The second step to gauge the value of a company is to determine the sum of all cash that has been invested in a company over its life without regard to financing form or accounting name. We call this Invested Capital.
Most of my research and publishing tends to focus on companies manipulating accounting rules to make their reported earnings look better than the real economic cash flows of their business.
It is unfortunately rare that I find a company whose economic earnings are outpacing the reported accounting results and whose stock is cheap.
One such company is Lam Research (LRCX – very attractive rating). One of September’s most attractive stocks, LRCX offers investors hidden value.
I am not a smoker or tobacco user, and I do not like to be around smokers. However, that prejudice does not blind me from the fact that Lorillard, Inc. (LO) is a “very attractive” stock. I recommend investors buy it as well as the following ETFs because of their large allocations to LO and their attractive-or-better investment ratings...
HIDDEN GEMS:
1. About $250 million in non-operating expenses (after-tax) cause reported earnings to be understated during the last fiscal year.
2. Our discounted cash flow analysis shows that CL’s current valuation (stock price of $77.52) implies that the company’s profits will decline by 7% and never grow again.
3. The company grew its economic earnings by $229mm (14% increase) during its last fiscal year.
HIDDEN GEMS:
1. Our discounted cash flow analysis shows that BMY’s current valuation (stock price of $27.16) implies that the company’s profits will decline by 35% and never grow again.
2. The company grew its economic earnings by $307.5mm (12% increase) during its last fiscal year.
3. The company has $9,507mm in Excess Cash, which we remove from our Invested Capital calculation. $9,507mm million is more than 20% of BMY’s market cap.
HIDDEN GEMS:
1. Our discounted cash flow analysis shows that WNI’s current valuation (stock price of $7.89) implies that the company’s profits will decline by 25% and never grow again.
2. The company grew its economic earnings more than its reported earnings. Economic earnings rose by $9.1mm (506% increase) while Net Income rose by only $8.1mm (79% increase) during its last fiscal year.
3. The company has $42mm in Excess Cash, which we remove from our Invested Capital calculation. $42 million is 20% of WNI’s market cap.
HIDDEN GEMS:
1. Our discounted cash flow analysis shows that MSFT’s current valuation (stock price of $24.73) implies that the company’s profits will decline by 20% and never grow again.
2. The company has $43,292mm in Excess Cash (over 20% of the market cap), which we remove from our Invested Capital calculation and which helps drive a whopping 61.6% ROIC.
3. Our economic earnings models shows profits are growing, not declining, which makes the Risk/Reward for MSFT Very Attractive.
Kyle Guske II, Senior Investment Analyst, MBA
David Trainer, Founder & CEO
