Cash for clunkers
The rally has been especially kind to seemingly vulnerable stocks such as Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS).
Both have pole-vaulted to triple-digit gains on a year-to-date basis,
despite dodgy financial health and exposure to the slings and arrows of
a still-outrageous financial sector. Toxic assets haven't evaporated,
after all, and the feds have been scrutinizing Bank of America's acquisition of Merrill Lynch for signs of criminality.
Meanwhile, the charts of Amazon (Nasdaq: AMZN) and Intel (Nasdaq: INTC)
demonstrate similarly suspect trajectories. Make no mistake: These
companies are far stronger than the likes of Goldman and Morgan
Stanley, in my view. Nonetheless, they now sport multiples that look
fat and unhappy: Both trade at more than 40 times current earnings.
If the recovery isn't as robust as the market seems to think it will
be, stocks with aggressive valuation profiles such as these may take a
hard hit. That's also true of high-flying Visa (NYSE: V),
which trades with a P/E near 40 despite the fact that its fortunes are
basically tethered to the economic cycle via consumer spending -- and
the level of consumer default.
Meanwhile, at the other end of the valuation spectrum ....
ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX)
may not appear as richly valued -- in fact, the former is sporting a
negative P/E. Still, following substantial price pops over the last
quarter, are these companies values or value traps? Both are deep
cyclicals whose fortunes will rise or fall with demand for a highly
volatile commodity.
Dialing for dollars
During these strange days, you may be surprised to learn that I have my eye on Sprint Nextel, which is up about 75% on a year-to-date basis.
Rocked hard amid the downturn, Sprint last paid a dividend in 2007,
and it has posted negative net income during each of its past two
fiscal years. At a glance, the company looks similar to the stocks I
"trash-talked" above. Yet one Fool's trash is another's treasure -- and
Sprint looks like a diamond in the rough to yours truly.
At some level, after all, even flailing companies can make
attractive investment prospects. Sprint isn't exactly flailing: It
raked in more than $35 billion in revenue during fiscal 2008, netting
out a gross profit of nearly $19 billion, and the company has been
free-cash-flow (FCF) positive during eight of the past nine years. The
sole miss occurred way back in 2001, and the past 12 months have seen a
sharp FCF increase compared with 2008.
On the risk side of the ledger, I'm troubled by the company's recent
debt offering. Yet even after factoring this fresh development into the
analysis, Sprint appears to be trading at a steep discount to fair
value. Indeed, using a normalized free cash flow figure and
conservative estimates of earnings growth that account for Sprint's
third-place status in a race that includes Verizon and AT&T, my back-of-the-envelope valuation for the company comes in at roughly $7.50 a share. As I type, Sprint trades near $3.20.
About that envelope
I didn't actually use one. I used the discounted cash flow (DCF) calculator that comes gratis with the Fool's Inside Value service.
With pointers to the data you need, this no-muss, no-fuss tool comes in
handy indeed when winnowing a field of contenders down to just those
that appear worthy of further research.
© 2009 UCLICK, L.L.C.
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