Good Companies on Sale - From Barrons

Monday, October 13, 2008


America For Sale: Price Reduced
By ANDREW BARY

Got cash? This could end up being one of history's quintessential buying opportunities. The case for ExxonMobil, Deere, Microsoft -- and more.

AT THE DEPTHS OF THE 1973-74 BEAR MARKET -- the worst of the post-war period -- when the Dow Jones industrial average was approaching its low of 577, Warren Buffett told Forbes magazine that he felt like "an oversexed guy in a whorehouse. This is the time to start investing."

Buffett's words may have been indelicate -- Forbes ended up changing the world "whorehouse" to "harem" when the interview ran -- but the CEO of Berkshire Hathaway was on the mark because that era produced some of the best bargains of the past 50 years.



Investors willing to show a little patience can find discounts on everything from real estate to stocks, bonds and commodities.
The stock market now is suffering a comparable decline to that historic '73-74 loss, with the Dow Jones Industrial Average, at 8,451, having fallen 40% from its October 2007 peak and 36% this year. The peak-to-trough drop in '73-'74 was 45%. The opportunities now could be equally attractive with some market indexes nearing, their 2002 lows and most major stocks valued at less than 10 times estimated 2008 earnings. A bullish Buffett has been buying lately, although his purchases haven't directly involved common stocks. He got equity warrants along with his attractive preferred-stock investments in General Electric and Goldman Sachs. Berkshire also has bought more stock this year in Wells Fargo, Buffett's favorite bank.

"There are extraordinary opportunities on many fronts for investors, from real estate to stocks and bonds and commodities," says Jim Paulsen, chief investment strategist at Wells Capital Management. "Assets are being given away. They may not do well in the next several months, but looking ahead two or three years, investors may see some of the best opportunities of their lives."

The crisis in the credit markets has highlighted the value of a strong balance sheet, an underappreciated quality during the bull run ending in 2007. Investors who once clamored for CEOs to take on debt to buy back stock now are quizzing corporations about debt maturities in the coming months because of refinancing fears.

This is a time when cash is king, enabling well-endowed companies to bypass the credit markets and potentially pick up bargain acquisitions in coming months.





We've highlighted more than a dozen cash-rich companies, ranging from ExxonMobil , which boasts Corporate America's biggest cash hoard at $30 billion, to smaller outfits like Barry Diller's IAC/InterActiveCorp and KBR , an engineering and construction company, whose cash accounts for over half their market values.

With such broad and deep losses throughout the stock market, a case can be made for virtually every major sector, including drugs, financials, consumer staples, technology and energy. (On the opposite page you'll find a chart with 25 candidates for your portfolio.)

INDUSTRIAL COMPANIES RANGING from United Technologies to Deere and Caterpillar also have suffered. They have strong market positions, good balance sheets and with the recent market setback, their stocks trade for less than 10 times estimated 2008 profits. Obviously, profits of industrial companies could be hit next year by the global economic slowdown and reduced credit, but all these companies have been through cycles before and should have the staying power to get through them.

Looking at some of the cash-rich giants, Exxon sits on $30 billion of net cash, or $6 a share. At 62, the stock trades for just seven times projected 2008 earnings market value, although it's likely that '09 profits will fall due to the drop in oil and natural gas prices. It's possible that Exxon may shift some of its cash from an aggressive share buyback program to an acquisition because some aggressive independent energy outfits like Chesapeake face trouble because of debt-financed acquisition binges.

Table: Everything Must GoMicrosoft CEO Steve Ballmer has been criticized for indecisiveness, but he was smart to walk away from the company's $47 billion offer to buy Yahoo !, whose shares are down to 12 from over 30 in the spring. Microsoft offers a nice package of a great balance sheet with $23 billion in cash, another $6 billion of equity investments, a monopoly software business and the lowest P/E in its history at just over 10 with the stock around 22. Microsoft's earnings could fall below its projection of about $2.15 a share in its fiscal year ending in June 2009, but a miss arguably is reflected already in the stock.

After being blasted by investors for conservatism for holding too much cash, tech leaders now are lauded by Wall Street. Apple and Dell have cash equal to more than 25% of their market values. Yahoo!, whose shares now trade around 12, has about $2 a share in cash and another $3 a share in investments, including a stake in Yahoo Japan. That could limit further downside in the stock. Depressed Motorola could get support from its cash position, which equals 30% of its market value. The same is true for Electronic Arts .

Loews , the conglomerate controlled by the Tisch family, has seen its shares battered recently because of sharp declines in CNA Financial and Diamond Offshore, in which it owns big stakes. Loews, at 26, is down from 40 recently. The good news is that Loews sits on about $3.5 billion of net cash, or $8 a share. The company's total net asset value, including positions in public companies, private investments and cash, is about $40 a share. Investors now can buy Loews at a big discount from its NAV and get a management team led by CEO Jim Tisch that's done a good job making acquisitions and delivering for shareholders.

The CEO of IAC/InterActive, Barry Diller, doesn't have a big Street following anymore because of a poor record with acquisitions like Lending Tree. The recent break-up of the company has failed to deliver for shareholders and Diller's vehicle, the new IAC/Interactive, is languishing near 15. The company has $10 a share in cash and Diller vows to be judicious in dealmaking. Barclays Capital analyst Douglas Anmuth wrote in a recent note that IAC/InterActive is "too cheap to ignore" and set a price target of 21.

The little-known Nam Tai Electronics , a Chinese contract maker of consumer electronics and other goods, is a favorite of Irving Kahn, the 102-year-old chairman of Kahn Brothers, a New York investment firm. Kahn pointed out Friday that Nam Tai's cash position equals its share price of around $6 a share. He likes Nam Tai's management and notes the company is solidly profitable. Kahn, who has been profiled in Barron's, is one of the few professional investors who not only remembers the 1929 market crash but who sold short prior to that famed downturn. He thinks stocks generally look attractive but he'd avoid those "that had a bubble in them."

Jeff Gendell, the chief of Tontine Associates, recently gave plug for KBR in an investor letter. Gendell noted that KBR, whose shares trade around 15, has $10 a share in cash and should earn $1.70 a share this year.

Industrial stocks have been pummeled lately as investors worry about a domestic recession and a downturn in formerly strong overseas markets. The result is that P/E ratios are at their lowest levels in years. Caterpillar trades at 45, just seven times this year's estimated earnings, while United Technologies fetches less than 10 times earnings at its current price of 47. Deere, the world's leading maker of farm equipment, has dropped to 38 from a spring high of 94 as grain prices have collapsed. It now trades for eight times '08 earnings. In a recent note, Citigroup analyst David Raso set a price target of 65 on Deere and 72 for Cat.

Terex , a maker of aerial work platforms and construction and mining equipment, has plunged, losing nearly half its value in the past month. At 19, it trades for just three times estimated 2008 earnings. Next year is apt to be weaker, but the valuation is awfully low for a well-managed company that Barron's favorably profiled this year with the stock at 55.

Paccar , the maker of highly regarded Peterbilt and Kenworth trucks, is down almost 50% this year to 28 and now trades for eight times estimated '08 earnings. Paccar has a great balance sheet with about $6 a share in net cash. One of the risks with Paccar and makers of construction and farm equipment is their finance subsidiaries. Paccar had $9 billion of finance receivables at the end of the second quarter and analysts worry about a recession's impact and declining truck values. Equipment makers also could get squeezed as their finance subsidiaries raise loan rates to reflect higher funding costs.

There was renewed concern last week on Wall Street about whether Ford Motor and General Motors may be forced to file for bankruptcy. GM said Friday it has no such intentions, although its debt now trades as if it were in bankruptcy. The company's NYSE-listed 6.25% convertible debt (GPM) finished Friday at $5, which is 20% of its face value of $25. These bonds, which have a current yield of 31%, look like a much better bet than GM's common shares, which ended the week at $5.

The Bottom Line

Look for companies with strong balance sheets that allow them to bypass the seized capital markets and give them the opportunity to make their own bargain-basement acquisitions.Buffett's Berkshire, meantime, fell sharply last week, as its class A shares dropped over $25,000, or 18%, to $113,100. Berkshire's equity portfolio, which stood at $69 billion on June 30, is falling in value, although it's ahead of the major averages this year. Berkshire has written, or sold, long-dated put options on some $40 billion of equity indexes, including the S&P 500. Those put sales, which amount to a bullish market bet, are deep in the red, although Berkshire doesn't have to post collateral against any paper losses. We estimate those puts could have cost Berkshire as much as $2 billion in the third quarter and several billion more dollars this quarter, with the S&P down over 20%. Berkshire ultimately may score with these puts if they expire worthless at maturity between 2019 and 2027. But the normally savvy Buffett made a mistake investing in financial derivatives, about which he has long warned. Berkshire had no comment.

The brutal market sell-off has stung even famed investors like Buffett, but patient investors stand to benefit, particularly if they choose well-capitalized companies with strong market positions whose stocks now trade at very depressed values.


The Bottom Line

Look for companies with strong balance sheets that allow them to bypass the seized capital markets and give them the opportunity to make their own bargain-basement acquisitions.

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