Friday, April 27, 2012

The Intelligent Investor

I've started reading Benjamin Graham's book The Intelligent Investor and have been amazed by some of the insights that he had.

On page 203 Graham writes "The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. ... Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage."

What Graham is saying here is that you are rarely forced by means outside of your control to sell your shares and that you shouldn't get caught up in the crazy swings of the market. Don't see a massive bleeding on the stock market and take that as a sign that you should sell out your positions. As long as there have been no fundamental changes with the underlying companies then sit back knowing that you are getting more shares from your dividend reinvestment and you should consider adding to your position. The market is one crazy s.o.b. and you should ignore the short term price fluctuations.

I highly recommend reading through The Intelligent Investor if you haven't done so already.

Thursday, April 26, 2012

Yesterday I went out to celebrate my purchase of shares in Wal-Mart.

I celebrated by buying gas at a ConocoPhillips gas station on my way to Wal-Mart where I bought some Crest toothpaste and a 12-pack of Cherry Coke Zero and purchased everything on my Chase Freedom credit card.

If you didn't pick up on the theme here, I went and purchased products or in some way made money for companies that I own shares of for buying items that I was going to get anyways. Chase made money off the transaction fee. P&G made money off my purchase of Crest toothpaste. Coca-Cola made money off my purchase of a 12-pack of Cherry Coke Zero, one of the best tasting diet drinks by the way. Wal-Mart made money because I purchased everything there. And Conoco-Phillips made money by my purchasing gas at one of their gas stations for the same price as the Exxon across the street.

So in turn, I just funded some of my own dividend payments.

I get some weird delight when I think about my portfolio sometimes.

Wednesday, April 25, 2012

Recent Buy

Yesterday I bought 9 shares in Walmart at a price of $57.71 in my Roth IRA. Recently, reports of Walmart bribing officials in Mexico for preferential treatment have been released. While this is concerning, it's one of those situations where everyone is doing it and they got caught. Any penalty stemming from this won't change the future for Walmart other than being just a little hiccup in the long-term. I am bullish on the company long term especially as a dividend growth stock. My YOC for this purchase is 2.71% based on the current forward annual payout rate of $1.59. Unfortunately this brings my YOC for my Roth IRA down to only 3.31%, but I'm getting a company that has historically had a high dividend growth rate. I would like to start purchasing in larger blocks but that was about the only ammo that I had in my Roth. I decided to pounce despite the limited capital because Walmart has pulled back 7.5% since the announcement of the bribery. My target entry price on Walmart was around $59 / share and I was able to get over a 2% discount to that. You can see my previous analysis of Walmart here.

While I think you will see Walmart shares drop lower later as more details come out about this I'm hoping they can wait until I have some more dry powder to throw their direction.

Building my dividend payers bit by bit.

Monday, April 23, 2012

Medtronic Stock Analysis

I ran Medtronic (MDT) through my screening process to see where it currently stands. MDT closed on Friday 4/20/12 at $37.61.

Company Background:

Medtronic, Inc. manufactures and sells device-based medical therapies worldwide. It provides implantable cardioverter-defibrillators, cardiac resynchronization therapy devices, and cardiac pacemakers for the diagnosis, treatment, and management of heart rhythm disorders and heart failure; AF products; diagnostics and monitoring devices; and patient management tools. The company also offers percutaneous coronary and peripheral vascular interventions, and renal denervation for the treatment of coronary artery disease, peripheral vascular disease, and hypertension; endovascular stent grafts to treat abdominal and thoracic aortic aneurysms; and heart valves, arrested and beating heart surgery, and surgical ablation for various heart valve disorders. In addition, it provides external defibrillators, including defibrillator/monitors used by hospitals and emergency response personnel; and automated external defibrillators used in commercial and public settings for the sudden cardiac arrest treatment. Further, the company offers medical devices and implants for treating spine and the musculoskeletal system, such as thoracolumbar, cervical, and biologics products; and integrated diabetes management solutions, professional CGM, carelink therapy management software, and blood glucose meters. Additionally, it provides neurostimulators for chronic pain; implantable drug delivery and deep brain stimulation systems; and urology and gastroenterology devices. In addition, the company offers products and therapies to treat diseases and conditions of the ear, nose, and throat, as well as certain neurological disorders; and image-guided surgery and intra-operative imaging systems that facilitate surgical planning during surgeries. It markets its products to hospitals, clinics, third-party health care providers, distributors, and other institutions through a direct sales force and independent distributors.

DCF Valuation:

Analysts expect MDT to be able to grow earnings at 6.35% per year for the next five years and I've assumed they can continue to grow at 3.00% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $56.26. This means that at $37.61 the shares are undervalued by 33%.

Graham Number:

Over the last 12 months, MDT's EPS were $3.18 and it's current book value per share is $16.50. The Graham Number is calculated to be $34.36 which means that at $37.61 the shares are overvalued by 9.5%. If you calculate the Graham Number based off the expected EPS, $3.45, for the fiscal year ending this April and keep the book value per share constant you arrive at a fair value price of $35.79 meaning it's overvalued by 5%. Either way MDT is overvalued according to the Graham Number calculation.

Average High Dividend Yield:

MDT's average high dividend yield for the past 10 years is 1.48% and for the past 5 years is 2.09%. Using the 5 year rate, MDT's fair value price would be $46.44 and the 10 year rate would give a price of $65.62. Therefore shares are undervalued by approximately 19% and 43%, respectively. I think that a 3.00% high yield is where Medtronic will settle into for the future barring a major growth catalyst for the company. Calculating the price off a 3.00% high yield would be $32.33 meaning it's overvalued by 16%. The following chart shows the historical high and low dividend yield as well as the current yield for the years 2001 to 2012.


Average Low PE Ratio:

MDT's average low PE ratio for the past 5 years is 15.43 and for the past 10 years is 23.68. This would correspond to a price per share of $53.23 and $81.69, respectively, based off the projected 2012 fiscal year earnings of $3.45. The 5 year and 10 year low PE price targets are undervalued by 29% and 54%. I think for the future the 10 year low PE is skewing the numbers and that the 5 year low PE is more realistic for calculations.

Average Low P/S Ratios:

MDT is currently trading at a P/S of 2.47. Ideally you want it to be closer to 1 or less than 1. Less than 1 is a great bargain but is going to be hard to find for large well-followed companies. Historically, MDT has traded at a 5 year average P/S of 2.44 and and 10 year average P/S of 3.85. The target price based on the 5 year P/S is $37.13 and the 10 year is $58.72. The 5 year seems like a more reasonable ratio to expect since MDT's forecast revenue growth is fairly low. On the 5 year target price shares are currently trading at fair value.

Dividend Discount Model:

For the DDM I assumed that Medtronic will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 9.76%. After that I assumed MDT can continue to raise dividends at the rate of long term earnings growth, 3.00%, and used a discount rate of 7.5%. Based on this MDT is worth $26.20 meaning it's overvalued by 44%. I am fairly conservative in my DDM valuation by assuming they can only continue to grow at the elevated rate for 5 years, personally I feel that you will see a slightly higher 5 year growth rate over a longer period but being conservative in your assumptions allows room for errors. These calculations also assume there would be no expansion in the payout ratio which would allow for a higher dividend growth rate.

P/E Ratios:

MDT's trailing PE is 11.83 and it's forward PE is 10.25. The CAPE for the previous 10 years is 19.58. Compared to it's industry, MDT seems to be significantly undervalued versus their competitors BSX (17.42) and JNJ (17.47), as well as to the industry as a whole (21.73). All industry and competitor comparisons are on a TTM EPS basis.

Fundamentals:

MDT's gross margin for FY 2009/10 and FY 2010/11 were 75.90% and 75.45% respectively. The gross margins are awesome to see at 75%+. Their net income margin for the same years were 19.59% and 19.43% respectively. The net income margins almost double what I like to see which is 10%. The cash-to-debt ratio for the same years were 0.20 and 0.17. The cash-to-debt is the one thing that worries me and I would like to see management address this issue.

Share Buyback:

MDT's shares outstanding have been falling thanks to a significant buyback program..


Dividend Analysis:

MDT's dividend growth rate has had a great run thus far in the 2000's. Its growth rates for the past 1 year, 3 year, 5 year and 10 year are 8.7%, 14.4%, 17.8% and 15.8% respectively. Medtronic has increased dividends for 34 years now. The payout ratio has been fairly stable around the 27% mark which is very encouraging since it would allow for expansion of the payout ratio to boost their dividend growth rates is earnings growth stalls.


Their FCF payout ratio has been all over the place. Three times since 2001 the FCF payout ratio has been over 100% and as high as 216%. I also don't like to see that even the most recent fiscal year 2010/11 had a FCF payout ratio over 100%. I am curious to see how they will fare with their next earnings release and closing of the fiscal year.

Return on Equity and Return on Capital: Invested

MDT's ROE and ROCI have fluctuated quite a bit since 2001. Their ROE seems to be around a minimum 22%. The ROCI has been trending downwards since 2001 which is troubling. Hopefully they can start to make progress on that front.


Average Price and EPS:


MDT's average share price tracked their EPS fairly closely until 2005. Since then there's started to be a PE multiple contraction which accounts for the disconnect in the average share price and EPS.

Forecast:


The chart shows the historical high and low prices since 2001 and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the minimum average low PE ratio for the previous 5 years or 10 years or 16. I have changed it to this calculation and will probably keep it so in the future because many of the companies that I've looked at so far had outrageous PE multiples in the early 2000's which skew the average PE ratio higher. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. Currently Medtronic is trading $2.31 less than this value.

Conclusion:

The average of all the valuation models gives a value of $47.72 which means that MDT is currently trading at a 21% discount to the fair value. Overall I think that MDT is undervalued at today's prices, but as with most companies there are some issues I'd like to see management make some progress on.

While I do like the growth prospects with an aging population here in the US and most developed countries, the most promising thing from a dividend growth perspective is that Medtronic has been able to grow their dividends at a high rate while keeping the payout ratio around 28%. With a low current payout ratio management can continue to increase dividends at an elevated rate despite lower earnings growth.

Sunday, April 22, 2012

Blog Milestone

Yesterday I passed over 1,000 total page views of my blog. Thanks to everyone for stopping by and I hope everyone can take something away from here.

Friday, April 20, 2012

Jury duty today

I'll be doing my civic duty today and hopefully will get released early and not get stuck there all day or selected for some major trial.

I also got a call yesterday talking about sending me back out for work again. It'll be good to get back out there since I've been home for 3 weeks now but it'll sure be hard to leave. Posts might be a little light depending on when I have to go out.

Thursday, April 19, 2012

Selling Puts for Added Income

As promised, here are my put option plays to target a specific entry price on Procter & Gamble (PG). Procter & Gamble closed trading on 4/18/12 at $66.76. It is a Dividend Aristocrat with 55 consecutive years of raising their dividend. The lowest of their 1, 3, 5 and 10 year dividend growth rates is 8.48% with the highest at 11.2%. The most recent payout ratio is 60.00% with a current yield of 3.36% based off the recent dividend announcement. There were very few options worth considering on PG since it is such a stable and dependable company. With the increase in recent market volatility one can only hope for continued volatility to increase the option premiums. Nevertheless, I did find a few compelling option plays.







































Procter & Gamble (PG) 18 Jan 2013 Puts
Strike PriceOption PriceCost Basis if exercisedTotal Return if ExpiresCAGR if ExpiresYOC if exercised
$65.00$3.60$61.495.40%7.27%3.66%
$67.50$4.80$62.796.98%9.41%3.58%
$70.00$6.45$63.649.09%12.30%3.53%

As mentioned in my stock analysis on Procter & Gamble, I would look to start accumulation of shares at $62.50 and lower. I don't like these moves as some that I have previously shown for put option plays mainly because the return is fairly low should the shares not reach your strike price. Especially since you would be tying up the money for 75% of a year. I'll refer to "The Intelligent Investor", my previous post about not waiting if the stock meets your value estimate including a margin of safety. If the option goes unexercised, you would have missed out on 3 dividend payments of $0.562 each from PG. That would effectively lower your cost basis from the current price of
$66.76 to $65.07. Since the option yield, Total Return if Expires, is higher in all cases this might not be that much of an issue. However if it was much closer to the same then I would not be interested in it at all. It's one more thing to think about this move since your return would be below my threshold.

I think the $67.50 put is probably the best option play at this time since it gives a significant return should the option not be exercised. You wouldn't have a realistic chance of the option being exercised too soon despite it currently being in the money, trading below the strike price, since there is significant time value built in to the option premium. With the $67.50 put you would have just over 6% of downside before you would lose money on the trade.

Overall I don't like the current option plays although the $65 is a little interesting since you can get a 7% return on your money which is nothing to laugh at while still getting a entry price below our targeted $62.50 beginning price.

Wednesday, April 18, 2012

Procter & Gamble Stock Analysis

I ran Procter & Gamble (PG) through my screening process to see where it currently stands. PG closed on Tuesday 4/17/12 at $67.02.

Company Background:

The Procter & Gamble Company provides consumer packaged goods in the United States and internationally. The company offers beauty products, such as cosmetics, female antiperspirant and deodorant, female personal cleansing, female shave care, hair care, hair color, hair styling, pharmacy channel, prestige products, salon professional, and skin care products under the Head & Shoulders, Olay, Pantene, and Wella brands; and grooming products, including electronic hair removal devices, home small appliances, male blades and razors, and male personal care products under the Braun, Fusion, Gillette, and Mach3 brands. It also provides health care products comprising feminine care, gastrointestinal, incontinence, rapid diagnostics, respiratory, toothbrush, toothpaste, water filtration, and other oral care products under the Always, Crest, and Oral-B brands; snacks and pet care products under the Iams and Pringles brands; fabric care and home care products consisting of laundry additives, air care, batteries, dish care, fabric enhancers, laundry detergents, and surface care products under the Ace, Ariel, Dawn, Downy, Duracell, Gain, Tide, and Febreze brands; and baby care and family care products, such as baby wipes, diapers, paper towels, tissues, and toilet paper products under Bounty, Charmin, and Pampers brands. The company sells its products in approximately 180 countries through retail operations, including mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons, and high-frequency stores.

DCF Valuation:

Analysts expect PG to be able to grow at 8.67% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $70.21. This means that at $67.02 the shares are undervalued by 4.5%.

Graham Number:

Over the last 12 months, PG's EPS were $3.40 and it's current book value per share is $22.90. The Graham Number is calculated to be $41.86 which means that at $67.02 the shares are over valued. If you calculate the Graham Number based off the expected EPS, $3.96, for the fiscal year ending in June and keep the book value per share constant you arrive at a fair value price of $45.68. Either way PG is overvalued quite a bit according to the Graham Number calculation.

Average High Dividend Yield:

PG's average high dividend yield for the past 10 years is 2.63% and for the past 5 years is 2.50%. These are fairly reasonable barometers since PG has been a quality dividend growth company for a long time. Using the 5 year rate, PG's fair value price would be $89.92 and the 10 year rate would be give a price of $85.37. Therefore shares are undervalued by approximately 25% and 21%, respectively. The following chart shows the historical high and low dividend yield as well as the current yield.



Average Low PE Ratio:

PG's average low PE ratio for the past 5 years is 15.42 and for the past 10 year is 17.62. This would correspond to a price per share of $62.46 and $71.35, respectively. The 5 year and 10 year low PE price targets are overvalued by 7% and undervalued by 6%. Based off the low PE ratio it seems that PG is currently fairly valued.

Dividend Discount Model:

For the DDM I assumed that PG will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 8.48%. After that I assumed PG can continue to raise dividends by 3.50% and used a discount rate of 7.5%. Based on this PG is worth $61.36 meaning it's overvalued by 2%. I am fairly conservative in my DDM valuation by assuming they can only continue to grow at the elevated rate for 5 years, personally I feel that you will see a slightly higher 5 year growth rate over a longer period but being conservative in your assumptions allows room for errors.

PE Ratios:

PG's trailing PE is 19.71 and it's forward PE is 15.57. The CAPE for the previous 10 years is 23.32. Compared to it's industry, PG seems to be slightly overvalued versus their behemoth counterparts JNJ (18.42) and KMB (18.92) but slightly undervalued versus the industry as a whole (21.46). All industry and competitor comparisons are on a TTM EPS basis.

Fundamentals:

PG's gross margin for FY 2009/10 and FY 2010/11 were 52.04% and 50.62% respectively. The gross margin is a little low for where I traditionally would like to see it but it is at least remaining flat and not falling significantly which is good to see. Their net income margin for the same years were 16.13% and 14.29% respectively. I like the net income margin to be at least 10% and preferably rising. PG is well above the 10% threshold but it's net income margin has fallen. I would check to see how this value stands based on a TTM basis for more assurance. The cash-to-debt ratio for the same years were both 0.13. I would definitely like to see PG make some progress on their high debt load.

Share Buyback:

PG's shares outstanding have been falling thanks to a significant buyback program, save for the stock split in 2006.



Dividend Analysis:

PG's dividend growth rate for has had a great run thus far in the 2000's. Its growth rates for the past 1 year, 3 year, 5 year and 10 year are 9.1%, 9.9%, 11.2% and 10.9% respectively. There's a reason that PG is considered a stable dividend growth company, and to see that they've raised dividends every year for the past 55 years is amazing. The payout ratio has been fairly stable around the 50% mark. I would like for it to be a little lower to allow for further increases but 50% is still low enough for me.



It's FCF payout ratio had seemed to settle in around the 70% mark until the last fiscal year. I would definitely like to see where they stand for this fiscal year ending in June.

Return on Equity and Return on Capital: Invested

PG's ROE and ROCI have been trending upwards since 2001. I assuming the big dropoff in ROE and ROCI is due to the stock split in 2006. I'm still fairly new to investing and haven't been able to get deep into the study of accounting. I like to see a stable or increasing value for both.



Average Price and EPS:



PG's average share price tracked their EPS fairly closely until the beginning of the financial crisis in 2008. Since then the average price and EPS have continued to growth around the same amount each year. Much different than how Walmart's share price behaved in the same time.

Forecast:



The chart shows the historical prices for the previous 10 years and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 10 years. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. Currently Procter & Gamble is trading $14.70 higher than this value.

Conclusion:

The average of all the valuation models gives a value of $68.49 which means that PG is currently trading at a 2% discount to the fair value.

Overall I think that PG is fairly valued at today's prices. If I had targeted PG as a necessary stock for my portfolio I would look to sell puts that would allow me to get at least a 10% CAGR if they expire and purchase no more higher than the $62.50 price. Tomorrow I will make a post discussing some of the put option possibilities.

Tuesday, April 17, 2012

Dividend Increase

On Friday, Procter & Gamble (PG) announced a 7.05% increase in their quarterly dividend to $0.565. The previous quarterly rate was $0.525.
























Dividend Increases
SymbolOld Quarterly DividendNew Quarterly DividendIncrease (%)Old YOCNew YOC
PG$0.525$0.5627.05%3.28%3.52%


My portfolio's YOC increased from 2.41% to 2.42%.

Sunday, April 15, 2012

The Intelligent Investor

I've started reading Benjamin Graham's book "The Intelligent Investor" and have been amazed by some of the insights that he had. I'll be starting a new series referencing Mr. Graham and help to share and reinforce his knowledge to everyone else.

On page 191 Graham wrote "There is one aspect of the 'timing' philosophy which seems to have escaped everyone's notice. ... He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income."

This quote from Graham really shed light on the fact that while you might not be getting the best price possible that price might not ever come. And what possible signs are that that without a shadow of a doubt the price will not decline further. You should instead look to purchase shares that with a margin of safety that you're comfortable with and when it hits that point pull the trigger. If you try and time the market you are risking the loss of the dividend income. In other words, if you don't make the purchase and the cash sits idle you have lost the opportunity to receive the dividends.

For example, say you wanted to buy Johnson & Johnson (JNJ) and feel that today's price of around $64.14 represents a good entry price. If you don't purchase the shares because you feel that the market has gotten ahead of itself and continue to wait for a pullback and it takes a year for that pullback to happen you would need the shares to decrease by the amount of the annual dividend, currently $2.28 per share, just to make up for the lost dividends that you should have received.

In conclusion, if through your analysis you find that the current share price represents good value then by all means make the purchase.

I highly recommend reading through The Intelligent Investor if you haven't yet done so.


Thursday, April 12, 2012

Harris Corporation Stock Analysis

I ran Harris Corporation (HRS) through my screening process to see where it currently stands. HRS closed on Wednesday 4/11/12 at $43.81.

Company Background:

Harris Corporation, together with its subsidiaries, operates as a communications and information technology company that serves government and commercial markets worldwide. It operates in three segments: RF Communications, Integrated Network Solutions, and Government Communications Systems.

DCF Valuation:

Analysts expect HRS to be able to grow at 2.20% per year for the next five years and I've assumed they can continue to grow at 1.50% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $52.17. This means that at $43.81 the shares are undervalued by 16%.

Graham Number:

Over the last 12 months, HRS's EPS are $4.32 and it's current book value per share is $19.92. The Graham Number is calculated to be $44.00 which means that at $43.81 the shares are fairly valued. This is interesting because it is fairly hard to pass the Graham Number calculation and come out undervalued.

Average High Dividend Yield:

HRS's average high dividend yield for the past 10 years is 1.66% and for the past 5 years is 2.19%. I think both of these are a little inflated since it wasn't until recently that HRS truly became a high dividend growth stock. Nevertheless, I would use the 5 year rate of 2.19% rather than the 10 year rate. This would give a value of $60.16. Therefore shares are undervalued by approximately 27%. If you calculate based off a 2.50% high dividend yield you get a value of $52.80 meaning the shares are undervalued by approximately 17%.

Average Low PE Ratio:

HRS's average low PE ratio for the past 10 year is 16.30. This would correspond to a price per share of $83.62 which would be undervalued by approximately 47%.

Dividend Discount Model:

For the DDM I assumed that HRS will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 12.80%. After that I assumed HRS can continue to raise dividends by 1.50% and used a discount rate of 7.5%. Based on this HRS is worth $33.90 meaning it's overvalued by 29%.

PE Ratios:

HRS's trailing PE is 10.14 and it's forward PE is 8.30. The CAPE for the previous 10 years is 18.25. Compared to it's industry, HRS seems to be relatively undervalued since the industry average PE is 15.37.

Fundamentals:

HRS's gross margin for FY 2010/2011 and FY 2009/2010 were 35.68% and 35.95% respectively. The gross margin is a little low for where I traditionally would like to see it but it is at least remaining flat and not falling which is good to see. They're net income margin for the same years were 9.92% and 10.79% respectively. I like the net income margin to be at least 10% but for it's last fiscal year is was fairly close by finishing with a 9.92% rate. The cash-to-debt ratio for the same years were 0.19 and 0.39. Both of these are way below what I like to see and it's moving in the wrong direction too. I would definitely monitor this situation very closely.

Share Buyback:

Harris's share outstanding had been relatively flat from 2001 to 2006. Since then that have initiated a share buyback program that has significantly reduced the share outstanding as can been seen in the following chart.



Dividend Analysis:

HRS's dividend growth rate for has been on a pretty remarkable tear. It's growth rates for the past 1 year, 3 year, 5 year and 10 year are 12.8%, 14.8%, 22.8% and 26.6% respectively. That kind of growth can build up a significant income stream down the line. The best part about it is that the payout ratio has remained relatively low despite the large increases as you can see in the following chart.



However, it's FCF and FCF payout ratio worry me. In 6 of the previous 11 fiscal years their FCF per share has been a negative number.

Return on Equity and Return on Capital Invested:

Harris's ROE and ROCI had been increasing up until the last 3 years. I would like to see the latest numbers to see how they've fared in relation to the trend of the past 3 years.



Average Price and EPS:



As you can see Harris's average price and EPS tracked fairly closely between 2001 and 2007. Since 2010 the EPS and Price have been moving in opposite directions. While EPS has been increasing the price has been decreasing. This is a positive sign for an undervalued stock.

Forecast:



The chart shows the historical prices for the previous 10 years and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 10 years. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. Currently Harris is trading $18.91 lower than this value.

Conclusion:

The average of all the valuation models gives a value of $53.42 which means that Harris is currently trading at almost an 18% discount to the fair value.

Overall I think that Harris is undervalued at the current prices but given the question marks surrounding government spending I would proceed with caution upon starting a position. I would probably by a quarter of the way into the position and then wait for a 5% drop in price and make another quarter purchase. If you can get at least a 3.00% YOC, which is about where Harris is currently at, then I would start making my entry. I think for the time being Harris is a buy and monitor very closely stock, especially with the upcoming election playing a big role in the amount the government will be allocating to defense spending. Things should turn out right but the low growth rates scare me a bit.

Wednesday, April 11, 2012

2012 Goals - 1st Quarter Update

I've made some good progress through the first 3 months of the year, but it's still early in the year and there's always more to work on.





































2012 Budeting Goals - 1st Quarter Results
GoalActual through 1st QuarterStatus
70% take-home pay savings rate74.23% average savings (Jan 74.51%, Feb 73.09%, Mar 75.10%)Exceeded Goal
Less than $1,600 required expenses$1,655.81 average (Jan $1,694.02, Feb $1,682.70, Mar $1,590.72)Needs Improvement
Reduce Misc. Expenses by 20% (Exp. < $131.62 per mo)$133.68Close but needs improvement
Reduce Restaurant Expenses by 20% (Exp. < $128.12 per mo)$164.45Needs Improvement
Reduce Grocery Spending by 10% (Exp. < $214.07 per mo)$188.59Exceeded Goal


So far in 2012 I've been very pleased with my budgeting efforts. The 70% take home savings rate has been great and really helped. The great thing about my job is that I don't spend much money since I'm gone from home a lot and aren't as tempted by draws of my money. That coupled with a high monthly pay has helped me average over 70% savings thus far. With the halving of our cable bill that could help push me to the less than $1,600 in minimum expenses. The rest of the budgeting goals that I've tried to focus on have given mixed results. I'm disappointed in my restaurant spending being above my goal and by a significant amount. While the restaurant spending is disappointing, I am very happy with the progress I've made on grocery and miscellaneous spending. However, if you don't know where you're at you can't know the path you need to get where you're going. I'll be focusing more on cutting back my restaurant spending in the 2nd quarter to hopefully push that average down.






















2012 Saving Goals - 1st Quarter Results
GoalActual through 1st QuarterStatus
Pay off all debtPaid off 39% of debtOn Target (Should reach in Jul/Aug)
$100,000+ Net Worth$98,548.08On Target (Should reach in 2nd quarter)


I can't wait for July/August to get here so all the money that I'm spending on debt service can go towards making money for me. If the markets cooperate through April then I could pass the $100,000 net worth but that will be a tough feat since wedding payments are coming up. That's a huge step and it's crazy to see the change since July 2010 when I had a -$1,663.30 net worth and have pushed that up to $98,548.08 so far. Obviously I've been there through the whole process but it's still amazing when I look back on it and inspiring to see the changes that can be made in a short time.





































2012 Investing Goals - 1st Quarter Results
GoalActual through 1st QuarterStatus
Receive $1,000 in dividends$108.49 received (On target for ~$450)Needs Improvement
3.00%+ YOC for Brokerage Account2.41% YOCNeeds Improvement
Surpass $100,000 in all investments (Brokerage, Roth IRA, 401k...)$84,049.94 ($20,354.56 increase thus far)On Target
Max out 401k$3,042.57 contributedNeeds Improvement
Max out Roth IRA's for myself and my fiance$1,300 contributedNeeds Improvement


My investing goals are behind across the board, but I knew that coming in to the year. That's why I set lofty goals to push myself to reach them. I'm not sure the $1,000 in dividends will be acheived this year but the target annual income will hopefully hit that point. Once the debt is gone that's an extra $2,500+ that will be going towards investing and that will definitely go a long way. I could probably push the dividends received if I was focused solely on the amount received but since the long-term goal is more important than the short-term I'll be looking for the best opportunities at the time. The YOC is another where I don't think I'll get to. That's mainly due to the fact that my ESPP shares get transferred to my brokerage account and due to the tax laws it doesn't make sense for me to sell them yet. Currently I have 30%+ of my portfolio dragging down the rest since it's YOC is 1.23%. I won't be reinvesting those dividends because they can be put to much better use elsewhere.

The max out of the 401k is lagging right now and will be highly dependent on how much I work. I'm pretty set on keeping my contribution at 10% and with the matching (5%) and profit sharing (4%) that's effectively a 19% for my 401k. I'm actually considering reducing my 401k further to where I receive the full match so I can have more money in my pockets and devoted to my financial independence. If I can reach my goal of retiring at 40 then I'll need as much money not locked up in my 401k. My ROTH IRA is currently on track to be fully funded but I haven't started one yet for my fiance. She's wary of investing and I'm trying to get her on board that it's not that scary and can actually free you of worry.



























2012 Personal Goals - 1st Quarter Results
GoalActual through 1st QuarterStatus
Lose and keep off 20 lbs.Lost 3 lbs.Needs Improvement
Workout 3 x per weekAveraging 0 workoutsNeeds Improvement
2+ Blog Posts per week3.75 posts per weekExceeded Goal


As far as the personal goals, my weight loss and workout is severely lacking. I'm attributing that to usually working in the middle of nowhere and not having daylight after my shift is over. Thankfully with the time change I now get 2-3 hours of sunlight to be outside. I know a lot of it is still motivation and I'm thinking of ways to try and keep myself on track. The blog posts have been coming pretty frequently so far in 2012. I'm currently averaging close to twice my goal. I fully intend to keep that up. I've been trying to build up some pre-written posts for the times when I just can't get around to making new posts.

All in all it's been a good 1st quarter and promising for what else is to come. I hope that everyone else has been making good strides toward reaching they're goals.

Tuesday, April 10, 2012

Getting Impatient

It's days like today that really make me mad that I don't have money to invest. More and more opportunities are starting to come around. I set a limit order for both VOD and WMT but then quickly cancelled them because it doesn't make sense to try and buy now. My capital just won't go far enough at the present time. It's very frustrating to not be able to initiate positions, but that's completely because of my own doing and getting in to debt. If work was as busy as last year I'd probably raid my emergency fund a little to get the debt paid off faster. I'm ahead of schedule from when I was thinking of getting the debt done with but it's still frustrating when it looks like the pullback we've been waiting for is starting. Time to go outside and away from the computer to not think about the potential investing opportunities. That's been the hardest part of this year so far. Hopefully today finds everyone else in better positions.

Portfolio Update - April 2012

Today I've updated my portfolio for everyone to see the changes.

Check out My Portfolio here.

Sunday, April 8, 2012

Net Worth Update - March 2012

March was another good month. Not quite as good as January and February but an $8k positive move is still good. More than half of that came from debt repayment. I sent an extra $3,350 to service that debt and it's going well to possibly be done with it a month earlier. The rest came from additional investments to my 401k and Roth IRA and increases in value as well as dividends paid. Also additional savings from my income accounted for about $1,200 of it.

Current Assets: $129,901.66
Curent Liquid Assets:
Current Debts: -$31,353.58
Net Worth: $98,548.08

I can't get my liquid assets because I didn't calculate it before I started making changes to my spreadsheet with the change of the month. It ended up being pretty much flat for the month.

My savings rate for March was 75.10% from my take home pay. As usual this doesn't include my 401k contributions, but does include my debt service payment.

YTD my net worth has increased 43.31% for a total of $29,784.63. My net worth is getting very close to the $100k mark. It might cross it at some point in April but I don't expect to end the month over $100k since I have a wedding bill coming up this month that's going to take a chunk of my savings. At least it's savings and not debt.

Best of luck to everyone else. Even if you aren't making big steps, as long as they're steps in the right direction it's progress.

Wednesday, April 4, 2012

Income Update - March 2012

I've added a new line on my chart in "Your Money or Your Life" fashion. I'm calling it my FI for financial independence. The way I'll be calculating it is if I take my net worth less the value in my 401k and Rollover IRA since there's steep penalties to access that money and then multiplying that value by the yield on the 30 year Treasury and dividing by 12 to get the potential monthly income. The yield that I use will be the current yield on the 30 year Treasury as of the last day of the month. This will show the potential early retirement funds better than just dividends received since they are less consistent month to month and will show off the effects of debt repayment and non-invested savings. My ultimate goal is to be able to live completely off of dividend income but it's still good to see what I would be able to generate as monthly income if I liquidated everything and just invested in a "risk-free" investment.

March was a good month as far as decreasing my minimum expenses. I was able to decrease it to $1,590.72, which is $91.84 less than my average. A lot of that was from the decrease in our cable bill. It's good to see the effects of that choice. My total expenses were lower this month but could have been even lower. I was home for more time this month and Lynsy was off for Spring Break so we went out to eat more and went to the rodeo. It was great to spend more time with her, unfortunately since I'm home very rarely it included spending more money that usual.



*Minimum Expenses is only the expenses related to rent, utilities, car, food, debt service and other necessities. In other words, the required amount of replacement income I would need for financial independce.
*Total Expenses is the total monthly outflow of money.
*Potential Retirement Income is income received from dividends, interest, cash back from credit card purchases and any other source of income not related to my job.
*FI is my liquid assets invested at the 30 year treasury bond yield at the end of each month divided by 12 to get monthly income.

Tuesday, April 3, 2012

Recent Transactions

I'm a little behind on this mainly because I was busy with work and getting to come home. Then I forgot until today that I hadn't made a post about this. On 3/27/12 I purchased 2 contracts of the BAC Jan 18 2014 Call Option for $2.11, so after commission it cost me $431.50. The call options give me the right to purchase 100 shares each of BAC at a price of $10 per share at anytime between now and Jan 18 2014 as long as BAC is trading above $10. My breakeven is really at $12.16 since you need to add the cost of the option to the strike price.

This is essentially my long term bullish bet on BAC making a comeback. I really like what they are doing with the landlord/rental opportunity for the homes that are in foreclosure. If they handle that right then they can turn the liability of the homes in foreclosure with the added issue of selling to get them off their books in a severely depressed market into a better situation for the bank and the people involved. They can then sell the houses off with the stated rental agreements in place to get a premium over the value of the house based on the fact that the tenants would already be in place.

Based on what I've seen, BAC has been making great strides and if this foreclosure rental works out nicely you can see some earnings surprises that will push the stock even higher. I wouldn't be surprised to see BAC be trading over my breakeven price by year-end which would give me another year to seek out more profit. Plus the expiration date is so far out that I have plenty of time for there to be hiccups along the way and still make some good profit. Ultimately I will probably exercise the options if everything works out as I think, while this won't give me the largest percentage gain it will net me a larger dollar gain.

I've been messing and looking more at options right now mainly because I just don't have the available capital to make purchases that would keep commission costs from eating too much of the return. I'll keep you posted on my option plays as well as my portfolio and dividends. It's going to be a great day when I can start plowing my debt service payments back towards my brokerage account to start contributing to my FI.

Sunday, April 1, 2012

Dividend Update - March 2012

March was my highest dividend payout month so far. I had a total of 8 stocks payout in my brokerage and 2 in my Roth. I'm reinvesting dividends in all the stocks except for HAL since it already represents 1/3 of my portfolio and is also my source of income. Diversification right? Plus it's by no means a solid dividend or dividend growth stock.































































Dividend Income 2012
CompanyDividend AmountShares Purchased
Waste Management (WM)$3.590.103
Pfizer (PFE)$5.110.238
Bank of America (BAC)$1.600.163
Coca-Cola (KO)$19.520.270
McDonalds (MCD)$4.940.051
Halliburton (HAL)*$16.61--
Centerpoint Energy (CNP)$18.540.959
Wells Fargo (WFC)**$1.310.038
March Total$71.22
2012 Total$108.49

*Receiving HAL dividends as cash.
**WFC announced they would pay a special dividend of $0.10 per share payable on March 30, 2012.

































Roth IRA - Dividend Income 2012
CompanyDividend AmountShares Purchased
Tower Group (TWGP)$9.380.412
Wells Fargo (WFC)*$2.510.073
March Total$11.89
2012 Total$19.89

*WFC announced they would pay a special dividend of $0.10 per share payable on March 30, 2012.

April isn't looking like a great month for dividend payouts for me. Only around $10 should get paid out unfortunately but that's still $10 more that I got for nothing.