Mar 31, 2012

We Are Moving Our Content on May 1st 2012

In an effort to combine all pertinent financial content in a single accessible location, all future research will now be moved to a new website: Investing Consultant If you enjoy the information here, you will certainly be glad to explore the new site.

Current content on the Grahamite in Training Blog will remain available over the next month to allow for a gradual transition until May 1st, 2012 when the blog will be permanently shut down so that the research and information is only available on From now on, future articles will only be published on the new website.

All the posts that were previously on the Grahamite In Training website and many more investing and trading ideas are now available on

Thank you for following us over the past four years. We hope you will find many mroe interesting investment opportunities on the new site.

 Happy investing!

Aug 22, 2011

Hewlett-Packard (HPQ) Is Still Good Without a PC Business

After the release of it's most recent quarterly earnings, and the conference call that came with it. HP's CEO Leo Apotheker has been under constant strain because of the seemingly ill time proposed acquisition of Autonomy. Investors are getting pessimistic about the future of the company and it reflects in the recent selloff that has hit HP's stock. Maybe is it time to take a break from the unending stream of information and be rational about the real long term potential of this company.

For those not in the know, and Reuters provides a very detailed description, Hewlett-Packard Company (HP), incorporated in 1947, is a provider of products, technologies, software, solutions and services to individual consumers, small- and medium-sized businesses (SMBs) and large enterprises, including customers in the government, health and education sectors. Its operations are organized into seven segments: Services, Enterprise Storage and Servers (ESS), HP Software, the Personal Systems Group (PSG), the Imaging and Printing Group (IPG), HP Financial Services (HPFS), and Corporate Investments. Services, ESS and HP Software are reported collectively as a broader HP Enterprise Business. In April 2010, the Company completed its acquisition of 3Com Corporation. In July 2010, the Company completed the acquisition of Palm, Inc. (Palm), In September 2010, the Company acquired Fortify Software. In September 2010, the Company acquired 3PAR Inc., a global provider of utility storage. In October 2010, the Company acquired ArcSight, Inc., a security and compliance management company. The Company’s offerings include multi-vendor customer services, including infrastructure technology and business process outsourcing, technology support and maintenance, application development and support services and consulting and integration services. It also provides enterprise information technology infrastructure, including enterprise storage and server technology, networking products and solutions, information management software and software that optimizes business technology investments; personal computing and other access devices, and imaging and printing-related products and services. It is interesting to note that, at current prices, the company offers the best long term potential among the components of the Dow Jones Index. 

An unfortunate chains of events leading to a 33%+ decline in the stock price of an established company can only mean two things. For one, it could mean that investors might be thinking that the company has seen it's share of growth and are anticipating that the coming years will see a major drop in the company's earnings. Another more frequent reason might be that investors are overreacting to a series of what they assume to be very bad news for the firm. 

Time will tell which of those two scenarios fits best to reality, but in the meantime, I adhere to a contrarian camp who thinks that HP still has room for even modest growth. Assuming a reasonable P/E ratio of 10, the current price assumes a decrease of HP's earnings of 0.5%% annually over the next 5 years, giving us a 2016 price of 35$. A 8% discount rate would then justify the current 24.45$ at the end of the August 22nd. However, we know that HP has been growing earnings at about 8% a year over the past 10 years, and they went through two recessions over that period. Let's make another assumption and let's say that the acquisition of Autonomy puts some breaks on the growth of HP's earnings and that the company is only able to grow EPS at 5% per annum. We find ourselves with a 2016 price of 48$ per share. 

For the long term investor who is knowledgeable of the tech industry, this must be a great entry price into a company that has rewarded investors with a solid performance in the past 10 years, considering it's seize. With my limited knowledge of this particular industry, I used four different measurements and I came to the conclusion that the current price of HP's stock is overly pessimistic. The earlier stated P/E method gave me a 48$ price tag on shares of HP. 

Interestingly enough, HP has managed to grow it's book value per share over the past 10 years at about 7.5% per year. Assuming they can manage to keep that pace, we end up with a book value of nearly 23$ per share in 2016. At the current depressed Price/Book ratio of 1.6, we end up with a price per share of 38$. 

We can also look at free cash flow per share, which I calculated to have grown about 7% per year over the same period, even if it has been swigging wildly as it can be seen on the above chart. Keeping HP's stock for 5 years and using a 8% discount rate, I ended up with a present value of 49$ per share for HP. Free cash flow per share would end up being about 4$ per share in 2016, If we use a reasonable Price/Free cash flow ratio of 10, we end up with a 2016 price per share of 40$ per share. 

Assuming that my assumptions are not too flawed, it seems to me therefore that the market is being overly bearish on the long term prospects of Hewlett-Packard. Investors are assuming that the current change of strategy will have negative effects on the company, without taking into account that HP might come out of this crisis as a more profitable company. And it will certainly be more profitable if it dumps it's hardware business and stops acquiring companies at absurd premiums to the current price. 

Disclosure: The author has no position in HPQ and does not intend to initiate one in the near future.

Jun 6, 2011

Microsoft Corporation (NASDAQ: MSFT) and Windows 8 Are On Sale

There is a consensus in play right now in the technology sector and it could be very profitable for investors willing to get in now and position themselves for the revaluation of an opportunity. Microsoft has a dominant position in the technology industry and with Windows enjoying almost a 90% market share in the operating systems business and the Microsoft Office Suite camping on a big chunk of the professional software market, this company is poised to experience growing profits over the coming years.

Investors appear to be anticipating a big drop in the market share of the company because of the rising threat arising from sales of tablets. Analysts seem convinced that iPads and Android tablets will eat the market share of PCs, thus reducing the overall grasp of the market by Microsoft.

Lets take a closer look at what the future has in place for Microsoft. First, Windows 8 is in the pipeline and according to the teaser preview provided by the company last week, this version of Windows promises to be quite different from it's predecessors. If you haven't seen it yet, take a look on their official website here. Windows 8 seems more exciting and more intuitive, showing that the company is working to create products that are more in line with what the competition, namely Apple and Google, are currently doing. Also they are not just imitating their competitors, they are innovating and bringing something new to the marketplace. The big news with Windows 8 is that it will be compatible with the touch technology, we will therefore expect to have an announcement in the coming months of a Windows 8 tablet.

 EPS for 2011 is an estimate and data for 2012 and after are projections.
The current attractiveness of the company is phenomenal from a fundamental standpoint. Over the past 10 years, Microsoft has been able to grow sales by roughly 10% per year because of good pricing power and an average 4 year product cycle. Assuming the company can grow it's sales by 7% over the next ten years and that most other expenses grow in line with sales, we end up with a company valuation of 33$ per share. At current prices, this provide investors getting in right now with a 40% return as the market starts to realize how undervalued the company is. 

The recent price of 23.91$ implies that Microsoft will be able to grow EPS by only 3% per year over the coming 10 years! We know that in reality the company has been able to grow this metric by an average of 13% over the past five years.

Also, you are paid to wait, as the shareholders currently enjoy close to a 3% dividend yield and Microsoft certainly has enough cash on hand, even following the recent acquisition of Skype, to sustain a healthy growing dividend. Long term investors should see the current price levels of the company as a great buying opportunity.

Using a price-earnings multiples valuation, we also come to the conclusion that the company is undervalued. The P/E ratio of the company is currently at 9.47. Over the past fire years, the average P/E ratio of Microsoft was 16, with a high of  23.7, which doesn't seem very much out of this world. With a trailing twelve months EPS of 2.52, we end up with a price per share of 40$ using the five years historical average P/E of Microsoft.

In my humble opinion, EPS for FY 2012 of Microsoft will hover around 3$ per share as the company finally catches up with it's competition and sales of Windows 8 pick up. By using once again our historical P/E of 16, we come up with a stock price of 48$. It is clear that current prices grossly undervalue the profit potential of the company as it is able to generate an incredible amount of profits for it's shareholders.

As you can see, these two methods allowed me to come to an approximate value for the shares of Microsoft ranging from 33$ to 48$ one year from now with fairly conservative assumptions. Acquiring a position now will be very beneficial to shareholders as those intrinsic values allow them to reap substantial profits. There is very little downside left and any good news by Microsoft will have a positive effect on the stock price.

Full Disclosure: The author is Long MSFT

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