Fundamental Analysis

  • 17 Oct
    The small cap stock you’ve never heard of – but that could be the best bargain in the Materials sector

    The small cap stock you’ve never heard of – but that could be the best bargain in the Materials sector

    Since hitting an all-time early this year, the Materials sector has seen some of the biggest declines in the broad market. And even while today marked a big surge in price for practically every economic sector, Materials still dropped, putting their decline since late January at about -16% and nearly -11.5% year-to-date as measured by the SPDR S&P 500 Materials ETF (XLB). More →

  • 03 Sep
    Which stock is a better actual value: GIL or HBI?

    Which stock is a better actual value: GIL or HBI?

    When you spend a lot of time analyzing different segments of the market, it isn’t all that unusual to come across two competing companies in an industry that both look appear to have a pretty good argument as a good bargain opportunity in the making. When it happens, as an investor you have a decision: which one should you pick? Or, if you have the capital to work with, should you bother choosing at all, or simply work with both of them? It’s the kind of thing that I like to call “a good problem to have,” because you get to choose between two pretty good things, and that usually means that whatever you decide to do, you’ll have a pretty good chance of seeing it work out okay.

    The problem, of course, is that just because you might find a couple of stocks in the same industry that look good, it doesn’t mean that everything is as it seems. Sometimes what looks like a great opportunity is, in reality a bigger risk than you might realize until it’s too late. This is the situation I found myself in earlier this week when I started evaluating Gildan Activewear Inc. (GIL) and HanesBrands Inc. (HBI), two stocks in the Textiles & Apparel industry. You’ve probably heard of HBI, of course; I don’t think there are too many men who haven’t worn a Hanes or Champion t-shirt, or that many women who haven’t bought Maidenform or Wonderbra undergarments or L’eggs nylon stockings. You may not be as familiar with GIL; they make the same products as HBI, and they sell them under some of their own brands, like Gold Toe, American Apparel, and others. A big portion of their business, however, focuses on branded apparel for the printwear market.



    I’ve followed both stocks for some time, in part because I like both of their products; for another, I think that while the industry exists in the Consumer Discretionary sector, which can be subject to economic cyclicality, the specific niche they both reside in makes them pretty attractive as stocks that should hold up well when the economy shifts to the downside. I like the idea of working with stocks like these as defensive positions; and the fact is that both stocks have generally underperformed the market over the course of the year.

    This week the S&P 500 pushed above resistance from its late January high after the Trump administration it had reached an agreement with Mexico to rework the NAFTA trade agreement; the market seems anxious to treat the news as the first domino to fall in favor of easing trade tensions with America’s largest and most important trading partners. There’s a long way to go, however, and a completion of the agreement, or of seeing it affect the other countries the Trump administration has targeted with tariffs in the way many hope it could isn’t a given. Even if things work out as many hope in the long run, the fact remains that the market is so extended that a significant reversal is inevitable sooner or later. That means that it’s smart to keep paying attention to defensive-oriented stocks that can position you to weather the storm of a reversal more effectively than stocks trading at extremely high valuations are.

    The fact that both stocks are well below their 52-week highs is a positive, of course, but it still doesn’t mean that they both automatically represent a terrific value right now. The truth is that if you simply paid attention to each stock’s current long-term downward trend, you’d probably conclude HBI is the better option, since it is only about $1 above its 52-week low price right now, down nearly 25% so far in 2018 and almost 32% lower for the past twelve months. By comparison, GIL is down only about 14% so far for the year, and only about 6% for the last twelve months. Digging deeper into the fundamentals for each stock, however paints a pretty different picture.



    Gildan Activewear, Inc. (GIL)

    Current Price; 29.45

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by a little over 6%, while revenue increased almost 7%.  The numbers for GIL have gotten better recently, however, with earnings growing nearly 53%, and revenue improving more than 18% in the last quarter. The company cited strength in its United States-focused brands in its last earnings report, which is interesting given the fact this is a Canadian stock that most would likely figure to be hurt by ongoing trade tensions with its neighbor to the south.
    • Free Cash Flow: GIL’s free cash flow is healthy, at more than $388.24 million. This is a positive, although this number has declined since the beginning of the year from a peak a little above $500 million.
    • Dividend: GIL’s annual divided is $.44 per share, which translates to a yield of 1.49% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for GIL is $9.15 and translates to a Price/Book ratio of 3.27 at the stock’s current price. The stock’s historical average Price/Book ratio is 3.32, suggesting at first blush that the stock is fairly valued. The picture gets more interesting, however, when you factor in the stock’s Price/Cash Flow ratio, which is currently running more than 70% below its historical average. That puts the stock’s long-term target price above $51 – well above its all-time high price from January of this year at around $34.50 per share.



    Hanesbrands Inc. (HBI)

    Current Price: $17.54

    • Earnings and Sales Growth: Over the last twelve months, earnings declined by more than 15%, while revenue increased about 4%.  The numbers for HBI are better in the last quarter, with earnings growing 73%, and revenue improving about 16.5% in the last quarter.
    • Free Cash Flow: HBI’s free cash flow is healthy, at more than $462 million. This is a positive, although this number has declined since the first quarter of 2017 from a peak at close to $900 million.
    • Dividend: HBI’s annual divided is $.60 per share, which translates to a yield of 3.43% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for HBI is only $2.13 and translates to a Price/Book ratio of 8.22 at the stock’s current price. The stock’s historical average Price/Book ratio is 7.18, suggesting at first blush that the stock is slightly overvalued. Like GIL, the picture gets more interesting when you consider the stock’s Price/Cash Flow ratio, which is currently running more than 200% below its historical average. That puts the stock’s long-term target price above $38, which is above the stock’s highest point since early 2015.

    Based on the numbers shown so far, both stocks look like pretty great value plays, right? Not so fast, because the truth is that I think HBI carries a much higher risk than GIL does right now, despite its much lower current price and attractive upside forecast. A significant divergence between these two companies comes when you dive into their use of debt and their operating margin profile.



    GIL currently shows $900 in long-term debt on their books. In and of itself, of course, debt isn’t automatically a bad thing, and GIL’s debt to equity ratio of .47 generally suggests the debt they have is very manageable. More importantly, the percentage of Net Income to Revenue has improved from 12.5% for the last twelve months, which is pretty healthy, to more than 14% in the last quarter. By comparison, HBI has more than $4.1 billion in long-term debt to go along with a debt to equity ratio of 5.41. That is a very high number that indicates HBI is one of the most highly leveraged companies in its industry. Their operating profile also suggests that they could have problems servicing their debt; over the last twelve months, Net Income as a percentage of Revenues was barely .5%. This number did improve in the last quarter to a little over 8%, but remains significantly below the level maintained by GIL.

    When most of the information about two stocks looks similarly attractive, a discriminating investor has to be able to split hairs to determine if one company’s opportunity is more worth the risk than the other. In this case, the fact that GIL shows a much more manageable debt burden, with operating discipline that has enabled it to not only maintain a stable level of profitability, but also to improve it, makes it a better bet than its more recognizable competitor.


  • 20 Aug
    CCL: take a cruise with a great value stock

    CCL: take a cruise with a great value stock

    Last week, I wrote about Royal Caribbean Cruises (RCL), which has been setting up what looks like a nice value-based opportunity. Today I’m highlighting another stock in the same industry, and one of RCL’s direct competitors, for practically the same reason. Carnival Corporation (CCL) may actually be a better opportunity than RCL for some investors. Based in London, CCL is a bigger company than RCL, with a market cap at around $32 billion, trading at a lower stock price. Like RCL and many stocks in the Leisure & Recreation Services industry, CCL has dropped from a high in late January, but since the beginning of July has begun to show some bullish strength.

    Another factor that can play into CCL’s favor isn’t just its status as a large-cap stock; it also has a very strong fundamental profile, with healthy profit margins, manageable and conservative debt management, and healthy cash flows. More importantly, the value proposition for the stock is very attractive right now. I’ve speculated that the market could be setting up for yet another extension of its long-term trend – what is usually seen as the “last gasp” push before the market finally begins to turn back into legitimate bear market territory. 

    The catch to that opinion is that there is no way to really know when the turn will happen, and those “last gasp” rallies can last as little as a few weeks to several months. If this next rally does materialize, there could still be plenty of upside potential to capture. You want to be selective about what stocks you’re working with, and very conservative about how much of your capital you’re putting into any single position, because at this stage risk management is becoming more and more important every day. That said, CCL is a stock that is worth taking a serious look, and might be a great stock to work with.



    Fundamental and Value Profile

    Carnival Corporation is a leisure travel company. The Company is a cruise company of global cruise guests, and a provider of vacations to all cruise destinations throughout the world. The Company operates in four segments: North America, EAA, Cruise Support and, Tour and Other. The Company’s North America segment includes Carnival Cruise Line, Holland America Line, Princess Cruises (Princess) and Seabourn. The Company’s Cruise Support segment represents certain of its port and related facilities and other services that are provided for the benefit of its cruise brands and Fathom’s selling, general and administrative expenses. Its EAA segment includes AIDA Cruises (AIDA), Costa Cruises (Costa), Cunard, P&O Cruises (Australia), P&O Cruises (the United Kingdom) and ship operations of Fathom. Its Tour and Other segment represents the hotel and transportation operations of Holland America Princess Alaska Tours and three ships that the Company bareboat charter to unaffiliated entities. CCL has a current market cap of about $32 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings have grown almost 31%, while revenues increased about 10.5%. The company’s margin profile shows that Net Income as a percentage of Revenues dropped somewhat from a little over 15% over the last twelve months to almost 13% in the last quarter. That’s not insignificant, but contrasted against the rest of the data we’ll look at, I don’t believe it is a major cause for concern.
    • Free Cash Flow: CCL’s free cash flow is healthy, at more than $2.3 billion. This is a number that has been relatively stable, yet rising slightly, since the second quarter of 2016 from around $2 billion.
    • Dividend: CCL’s annual divided is $2.00 per share and translates to a yield of 3.30% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CCL is $45.10 and translates to a Price/Book ratio of 1.34 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.62, which puts a target price for the stock at about $73 per share, or about 20% higher than its current price. It’s also worth noting that Book Value has increased steadily since the first quarter of 2016, despite its slight drop in the last quarter from $45.65. Another element supporting CCL’s undervalued argument is its Price/Cash Flow ratio, which is currently 23% below its historical average. That puts the stock’s target price a little above $74.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s downward trend dates back to January after the stock hit a 52-week high at around $73 per share. The stock is in a strong downward trend from that point, finding a trend low in July at around $56 per share. That’s a total decline up to that point of about 23%, and is one of the first technical indications that while the stock remains much higher than when it started at in 2009 when this bull market started, it could be setting up a nice value play now. The stock’s rally to around $60 as of this writing is evidence the stock’s current downward trend looks set to reverse.
    • Near-term Keys: A break above resistance around $62.50, marked by the 38.2% retracement line would provide good validation that trend reversal is happening, with a good chance of seeing the stock retest its 52-week high around $73 per share. A bullish investor should wait for that break to get in, either by buying the stock outright or by using call options. If the stock breaks below trend support around $56, however, you can assume that the downward trend will continue for the foreseeable future. In that case, the stock could easily drop near to its 2-year lows between $42 and $46 per share – levels last seen in 2016 prior to last year’s extended rally.


  • 09 Aug
    WDC was a good buy a few weeks ago; now it’s a GREAT buy

    WDC was a good buy a few weeks ago; now it’s a GREAT buy

    In late July, and just before they released their latest quarterly earnings report, I wrote about Western Digital Corporation (WDC) and the fact that the stock had dropped more than 28% below its all-time high at around $108. The stock was around $75 per share then, and following their earnings report, the stock plunged even more; as of this writing the stock is just a little above $66 per share. At the end of July, I thought the stock was a nice buy; after reviewing the stock’s latest earnings information, and taking the latest drop into account, I think it’s an even bigger bargain now.

    So what’s been driving the latest plunge (almost 11.5% since my last post about this stock)? Sometimes, the stock market makes sense – or at least, you can tie what a stock is doing at a given time to specific news, or to something about the underlying company that has some semblance of logic to it. Often, though, it’s downright maddening. I’ll admit that when I first saw WDC drop below $70 I struggled to tie it to anything concrete. I’ve kept digging, and while I think I’ve found a couple of threads to tie the decline to, the logic behind one of them makes me shake my head.



    Shortly after my post, WDC published its latest quarterly earnings report. The numbers were good across the board – every fundamental measurement I use in my analysis remained very healthy or improved, including the company’s Book Value. It was right after that report, however that the stock started to drop. At the same time, WDC’s only real competitor in the HDD space, Seagate Technology Plc (STX) released their own earnings report. STX’s report reflected a reality that seems to be scaring investors about either company, because sales of HDD drives continues to decline. In the consumer space, in particular, HDD clearly looks like a dying breed. And while STX is focusing more and more on the only market where HDD sales remain healthy – the enterprise, cloud server storage space – they don’t have a plan to evolve their business beyond that. WDC, at least in part, looks like a victim by association of STX’s poor report, which also prompted downgrades on that stock from analysts. That’s the part that makes me scratch my head, because anybody that thinks STX is in a better position than WDC to stay relevant has to be smoking something.

    The other thread I’ve found, and that the market seems to be teeing off on, is the fact that competition in the SDD and NAND space – memory types that are built on solid-state technology, and a major piece of WDC’s evolution strategy – is intensifying. WDC bought SanDisk in 2016 primarily because they knew that staying pat with HDD technology was a loser’s game; acquiring SanDisk immediately put them at the front of the SSD and NAND chip pack. There is market data that suggests supply of SSD and NAND chips is higher than demand right now. With more companies like Micron Technology (MU), Intel Corporation (INTC) and others making forays into the space, it isn’t a given WDC will maintain their leadership position in this segment. Intensifying competition, along with high supply clearly is also playing a role right now in the stock’s decline.

    Competition in any business segment is a normal thing, and while that increases the pressure on any company, a good management team doesn’t shy away from it. I really like WDC’s strategy, and I think that in the long run they’re doing the right things to keep their business growing. Their fundamentals remain excellent in the meantime, which really means that if the stock was a nice buy at $75, it’s a great buy now.



    Fundamental and Value Profile

    Western Digital Corporation (WDC) is a developer, manufacturer and provider of data storage devices and solutions that address the needs of the information technology (IT) industry and the infrastructure that enables the proliferation of data in virtually every industry. The Company’s portfolio of offerings addresses three categories: Datacenter Devices and Solutions (capacity and performance enterprise hard disk drives (HDDs), enterprise solid state drives (SSDs), datacenter software and system solutions); Client Devices (mobile, desktop, gaming and digital video hard drives, client SSDs, embedded products and wafers), and Client Solutions (removable products, hard drive content solutions and flash content solutions). The Company develops and manufactures a portion of the recording heads and magnetic media used in its hard drive products. WDC’s current market cap is $19.9 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 29% while revenue growth was modest, posting an increase of almost 6%. WDC operates with a narrow margin profile of about 1%. By comparison, STX’s margins are around 10%. I believe the difference is a reflection of the company’s differing approach to growth; STX focuses almost exclusively on the higher margin aspect of increasing enterprise demand, while WDC takes a two-tiered approach by meeting enterprise demand for HDD drives while also pushing hard on innovation and evolution with SSD storage.
    • Free Cash Flow: WDC’s free cash flow is very healthy, at almost $3.4 billion. That translates to a free cash flow yield of almost 17%, which is much higher than I would normally expect given the company’s narrow operating margins.
    • Debt to Equity: WDC has a debt/equity ratio of .95. That number declined from a little above 1 two quarters ago, as long-term debt dropped by more than $1 billion. Their balance sheet indicates their operating profits are more than adequate to repay their debt, and with almost $5 billion in cash and liquid reserves, the company has excellent financial flexibility, which they plan to use to pay down debt, repurchase their shares and consider other strategic acquisitions.
    • Dividend: WDC pays an annual dividend of $2.00 per share, which translates to a yield of about 3% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WDC is $38.53 and translates to a Price/Book ratio of 1.7 at the stock’s current price. Their historical average Price/Book ratio is 2.12. That suggest the stock is trading right now at a discount of a little over 19%, which is attractive; to support that opinion, the industry average is 4.6. That suggests the stock could be even more significantly undervalued right now. Using a long-term target price above $140 is probably over-optimistic since the stock’s highest price was reached in late 2014 around $110; however if the company’s evolution strategy is correct, as I expect it to be, that historical high is useful.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock broke below strong support from repeated low pivots since late last year at $75, which has really driven the stock’s bearish momentum. The Fibonacci analysis shown on the chart above makes it hard to see where the stock’s next support level is likely to be. The upward trend that ended in March actually began in March 2016 at a low of around $35 per share; applying the same Fibonacci calculations to that trend puts the 61.8% retracement level at around $62.50, meaning that the stock is nearing the next important support area.
    • Near-term Keys: The stock is already offering a significantly discounted price relative to where I think it’s long-term potential lies. The truth is that if you went long on this stock in late July, you’re probably trying to decide what to do to manage the position now. I think there is more than adequate argument to hold on and ride out the stock’s current downward trend; but if you want to limit your risk, using a stop loss 25% below your purchase price would be a smart, conservative approach. If you’re thinking about trying to short the stock or start working with put options to take advantage of downside, the best signal for that kind of trade came at the end of July, so that opportunity has come and gone. The next signal for a bearish trade would come if the stock continues to break down and drops below $62. That could see the stock drop another $10 lower to around $51 or $52.


  • 01 Aug
    Will buying TPX let you sleep at night – or make you toss and turn?

    Will buying TPX let you sleep at night – or make you toss and turn?

    Getting a good night’s worth of sleep is important for good health – physical, mental and emotional. I’ve used the same idea throughout my investing career to help guide the investment decisions I make. If putting my hard-earned dollars into a stock is going to keep me up at night, it doesn’t matter what other people, or the market at large think about it – the smart thing for me to do is to move on and find something else. That doesn’t mean that I’m so risk-adverse that I can’t take advantage of opportunities when I see them, but it does mean that the opportunity I do choose to pursue must be clearly superior to the level of risk involved.

    Tempur Sealy International Inc (TPX) is an interesting play on that concept, if for no other reason than the fact that a good night’s sleep is what this company is all about. And a quick look at the stock’s chart shows that the stock is more than 27% below its 52-week high, but could be showing some bullish strength right now. Does that mean there is a great opportunity to be had? It’s a little hard to say definitively. There are certainly a number of positives about the business to be seen, including solid earnings growth over the past year, and an improving Book Value. There are also things to be concerned about, like a very high debt level, mostly flat sales, and a narrow operating margin. Ultimately, the value picture is probably in the eye of the beholder, so I’ll outline what I’ve found so far and let you make your own decision.



    Fundamental and Value Profile

    Tempur Sealy International, Inc. is a bedding manufacturer. The Company develops, manufactures, markets and distributes bedding products. The Company operates in two segments: North America and International. The North America segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in the United States and Canada. Its International segment consists of Tempur and Sealy manufacturing and distribution subsidiaries, joint ventures and licensees located in Europe, Asia-Pacific and Latin America. Its brand portfolio includes TEMPUR, Tempur-Pedic, Sealy, Sealy Posturepedic, and Stearns & Foster. It offers its products in over two categories, including Bedding, which includes mattresses, foundations and adjustable foundations, and Other, which includes pillows, mattress covers, sheets, cushions and various other comfort products. As of December 31, 2016, it sold its products across the globe in approximately 100 countries. TPX has a market cap of $5.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined by about 15.5%, while sales increased at a modest rate of about 1.5%. The story is similar in the most recent quarter, as TPX saw an earnings improvement of nearly 24% against sales growth of 3.3%. The company operates with pretty narrow margins, as Net Income was about 5% of Revenues for the last twelve months. In the last quarter, however, Net Income relative to Revenues narrowed to only about 3.4%. I take this as a red flag that the company is becoming less efficient despite the acceleration in earnings growth.
    • Free Cash Flow: TPX’s free cash flow is marginal, at only $72.5 million.
    • Debt to Equity: TPX has a debt/equity ratio of 10.8, a very high number that makes them one of the most highly leveraged companies in the Household Durables industry. That is a red flag, however the company’s balance sheet indicates that operating profits are sufficient to service their debt.
    • Dividend: TPX does not pay a dividend.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TPX is $2.90 and translates to a Price/Book ratio of 16.98. The industry average is only 2.9, implying the stock is significantly overvalued. The company’s Book Value was actually 0 until a year ago, but has improved steadily from the end of the first quarter of 2017 until now. The lack of a historical Book Value makes it a little difficult to compare the current Price/Book to anything, however we can also use the stock Price/Cash Flow and Price/Sales ratios in a similar way. The stock is currently trading a little more than 10% below its historical Price/Cash Flow average, and nearly 35% below its Price/Sales ratio. That could put the stock’s long-term target price in the $54 to $65 range, depending on how optimistic you want to be. The absence of useful Book Value information is a concern to me, however and makes me lean more to the conservative side of things, so I have to admit that I have a hard time seeing an intrinsic reason that the stock should be worth more than $54; a 10% upside is a little more limited than I would prefer to work with.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend beginning in January of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock has shown some bullish momentum since late April, rising from a trend low of about $41 to the current level; however it has dropped back from a recent pivot high around $54.50 in just the last couple of weeks and is only a couple of dollars below the 38.2% retracement line at around $51 per share. A break above that line would be required to give the short-term upward trend any validation and a real chance to extend further. Otherwise I expect the trading range between about $47 for support and $51 for resistance to hold sway. A break below $47 would mark a short-term trend reversal to the downside and could see the stock challenge its trend low price at $41.
    • Near-term Keys: If you like to work with trend-based, momentum-focused trading methods, look for a break above $51 to confirm the short-term trend’s strength and provide a decent bullish signal to buy the stock or start working with call options. If the stock breaks down, wait for a push below $47 before trying to short the stock or start buying put options.


  • 28 Jun
    DISH: Dead cat bouncing, or incredible bargain?

    DISH: Dead cat bouncing, or incredible bargain?

    Consumer trends can be a fascinating thing to watch, despite the fact that sometimes they are fickle. That’s because sometimes those trends can give you important clues about the viability of certain products or ways of approaching business. It’s easy to get caught up in the excitement of a new, groundbreaking technology, for example, but if the buying public doesn’t buy it, it doesn’t matter how great the tech is; it isn’t going to stick around for very long.

    In the 1980’s, my parents bought a video tape player for the family. We were excited because we could finally watch movies in our home without having to wait for network TV to broadcast them for us. The player was a Betamax player, and my dad went to great lengths about why Betamax players were superior to the VHS players we had been hassling him about. And it’s true, it was a terrific piece of machinery, and I thought that the quality of our home recordings, and of movie tapes in general, was far better than any comparable VHS tape.

    The thing was, not many other people felt the same way – or cared enough to make Betamax more than a passing fad. By the beginning of the 1990’s, Betamax was a thing of the past. We still had our player, and the tapes with our home recordings, but guess what we had sitting right on top of it? You bet – a VHS player, and all of the movies we bought to keep at home were VHS tapes. If you invested back then in Betamax development, you probably lost a lot of money.



    The same idea can be applied to very mature businesses as well; the advent of one kind of new technology often means that a previously lucrative and growing technology becomes obsolete. That is especially true if the new technology is widely adapted and erodes the consumer base the older technology relied on. Cable and satellite broadcasting is one of those mature technologies that consumer trends show may be looking at the end of its usefulness in the not-so-distant future. More and more customers of all ages are “cutting the cord” with traditional television viewing in favor of on-demand, web-based streaming services. It’s a trend that has built Netflix (NFLX) into a media powerhouse with a market capitalization larger than the Walt Disney Company (DIS) and has traditional broadcasting networks scrambling to find ways to evolve and survive.

    Dish Network Corporation (DISH) is among a number companies in the Media industry that finds itself at a crossroads, with a still large, but dwindling subscriber base that requires attention and a high level of service and quality, but a desire to redirect its business to evolve with the needs of a changing business landscape. The market has seen the numbers about their eroding customer base and has treated the stock accordingly, driving it into a clear downward trend for the past year that has seen it lose approximately 50% of its value over that period. A clear loser in the scope of broader market performance, the stock has actually rebounded almost 16% since the beginning of June. Contrarian, value-oriented investors might be tempted to bet on a reversal of the stock’s long-term downward trend, but others would be more cautious.

    “Dead cat bounce” is a term that investors like to use to describe what happens sometimes when a stock in a long, downward trend finds support and starts to rally higher. Generally speaking, the only way a long-term downward trend can manage a legitimate reversal is if the market sees a very strong fundamental reason to start buying the stock. Often, a stock experiences that downward trend for very good reasons, and in the case of DISH, an eroding customer base is one of those very good reasons. The problem the company has in reversing the trend is that the erosion isn’t to competitors in the same business; it’s coming from a “sea change” in consumer habits and preferences that typically marks the death of one business model in favor of another. The “bounce” comes when technical traders start to buy the stock at a low point, hoping for a quick, short-term gain in the stock’s price; but since there is no fundamental reason for other investors with a longer-term perspective in mind to jump in, that gain is extremely limited in both size and duration.



    The argument long-term investors might have for DISH, and that the company is absolutely trying to communicate to the market, is the way they have decided to evolve their business. Since 2008, the company has spent more than $11 billion buying wireless spectrum frequencies in order to build their own 5G wireless network. Their founder and CEO relinquished his role as chief executive at the end of 2017 to focus on developing that part of the business. The challenge is that the company is generating zero revenue from the licenses they hold, and they won’t begin to see any return on their already large and ongoing investment until they complete the buildout of their network sometime in 2020. So is DISH a “dead cat bounce” that only a fool would try to work with, or a real bargain opportunity? Here’s a few numbers to consider that might help you make your own decision.

    Fundamental and Value Profile

    DISH Network Corporation is a holding company. The Company operates through two segments: Pay-TV and Broadband, and Wireless. It offers pay-TV services under the DISH brand and the Sling brand (collectively Pay-TV services). The DISH branded pay-TV service consists of Federal Communications Commission (FCC) licenses authorizing it to use direct broadcast satellite and Fixed Satellite Service spectrum, its owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in its operations. The Sling branded pay-TV services consist of live, linear streaming over-the-top Internet-based domestic, international and Latino video programing services. The Company markets broadband services under the dishNET brand. The Company makes investments in the research and development, wireless testing and wireless network infrastructure. DISH has a current market cap of $7.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both declined modestly, with earnings decreasing at a slightly greater rate (almost 8%) than sales (6%). In the last quarter EPS actually increased almost 23% while sales declined about 1%.
    • Free Cash Flow: DISH has very healthy free cash flow of more than $2.2 billion over the last twelve months, despite its decline from a little over $2.4 billion in late 2017.
    • Debt to Equity: the company’s debt to equity ratio is 2.07, which is high; levels at 1 or below are preferred. However, the company’s balance sheet indicates operating profits are more than adequate to service the debt they have, with adequate liquidity from their cash flow to provide additional stability and flexibility. High debt to equity ratios are also pretty normal for this industry.
    • Dividend: DISH does NOT pay a dividend, which is normal for stocks in the Media industry.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DISH is $15.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.14. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Media industry is 2.2, and the historical average for DISH is 6.53. The stock would have to move above $100 to be at par with the its historical average. While I believe that is an over-optimistic target on even a long-term basis, it does suggest that the stock’s 52-week high, which was $66 in July of last year, is useful and within striking distance over time.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red, dotted diagonal line traces the stock’s decline and concurrent downward trend for the past year. The stock has been rebounding since the beginning of this month but is now pushing directly up against that downward trend, which should push the stock back down to retest its recent pivot low around $29. A drop back down from that line, to around $31 would be a good sign that the “dead cat bounce” effect is at play. On the other hand, a push above the line to the $35 level, or better, $36 should give the stock some good short-term momentum to push up to the $40 level. That’s a range that short-term traders could find useful for a bullish trade. The stock would have to break above $40 to mark a legitimate reversal of the long-term downward trend.
    • Near-term Keys: Look for the stock to break above $35 per share. A move above this level could be a good opportunity to enter a bullish trade, either by buying the stock or working with call options. A move below $31, on the other hand could suggest the stock’s downward trend will reassert itself and push the stock even lower than $29, which could be a good opportunity for a bearish short-term trade by either shorting the stock or working with put options.


  • 31 May
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    Introduction

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