CEMEX has pursued an aggressive strategy of acquisitions that has left it debt-ridden and in a perilous situation financially. The company looks cheap and indeed popped 8.6% on Friday; but this is the equivalent to driving with a knife pointing out of the steering wheel: even a minor accident, you’re dead. We would therefore recommend looking elsewhere for value.
Terex Corporation (TEX) manufactures construction and mining equipment with four manufacturing segments: Cranes, Construction, Aerial Work Platforms , and Materials Processing accounting for 40%, 24%, 4%, and 12% of 2010 revenues, respectively. Terex is well-diversified geographically with 27% of sales from the U.S., 32% from Europe, and 41% from the rest of the world.
Terex looks cheap right now, but so do its stronger peers (note that table measures five-year averages for Net Margin, Asset Turn, ROE and Leverage). Without a dividend, nor a durable competitive advantage and considerable coupling to macroeconomic events, we’d take a pass on this company and focus on those with an economic moat that can be defended (such as CAT and DE).
Petroleo Brasileiro SA Petrobras ADR (PBR)
With extensive experience in deepwater offshore operations, huge recently discovered national reserves, and potential for preferential access to the majority of Brazil’s future pre-salt fields; Petrobras has remarkable upside potential due to the prospect of doubling its resource-base and production in the next 8-12 years. This could truly be a great growth story. The biggest negative is that Petrobras is controlled by the Brazilian government, who may decide that “social returns” outweigh shareholder returns.
Comparing Petrobras to some of its peers, the company “looks” to be about the cheapest. This is a case of high-risk and high reward. Assuming that PBR’s intrinsic value is in the $38-45 range, we would be looking for a 40-45% margin of safety and $22-$24 appears to be a reasonable entry point for those who understand the risks.
Vulcan Materials (VMC)
With 319 aggregates production facilities, 172 crushed stone plants and 43 sand/gravel plants, Vulcan Materials Company (VMC) is the nation’s leading commercial producer and distributor of crushed stone. The company operates in the U.S. and in Mexico. With considerable economies of scale, Vulcan enjoys considerably more pricing leverage selling aggregates versus other commodities and should benefit from upcoming infrastructure spending and economic recovery. Congressional funds for road construction as part of the Highway Act are available and we do not believe we are in for a double-dip recession. Vulcan has a 4.2% dividend yield that can sustain investors who are willing for shares to appreciate. However, overall it appears that Vulcan is likely to see more bad times before good. We would not be interested until VMC gets close to its 52-week lows of about $25.
UPDATE via Zack's Analyst Blog: "Vulcan Materials Company (VMC - Analyst Report) recently announced a quarterly dividend of one cent per share on its common stock payable on December 9, 2011, to shareholders of record at the close of business on November 23, 2011. This marks a drastic reduction from 25 cents per share paid on September 10, 2011." Hat tip Platawn
Strayer Education (STRA)
Strayer is a for-profit educational services provider that provides degreed programs in business disciplines and IT and targets the working adult population. Enrollment has grown to 50,000 students at roughly 90-plus campuses.
Both the U.S. House of Representatives and the Senate announced during fiscal 2012 budgeting meetings in October that the maximum Pell Grant would be preserved at $5,500 per student for 2012 upcoming year, which is good news for the for-profit school sector. However, with many more budget battles yet to come in the coming years, limits to subsidies on loan interest and eligibility to Pell grants will likely be another headwind for this sector. The “golden age” of this sector is behind it and increased regulation of the for-profit educational sector will likely lead to compressed margins, lowers returns on invested capital and industry consolidation.
Looking at operational performance and scale, we believe that Apollo group is the best of breed in the sector. However, a recent pop in share price has pushed Apollo closer to fair value. (Disclosure: Our last two trades for APOL were a buy at $35 and a sell at $50.)
Book value and EPS growth over the last 10 years appears solid.
This screen validates that Mr. Market can be rational at times and irrational at others. Many of these "dirt cheap" shares deserve their cheapness. It does appear, however, that Mr. Market has thrown baby Strayer (STRA) out with the bathwater on valuing STRA. Strayer remains attractively valued and includes a dividend yield of 4.6%. With an approximate 40% discount to a “quick and dirty” intrinsic value calculation, STRA looks attractive and warrants further analysis. You can starthere (http://www.gurufocus.com/news/145912/strayer-stra-one-of-the-best-of-the-forprofit-breed) with Ben Strubel's fine article on the company.
About the author:
We apply Buffett's and Charlie Munger's four filters in selecting stocks as part of a concentrated portfolio (10-15 equities). Criteria for selecting companies are:
1.They are strong businesses; as defined by high long-term cash generation, above-average return on invested capital, possession of favorable underlying economics and a durable ...More competitive advantage, good financial health, and above-average profit margins
2. We understand the business
3. They are run by competent management
4. They are available at bargain prices.
We require a 25-50% margin of safety, depending on the stability and economic moat for the company.
In addition to equity research services, we are a member of the Gerson Lehman Group Expert Counsel of Advisors and provide research/consulting services to investment banks.