This is the 7th in a series of ideas where I contrast a cheap security with an expensive one that otherwise shares some characteristics. So far, I am 5 for 6:
|
|
BUY |
SELL |
|
|
|
MPR |
NLC |
|
| 13-Mar |
|
7.30 |
11.99 |
|
| 8-Jul |
|
10.17 |
15.45 |
|
|
|
39.3% |
28.9% |
5.2% |
|
|
|
|
|
|
|
JNJ |
AGN |
|
| 17-Apr |
|
53.05 |
49.49 |
|
| 8-Jul |
|
57.08 |
46.10 |
|
|
|
7.6% |
-6.8% |
7.2% |
|
|
|
|
|
|
|
COLM |
UA |
|
| 1-May |
|
30.36 |
24.00 |
|
| 8-Jul |
|
30.30 |
20.89 |
|
|
|
-0.2% |
-13.0% |
6.4% |
|
|
|
|
|
|
|
BCR |
ISRG |
|
| 8-May |
|
73.52 |
158.77 |
|
| 8-Jul |
|
74.76 |
145.18 |
|
|
|
1.7% |
-8.6% |
5.1% |
|
|
|
|
|
|
|
EZPW |
AAN |
|
| 5-Jun |
|
13.09 |
32.85 |
|
| 8-Jul |
|
10.19 |
28.68 |
|
|
|
-22.2% |
-12.7% |
-4.7% |
|
|
|
|
|
|
|
SCVL |
PSS |
|
| 19-Jun |
|
12.04 |
14.38 |
|
| 8-Jul |
|
12.55 |
13.31 |
|
|
|
4.2% |
-7.4% |
5.8% |
For reference:
3/14: Buy Met-Pro ( ), Sell Nalco Holding ( )
4/18: Buy Johnson & Johnson ( ), Sell Allergan ( )
5/3: Buy Columbia Sportswear ( ), Sell UnderArmour (UA)
5/10: Buy C.R. Bard ( ), Sell Intuitive Surgical ( )
6/6: Buy EZCORP ( ), Sell Aaron's Rents (RNT)
6/20: Buy Shoe Carnival (SCVL), Sell Collective Brands (PSS)
Similar to each of the trades above, my idea today is one that allows the investor to go "up in quality". I have liked Hormel (HRL) since Thanksgiving - check out my views back then. The stock is in my own portfolio and has been a "staple" in both my model portfolios, the Top 20 (up over 29% YTD) and Conservative Growth/Balanced (up almost 11% YTD). The bullish thesis is that the company is extremely well managed, has a good balance sheet (great for the industry) and has strong prospects for EPS growth despite the weak economy as input costs fade. The other side, DineEquity (DIN), is the operator of Applebee's and IHOP. I don't know the story that well, but clearly the company is extremely leveraged. I recall not liking either of the companies before and don't see how the combination makes for a better company. This trade benefits from the shift from restaurants to home-prepared meals. Check out the tape:
|
HRL |
DIN |
| Price 7/9/09 |
34.09 |
31.86 |
| Market Cap (mm) |
4578 |
560 |
| Enterprise Value |
4716 |
2715 |
| 2009 YTD Price Return |
10.0 |
175.6 |
| 2008 Price Return |
-23.2 |
-68.4 |
|
|
|
| Income Statement |
|
|
| Sales (ttm) |
6824 |
1545 |
| Sales growth ttm |
7% |
85% (post-merge) |
| Sales growth mrq |
0% |
-15% |
| EBITDA (2008) |
612 |
259 |
| EBITDA Margin 2008 |
9.0% |
16.8% |
| Pre-tax Margin 2008 |
7 |
3.4 |
| Avg Pre-tax Margin 2005-2007 |
7.5 |
21.0 |
| FCF (2008) |
286 |
166 |
|
|
|
| Balance Sheet |
|
|
| Equity |
2105 |
266 |
| Tangible Equity |
1340 |
-1384 |
| Cash |
312 |
98 |
| Cash/Equity |
14.8% |
36.8% |
| Total Liabilities |
1528 |
3008 |
| ST Debt |
100 |
18 |
| LT Debt |
350 |
2235 |
| Net Debt/Cap |
5.4% |
85.5% |
| Liabilities/Current Assets |
1.0 |
8.8 |
| Liabilities/EBITDA |
2.5 |
11.6 |
| Liabilities/FCF |
5.3 |
18.1 |
|
|
|
| Valuation |
|
|
| PE F12M |
14.1 |
15.0 |
| EV/EBITDA |
7.7 |
10.5 |
| EV/Sales |
0.7 |
1.8 |
| (EV/Sales)/Pre-tax Margin |
9.2 |
8.4 |
| P/B |
2.2 |
2.1 |
| P/TB |
3.4 |
-0.4 |
| FCF/Market Cap |
6.7% |
35.9% |
| Dividend Yield |
2.22% |
0.00% |
DIN could work out great if they can grow their way out of their debt, while HRL seems very reasonable without any requirements of much growth (though I expect it to grow).
Disclosure: Long HRL
