These companies are niche but powerful players in their areas and can be bought and left in a portfolio for two to five years without watching them constantly.
Nuance Communications, Inc. (NUAN) is trading at an all time high of around $29 since its initial public offering in 1995 of about $22. Nuance has a market cap of $8.8 billion and an enterprise value (which adds debt to and excludes cash from market value) of $9.3 billion. Nuance is a growth stock with a price to earnings ratio of 245 compared to the S&P 500 price to earnings ratio of 14. During 2011, it acquired a few companies and it is now in a unique position to provide voice and language recognition technology to a variety of industries. The demand for this technology is growing and no other company can offer it to the extent Nuance does. During the third quarter of 2011 Nuance had revenue of $367 million and gross margin of $230 million or 62.7%. Its competitor, and likely acquirer, International Business Machines (IBM), gross margin for the same period was 47% and the gross margin of the average S&P 500 company was 39%. The strategic partnership in 2009 between IBM and Nuance has ripened, and much of Nuance's speech technology software has had input from IBM. Thus, going forward, both companies could benefit from cementing an already cozy relationship. In conclusion, Nuance is a technology leader whose sales are growing quickly around the world. Even if the company is not acquired at a double digit premium to its current price by one of the bigger, cash-rich, technology companies, it is still a viable investment on its own.
CSX Corp's (CSX) stock price is around $23 at the time of this writing and it has a price to earnings ratio of 14, dividend yield of about 2%, and earnings before interest tax and depreciation margin of 38%. CSX has 1.049 billion shares outstanding, implying a market capitalization of about $24 billion. The U.S. economy is expected to grow slightly in 2012 and any improvement in economic activity will bring more business to CSX which means better margins and utilization of its rail network. Specifically, CSX will benefit from increased demand for coal freight, particularly from the Appalachian basin to utilities operating near Eastern population centers. Alternatives like truck freight are becoming increasingly uneconomical due to diesel fuel costs, and thus rail freight will benefit even in a flat to slow volume growth market. For its most recent fiscal quarter, CSX earned $0.43 per share, a 19% improvement from the $0.36 earned for the same period of last year while revenue grew 11% to $2,963 millions compared to the third quarter of 2010. Another tailwind for CSX is its share repurchase program which still has a remainder of $700 million of shares to be repurchased through 2012 which will lower the share count and boost the earnings and dividend yield per share.
Back to the technology sector with Applied Materials, Inc. (AMAT) which trades around $13 or slightly under the average of its fifty two week range ($9.70 to $16.93) and its price to earnings ratio is attractive at 8.6. The company has 1.3 billion shares outstanding, a market cap of $16.3 billion and currently pays an annual dividend of $0.32 for a 2.6% dividend yield. In terms of profitability, Applied Materials' margins are better than those of the average company in the S&P 500, as well as in the technology industry and the semiconductor sector. For its last full quarter, Applied Materials' earnings before interest, tax and depreciation was 25% which compares favorably to 19.6% for the average company in the S&P 500, 21.2% for the technology industry, and 22.6% for the semiconductor sector. In addition, it has a solid balance sheet ($1.9 billion of debt compared to $6.2 billion of cash as of October 31, 2011). Overall, Applied Materials fundamentals suggest the company is undervalued and any substantial increase in the demand for solar panels, flat screen displays, tablets and smart phones will add value. In the meantime it rewards investors with an attractive dividend while they wait for the stock to appreciate.
Discover Financial Services (DFS) trades around $27 near the high end of its 52-week range ($20.09 to $27.92), has 550.6 million shares outstanding, a market capitalization of $15.1 billion, and a dividend yield of 1.5%. DFS has successfully grown its revenue since its spinoff in 2006 from its parent, Morgan Stanley (MS). Even more remarkable is Discover's earnings per share for the fiscal year ended November 30, 2011 which was $4.06 per share giving the company a price to earnings ratio of 6.8, which compares favorably to the price to earnings ratios of its closest competitors American Express (AXP), Visa (V), and MasterCard (MA) of 12.5, 18.9, and 19.1, respectively. Discover Financial Services is expected to benefit from any improvement in consumer confidence and the company is a good inflation hedge. As prices rise, its revenues increase as it charges a transaction fee which is a percentage of the sale price.
Teva Pharmaceutical Industries Ltd (TEVA) recently traded at around $46 or nearly midway between its fifty two week range ($35.00 to $57.08), has 942 million shares outstanding, a market cap of $42.7 billion and a dividend yield of about 2%. While Teva is based in Israel, for the quarter ended September 30, 2011 its sales were derived from North America (50%), Europe (31%), Latin America and Mexico (5%), Eastern Europe, Israel, the Middle East and Africa (8%), and Asia (6%). As the healthcare costs continue to rise, baby boomers retire, and patents for brand-name drugs expire, the importance of generic drug manufacturers such as Teva will increase and the share valuation will rise. From a valuation stand-point, Teva is conservatively valued. Its price to earnings ratio is 13.6, much lower than its closest competitor, Watson Pharmaceuticals (WPI), with a price to earnings ratio of 40. While WPI is valued higher, Teva actually has better margins with earnings before interest, tax and depreciation margin of 25% compared to 19.4% for Watson. To sum it up, Teva is currently undervalued and the company share price will benefit from secular changes in the pharmaceuticals sector while also rewarding its shareholders with a stable dividend. (source http://seekingalpha.com )
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