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Margin of Safety
Margin of Safety
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'Margin of Safety' Stocks That Trade at A Discount To Value-November 22 Update

This short article is a bimonthly news update of stocks for value investors 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 discount to intrinsic value.

Current trends and events

· HP delivered “better than expected” results;

· Business and government tech spending down;

· Boeing received two record orders;

· GE, Boeing and Exxon move into Middle East;

· Stryker tightens its belt preparing for new healthcare regulations;

· US economic uncertainty and high unemployment put pressure on housing renovations.


Nokia announced that it will release a tablet running on Microsoft’s (MSFT) upcomingWindows 8 operating system in the summer of 2012, which will compete with Apple’s iPad and numerous Android tablets. According to research firm Gartner, Windows phone platform’s global market share shrank to 1.5% during Q3-2011, losing ground to Google’s Android, which more than doubled to 52.5%, and Apple’s OS that accounted for 15% of the market. Microsoft’s shareholders expressed some concerns at the annual meeting related to the company’s share price, which has stalled in the $20 to $30 range for more than a decade; they also were worried that the company “is losing ground to tech rivals Apple Inc. and Google Inc.” Shareholders even proposed to split the company’s operations despite Microsoft registering record profit for last fiscal year and having a strong balance sheet.

Hewlett-Packard (NYSE:HPQ) reported “better than expected” FY11 results, with non-GAAP net revenue increasing marginally by 1% year-on-year to $127.2 billion and non-GAAP diluted EPS increasing by 7% year-on-year to $4.88. HP has introduced its first business Ultrabook with up to 9 hours of battery life. Reuters reported that HP is considering selling the webOS mobile software platform in a “deal that could fetch hundreds of millions of dollars but less than the $1.2 billion that HP paid last year.”

Cisco (CSCO) reported Q1-FY12 results with revenue increasing by 5% year-on-year to $11.3 billion and non-GAAP EPS increasing by 2.4% year-on-year to $0.43. The positive results came after the company completed most of its restructuring and organizational changes. Cisco presented new business productivity and competitiveness solutions by launching new “post-PC” era services which should aid people collaborate from “anywhere, anytime and on any device or application.”

Applied Materials (NASDAQ:AMAT) reported results for fiscal year ended on October 31, 2011, with revenue increasing by 10% year-on-year to $10.5 billion and non-GAAP EPS increasing by 48% year-on-year to $1.30. Looking forward, the company expects to face a challenging economic environment during H1-FY12, however it anticipates that “overall business will acquisition of Varian Semiconductor Equipment Associates for $4.2 billion, which strengthens the company’s portfolio with ion implantation technology.

Current economic uncertainty puts downward pressure on business increase by 3.9% during 2012 compared to the 5.9% increase registered during 2011. Related to governments, Gartner said “spending is going to be down, and in some places it’s going to be down considerably.”


General Electric (NYSE:GE) continued its geographic expansion by moving into resource-rich Middle East and opening three offices in Iraq. GE will sell 50 engines to Indonesia’s Garuda Airlines in an agreement worth $1.3 billion. GE Transportation announced the acquisition of transportation software provider RMI, expected to close in early 2012 (deal value was not disclosed). GE Aviation and CFM International joint venture received engine and service orders worth more than $13.8 billion at the 2011 Dubai Air Show. GE plans to sell $20 billion worth of securities, both stock and debt, with proceeds to be used for debt repayment, capital expenditures and investment in subsidiaries or acquisitions.

Boeing (NYSE:BA) agreed to sell 230 model 737 planes between 2017 to 2025 to PT Lion Mentari Airlines, Indonesia’s biggest budget carrier in a deal worth $21.7 billion. This is Boeing’s record deal in terms of value and quantity and it also includes options for another 150 aircraft. The deal was announced shortly after another record order from Dubai-based Emirates Airline for 50 twin-engine 777 aircraft worth $18 billion with an option for an additional 20 jets for about $8 billion. Boeing entered into new $2.3 billion revolving credit agreements with Citigroup and JPMorgan Chase & Co that will replace previous financing contracts. Boeing sees Middle East as “key” to its development after trillion-dollar US defense budget cuts and has already signed a deal with Mubadala Aerospace, which will become a major aircraft parts supplier. Boeing also estimated that Middle East operators could buy 2,520 new commercial airplanes worth about $450 billion over the next 20 years, significantly up from the current fleet of 1,040 planes.

US industrial production was up by 0.7% in October after a revised 0.1% drop in September with manufacturers benefiting from sales both abroad and in the USA.


A judge from New Orleanssaid BP can’t use Transocean’s (NYSE:RIG) insurance to cover costs related to the oil spill in the Gulf of Mexico after BP filed claims last year seeking $750 million in damages.

Exxon Mobil (NYSE:XOM) has entered into an agreement with the semi-autonomous northern Kurdish region in Iraq over six exploration oil and gas deals. The Iraqi government commented any deals signed with the Kurdish Regional Government are illegal and implied this could threaten Exxon’s contract for the development of West Qurna oilfield in southern Iraq. Exxon Mobil has not yet issued a reply. Workers from the Antwerp refinery announced starting a strike on November 23. In turn, the company officials said they would have to close down the plant in case an agreement is not reached over workers’ pay. Exxon will sell its Swiss unit to Socar, Azeri national oil company, for an undisclosed amount.


A shareholder rights litigation firm started investigating Abbot Laboratories (NYSE:ABT) over possible breaches of fiduciary duty and other law violations by certain officers and directors in relation to the blockbuster anti-seizure drug Depakote. The company has already reserved $1.5 billion related to the U.S. Department of Justice investigation over the same breaches. Abbot has reportedly agreed to pay at least $1.3 billion to settle claims by the Department of Justice. This settlement might be the “third largest for illegal pharmaceutical marketing in U.S. history.” Abbot has presented favorable results of the two-year trial of bioabsorbable stent for treatment of heart arteries.

Stryker (NYSE:SYK) announced it will reduce its workforce by 5% (1,000 jobs) in a cost cutting measure to mitigate the impact of the new Medical Device Excise Tax in 2013. Stryker expects to save $100 million from the restructuring which will be completed by the end of 2012. The Medical Device Excise Tax, a component of Patient Protection and Affordable Care Act signed into law on March 23, 2010, requires the producers of various medical devices to pay 2.3% of their gross U.S. revenues on such products beginning in 2013.

UnitedHealth (NYSE:UNH) is among several bidders including WellPoint and Aetna to acquire XL Health, which provides care for chronically ill Medicare patients. This deal may be worth up to $2 billion. Analysts estimate XL Health is well positioned to benefit from the U.S. health program for the elderly and disabled. The program may generate $10 billion in revenues for insurers by 2015 as baby boomers reach their retirement age. In early November, UnitedHealth sold $1.5 billion worth of senior unsecured notes.

Merck (NYSE:MRK) agreed to pay almost $1 billion in settlements related to criminal and civil charges arising from the marketing of Vioxx painkiller, after it was alleged to have promoted the drug for rheumatoid arthritis before it was officially approved (the drug was withdrawn in 2004). The payment should come from a reserve the company set aside last year and thus should not affect profitability.


Lowe’s Companies (NYSE:LOW) reported Q3-2011 results with revenue increasing by 2.3% year-on-year to $11.9 billion and EPS decreasing to $0.18 compared to $0.29 a year ago. Revenues benefited from Hurricane Irene and lower prices. The company’s CEO said “demand for expensive renovations is still weak,” given the economic challenges and increasing domestic unemployment. Lowe’s expects to raise $991 million after selling $500 million of 3.80% notes due in 2021 and $500 million of 5.125% notes due in 2041. The financing will be used to repurchase common stock, for capital expenditures, acquisitions and working capital needs.

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.

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