the largest payment in a long time. Of this, $5 billion will go to funded plans and $400 million will go to unfunded plans. The number is large enough to worry some investors and eat a large portion of Ford's income; however, keep in mind that once the progra! m is fund! ed, Ford won't have to worry about this anymore, which means it can focus on other things such as further growth, higher dividends and stock buybacks. Once the pension plan is fully funded, Ford's balance sheet will start get significantly stronger. Currently, Ford's balance sheet is one of Alan Mulally's biggest priorities because he understands the importance of a strong balance sheet for both operations and investors of a company. Strong balance sheets support strong dividends and buybacks in addition to future growth initiatives.

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The future contributions to the pension plans will depend on several factors. These factors are discount rates (dependent on yield of high-quality bonds in a given country), expected long-term rate of return on assets (focuses on historical long term trends rather than short term fluctuations), salary growth (a function of inflation), inflation (based on GDP growth and central bank inflation targets), expected or planned contributions (based on cash availability), retirement rates and mortality rates. Due to the strong stock market in the US last year, the return on assets was as high as 14.2%. In the long term, the expected return on assets is 7.5% per annum. This is because the pension plan is heavily invested in high quality bonds and the stock exposure of the pension plan is limited in order to limit the risk.

In addition to the pension plans, the company also offered to pay a lump-sum to many current or former employees that were either close to or in retirement. A number of these employees voluntarily took the payouts, which resulted in a one-time payment of $1.2 billion. Ford is pretty much done with making payments to those who accepted the lump-sum payment. The offer is good through 2013, so there might be more people who accept to take the payment and be done with it.

In conclusion, under the leade! rship of ! Mr. Mulally, Ford is working on improving itself in every way including its balance sheet. Currently, the company is making large contributions to its pension plan, but once the plan is fully funded, the company will be able to put its cash in other uses such as dividends, stock buybacks and future growth initiatives.

Source: Ford To Fund Its Pension Fully By Mid-Decade

Disclosure: I am long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Thursday, July 25, 2013

Big Pharma's 3 Most Profitable Companies

Patent expirations have cut into sales at Big Pharma's best in recent quarters. Doom-and-gloom talk over the patent cliff ,and shaky pipelines at pharmaceutical firms, have waxed and waned, but some of the industry's best firms have kept up profitability that would make any Wall Street analyst blush.

Which firms are earning the most for your investment -- and are they really worth your money? Motley Fool contributor Dan Carroll takes a look below at the three firms maintaining the industry's best net profit margins, and explains if these stocks match up to what their businesses are bringing in.

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Wednesday, July 24, 2013

Today’s 3 Worst Stocks

Unable to continue a four-day rally that had sent it to all-time closing highs yesterday, the S&P 500 Index (SNPINDEX: ^GSPC  ) ended its hot streak Tuesday, falling 3 points, or 0.2%, to close at 1,692. House Speaker John Boehner elicited a nearly audible sigh from markets today as he reminded Washington and, indeed, the world, that another nightmarish debt-ceiling/spending-cut debate lies ahead, the beginning stages of which may begin as early as next month. Two years ago, Washington's ineptitude on this very issue caused the ratings agency Standard & Poor's to downgrade America's credit rating.

Chipmaker Advanced Micro Devices (NYSE: AMD  ) registered as one of the index's worst performers for a third straight day, losing 6.2% Tuesday. AMD shares just can't seem to catch a break, with three consecutive days of losses taken straight from the negatives of a financial horror film: First AMD plummeted 13%, and then lost another 3%, only to cap it all off with today's abysmal showing. Not much has changed materially since the company underwhelmed on its quarterly report, sparking several analyst downgrades and a sharp sell-off. Still boasting 52% gains on the year, some investors are taking the downturn as a sign that the run's over.

Tobacco giant Lorillard (NYSE: LO  ) also ended toward the bottom of the index today, losing 4.5% as an FDA study revealed that menthol cigarettes pose an even greater public health risk than normal cigarettes do, though the agency stopped short of recommending specific policy measures. Lorillard, more so than other major tobacco players, faces more dire financial repercussions from the ruling, since it owns the Newport brand, the premier menthol cigarette in the United States.

Lastly, online streaming provider Netflix (NASDAQ: NFLX  ) slid 4.5% after subscriber gains fell short of expectations. While it was an interesting touch to hold the earnings call on a live video conference, the medium didn't distract from the message. The message Wall Street gleaned from the call was that its current heady growth projections for the company were a bit too ambitious. Though Tuesday's performance was disappointing, the service still added 630,000 new subscribers in the U.S., and longer-term investors have still seen Netflix's stock rocket 170% in 2013 alone.

The television landscape is changing quickly, with new entrants like Netflix and Amazon.com disrupting traditional networks. The Motley Fool's new free report "Who Will Own the Future of Television?" details the risks and opportunities in TV. Click here to read the full report!

Tuesday, July 23, 2013

Why Precision Castparts Earnings Should Fly Higher

Precision Castparts (NYSE: PCP  ) will release its quarterly report on Thursday, and judging from the movement of its stock, investors are expecting good results. With activity in the aerospace industry helping the aircraft components maker's business, Precision Castparts earnings look poised to produce strong growth both this quarter and well into the future.

Precision Castparts actually has a much wider scope than aerospace, serving the auto, medical, and chemical industries as well with a variety of cast and forged metal component offerings. Yet with general weakness in the global economy in many industrial businesses, Precision is undoubtedly benefiting from the relative strength in aircraft demand. Let's take an early look at what's been happening with Precision Castparts over the past quarter and what we're likely to see in its quarterly report.

Stats on Precision Castparts

Analyst EPS Estimate

$2.90

Change From Year-Ago EPS

23%

Revenue Estimate

$2.52 billion

Change From Year-Ago Revenue

28%

Earnings Beats in Past Four Quarters

1

Source: Yahoo! Finance.

How will Precision Castparts earnings fare this quarter?
Analysts have gotten more optimistic about Precision Castparts and its earnings prospects in recent months, boosting their June-quarter estimates by a nickel per share and raising full-year fiscal 2014 and 2015 views by about $0.20 per share each. The stock has reflected that enthusiasm, rising almost 30% since mid-April.

Precision started the quarter off on a positive note, with a strong earnings report in May from its previous quarter. Precision's soaring revenue growth on the back of its acquisition of Titanium Metals didn't quite match up to more aggressive expectations from analysts, but earnings growth of 23% beat estimates and helped send the shares up sharply.

Two moves from Precision during the quarter showed the company's commitment toward improving its strategic position within the industry. The biggest was its announced $600 million acquisition of Permaswage late last month, which designs and makes aerospace fluid fittings. With expectations that the buyout will immediately boost earnings once it closes, the move accentuates the huge opportunity that Precision sees in the aerospace industry. But it also sold off its Primus Composites division to Triumph Group (NYSE: TGI  ) , showing Precision's willingness to sell off what it considers to be non-core assets even if it is more typically a buyer than a seller.

The growth opportunity that Precision has from aerospace just keeps getting bigger. As a supplier to Boeing (NYSE: BA  ) , Precision stands to make big gains from Boeing's projections of $4.8 trillion in aircraft sales over the next 20 years. Boeing's recent woes with its 787 Dreamliner have led to some volatility in stocks of major suppliers, as even engine-manufacturer General Electric (NYSE: GE  ) and components-maker United Technologies (NYSE: UTX  ) are potentially vulnerable to measurable setbacks if something happens to derail Boeing's favorable assessment of the industry. Still, without such an unexpected surprise, any pullback for supplier stocks could be a buying opportunity.

In the Precision Castparts earnings report, watch for the company to discuss the potential impact of the Permaswage acquisition further. With its ongoing efforts to increase its footprint in aerospace, Precision has plenty of chances to send its stock flying much higher in the years to come.

With U.S. stock markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery", outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

Click here to add Precision Castparts to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Monday, July 22, 2013

How Dividends Change the Game for McDonald's Shareholders

The wealth-building power of compound interest will never cease to amaze me. It's a story of patience and attention to detail, where small, short-term differences add up to massive divergence over decades. And in the end, the biggest winners don't always deliver the fattest share-price returns.

Let's take a deeper look at McDonald's (NYSE: MCD  ) dividend-generation skills.

The fast-food giant just reported (link opens PDF) second-quarter earnings, with both sales and earnings falling slightly short of analyst estimates. Management sees tough times ahead in the second half of 2013 but also reminds investors that the company has "succeeded in a variety of operating and economic environments." All told, investors focused more on the negative short-term outlook than on the promise to come back swinging: McDonald's shares fell as much as 3.2% on the news, making it by far the weakest performer on the Dow (DJINDICES: ^DJI  ) today.

What's bad for share prices is generally good for dividend yields. At today's prices, McDonald's offers a generous 3.1% yield. That's comfortably above the Dow's average yield of 2.6%, beating all but eight of its 29 Dow peers.

McDonald's is a classic Dividend Aristocrat, having increased its annual payouts in each of the last 37 years. The company just announced another $0.77 per-share payout, staying true to the clockwork-like model of paying the same dividend for four quarters at a time. Expect the next dividend to jump by another 10% or so. That's how McDonald's rolls.

MCD Dividend Yield Chart

MCD Dividend Yield data by YCharts.

You can set your calendar by McDonald's dividend increases, and this ultra-reliable policy is fantastic news for investors. Sure, the stock tends to beat the Dow based on rising share prices alone, but the dividend really puts McDonald's over the top.

MCD Chart

MCD data by YCharts.

Investors who say "no thanks" to 40% higher 10-year returns thanks to a fantastic dividend should just take their nest eggs and retirement portfolios to the nearest casino instead. McDonald's delivers a master class in how to build lasting wealth. And the longer you stretch your investing horizons, the better this stock looks. The annual dividend checks nowadays are larger than the original investment if you bought McDonald's 30 years ago.

McDonald's stock is safe as houses (or even safer, for those who remember the panic of 2008!). This management team isn't kidding around when they say they've seen every market condition in the book. That's the kind of cash machine you can buy on the dips and keep for decades to come. I just started a bullish CAPScall on the stock myself to exploit today's negative overreaction.

If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report "5 Dividend Myths...Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. You'll also take an even deeper dive into Mickey D's dividend policies. Click here to keep reading.

Sunday, July 21, 2013

Hot Safest Companies To Invest In Right Now

Royal Dutch Shell and ExxonMobil both recently announced incredibly expensive, incredibly ambitious offshore projects in the Gulf of Mexico. The massive oil reserves that exist beneath the ocean floor are increasingly being targeted by the oil majors in their quest to increase production. In this video, Fool.com contributor Aimee Duffy looks at the company's behind three new offshore innovations that will make big oil's big challenge safer, and more efficient.

National Oilwell Varco is perhaps the safest investment in the energy sector due to its industry-dominating market share. This company is poised to profit in a big way; its customers are both increasing the number of new drilling rigs and updating aging fleets of offshore rigs. To help determine if it could be a good fit for your portfolio, you're invited to check out The Motley Fool's premium research report featuring in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now to claim your copy.

Hot Safest Companies To Invest In Right Now: Fluor Corporation(FLR)

Fluor Corporation, through its subsidiaries, provides engineering, procurement, construction, maintenance, and project management services worldwide. Its Oil & Gas segment offers design, engineering, procurement, construction, and project management services to upstream oil and gas production, downstream refining, chemicals, and petrochemicals industries. This segment also provides consulting services comprising feasibility studies, process assessment, and project finance structuring and studies. The company?s Industrial & Infrastructure segment offers design, engineering, procurement, and construction services to the transportation, wind power, mining and metals, life sciences, manufacturing, commercial and institutional, telecommunications, microelectronics, and healthcare sectors. Its Government segment provides engineering, construction, logistics support, contingency response, management, and operations services to the United States government focusing on the Departme nt of Energy, the Department of Homeland Security, and the Department of Defense. The company?s Global Services segment offers operations and maintenance, small capital project engineering and execution, site equipment and tool services, industrial fleet services, plant turnaround services, temporary staffing services, and supply chain solutions. Its Power segment provides engineering, procurement, construction, program management, start-up and commissioning, and operations and maintenance services to the gas fueled, solid fueled, plant betterment, renewables, nuclear, and power services markets. The company also offers unionized management and construction services in the United States and Canada. Fluor Corporation was founded in 1912 and is headquartered in Irving, Texas.

Hot Safest Companies To Invest In Right Now: Goldman Sachs Group Inc.(The)

The Goldman Sachs Group, Inc., together with its subsidiaries, provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. Its Investment Banking segment offers financial advisory, including advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense, risk management, restructurings, and spin-offs; and underwriting securities, loans and other financial instruments, and derivative transactions. The company?s Institutional Client Services segment provides client execution activities, such as fixed income, currency, and commodities client execution related to making markets in interest rate products, credit products, mortgages, currencies, and commodities; and equities related to making markets in equity products, as well as commissions and fees from executing and clearing institutional client transactions on stock, options, and fu tures exchanges. This segment also engages in the securities services business providing financing, securities lending, and other prime brokerage services to institutional clients, including hedge funds, mutual funds, pension funds, and foundations. Its Investing and Lending segment invests in debt securities, loans, public and private equity securities, real estate, consolidated investment entities, and power generation facilities. This segment also involves in the origination of loans to provide financing to clients. The company?s Investment Management segment provides investment management services and investment products to institutional and individual clients. This segment also offers wealth advisory services, including portfolio management and financial counseling, and brokerage and other transaction services to high-net-worth individuals and families. In addition, it provides global investment research services. The company was founded in 1869 and is headquartered in New York, New York.

10 Best Stocks To Watch Right Now: Petroleo Brasileiro S.A.- Petrobras(PBR)

Petroleo Brasileiro S.A. primarily engages in oil and natural gas exploration and production, refining, trade, and transportation businesses. The company?s Exploration and Production segment involves in the exploration, production, development, and production of oil, liquefied natural gas (LNG), and natural gas in Brazil. This segment supplies its products to the refineries in Brazil, as well as sells surplus petroleum and byproducts in domestic and foreign markets. Its Supply segment engages in the refining, logistics, transportation, and trade of oil and oil products; export of ethanol; and extraction and processing of schist, as well as holds interests in companies of the petrochemical sector in Brazil. The Gas and Energy segment involves in the transportation and trade of natural gas produced in or imported into Brazil; transportation and trade of LNG; and generation and trade of electric power. In addition, the segment has interests in natural gas transportation and d istribution companies; and thermoelectric power stations in Brazil, as well engages in fertilizer business. The Distribution segment distributes oil products, ethanol, and compressed natural gas in Brazil. The International segment involves in the exploration and production of oil and gas, as well as in supplying, gas and energy, and distribution operations in the Americas, Africa, Europe, and Asia. Further, the company involves in biofuel production business. Petroleo Brasileiro was founded in 1953 and is based in Rio de Janeiro, Brazil.

Advisors' Opinion:
  • [By Dave Friedman]

    Institutional investors bought 78,663,680 shares and sold 101,125,380 shares, for a net of -22,461,700 shares. This net represents 0.23% of common shares outstanding. The number of shares outstanding is 9,872,826,100. The shares recently traded at $27.61 and the company’s market capitalization is $170,178,700,000.00. About the company: Petroleo Brasileiro S.A. – Petrobras explores for and produces oil and natural gas. The Company refines, markets, and supplies oil products. Petrobras operates oil tankers, distribution pipelines, marine, river and lake terminals, thermal power plants, fertilizer plants, and petrochemical units. The Company operates in South America and elsewhere around the world.

  • [By ETF Authority]  

    Current Price: $47.68 12-month target: $80

    PBR plans to invest $174 billion by 2013 to support the largest oil discovery in 30 years. PetroBras has both the backing of the Brazilian government who invested over $30 billion and the Chinese private investors who have pledged over $20 billion to PBR’s discovery. Brazils government proposed to make PBR the only operator of all new offshore pre-salt oil fields yet to be exploited. PetroBras expects oil production to increased from 2.4 million barrels a day to around 5.7 million barrels a day by 2020. PBR has long-term views and have been expanding renewable energy programs such as solar, biofuel, and energy. Biofuel production is expected to increase 18% by 2013.

Hot Safest Companies To Invest In Right Now: Under Armour Inc.(UA)

Under Armour, Inc. develops, markets, and distributes performance apparel, footwear, and accessories for men, women, and youth primarily in the United States, Canada, and internationally. It offers products made from moisture-wicking synthetic fabrics designed to regulate body temperature and enhance performance regardless of weather conditions. The company provides its products in three fit types: compression (tight fitting), fitted (athletic cut), and loose (relaxed) extending across the sporting goods, outdoor, and active lifestyle markets. Its footwear offerings comprise football, baseball, lacrosse, softball, and soccer cleats; slides; performance training footwear; and running footwear. The company also provides baseball batting, football, golf, and running gloves, as well as licenses bags, socks, headwear, custom-molded mouth guards, and eyewear that are designed to be used and worn before, during, and after competition. Under Armour sells its products through retai l stores, as well as directly to consumers through its own retail outlets and specialty stores, Website, and catalogs. The company was founded in 1996 and is headquartered in Baltimore, Maryland.

Advisors' Opinion:
  • [By Roger]

    Under Armour (NYSE:UA), a maker and designer of apparel, footwear and accessories that target sports enthusiasts, has more than doubled in one year. But despite the advance, many research firms still have a “strong buy” recommendation on the stock. And S&P recently revised its annual target to $93.

    Technically UA has advanced on a series of stair steps, sometimes called “base moves.”? These are very bullish formations that resemble cups. UA reversed up recently following a signal from our proprietary Collins-Bollinger Reversal (CBR) indicator. If the recent pullback to its 50-day moving average (blue line) holds, then the next move up should break the prior high with a target of $85.

    Traders could take risk positions now with a target of $85 to $90. But be careful and use stop-loss orders to protect against a violent reversal, which could drop prices back to support at $62 where this volatile stock could be bought again.

  • [By Glenn]  

    Current Price: $27.27 12-month target: $37

    I see potential in opportunities for new product adjacencies, and expanding distribution worldwide. Footwear growth will continue to increase. Revenues for these products have increased over 69% in 2009. Adding to this I still see growth in Under Armour’s apparel sales, which are up 8%. Under Armor had yet to even break into the international market, which offers a plethora of new opportunities for this growing brand. I believe sales will rise drastically in 2010 driven by international sales, new women’s clothing line, and expansion within their own footwear line.
  • [By Fernandez]

    Under Armour designs, develops, markets, and distributes performance apparel, footwear, and accessories for men, women, and youth primarily in the United States and Canada.

    You’ve probably seen the company’s “Protect This House” or “Click-Clack” commercials, and probably seen anyone from the weekend warrior to professional sports teams wearing the company’s moisture-wicking synthetic fabrics, which are designed to keep perspiration away from the skin, and regulate body temperature regardless of weather conditions.

    I must admit for full disclosure that I am an Under Armour nut, and own about 20 pairs of their shorts, shirts and shoes.

    I can attest from personal experience as a natural bodybuilder and athlete that the Under Armour apparel are the best workout clothing I have ever worn, and they look pretty darn cool too.

    Now let me make a clear distinction between a great company, and a great stock.

    Up until recently, Under Armour was the former, but not the latter.

    It has now entered into a zone where the valuation metrics, even in the face of a consumer slowdown, is looking more and more attractive.

    In fact, Under Armour just released earnings Monday.

    They were pretty much in line with analyst’s expectations, and then Under Armour slightly lowered their forward guidance for the remainder of 2008 based on those same consumer headwinds.

    The market liked what it heard sending shares up 20% (of course, the overall market was up 10%, so…). Shares have since rebounded further are now up almost 50% from their lows just last week!

    This leads me to my investment thesis in shares of Under Armour.

    I believe that Under Armour represents one of the quintessential brands of this decade when it comes to sports apparel, the way Under Armour’s fiercest rival Nike (NYSE: NKE) dominated the 90’s.

    Until now the valuation of the company was not commensurate with the! projected profit and growth, which I thought were way too high, and still might be, along with certain inventory related problems that the company now seems to be getting a handle on.

    Still, with the spike in share price, along with the uncertainty in the market and overall economy, I feel that we will still be able to purchase shares of this great company at a great price in the near future and that we’re seeing a bit of a short squeeze in shares of Under Armour.

    Why I Like the Company: One of the quintessential brands of this decade; Valuation is reaching reasonable to “cheap” levels depending on direction of consumer market and Under Armour’s stock price; Dedicated and fully invested founder with over 77% voting power via class B shares; Improved business fundamentals via better inventory controls and operational structure, and new product offerings; Further expansion available outside the U.S.; Relatively higher margins than competition

Saturday, July 20, 2013

Boeing's F-15 on Target for Largest Foreign Arms Sale in U.S. History

The U.S. is in the middle of major defense budget cuts because of sequestration, but Saudi Arabia is clearly not in the same predicament. In fact, the Royal Saudi Air Force, or RSAF, is in the middle of a fleet modernization program and has gone on a veritable shopping spree with U.S defense contractors. More pointedly, this latest venture is the largest foreign arms sale in U.S. history. For Boeing's (NYSE: BA  ) F-15SA, in particular, this is excellent news. 

Photo: U.S. Air Force, via Wikimedia Commons. 

Boeing on target
In 2011, Air Force officials announced that the RSAF would purchase 84 new Boeing F-15SA fighters and upgrade 70 of its current F-15C/D Eagle Fleet aircraft to the SA configuration -- since reduced to 68 upgrades -- in a deal worth $3.5 billion for Boeing, and part of a $29.4 billion foreign military sale between the U.S. and Saudi Arabia.

Since then, Boeing's F-15SA successfully completed its maiden voyage, and met all of the test objectives, on Feb. 20, and in a financial statement released on July 3, Boeing revealed that three F-15SAs had been delivered for the flight trials campaign. Although the report didn't specify delivery to Saudi Arabia, the RSAF is currently the only customer for the new F-15SA. 

Put together, these reports indicate that Boeing's F-15SA is on track for its scheduled 2015 delivery to the Kingdom of Saudi Arabia. Further, Col. Robert Stambaugh, the Air Force Security Assistance program manager for the F-15SA program at Robins Air Foce Base, Ga., stated, "Completing this major milestone in less than one year after program implementation was truly remarkable." Great news for Boeing. It's also great news for Lockheed Martin (NYSE: LMT  ) , which is helping with modernization of the F-15s, for the fixed price of $253.4 million.  

Clear skies ahead
The news that Boeing is on track with its F-15SA is certainly welcome, especially given the latest issues with the Dreamliner. And while nothing is certain regarding an on-time delivery of the F-15SAs, right now, it looks promising.

Boeing has had a rocky few weeks, but that doesn't mean its future isn't bright. Still, there are some things to consider before investing in Boeing. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies, including Boeing, that could take off when the global economy gains steam. Click here to read the free full report!

Friday, July 19, 2013

8 Fascinating Reads

Happy Friday! There are more good news articles, commentaries, and analyst reports on the Web every week than anyone could read in a month. Here are eight fascinating ones I read this week.

Wisdom
Business Insider pulled a list of quotes from Back Swan author Nassim Taleb's Facebook page. Here are a few: 

Journalists cannot grasp that what is interesting is not necessarily important; most cannot even grasp that what is sensational is not necessarily interesting. We often benefit from harm done to us by others; almost never from self-inflicted injuries.  The artificial gives us hangovers, the natural inverse-hangovers. The only problem with the last laugh is that the winner has to laugh alone. Intelligence without imagination: a deadly combination. When someone writes "I dislike you but I agree with you," I read "I dislike you because I agree with you."

Leg up
Matt Bruening cites data from the Pew Economic Mobility study: 

So, you are 2.5 times more likely to be a rich adult if you were born rich and never bothered to go to college than if you were born poor and, against all odds, went to college and graduated. The disparity in the outcomes of rich and poor kids persists, not only when you control for college attainment but even when you compare non-degreed rich kids to degreed poor kids!

Losing interest
CNBC viewers are fleeing, writes ValueWalk: 

Many of CNBC's leading programs have seen a downward spiral in terms of ratings. The quarterly data show that Mad Money, Squawk on the Street, and the Kudlow Report have posted their worst rated quarter ever

CNBC continues to lose ratings. The latest Nielsen Media Research statistics show that the business network's total number of quarterly viewers fell to their lowest level since the second quarter of 2005. In the all-important age group of 25-54, CNBC witnessed its lowest level quarter since 1994. That's not an impressive track record for a network that's "First in Business Worldwide."

Dedication 
Alfred Feld has worked at Goldman Sachs (NYSE: GS  ) for 80 years, writes The Wall Street Journal: 

One day into his job at Goldman Sachs, Alfred Feld found his name on a list of employees the firm had targeted for layoffs.

Then fate, and a supportive boss, intervened.

Eighty years later, Mr. Feld is still at it at Goldman.

"I came so close to being fired after one day," Mr. Feld, 98 years old, said Wednesday. "I'm glad that didn't happen.

Patent trolls
The New York Times writes a profile of a patent troll: 

[The] number of patent infringement suits has more than doubled in recent years, to 4,731 cases in 2012 from 2,304 in 2009, according to that RPX report. The cost to businesses, which pass along the expense to consumers, is immense.One study found that United States companies -- most of them small or medium-sized -- spent $29 billion in 2011 on patent assertion cases.

Backfired
BusinessWeek profiles Sears Holdings (NASDAQ: SHLD  ) Eddie Lampert's management style: 

An outspoken advocate of free-market economics and fan of the novelist Ayn Rand, he created the model because he expected the invisible hand of the market to drive better results. If the company's leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.

Instead, the divisions turned against each other -- and Sears and Kmart, the overarching brands, suffered. Interviews with more than 40 former executives, many of whom sat at the highest levels of the company, paint a picture of a business that's ravaged by infighting as its divisions battle over fewer resources.

Now's the chance 
Barry Ritholtz says we need to fix our crumbling infrastructure while we can -- when interest rates are low: 

Thanks to the Federal Reserve's zero interest rates and quantitative easing policies, borrowing costs are near generational lows. The costs of funding the repair and renovation of America's decaying infrastructure are as cheap as they have been since World War II.

But the era of cheap credit may be nearing its end. And thanks to a dysfunctional Washington, D.C., we are on the verge of missing a once-in-a-lifetime opportunity.

Due dilligence
Warren Buffett biographer Alice Shroeder talks about how Warren picked stocks before he took over Berkshire Hathaway (NYSE: BRK-B  ) : 

Enjoy your weekend. 

More big-picture stuff 
My new report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read it. 

Thursday, July 18, 2013

Will These Numbers from AT&T Be Good Enough for You?

AT&T (NYSE: T  ) is expected to report Q2 earnings on July 23. Here's what Wall Street wants to see:

The 10-second takeaway
Comparing the upcoming quarter to the prior-year quarter, average analyst estimates predict AT&T's revenues will expand 0.8% and EPS will increase 3.0%.

The average estimate for revenue is $31.84 billion. On the bottom line, the average EPS estimate is $0.68.

Revenue details
Last quarter, AT&T booked revenue of $31.36 billion. GAAP reported sales were 1.5% lower than the prior-year quarter's $31.82 billion.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
Last quarter, non-GAAP EPS came in at $0.64. GAAP EPS of $0.67 for Q1 were 12% higher than the prior-year quarter's $0.60 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Recent performance
For the preceding quarter, gross margin was 60.0%, 30 basis points better than the prior-year quarter. Operating margin was 18.9%, 30 basis points worse than the prior-year quarter. Net margin was 11.8%, 50 basis points better than the prior-year quarter.

Looking ahead

The full year's average estimate for revenue is $128.32 billion. The average EPS estimate is $2.50.

Investor sentiment
The stock has a three-star rating (out of five) at Motley Fool CAPS, with 5,429 members out of 5,888 rating the stock outperform, and 459 members rating it underperform. Among 1,213 CAPS All-Star picks (recommendations by the highest-ranked CAPS members), 1,145 give AT&T a green thumbs-up, and 68 give it a red thumbs-down.

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on AT&T is hold, with an average price target of $36.39.

Can your portfolio provide you with enough income to last through retirement? You'll need more than AT&T. Learn how to maximize your investment income and "Secure Your Future With 9 Rock-Solid Dividend Stocks." Click here for instant access to this free report.

Add AT&T to My Watchlist.

7 New Offerings For The Red-Hot IPO Market

It took awhile, but the IPO market is heating up. 

Recent deals have performed so well that investment bankers are hustling the next crop up to the starting gate at a rapid pace. You can't blame them. A shift in the markets can shut the IPO market down, so these firms and their bankers are looking to strike while the iron is hot.

Of course, investors only have access to these deals if they have a brokerage account with one of the company's underwriters. If you have accounts with any investment banks, it pays to give your broker a call and see what deals the firm is underwriting.

 
Expecting triple-digit gains (sometimes in a matter of weeks) -- as these IPOs have generated -- is unrealistic. But as long as the stock market stays aloft, many coming IPOs could easily tack on 20% to 40% in aftermarket trading. The IPO market is simply that frothy right now.

Ironically, this year's most anticipated deals have yet to materialize. Back in January, I looked at 10 potential blockbuster IPOs in the tech sector, though none of these firms has lined up in the near-term IPO pipeline queue. They shouldn't wait too long. The IPO market can slam shut in the blink of an eye if the market turns south.

Yet we can take a sneak peek at companies that have already filed to go public in coming weeks and months. Here are seven firms to watch.

1. Phillips 66 Partners
Investors in energy pipeline master limited partnerships (MLPs) are likely to give this deal a close look. The backing of such a large corporate parent could give this offspring access to some sweetheart deals. Bankers are completing the paperwork, and the IPO, using the ticker PSXP, come arrive any day now. JPMorgan Chase (NYSE: JPM) is the lead underwriter (though your broker may also be "on the cover" of the deal book, which could enable you to get shares at the offering price).

 

2. WCI Communities
This may be a familiar name. It was a high-end homebuilder that crashed and burned after the 2008 housing crisis. A focus on Florida explains why this builder went into bankruptcy. Yet a resurgent Floridian real estate market explains why it's time to go public again. The high end of the real estate market is indeed the place to be, but this deal won't likely be much of a bargain considering homebuilding peers have already seen their shares bid up sharply over the past few years. Citigroup (NYSE: C) is acting as lead underwriter; the ticker will be WCIC.

 

3. Associated Materials 
This is a play on the various materials used in new and used home construction, and like WCI, may be attractive to housing market bulls. Yet be warned that this company remains unprofitable and will still have a hefty debt load even after the IPO is completed. As a result, it may be wise to buy shares only if they are priced at a very attractive discount to the peer group. Goldman Sachs (NYSE: GS) will be the underwriter, though no ticker symbol has yet been assigned.

 

4. Agios Pharmaceuticals
Biotech stocks are in high demand, both as IPOs and as already public companies. And this one should be as hot as any, thanks to the backing of biotech superstar Celgene (Nasdaq: CELG). Agios is developing drugs that starve cancer cells by blocking the mutated metabolic enzymes that feed them. However, Agios is only now entering clinical trials, and it will be several years before any drugs hit the market. And that of course assumes that the clinical trials will be successful.

My preferred strategy: If you can't buy the shares at the IPO, wait for the inevitable return to earth that besets all biotechs at some point in their multi-year drug testing cycle. These kinds of stocks tend to drift out of investors' minds during Phase I and Phase II testing. JPMorgan will act as the lead underwriter.

 

5. Jones Energy
The timing for this natural gas driller is a bit suspect. Weak gas prices have recently rendered the Austin, Texas-based firm unprofitable, and it would have been preferable to seek an IPO when gas prices are higher. Still, Jones appears unable to wait much longer, as it needs the cash to keep up with its drilling plans. JPMorgan is the lead banker, and this stock will trade under the ticker JONE.

 

6. Onconova Therapeutics
As noted, investors are snapping up biotech stocks with abandon right now, though in terms of IPOs, the field is mostly confined to companies that are only in the early stages of drug testing.

Onconova is the rare biotech that is going public while a key drug is already in Phase III trials, meaning investors only need to wait for several quarters and not several years to find out if the company will succeed. Onconova is developing rigosertib, which targets pancreatic cancer. (Other cancers are being targeted in earlier clinical trials.) Citigroup is the underwriter, and the ticker will be ONTX. Baxter (NYSE: BAX), which has secured European sales rights, is one of several investors in the company.

 

7. SFX Entertainment
SFX is the world's largest operator of electronic dance events, which we old folks used to call "raves." The company's festivals have often drawn up to 100,000 attendees, which means this IPO will garner plenty of buzz. But IPO investors may be turned off by the fact that SFX lost roughly $50 million last year on a base of $242 million in revenue. An investment in SFX is a wager on CEO Robert Sillerman, who has made investors considerable profits with past ventures in the music business. UBS is the lead underwriter, and the ticker will be SFXE.

Risks to Consider: Even if you buy these IPOs, it's risky to hold them too long as they can move out of favor after a quarter or two. That's often when analysts decide to stop covering a company. Moreover, a drop in the stock market can be especially hard on these new issues, as they lack a long-term track record and entrenched shareholder base.

Action to Take --> This is shaping up to be one of the strongest years for IPOs in quite some time, and many of the new issues have generated rapid and profitable trades. Still, it pays to do a great deal of due diligence on these stocks before buying to ensure that there is a tangible growth opportunity in place. Remember, it may pay to call your broker and see whether your firm is underwriting any of these deals.

P.S. -- If you're looking for the next big IPO, then you should know about a group of stocks with wealthy and powerful company backing them -- or what I like to call a "Rich Parent." These "Rich Parent" stocks are one of my favorite ways to profit in the market right now. One is a low-risk play that has already returned 333% since going public in 2008, while another yields nearly 10%. To find out how to get the names of 20 of my favorite "Rich Parent" MLPs, go here.

Wednesday, July 17, 2013

1 Million Facebook Advertisers Are Oh So Wrong

Facebook  (NASDAQ: FB  )  recently announced it has reached 1 million advertisers significant. At least one commentator believes the social media giant may have gone too far with its effort to monetize its user base. Online advertising represents a delicate balance between the value provided to the advertiser and the tolerance and interest of the user.

In the video below, Fool.com contributor Doug Ehrman discusses the milestone for Facebook and the importance of finding a level of ad saturation that communicates the message without overly annoying users.

Though Facebook may have gone too far, social media continues to have huge potential. This incredible tech stock is growing twice as fast as Google and Facebook, and more than three times as fast as Amazon.com and Apple. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table, and why he's so confident this will be a huge winner in 2013 and beyond. Just click here to watch!

Monday, July 15, 2013

Why Catamaran Is Poised to Bounce Back

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, health care IT services specialist Catamaran (NASDAQ: CTRX  ) has earned a coveted five-star ranking.

With that in mind, let's take a closer look at Catamaran and see what CAPS investors are saying about the stock right now.

Catamaran facts

Headquarters (founded)

Lisle, Ill. (1993)

Market Cap

$9.9 billion

Industry

Healthcare services

Trailing-12-Month Revenue

$11.4 billion

Management

Chairman/CEO Mark Thierer (since 2012)

CFO Jeffrey Park (since 2012)

Return on Equity (average, past 3 years)

11.3%

Cash/Debt

$311.4 million / $1.1 billion

Competitors

Caremark Pharmacy Services
Cerner
Express Scripts

Sources: S&P Capital IQ and Motley Fool CAPS.

On CAPS, 96% of the 392 members who have rated Catamaran believe the stock will outperform the S&P 500 going forward.   

Just last month, one of those Fools, NHWeston102, succinctly summed up the Catamaran bull case for our community:

Buy-out Bait! An innovative company with a lot of management hustle and lots of little deals with big companies. This is an area that can't not grow, not with the aching need to rationalize health care records and management. Demographics, debt, and management urgency are all behind the [Catamaran].

While you can certainly make huge gains in health care stocks, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Sunday, July 14, 2013

Don't Get Too Worked Up Over Eaton Vance's Earnings

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Eaton Vance (NYSE: EV  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Eaton Vance generated $74.5 million cash while it booked net income of $216.8 million. That means it turned 5.9% of its revenue into FCF. That sounds OK. However, FCF is less than net income. Ideally, we'd like to see the opposite.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Eaton Vance look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 23.7% of operating cash flow coming from questionable sources, Eaton Vance investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, stock-based compensation and related tax benefits provided the biggest boost, at 68.4% of cash flow from operations. Overall, the biggest drag on FCF came from changes in accounts receivable, which represented 23.1% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

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Saturday, July 13, 2013

Top Small Cap Companies To Buy For 2014

There's a certain thrill involved with holding small cap stocks in your portfolio. After all,�given the relatively tiny size of their underlying businesses, these are the stocks which often hold the greatest prospects for growth over the long run.

To be sure, who wouldn't love to see his or her portfolio explode to the upside as today's small caps become tomorrow's massively profitable industry giants?

So what's the catch? Small-cap stocks tend to be much more volatile than their larger brethren. As a result, as long as nothing has happened to significantly change your buying thesis, you need to be willing to stick it out through thick and thin to realize truly substantial long-term gains.

With that in mind, here are two small cap stocks which are trading significantly below their 52-week-highs, and why I think you should buy them before they bounce back:

Top Small Cap Companies To Buy For 2014: Hot Topic Inc.(HOTT)

Hot Topic, Inc., together with its subsidiaries, operates as a mall- and Web-based specialty retailer in the United States. The company operates Hot Topic and Torrid store concepts, as well as an e-space music discovery concept, ShockHound. Its Hot Topic stores sell music/pop culture-licensed merchandise, including tee shirts, hats, posters, stickers, patches, postcards, books, novelty accessories, CDs, and DVDs; and music/pop culture-influenced merchandise comprising women?s and men?s apparel and accessories, such as woven and knit tops, skirts, pants, shorts, jackets, shoes, costume jewelry, body jewelry, sunglasses, cosmetics, leather accessories, and gift items for young men and women primarily between the ages of 12 and 22. The company?s Torrid stores sells casual and dressy jeans and pants, fashion and novelty tops, sweaters, skirts, jackets, dresses, hosiery, shoes, intimate apparel, and fashion accessories for various lifestyles for plus-size females primarily betw een the ages of 15 and 29. As of July 30, 2011, it operated 636 Hot Topic stores in 50 states, Puerto Rico, and Canada; 145 Torrid stores; and Internet stores, hottopic.com and torrid.com. The company was founded in 1988 and is headquartered in City of Industry, California.

Advisors' Opinion:
  • [By Wyatt Research]

    The teen retailer reported its same-store sales rose 0.4 percent, with same-store sales at its Torrid chain for overweight teens rising 7 percent. Analysts were expecting a decline.

Top Small Cap Companies To Buy For 2014: Rackspace Hosting Inc(RAX)

Rackspace Hosting, Inc. operates in the hosting and cloud computing industry. It provides information technology (IT) as a service, managing Web-based IT systems for small and medium-sized businesses, as well as large enterprises worldwide. The company?s service suite includes dedicated hosting comprising customer management portal and other management tools that manage data center, network, hardware devices, and operating system software; and cloud computing that enables customers to provide and manage a pool of computing resources, as well as delivery of computing resources to business when they need them. It offers cloud servers, cloud files, and cloud sites, as well as cloud applications, such as email, collaboration, and file back-ups; and hybrid hosting that provides a combination of dedicated hosting and cloud computing services. The company also offers customer support services. It sells its service suite through direct sales teams, third-party channel partners, an d online ordering. The company was formerly known as Rackspace.com, Inc. and changed its name to Rackspace Hosting, Inc. in June 2008. Rackspace Hosting, Inc. was founded in 1998 and is headquartered in San Antonio, Texas.

Advisors' Opinion:
  • [By Sherry Jim]  

    This computing specialist that provides web-based IT systems has soared 60%+ in the past year.  With a P/S above 3 and Price to Cash of 10 this stock is poised to continue to soar and outperform it’s peers. $25 in a year is a realistic bet.

Top 10 Dow Dividend Stocks To Own For 2014: ATA Inc.(ATAI)

ATA Inc., through its subsidiaries, provides computer-based testing services in the People?s Republic of China. It offers services for the creation and delivery of computer-based tests utilizing its test delivery platform, proprietary testing technologies, and testing services; and provides logistical support services relating to test administration. The company?s computer-based testing services are used for professional licensure and certification tests in various industries, including information technology (IT) services, banking, securities, teaching, and insurance. Its e-testing platform integrates various aspects of the test delivery process for computer-based tests ranging from test form compilation to test scoring, and results analysis. ATA also provides career-oriented educational services, such as single course programs, degree major course programs, and pre-occupational training programs focusing on preparing students to pass IT and other vocational certification tests; test preparation and training programs and services to test candidates preparing to take professional certification tests in securities, futures, banking, insurance and teaching industries; online test preparation and training platform for the securities and banking industries; and test preparation software for the teaching industry. In addition, the company offers HR select employee assessment solution, an online system that utilizes its proprietary software and an inventory of test titles to help employers improve the efficiency and accuracy of their employee recruitment process. As of March 31, 2010, it had contractual relationships with 1,988 ATA authorized test centers. The company serves Chinese governmental agencies, professional associations, IT vendors, and Chinese educational institutions, as well as individual test preparation services. ATA Inc. was founded in 1999 and is based in Beijing, the People?s Republic of China.

Advisors' Opinion:
  • [By Wyatt Research Staff]

    The Chinese-based educator spiked higher recently after it exceeded analysts' expectations. Revenue and adjusted earnings soared 78% and 269%, respectively. Its long-term annual growth rate is 15%.

    Analysts at Zacks Investment Research upgraded shares from "neutral" to "outperform". 

Top Small Cap Companies To Buy For 2014: Achillion Pharmaceuticals Inc.(ACHN)

Achillion Pharmaceuticals, Inc., a biopharmaceutical company, engages in the discovery, development, and commercialization of treatments for infectious diseases. The company focuses on the development of antivirals for the treatment of chronic hepatitis C; and the development of antibacterials for the treatment of resistant bacterial infections. Its drug candidates for the treatment of chronic HCV include ACH-1625, a protease inhibitor, which is in phase IIa clinical trial for the treatment of chronic HCV; ACH-2684, a pangenotypic protease inhibitor, which is in phase I clinical trial for the treatment of chronic HCV infection; and NS5A inhibitors for the treatment of chronic HCV infection, including ACH-2928, which is to enter a phase I clinical trial, as well as various additional NS5A inhibitors in preclinical development. Its pipeline of product candidates also includes ACH-702 and ACH-2881 for drug resistant bacterial infections; elvucitabine for HIV infection; and AC H-1095 for HCV infection. The company was founded in 1998 and is based in New Haven, Connecticut.

Advisors' Opinion:
  • [By Brian Nichols]

    Achillion is an odd play because it has both the most upside and the most downside of any stock on this list. The company's developing and testing its hepatitis C treating drug, ACH-1625, which is currently in phase II. The results of initial testing have consisted of ups and downs, but after many years and a long process, ACH-1625, appears to be on the right track for an FDA approval.

    The upside in shares of ACHN comes from two places: encouraging data from trials and its likelihood of being acquired. In my opinion, ACHN has a very high chance of being acquired in the next 6 months. Both Pharmasset (VRUS) and Inhibitex (INHX) were acquired over the last 5 months with insanely large premiums. VRUS was purchased at a 81% premium and INHX for a 182% premium. ACHN is perhaps the most speculative, but it could also be purchased the cheapest.

    The stock's recently pulled back after a downgrade and is trading much lower over the last couple weeks. The stock's trend reminds me so much of INHX; the month following the VRUS acquisition when INHX traded higher by nearly 300%. But then after the one-month gain, INHX lost its momentum and traded lower by 40% before being acquired with a 182% premium. INHX traded higher after the VRUS purchase because investors thought it would also be acquired, because of its hepatitis C candidate. ACHN is following the same trend, from November 12 till January 13 the stock more than doubled, but has since retraced.

    At $10 I think ACHN is a buy, it does have a good HCV candidate, and I believe that big pharma will bid to acquire ACHN in the near future. However, the risk in ACHN is if the company's not acquired, then it could have significant loss over the next year. But in a competitive biotechnology industry I believe the reward is worth the risk, and that a large pharma company will take the chance and purchase ACHN in an attempt to stay competitive and capitalize on the trend of investors being bullish on HCV treating drugs.

  • [By Wyatt Research]

    The developer of treatments for infectious diseases has seen its shares rise 280 percent in the past year, and last month had a successful sale of 1.44 million more shares that raised $60.9 million.

Top Small Cap Companies To Buy For 2014: China Metro-Rural Holdings Limited(CNR)

China Metro-Rural Holdings Limited, through its subsidiaries, primarily engages in the development and operation of agricultural logistics and trade centers in northeast China. It also involves in purchasing, processing, assembling, merchandising, and distributing pearls and jewelry products. The company markets its pearls and jewelry products to wholesale distributors and mass merchandisers in Europe, the United States, Hong Kong, and other parts of Asia. In addition, it develops, sells, and leases residential and commercial properties in Hong Kong and the People?s Republic of China. The company is based in Tsimshatsui, Hong Kong.

Advisors' Opinion:
  • [By Wyatt Research Staff]

    The stock moved significantly higher in mid-January and traded in a fairly tight range ever since. However, that could change soon. China's agricultural exports to Japan will grow if radiation continues to seep into the food chain.

    China exported $593 million worth of agricultural goods to Japan last year.

Friday, July 12, 2013

Why Infosys Earnings Are Under Siege

Infosys (NYSE: INFY  ) will release its quarterly earnings report next Monday, but investors are already skittish about how well the IT services company will be able to perform. In a sluggish environment for global economic growth generally and for IT spending in particular, the entire outsourcing and consulting industry has felt the pressure, and as a primary beneficiary of more positive trends in the industry over the years, Infosys is potentially vulnerable to a reversal in those trends.

Even under tough conditions, though, Infosys remains a leader in IT services, and the need for those services is only likely to increase in the long run. Does that make current weakness a buying opportunity? Let's take an early look at what's been happening with Infosys over the past quarter and what we're likely to see in its report.

Stats on Infosys

Analyst EPS Estimate

$0.70

Change From Year-Ago EPS

(4.1%)

Revenue Estimate

$1.93 billion

Change From Year-Ago Revenue

10%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

How will Infosys handle earnings headwinds?
Analysts have pulled back on their earnings views for Infosys over the past few months, cutting their June-quarter estimates by $0.03 per share and slashing $0.17 to $0.18 from their estimates for both this fiscal year and next. The stock has responded quite unfavorably, falling 17% since early April.

Most of the damage for Infosys came at two important points during the quarter. After Infosys announced its previous-quarter earnings in mid-April, the stock plunged 20%, as the company missed its revenue estimates and gave guidance that led to the downgrades in earnings that we've seen. Growth of 6% to 10% in revenue might seem healthy, but for the emerging-market company, it's a severe slowdown that reflects the uncertainty in the global IT economy right now.

The second hit came late last month, when rival Accenture (NYSE: ACN  ) announced its own earnings weakness. For Accenture, IT consulting has become an increasingly important part of its overall business as it seeks to keep cashing in on the highly profitable opportunities in the space. But the company lowered its guidance for earnings by about 2% and reduced its revenue-growth guidance to the 3% to 4% range. Investors also bid down shares of Infosys in sympathy, seeing Accenture's challenges as applying to the entire industry.

One big problem that Infosys faces is that its remote location from the North American market creates some competitive disadvantages for the company. Rival consultant Cognizant Technology (NASDAQ: CTSH  ) hasn't been immune to the downdraft that has taken IT-services stocks lower, but its New Jersey location has been instrumental in drawing about 80% of its revenue from North America, whose economies have held up far better than those in other regions. By contrast, Infosys gets a greater proportion of its sales from Europe and the rest of the world, which have been challenging lately.

When Infosys announces earnings next week, look to see how the company is working to expand its North American presence while also holding off some of its fellow Indian competitors to maintain its strength in other markets. Eventually, when the tide turns in the technology economy, Infosys should be in a better position to restore its past pace of earnings growth.

Infosys and its IT services are important in supporting the massive upsurge of technological usage in recent years, but what's surprising is how just a handful of companies influence nearly all of our digital and technological lives. Find out who will win the war among the five biggest tech stocks by reading The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Click here to add Infosys to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.