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“Value” Stock Picks, July 2017, Post #2

TL;DR

I’m not confident enough in INTC/CSCO to invest, although I do not have much negative to say about either (except that they’re getting fairly big, which restricts their ability to keep expanding).  I would not recommend investing in MEI.

Intro

For all of these stocks, I started off with the following initial filters:

  • Current P/E < 20
  • P/E (Trailing 12 Months) < 20
  • Current Ratio > 1.5
  • Quick Ratio > 1
  • 5 Year Avg Dividend Yield > 1%
  • Price / Cash Flow < 20
  • Price / Book < 3
  • 5 Year Avg Sales Growth > 1%
  • 5 Year Avg EPS Growth > 1%
  • Market Cap > 300M
  • Sector: Computer & Technology

Analysis – Intel (INTC)

  • Current P/E = 12.11
  • P/E (Trailing 12 Months) = 12.21
  • Current Ratio = 1.69
  • Quick Ratio = 1.48
  • 5 Year Avg Dividend Yield = 3.29
  • Price / Cash Flow = 7.81
  • Price / Book = 2.44
  • 5 Year Avg Sales Growth = 2.35
  • 5 Year Avg EPS Growth = 6.47
  • Market Cap = 163.26102 B

In addition to the statistics above, I also took into consideration Intel’s Debt/Equity ratio (0.31), Interest Coverage (22.23), 5-Year Dividends Growth (4.32229%), and PEG ratio (1.44).  Lets start off looking at some 10-Year statistics:

P/E:

22.6 15.9 26.5 10.5 10.5 9.7 14.0 17.3 14.9 17.0 15.0

Conclusion – it looks like Intel is somewhat lower than normal at the moment, potentially indicating it’s under-priced.

EPS:

1.18 0.92 0.77 2.01 2.39 2.13 1.89 2.31 2.33 2.12 2.31

Conclusion – it looks like Intel has had fairly consistent growth in earnings per share.  There were negative earnings in June 2009, although that seems to have been a 1-time occurrence.

Dividends (Yield, %):

1.68 3.64 3.01 3.08 3.23 3.98 3.75 2.67 2.81 3.07 2.85

Conclusion – it looks like their dividends are fairly predictable/steady and fluctuate with the EPS

Interest Coverage:

961.75 434.68 166.26 52.68 43.17 18.64 22.23

Conclusion – it doesn’t look like interest/debt is an issue for Intel, although it is somewhat strange that it seems to be rising these past 3 years.  They’re still within acceptable ranges, however (IMO).

Debt/Equity:

0.05 0.05 0.05 0.04 0.15 0.26 0.23 0.22 0.33 0.31 0.31

Conclusion – it doesn’t look like interest/debt is an issue for Intel, although it is somewhat strange that it seems to be rising these past 3 years.  They’re still within acceptable ranges, however (IMO).

There’s no doubt that Intel is a dominant player in the market – with most computers (that I interact with, anyways) utilizing Intel processors.  That being said, there seems to be some increasing pressure in the market from AMD, not to mention that it looks like they’re pretty much out of the phone market entirely… this seems to raise the question – where is Intel intending to expand?  There’s certainly some promise in areas like tablets and IoT devices, but with tablets I doubt that will increase their revenue that much (as I’d imagine if someone buys a tablet, they probably wouldn’t buy a computer as well).

IoT devices look to have a bit more potential, but there is a lot of competition (AMD, Arduino, ARM, Atmel, Cypress, Freescale, Marvell, MediaTek, Nvidia, Qualcomm, Renesas, Samsung, Semtech, STMicroelectronics, Texas Instruments, etc…).  That being said, IoT was Intel’s 3rd biggest revenue generator in 2016 @$2.6B (out of $59.4B)… and it looks like based on their latest earnings call they also have driver-less cars as well as artificial intelligence related products pushing up their revenue.

It’s hard to say what the future holds for Intel – but they’re certainly still driving the market to some extent with their production of 7-nanometer chips and the apparent creation of 3,000 new jobs to run/build the Fab 42 factory.  Looking at some ratings / statistics, it looks like their employee satisfaction is OK, and the CEO has decent approval ratings.  They’re not quite as impressive as some other companies that I’ve researched, but they’re also not nearly as bad as some others (you’ll see below!!!).

Due to the size of Intel, I’m finding it to be somewhat difficult to convince myself to invest; solely because larger companies don’t have as much room to grow.  I don’t see much inherently wrong with Intel though at the moment, and for solid, steady, predictable growth (but with less chance of a giant upswing / rally), I’d recommend Intel for sure.

Analysis – Cisco Systems (CSCO)

  • Current P/E = 14.92
  • P/E (Trailing 12 Months) = 14.6
  • Current Ratio = 3.52
  • Quick Ratio = 3.11
  • 5 Year Avg Dividend Yield = 3.04
  • Price / Cash Flow = 12.38
  • Price / Book = 2.46
  • 5 Year Avg Sales Growth = 1.04
  • 5 Year Avg EPS Growth = 5.57
  • Market Cap = 160.60172 B

In addition to the statistics above, I also took into consideration Intel’s Debt/Equity ratio (.43), Interest Coverage (16.26), 5-Year Dividends Growth (19.29299%), and PEG ratio (1.96). Lets start off looking at some 10-Year statistics:

P/E:

21.5 12.3 24.4 14.8 15.6 12.7 12.2 18.9 14.5 14.5 16.1

Conclusion – it looks like Cisco is within a reasonable price range based on their historic P/E ratios.

EPS:

1.17 1.31 1.05 1.33 1.17 1.49 1.86 1.49 1.75 2.11 1.97

Conclusion – it looks like Cisco has had fairly consistent growth in earnings per share.  There don’t appear any quarters in the past 10 years or so where Cisco has ever dipped into the negatives for earnings.

Dividends (Yield, %):

2.64 2.94 2.83 2.94 3.19 3.14 3.54

Conclusion – it looks like their dividends are fairly predictable/steady and fluctuate with the EPS.  Looks like Cisco didn’t start doing dividends until 2011 or so, but since then it’s been uninterrupted except for January 2013.

Interest Coverage:

23.23 16.11 13.46 18.05 20.26 18.23 20.79 20.11 16.26

Conclusion – it doesn’t look like interest/debt is an issue for Cisco.  It seems it’s slightly higher than average lately, but it’s not outside of their “norm”.

Debt/Equity:

0.20 0.19 0.27 0.28 0.34 0.32 0.22 0.36 0.36 0.39 0.43

Conclusion – it looks like lately, Cisco’s debt has been increasing more than their equity.  That being said, their interest coverage doesn’t seem to be affected much at all – it looks like Cisco has debt at low rates perhaps.  This does seem to suggest, however, that Cisco is becoming more reliant on debt in order to expand their business.

From working in a large corporation, I know that Cisco has a fairly large chunk of the market when it comes to routers and switches (amongst other networking equipment).  That being said – I also know that they’re not without competition from companies like Huawei, HP, Avaya, Brocade, Aruba, Juniper, and Netgear; and that list was generated just off the top of my head!!!

Cisco seems to be addressing this by expanding into software & services as well, as they recognize that the need for switching, wireless, and routing will not continue to expand indefinitely.  Software has the positive aspect that it tends to have higher margins associated with it.  Services (if executed properly) could also be a source of a lot of future revenue.

I like the fact that Cisco seems to be making somewhat larger leaps when it comes to attempting to expand their business compared to companies like Intel which seem to be staying locked into a few core specialties.  Looking at some common ratings websites, it looks like Cisco has pretty good employee satisfaction as well as a highly-rated CEO.

Due to the size of Cisco, I’m finding it to be somewhat difficult to convince myself to invest; solely because larger companies don’t have as much room to grow.  I don’t see much inherently wrong with Cisco though at the moment, and for solid, steady, predictable growth (but with less chance of a giant upswing / rally), I’d recommend Cisco for sure.

Analysis – Methode Electronics (MEI)

  • Current P/E = 16.39
  • P/E (Trailing 12 Months) = 15.94
  • Current Ratio = 4.26
  • Quick Ratio = 3.8
  • 5 Year Avg Dividend Yield = 1.33
  • Price / Cash Flow = 12.49
  • Price / Book = 2.76
  • 5 Year Avg Sales Growth = 12.82
  • 5 Year Avg EPS Growth = 52.72
  • Market Cap = 1.49539 B

In addition to the statistics above, I also took into consideration Methode Electronic’s Debt/Equity ratio (.05), Interest Coverage (Effectively Infinity), 5-Year Dividends Growth (7.1201%), and PEG ratio (1.09).  Lets start off looking at some 10-Year statistics:

P/E:

17.9 7.9 31.6 18.4 11.3 27.8 12.8 12.7 18.1 16.4

Conclusion – There’s not much consistency here, it’s hard to draw a conclusion.

EPS:

1.06 -3.05 0.37 0.52 0.22 1.08 2.51 2.57 2.20 2.48 2.48

Conclusion – it looks like their earnings have somewhat stabilized over the past 5 years, increasing significantly over the previous years.  The negative earnings earlier on and the lower earnings are (somewhat) concerning.  They’ve had negative earnings as recent as October 2011.

Dividends (Yield, %, Approximated due to difficulties obtaining data):

1.85 4.32 2.52 2.27 3.31 1.95 1.08 0.84 1.21 0.81 0.90

Conclusion – it looks like their dividends are fairly predictable, although they don’t seem to be increasing in correlation to price or earnings, which is a bit annoying.  It appears that their dividends record is flawless despite the fact that they’ve had negative earnings from time to time.  That may explain the discrepancy between increases in price/earnings and increases in dividends.

Interest Coverage:

Conclusion – it looks like the company does not maintain much debt at all.

Debt/Equity:

0.19 0.15 0.12 0.01 0.12 0.05 0.05

Conclusion – it looks like the company does not maintain much debt at all.

Compared to the larger companies that I’ve analyzed, it’s definitely more difficult to find information on this Methode Electronics company.  It’s appealing to me as it seems to be fairly small still despite having been around since 1946 – and it looks like their business is taking off more lately presumably due to their involvement in the automotive industry.  From the looks of it, they’ve got Ford, Volkswagen, General Motors, Renault, Fiat, Aston Martin, Schaeffler, BMW, and Tesla as customers of various components (Torque Sensor, Integrated Center Console, Lead Frame, etc.).

Looks like other portions of their business also work with major suppliers like Maytag, Whirlpool, KitchenAid, Coca Cola, Kenmore, John Deere with their Consumer Touch Panels.  They’ve also got Cisco as a primary customer for their Copper Transceiver Modules.

Based on my research, it doesn’t seem like employees have particularly high opinions of management or corporate culture at Methode Electronics – complaining about things like high turnover rates, lack of recognition (raises) as a result of good performance, the company being run to “lean”, etc.  Of the three companies I’ve listed in this blog post, Methode is by far the worst rated with regards to general employee satisfaction and their opinions of management.  Overall, it seems like with the factors above – this company would be somewhat of a gamble to invest in.  They look good on paper (at least since 2012 or so), but that may not be enough to overcome bad management.  Also, their rate of EPS growth is astronomical to the point that it’s fairly obvious that it’s unsustainable in the long term.  There are too many red flags with this stock for me to consider investing in it – perhaps I will revisit it in the future.

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