This is a summary of this week’s show. Listen in at Value Line Observer – Jan 8 2010
Note: This Blog is for Entertainment Purposes Only and should not be relied on. See all our disclosures at www.thevalueguys.com.
Harris ( HRS) is a maker of communication systems for large commercial and government customers. They seem to be on a bit of a winning streak with many years now of improving return on capital and a stable above average margin. My conclusion is that they have come on to several large proprietary niches where they are enjoying strong margins and profits on a product line where they either have an exclusive on the technology, or where they are driving so much productivity at the customer, that price doesn’t matter. In any case, this company appears to be on to something good, and at 7x EBITDA, it looks undervalued.
Technitrol (TNL) caught my eye almost entirely due to the valuation, which appears to be about 1.7x EBITDA. I know that sounds too low, so better examine carefully. But it looks like the company has sold a discontinued business — that is a business whose results are not showing up in the income statement, but has value that is about to be realized. The current Enterprise Value of TNL appears to be about $270 million, and the company appears to generate about $50 million in EBITDA. But once the discontinued operation sells, and the company pays down $200 million in debt, the Enterprise Value will fall to $70 million, with $50 million in EBITDA. Oh yeah, the company makes some kind of magnetic devices that earn only so-so returns on capital. At 1.7 x EBITDA, so what! I’d nibble on this and forget about it.
International Business Machines (IBM) caught my attention because as an enormous company, with over $100 billion in revenue and nearly $200 billion in market capitalization, this hulk manages to still put up over a 30% return on capital, and with some leverage, about a 50% return on equity. This is simply un-heard of for a company this size or age. We think of GE as the big performer from a different era, but IBM got it’s start in a card reading invention from Herman Hollerith in 1884, just seven years after the invention of the light bulb. With over 50% of revenue now software and services that are hard to turn off, and a valuation of just 8x EBITDA, or a 12.5% cash on cash, it’s attractive. It’s doubled off the scary lows of early 2009, but still looks attractive for a long term position.
To hear the show, click a link.
Best,
Val
Tags: Government, Healthcare, HRS, IBM, TNL
