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January Update - 'Margin of Safety' Stocks That Trade at a Discount to Value

This short article is an update of stocks that we follow in our "Margin of Safety Portfolio." These are stocks identified to have a durable competitive advantage and, based upon our intrinsic valuation models and fundamental analysis, are trading at a substantial discount to intrinsic value.

Current trends and events

· Microsoft predicts lower PC shipments in the near term;

· Microsoft’s Kinect sales hit 18 million in just over a year;

· Rio Tinto has clear way to take over Ivanhoe, owner of one of the largest copper mines in the world;

· The manufacturing indices for December 2012 show different trends for the USA and EU.

Technology



Microsoft (MSFT) has partnered with Qualcomm to ship Snapdragon S4 processors with LTE Connectivity for Windows 8. Microsoft warned about fewer PC shipments in the near term due to floods in Thailand hurting suppliers. Microsoft TV was put on hold “after deciding that the licensing costs were too high for the business model Microsoft envisaged.” Microsoft reported the sales of the Kinect sensing device for the Xbox game console have reached 18 million in just over a year since launch, outselling Nintendo’s Wii and Sony’s PlayStation in the U.S. game console market.

Hewlett-Packard (HPQ) is undergoing further administrative changes naming Bill Veghte, HP’s former top software executive, as chief strategy officer. HP also named Henry Gomez as chief communications officer. Mr. Gomez previously held positions with eBay and worked on CEO Meg Whitman’s campaign for California governor.

Industrial



General Electric (GE) will supply 23 MW of cadmium telluride solar photovoltaic (PV) modules to Invenergy LLC based in Illinois for the largest solar PV plant in the U.S. Midwest. GE reported Q4-2011 results with revenue decreasing by 8% year-on-year to $38 billion and EPS down by 17% year-on-year at $0.35 (operating EPS was up 11%). For the entire 2011, revenue decreased by 2% year-on-year to $147.3 billion and diluted EPS increased by 16% year-on-year to $1.23. When providing the guidance for 2012, GE Chairman and CEO Jeff Immelt said “We are confident in our 2012 framework to realize double-digit earnings growth in our Industrial and Capital segments, increase margins and provide dividend growth to our shareholders in line with earnings.” Bank of Ayudhya, 33% owned by a unit of General Electric, announced it will buy HSBC’s Thai credit card and retail business with a loan portfolio estimated at between $942 million and $1.26 billion, with about 500,000 credit card customers. The value of the deal was not disclosed.

Rio Tinto (RIO) has the green light to take over Ivanhoe Mines, owner of one of the world’s largest new copper projects in Mongolia. Currently Rio holds a 49% stake in Ivanhoe. Rio Tinto shipped 239 million tons of iron ore globally in 2011 which was below the production volume of 245 million tons due to extreme weather conditions experienced in H1-2011.

In the U.S., the Manufacturing ISM Report on Business for December 2011 showed that “economic activity in the manufacturing sector expanded in December for the 29th consecutive month, and the overall economy grew for the 31st consecutive month.” The Euro zone manufacturing activity decreased “for a fifth consecutive month in December, although at a slightly slower rate than November’s 28-month record low.”

Energy



Morningstar Inc.hasreleased its Mergers & Acquisitions Insights report putting Transocean (RIG) “among companies that may be acquired in 2012 because they trade below fair value estimates.” Analysts with Wells Fargo Securities say “Transocean Ltd. is “serious” about shedding up to 50 aging shallow-water rigs” which may fetch up to $2.5 billion net.

Reuters reports that Exxon Mobil (XOM) received licenses from Norway’s Oil and Energy Ministry for mature offshore areas. The joint venture between Royal Dutch Shell Plc and Exxon Mobil Corporation drilled a new onshore natural gas field in the Netherlands with the production due to begin in the summer.

Healthcare



UnitedHealth (UNH) has reported Q4-2011 results with revenue increasing by 8% year-on-year to $25.9 billion and EPS increasing by 24% year-on-year to $1.17. Full-year revenue also increased by 8% year-on-year to $101.8 billion and EPS grew by 15% year-on-year to $4.73. The revenue growth was driven by “strong enrollment and revenue growth in each of UnitedHealth’s benefits businesses and strong revenue growth at all Optum business units.” For 2012 the company forecasts revenues in the range of $107 billion to $108 billion and EPS in the range of $4.55 to $4.75 per share.

Stryker Corporation (SYK) released preliminary results for Q4-2011, with revenue increasing by 11% year-on-year to $2.2 billion. For the entire 2011, revenue increased by 13.5% year-on-year to $8.3 billion. The company expects EPS for 2011 to be in the range of $3.72 to $3.74, an increase of 12% compared to 2010. For 2012 Stryker projects sales growth in the range of 2% to 5% and double-digit EPS growth.

Services



Lowe's Companies (LOW) acquired ATG Stores, a Kirkland-based online home furnishings retailer for an undisclosed amount.

Paychex (PAYX) acquired Icon Time Systems, provider of in time and attendance solutions for small businesses. The terms of the deal were not disclosed.

About the author:

Margin of Safety
Margin of Safety Equity Research is a value-investing focused company providing equity research services, the Securities Analysis System investment software, stock valuation models, and other financial resources for value investors. Members of our subscription services have access to the Margin of Safety value-oriented portfolio and discounted access to our software.

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.

Visit Margin of Safety's Website


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