Smart Investing

 

June 1, 2012

October 25, 2013


Ignore the headlines, and look at the facts

This week, in one of my many posts on social media platforms, I posted something that was important to investors — a report on corporate profits.

Yet a lot of people were probably not even aware that this data came out. As the report was released Thursday morning, headlines resembled a bad movie that's been played over and over again since the summer of 2010.

While many are in a panic about what is going on in Europe, corporate profits grew in the first quarter of 2012 to $1.669 trillion — an increase from the fourth quarter of 2011 of $1.494 trillion, an 11.7 percent increase. Year over year, corporate profits are up 14.7 percent.

My question to investors: Should one be investing in companies because they are making more money?

I hope you will agree that the answer to that question is yes, especially if the company is fundamentally strong and trading around 10-12 times earnings.

A smart investor looks at the facts, not the headlines.

An example of a good, strong company would be Helmerich & Payne, trading under the symbol HP. Don’t confuse the HP trading symbol with that computer company, whose fundamentals are not so great.

H&P is in the industry of oil and gas drilling and exploration. The company is based in Tulsa, Okla., and employs nearly 9,000 people. Over the last 52 weeks, the stock has been as high as $73.40 and as low as $35.58

Using the last 12 months of earnings per share yields a PE of 9.9 times earnings, which is close to the five-year low of 7.7. Looking at a forward PE, using September 2013 EPS based on the mean of 27 analysts, the FPE is 8.5, using the mean EPS of $5.33.

Price to sales favors the company when compared to the industry average of 1.8; H&P is 1.7. Price to tangible book looks slightly better for the industry at 1.2 compared to the company at 1.4. It should be noted that H&P has no intangible assets on its balance sheet, a feat not often seen in today’s time. Price to cash flow is 5.8 for H&P, slightly under the industry average of 6.6.

Investors may have been ignoring H&P because of its low yield of 0.06 percent versus the industry average of 1.6 percent. Looking at the numbers, H&P could increase its dividend if it wanted to, because the company only uses 6 percent of its earnings to pay its dividend.

Over the past 12 months, the stock has fallen nearly 20 percent, yet the sales have increased 27 percent year over year, beating the industry average growth of 25.1 percent. Earnings per share growth year over year looks even better for H&P, increasing 42.4 percent when the industry experienced an earnings per share decline of 148.3 percent.

No matter what the stock price does, a strong balance sheet should give investors a comfortable feeling that the company can weather any storm. H&P meets those high standards. With a current ratio of 2.7, well above the industry average of 1.7, investors know that this company has the ability to pay off the next 12 months of liabilities nearly three times. Debt to equity for the industry average is 50.3 percent — not too bad — but H&P has kept its debt well in check at 9.7 percent, most of which is long-term debt.

The oil and gas drilling industry has a return on equity at a negative 2.1 percent, while H&P has a positive return on equity of 15 percent. The net profit margin for H&P is also attractive at 17.8 percent, which means almost 20 cents of every dollar that comes in at the top line hits the bottom line.

Over the last 12 months, H&P turned over its receivables six times while the industry managed to turn over its receivables only 4.8 times. Keeping on pace with a well-managed company, H&P also did well managing its inventory, turning it over 30 times over the last 12 months, which is double the industry average of 15.6 times.

The stock, as I said, has dropped nearly 20 percent over the past year, yet the equity of the company has climbed 15.2 percent to $3.6 billion.

Cash and short-term investments have increased by $83 million to $324 million. I also noticed on the cash flow statement that H&P generated $439 million in cash from operations over the last six months, and the company seems to average around $225 million per quarter over the last 12 months.

I know this bad movie will end, just like it did in 2010 and many times before. In the meantime, an investor should be looking at reviews of upcoming movies and invest in some companies that will win the Oscar.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.


Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


 

June 1, 2012

October 25, 2013


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