GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

5 Bullish Picks Jim Cramer Is Right About

Jim Cramer, the colorful and at times controversial host of CNBC’s Mad Money, recommended these six stocks on the Monday, December 5 episode. In this article I will analyze his recommendations on a fundamentals basis to determine whether they offer the solid investment opportunities that will grow in value. I conclude that Cramer was right on FLR, BIDU, KKR, GOOG, MA and CY. Here is my unique analysis showing why.

Fluor Corporation (FLR)

Fluor is one of Cramer’s favorite picks. It has a market cap of $8.9 billion and is currently trading at around $52, with a price to earnings ratio of 17. It has a 52 week trading range of $44.16 to $75.76 per share. It reported third quarter 2011 earnings of $6 billion, approximately the same as second quarter earnings of around $6 billion. The income statement showed net income for the third quarter of $135 million, a significant decrease from second quarter net income of $166 million. It has quarterly revenue growth of 9.5%, a return on equity of 19% and pays a dividend with a yield of around 1%.

One of Fluor’s competitors is Jacobs Engineering Group Inc. (JEC), which has a market cap of $5.5 billion and is trading at around $43, with a price to earnings ratio of 16. It has quarterly revenue growth of 16% and a return on equity of 11%. This data indicates that Jacobs has greater revenue growth than Fluor but is lagging on return on equity.

Fluor's cash position has substantially improved in the last quarter. Its balance sheet showed $906 million in cash for the third quarter, an increase from $774 million in the second quarter. Fluor’s quarterly revenue growth of 9.5%, versus an industry average of 20%, and a return on equity of 19%, versus an industry average of 12%, indicates that it has weaker growth prospects than its competitors but management is creating a substantially better return on equity than these competitors.

Before diving into the numbers let’s examine what Fluor does and whether this gives us any insight into why Cramer has picked this stock. Fluor is a leader in providing engineering, procurement, construction, and maintenance (EPCM) services. The company specializes in large scale, multibillion dollar mega projects providing design, engineering, construction, and management services for complex and capital intensive projects. This is a difficult industry to enter mainly due to the high entry barriers, which insulates Fluor somewhat from competition.

The earnings outlook for the technical services industry, in which Fluor operates, is closely tied to the global economic cycle and the demand for energy, raw materials and construction. This is because the industry provides engineering, construction and maintenance services to oil and gas drilling projects as well as maintenance and engineering support to refinery and chemical processing plants. As the global economic outlook is currently quite shaky due to the European sovereign debt crisis appearing to derail the global economic recovery, the earnings outlook for 2012 appears as negative.

On deeper investigation of the numbers though, it is easy to see why Cramer loves this stock. The company has strengthened its balance sheet in a difficult operating environment, as well as having a price to sales ratio of 0.41, which ranks it seventh in its industry. In addition, its earnings yield of 6%, in my view indicates that it is relatively cheap when compared to bond yields. When all of this considered and despite the negative industry outlook, I agree with Cramer’s pick and rate the Fluor as a buy.

Baidu Inc. (BIDU)

Baidu has a market cap of $46 billion and currently trades at around $131, with a price to earnings ratio of 50. Its 52 week trading range is $94.33 to $165.96. It reported third quarter 2011 earnings of $652 million, a substantial increase from second quarter earnings of $527 million. Third quarter net income was reported at $294 million, an increase from second quarter net income of $252 million. It has quarterly revenue growth of 85%, and a return on equity of 54%.

One of Baidu’s closest competitors is Sina Corporation (SINA), which has a market cap of $4 billion and is trading at around $62. It has quarterly revenue growth of 20%, a return on equity of -35%. Based on these indicators it is substantially under-performing Baidu.

Baidu’s cash position has improved with $1.9 billion in cash for the third quarter 2011, an increase from $1.6 billion of cash in the second quarter. Baidu’s quarterly revenue growth of 85%, versus an industry average of 18%, and a return on equity of 54%, versus an industry average of 15%, indicates that it is substantially outperforming many of its competitors.

The earnings outlook for Internet information providers is mixed primarily as competition in the industry is strong with the larger industry participants taking the lead and exerting further pressure on smaller players. In addition, growth has been somewhat stymied due to the subdued economy and decreased business and consumer demand. However, there are also large potential growth opportunities, both geographically and technologically with companies focusing on technological innovation and increasingly accessing emerging markets.

However, before diving into the numbers let’s see whether there are any hints in what Baidu does to see if we can gather insight into why Cramer likes Baidu so much. Baidu is the dominant Chinese search engine and web portal, and this provides the company with the opportunity to capitalize on the largest fastest growing middle class population in the world, which should see earnings lift as Chinese society becomes more affluent.

Then when analyzing the numbers its becomes even clearer why Cramer likes this stock. Baidu has revenue growth of 94%, which is the third highest in the industry, as well as a profit margin of 45%, which is the highest in its industry. Its profit margin is well ahead of Google, the largest industry participant by market cap, which is ranked seventh with a profit margin of 5.7%. It also has an earnings yield of 2%, which indicates that at its current price it is trading at fair value when compared to current bond yields. Therefore, due to Baidu’s stronger balance sheet and solid revenue growth and profit margin I rate Baidu as a buy.

Kohlberg Kravis Roberts and Co. (KKR)

Kohlberg Kravis Roberts has a market cap of $2.7 billion, and is currently trading at around $13, with a price to earnings ratio of 20. Its 52 week trading range is $8.95 to $19.16. It reported third quarter 2011 earnings of $147 million, an increase from second quarter earnings of $100 million. Third quarter net income was -$243 million, a substantial decrease from second quarter net income of $40 million. It has quarterly revenue growth of 72%, a return on equity is 10% and pays a dividend with a yield of around 3%.

One of Kohlberg Kravis Roberts' main competitors is BlackRock Inc. (BLK), which has a market cap of $30 billion and is trading at around $169, with a price to earnings ratio of 13. It has quarterly revenue growth of 6%, a return on equity of 9.5% and pays a dividend with a yield of 3%. Based on these indicators Kohlberg Kravis Robert’s is outperforming BlackRock.

Kohlberg Kravis Roberts’ cash position has declined with cash holdings in the third quarter of $1.35 billion, a decrease from $1.5 billion in the second quarter. Net tangible assets have also decreased, with $1.27 billion in the third quarter 2011, from $1.5 billion in the second quarter. Kohlberg Kravis Roberts’ quarterly revenue growth of 72%, versus an industry average of 23%, and a return on equity of 9.5%, versus an industry average of 10%, indicates that it is outperforming many of its competitors.

The earnings outlook for the asset management industry is relatively positive, despite volatile investment returns, tight credit markets and poor consumer sentiment, all of which have contributed to a decline in investment value and demand for investments. This increasingly positive outlook can be attributed to the improved earnings capacity of industry participants and decreased regulatory risk, which should lead to reduced future costs.

Before examining the numbers further let’s see if any of Kohlberg Kravis Roberts’ recent business activities can give us further insight into the company’s future potential. In November this year, Kohlberg Kravis Roberts led a consortium to buy oil and gas group Samson Investment Co for around $7 billion, and it has taken a share of 60% in this investment. This bodes well for Kohlberg Kravis Roberts’ future earnings, as Samson has interests in more than 10,000 wells in oil rich areas such as Bakken and Powder River, and with the high demand for energy, this can only lead to higher future earnings.

When taking a deeper dive into the numbers it is easy to agree with Cramer’s recommendation as Kohlberg Kravis Roberts is currently trading at around $13, which is only around $4 per share higher than its book value per share of $9. In addition, with an earnings yield of 5.41%, I believe the stock is undervalued. Therefore, I agree with Cramer and rate Kohlberg Kravis Roberts as a buy.

Google Inc. (GOOG)

Google Inc has a market cap of $201 billion and is trading at around $621, with a price to earnings ratio of 21. Its 52 week trading range is $473.02 to $642.96. It reported third quarter earnings 2011 of $9.7 billion, a substantial increase from second quarter earnings of $9 billion. Third quarter net income was $2.7 billion, an increase from second quarter net income of $2.5 billion. It has quarterly revenue growth of 33% and a return on equity of 20%.

One of Google´s closest competitors is Yahoo Inc. (YHOO), which is trading at around $15, with a price to earnings ratio of 19. It has quarterly revenue growth of -24% and a return on equity of 9%. Based on these key performance indicators, Google is strongly outperforming Yahoo.

Google’s third quarter 2011 balance sheet showed cash of $1.5 billion in cash, a decrease from second quarter cash of $1.6 billion. It has net tangible assets in the third quarter of $8.5 billion, a decrease from second quarter’s $8.7 billion. Google’s quarterly revenue growth of 33% versus an industry average of 18%, and a return on equity of 20%, versus an industry average of 15%, shows that it is outperforming the majority of its competitors.

The earnings outlook for the internet information providers industry is mixed, primarily due to strong competition in the industry, with the larger industry participants taking the lead and exerting further pressure on smaller players. In addition, growth has been somewhat stymied due to the subdued economy and decreased business and consumer demand. However, there are large potential geographical and technological growth opportunities through industry participants focusing on technological innovation and accessing emerging markets.

In a recent analysts report Bernstein Research allayed many of the fears that have been seen to be a looming threat to Google’s future earnings growth when they stated; “We do not think the online advertising market is close to saturation, that Facebook poses a major threat to search revenue growth, or that Google faces a real threat of proactive regulatory action on anti-trust or privacy grounds that would fundamentally change the trajectory of the business.”

When all of these factors are considered Google starts to look quite attractive, but a deeper investigation of the numbers shows that Google even at its current price, is a compelling investment. Not only is it the largest industry participant by market cap, it has a solid profit margin of 28% coupled with an enviable return on equity of 33%. I also believe that Google is marginally undervalued at its current trading price as it has an earnings yield 5%, which is higher than current bond yield. It is clear that Cramer is again on the money with Google and I rate the company as a buy.

MasterCard Incorporated (MA)

MasterCard has a market cap of $47 billion and is trading at around $374, with a price to earnings ratio of 21. Its 52 week trading range is $215.00 to $384.99. The company reported third quarter earnings 2011 of $1.8 billion, an increase from second quarter earnings of $1.7 billion. Third quarter net income was $717 million, a substantial increase from second quarter earnings of $608 million. The company is achieving quarterly revenue growth of 27% with a return on equity of 42%. It pays a dividend with a yield of 0.2%.

One of MasterCard’s competitors is Visa Inc (V), which has a market cap of $78 billion and is trading at around $96, with a price to earnings ratio of 21. It has quarterly revenue growth of 13%, a return on equity of 14% and pays a dividend with a yield of 1%. Based on these performance indicators Visa is substantially underperforming MasterCard.

MasterCard’s cash position has substantially increased, its third quarter balance sheet showed $4.4 billion in cash, an increase from second quarter cash of $3.4 billion. With quarterly revenue growth of 27%, versus an industry average of 13%, and a return on equity of 42%, versus an industry average of 14%, it is substantially outperforming many of its competitors.

Before we dive into the key numbers it is clear that MasterCard is a compelling investment story, purely by size and market share alone. It has more than 988 million of its products in use around the world and $5 billion in cash. Another appealing aspect is that even though MasterCard makes credit cards, it doesn't take on any credit risk, simply acting as a facilitator and toll operator, the credit risk is taken on by the financial institution issuing the card. Simply put the more people around the world who use MasterCard the more its earnings will grow and there is ample opportunity for increased usage.

The numbers show that it is a compelling investment and I can understand why Cramer has recommended this stock. Firstly it has had an impressive increase in earnings and net income for the third quarter, an increase of around 9% in earnings and around 18% in net income respectively, in what is a difficult economic environment. Secondly it has a profit margin of 39%, which places it third in its industry segment. Finally it has a price to sales ratio of 7.5, which is eighth highest in its industry. Yet it only gets better as MasterCard has an earnings yield of almost 5%, which in comparison to current bond yields shows that it is undervalued even at its current trading price. I agree with Cramer’s recommendation and strongly rate MasterCard as a buy.

Cypress Semiconductor Corporation (CY)

Cypress has a market cap of $3 billion and is trading at around $18, with a price to earnings ratio of 23. Its 52 week trading range is $13.67 to $23.95. The company reported third quarter earnings 2011 of $265 million, an increase from second quarter earnings of $255 million. Third quarter net income was $40 million, a decrease from second quarter earnings of $40.6 million. The company is achieving quarterly revenue growth of 14% with a return on equity of 26%. It pays a dividend with a yield of around 2%.

One of Cypress’ competitors is Xilinx Inc (XLNX), which has a market cap of $8 billion and is trading at around $32, with a price to earnings ratio of 15. It has quarterly revenue growth of -10%, a return on equity of 26% and pays a dividend with a yield of around 2%. Based on these performance indicators Xilinx is underperforming Cypress.

Cypress’ cash position has substantially decreased, its third quarter balance sheet showed $64 million in cash, a decrease from second quarter cash of $280 million. With quarterly revenue growth of 14%, versus an industry average of 35%, and a return on equity of 26%, versus an industry average of 23.5%, it isn’t demonstrating the same earnings growth prospects of its competitors but it is delivering a marginally higher return on equity.

Currently the outlook for the semiconductor industry is relatively negative, primarily due to the poor domestic and global economy and high unemployment triggering poor business and consumer sentiment, which has led to a steep decline in both discretionary spending and demand. This indicates that the earnings outlook for companies generating revenue both in the US and globally remains poor in the short term, despite signs of an emerging global economic recovery.

Why buy Cypress especially with such a negative industry outlook, well before we dive deeper into the numbers let’s get a better understanding of what the company does. Cypress is a major American supplier for SRAMs with diverse end market exposure. It supplies chips for traditional HP and IBM blade servers, industrial equipment, iPod, Del LCD, and LG handsets. It is also introducing new product lines such as Programmable System-on-Chip (PSoC) image sensors, which have recorded solid adoption rates. With the introduction of new products and the on-boarding of new customers for these products, the prospect of enhanced overall earnings growth is strong.

The company has an impressive return on equity of 26%, which demonstrates that it has strong management who have a firm grasp of the business. It has a profit margin of 15%, which places it ninth in its industry segment, as well as a price to sales ratio of 3.26, which is the fourth highest in its industry segment. In addition, based on the company’s current earnings yield 4.12%, I believe that at its current price the stock is undervalued when compared to bond yields. Despite the decreased net income and weaker balance sheet all of this indicators show that it is well positioned to create further earnings growth and is handy addition to any investment portfolio. I agree with Cramer and rate the company as a buy.

About the author:

Investment Underground
Buy low and sell high is easier in theory than in practice– and that’s where we come in.

At Investment Underground, our editors are disciplined, independent thinkers who will inform you when to buy undervalued investments, recognize catalysts, and sell when full value is realized. We provide timely, detailed analysis of our value investing strategies and help you achieve your goals of a reduced-risk trading environment.

If you are fed up with volatile markets and manipulation that put your financial well-being in jeopardy, join us to achieve those gains you deserve without the headache.

Visit Investment Underground's Website


Rating: 3.7/5 (18 votes)

Comments

rcgroups1
Rcgroups1 - 2 years ago
i don' know if you saw yesterday's show. he turned bearish for BIDU. I don't know what you call that flip-flop?

InvestmentUnderground
InvestmentUnderground - 2 years ago
Yes. You're right about Cramer flip-flopping.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK