Genworth Financial, Inc. (GNW)

Special Case:
    Genworth Financial, Inc., is a financial services company in the insurance industry that operates in four segments: US mortgage insurance, Australia mortgage insurance, US life insurance, and runoff.
    From a variety of valuation measures, the company has been cheap for a while. This is likely due to a handful of reasons. Genworth put together bad polices in the past that they’re currently paying the price for. Along with this, Genworth planned to sell off their Enact subsidiary to China, but that deal has repeatedly fallen through. I’m assuming this has left a sour taste in investor’s mouths, and on top of that, it’s not a terribly exciting company.
    It has long been a goal of their management to get ahold of the debt situation. To do this, they have spun off the Enact subsidiary as an IPO. As of 9/20/2021, GNW successfully completed the IPO of their subsidiary Enact Holdings, now trading under the ticker ACT. Enact Holdings is a leading provider of the private mortgage insurance. Genworth sold 19.9% of their shares, resulting in net proceeds of $535 million. With this money, they are working to reduce their debt situation, and Genworth still owns 81.6% of ACT. At the current (10/1/2021) price, this puts their ownership worth around $2.65 billion. This development is very interesting considering that figure is higher than GNW’s current market cap. To my understanding, ACT will be offering $200 million in dividends to its shareholders. With this dividend and future dividends, Genworth will continue to further reduce its debt situation, allowing GNW to pay back shareholders.
    The Enact portion of Genworth was valuable; it was responsible for around 50% of Genworth’s operating income. I would typically be worried about holding GNW after they have lost 50% of their operating income, but GNW is currently discounted to a point that it still remains an attractive company to me. Over the past five years, they have been able to average around $2 billion in FCF. Cut that number in half and GNW is stuck with $1 billion in FCF. To be conservative, let’s say half a billion dollars in FCF. Doing a DCF on a MC/FCF = 4 company produces some nice returns, especially at a better debt position. Running a DCF the IRR is very attractive as long as they can maintain at least half a billion in FCF for the foreseeable future. Genworth definitely isn’t the coolest company to hold and it has its drawbacks, but, I'm intrigued by this special situation and have allocated a small portion to this investment.


Note: Disclosure: I do have a position in this company at a $3.63 cost basis. I usually don’t state if I have a position, but I thought this was a unique situation. See disclaimer at the bottom of blog.


Links:
https://www.investopedia.com/terms/r/runoff-insurance.asp
https://newsroom.genworth.com/2021-09-20-Genworth-Financial-Announces-Completion-of-the-IPO-of-Enact-Holdings,-Inc
https://www.yahoo.com/now/genworth-financial-announces-completion-ipo-201700840.html
https://d18rn0p25nwr6d.cloudfront.net/CIK-0001276520/7c5c3723-79be-4f08-8d79-722946c5db12.pdf
http://s2.q4cdn.com/240635966/files/doc_financials/2021/q2/2Q21-Earnings-Presentation_Final_080521.pdf
https://www.investopedia.com/terms/r/runoff-insurance.asp

Discover Financial Services (DFS)

The company: 

    Discover Financial Services (DFS) is a large-cap (37B) company trading on the NYSE. The company operates in payment services and digital banking. The payment services segment consists of a variety of services and products including the PULSE network, Diners Club International, and the Discover Network. The PULSE network is a debit, atm, and digital fund transfer system. The Diner Club International is a credit service offered to customers outside of the US with an emphasis on travel. The Discover Network handles transacting and settlement services. The digital banking portion consists of debit and credit cards, loans (private student loans, personal, home), depositing, money market, IRA deposits and savings, checking accounts, and sweep accounts.

Advantages: 

    Cash isn’t widely used since the introduction of debit and credit cards. Using cards definitely add value to users. If you lose a credit card, you can simply call the company and cancel the card. If an odd transaction occurs, the card company can flag that transaction and inform you. If a transaction was made that wasn’t you, you can decline the transaction and get your money back. For using your credit card, the issuer can typically earn money. With all this said, Discovers earns money from every transaction and interest from unpaid debt.
Debit cards have simply served as a place to have your paycheck deposited, for me anyways. It’s a way to directly access my checking account, but any transaction I make is typically done using credit cards. Discover has made checking accounts more valuable to their customers by offering rewards for holding money in their checking account. Discover profits by investing money from these accounts.
    The buy-now-pay-later services offered by other companies are a risk. I will cover that more in the disadvantages, but one positive that’s happening in the relationships developing with the new competition, such as Sezzle. Discover’s services work alongside Sezzle’s buy now pay later options so that discover is accepted as a form of payment.
    DFS is exposed to all the risks associated with interest rates. Discover is diversified throughout many parts of the financial sector by offering a wide variety of services. If a customer would like Discover for all their financial needs, they could. Investing, banking, credit cards, loans, buy-now-pay-later, ATM, etc. I think having good services for all of these reduces the risk. If interest rates rise, users invest more, spend more, take out more loans, etc. If interest rates rise, DFS makes more off savings and debit accounts, and loans in general. 
    Discover’s customers typically have credit scores over 660. This usually includes the middle-income class, which are usually low risk. If there was another financial crisis, I would get a little more concerned because these types of jobs are usually at risk, and their savings rates are historically lower. Let’s be honest though, in a recession, everything's at risk. A positive for the middle class is wages are rising. In general, this is a positive for Discover.

Disadvantages: 

    Discover is global but it lags behind competitors. Mastercard is accepted in 210 countries, Visa is accepted in 200 countries, American in 100 countries, and Discover is accepted in 185 countries. Listing from largest to smallest in the US, Visa, Master Card, and American Express, Discover. In a way it could be a positive considering there is growth potential. 
Visa and Mastercard only manage and process credit card transactions. Meaning, they don’t issue the credit card, they don’t manage the financing, they don’t take the bulk of the risk. American Express and Discover handle both issuing and financing. Min summary, they take on more risk than Mastercard and Visa.
    The buy-now-pay-later-services will hurt credit card companies if successful. Credit card companies make money by loaning money at interest. If you pay them by the end of your monthly bill, you pay no interest, if you don’t, you get charged interest. For buy now pay later, you can set up a payment plan to buy a product that you currently cannot afford or wish to pay overtime. In summary, this eliminates the need for credit card companies. These companies are taking on high risks. I’m not sure what happens if you don’t repay your debt, either the company or consumer takes on high risk. We are still in the infancy stages of this service; it’ll take some time before we know if it’s successful or not.
    In general credit card companies can have a bad rap. Taking on excessive debt is a terrible thing and considerable effort is put into making sure future generations do not make that mistake. In good financial times, you don’t hear bad publicity about credit card companies, but when times are rough, they catch a bad light in the news. 

Valuation and current state: 

    DFS valuation is attractive. Market cap = 36.8B, PE = 7.7, EV/FCF = 7, cash/debt = 0.78, ROE_5yr = 22%, profit margin_5yr = 22%. The market cap for this company is low compared to main competitors (V, MA, AXP). If this company continues to operate well, I think it’s responsible for this company to get to a similar market cap within the next 5 to 10 years. Keep in mind this is a “back of a napkin calculation”, take it for a grain of salt. Comparing the valuation values from its 5-year average and competitors, it looks cheap as well. The financial statements show growth and consistency. Revenue, net profit, and FCF have been steady and slowly growing over the past ten years. The only thing that does stick out a little is the stagnate shareholder equity. Using a 3yr FCF average and a conservative growth estimate, the company produces a nice IRR. 

Final thoughts: 

    I like the company as it could be a good opportunity. The company has potential due to its relatively small size and operational growth. The diversity of the company also adds some reassurance. The biggest risk I see for the company is a recession and the buy now pay later services. I think they have a strong enough customer base to stay relevant. 

Links:
https://www.paymentsdive.com/news/discover-invests-30-million-in-bnpl-company-sezzle/603580/
https://investorrelations.discover.com/newsroom/press-releases/press-release-details/2021/Discover-Signs-Agreement-to-Help-Expand-Acceptance-of-Sezzles-Buy-Now-Pay-Later-Feature/default.aspx
https://somethingbluebride.com/pages/sezzle
https://www.nerdwallet.com/article/credit-cards/how-discover-amex-different-from-visa-mastercard
https://www.thebalance.com/key-differences-between-visa-mastercard-discover-and-american-express-4588450
https://www.creditcards.com/credit-card-news/visa-mastercard-amex-discover-difference/
https://www.valuepenguin.com/where-visa-mastercard-american-express-discover-accepted
https://finance.yahoo.com/quote/DFS?p=DFS&.tsrc=fin-srch
https://app.tikr.com/markets?fid=1
https://www.morningstar.com/stocks/xnys/dfs/quote

Facebook (FB)

The company: Facebook, Inc. (FB) is a social media company that was launched in 2004 by Mark Zuckerberg and currently has a market cap in the mega classification. Since Facebook gained momentum it has become one of the, if not the most popular social media platforms year after year. The company has become global and continues to grow. Along with their main social media platform “Facebook”, the company also owns two other popular applications Instagram and WhatsApp, which are also growing at a fast rate and offer services and enjoyment that appeal to the general population.

Advantages: Facebook has owned most of the social media industry since 2010. A few other platforms have injected themselves into the industry as well such as Vine, Snapchat, Tik-Tok, and Instagram. These apps either thrive with Facebook, fade away and go under, or Facebook buys them and they become an even bigger success. The Facebook company has the team and cash to recognize what can be a success and can bring it to fruition. In the US, digital ad spending equals around 121B and is growing year over year. For media advertising, the world spends around 650B and that number is growing year over year. In 2020 Facebook had around 85B in revenue. In comparison to the revenue that is being spent in the US and all over the world, Facebook still has plenty of room to grow. With how dominating they are, I see consistent revenue growth as a high probability. Keep in mind how expensive and difficult it used to be advertising with magazines, billboards, televisions, radio, etc., Facebook has made advertising a lot more accessible. With that said, I would expect the revenue that was dedicated towards the more traditional methods to shift over to online and media methods. Facebook has also adapted its platform to stay relevant and innovative. For example, Facebook marketplace. It has taken the popular method to sell or buy items or services (as seen in Craigslist) but has taken it to a much-improved level. Facebook has done that with nearly every aspect of its services. Facebook was originally an exclusive service and was later adapted and used by nearly every person under 30 years old in the US. Over time it became popular with nearly all age groups and this expanded its potential. Although this company has gone through a handful of legal issues, its profitability and growth don’t skip a beat. That enunciates how effective their products and services are.

Disadvantages: The future for Facebook will more than likely be rough. I think this company’s earnings goingnegative is nearly possible, but I wouldn’t be surprised if the road is rocky. In the past few years, they have been tied up in a handful of legal issues. This is never good for a company. Privacy and monopoly-related lawsuits and issues are the most troublesome. When people learned about how their information is being used it upset a handful of users. Facebook's smart acquisitions have brought on monopoly lawsuits. I don’t think these will be successful but, in any case, this is distracting to the CEO and the company. One that could directly affect revenue and ad effectiveness is Apple’s new feature to restrict Facebook from accessing personal data which would hinder their ability to effectively advertise. To sum up my concerns, we are entering a new world of data and governments will be evolving to make sure our privacy is not impaired. Unfortunately, Facebook is caught up in the middle of it and they will have to fight and adjust to the adverse situations.

Valuation and current state: Common valuation metrics P/E, P/CF, PEG and EV/EBIT for Facebook are 30, 22.3, 0.91 and 24.5, respectively. These values aren’t particularly attractive, but with the amount of money flowing into the stock market, and the solid financial statements that Facebook has, you’re going to have to pay up for it. Speaking of the financial statements, the company has consistent growth revenue, FCF, net income, shareholder equity, cash, and the company has been buying back shares. All those attributes draw me to this company. I do see some potential with my DCF model but not enough to consider it cheap.

Final thoughts: I think this pick is interesting. It isn’t the common value play, but I do think this industry will see considerable growth in the next decade. I think Facebook could be an integral part of people’s lives worldwide. It’s hard for me to put a market cap value on the company since it’s already so high, but I think it still has room to grow. The company is going through a handful of legal, social, and business strategy complications. I think this could open some better buying opportunities in the future. If the right correction occurs I would take on a position. Possibly this summer when Apple pushes it’s new IOS update.


Links:
https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/
https://www.statista.com/topics/1176/online-advertising/
https://www.statista.com/topics/990/global-advertising-market/
http://financials.morningstar.com/income-statement/is.html?t=FB&region=usa&culture=en-US
http://financials.morningstar.com/income-statement/is.html?t=FB&region=usa&culture=en-US
https://www.statista.com/statistics/429036/advertising-expenditure-in-north-america/
https://vincos.it/world-map-of-social-networks/
https://www.businessofapps.com/data/facebook-statistics/#2
https://www.statista.com/statistics/241552/share-of-global-population-using-facebook-by-region/
https://www.theguardian.com/technology/2020/dec/10/facebook-faces-biggest-legal-battle-in-years-as-us-officials-launch-lawsuits
https://en.wikipedia.org/wiki/Criticism_of_Facebook
https://about.fb.com/actions/protecting-privacy-and-security/

The Allstate Corporation (ALL)

The Company: Allstate Corporation (ALL) is a large cap insurance company that was founded in 1931. The auto portion of the company is the second largest in the US and the home insurance portion of the company is the fourth largest. According to a handful of insurance ratings, the company holds high rankings, which highlights their customer satisfaction. Since the early 2000s Allstate has promoted the “Are you in good hands?” slogan, which is known by almost everyone in the US.

Advantages: Although the underwriting business is challenging, it can produce consistent revenues year after year if you’re able to satisfy customers and continue to improve that aspect of the business. Recently, they sold off their life insurance portion to Blackstone. Some many see this as a downfall, but I see it as management whiling to make hard decisions so that they can improve on what they are good at, auto and home insurance. They aren’t the largest insurance company in either auto or home, but that means they have room to grow which is a nice problem to have when you are wanting a company to grow. The two types of insurance they chose to focus on are types that most US citizens need to have. To drive a car, you must have car insurance. When it comes to home insurance, it’s not a good move to not have insurance, and most lenders require you to when getting a loan. As time goes on more people are acquiring homes and cars which should increase customers. Because of these reasons, one can expect consistent revenue in the future if they keep customers happy.

Disadvantages: The future state of auto insurance is their biggest concern. Some would say that insurance for self-driving cars could be cheaper, or non-existent. I wouldn’t go as far to say that we would not have insurance. For one it is the law, and for two, even if self-driving cars are nearly perfect, there is still a need to insure your car for many other reasons such as natural disasters, road wear, personal legal reasons, etc. However, these concerns would be many years down the road. The amount of companies in this sector means that there is plenty of competition. I like the competition; it’ll force the company to continuously get better. If they don’t, it could be bad, but it would take a while for that to trickle to the revenue in a meaningful way. Insurance companies are responsible for their customers. This means if natural disasters occur, it can quickly drain their cash. The underwriting business is challenging, little decisions can make a significant impact. Good or bad.

Valuation and current state: Allstate is considered a value play from my perspective. The P/E, P/B, P/S, P/CF, and enterprise multiple are 6.38, 1.18, 0.78, 6.51 and 5.89, respectively. Looking at these valuation measures they are attractive, especially considering they are all lower than the five year averages. The dividend has been constantly growing over the past five years, and with the payout ratio being lower than 15%, they will have no trouble paying it to shareholders. With a debt/cash ratio ~1, and the debt/EBITDA >1, the debt is not a stress to the company. Doing a DCF I can get the company undervalued and should expect nice returns if the FCF keeps up. At its current price, it’s attractive.

Final thoughts: Allstate isn’t the attractive tech company that has been getting a lot of attention as of recently, which could be a reason it’s undervalued. I like how the revenue will be relatively stable due to there products being something customers need to have. I found it impressive that even in 2020 the company was able to turn a profit. Many people were not driving and decreased the amount of coverage to take coverage off altogether. This shows that Allstate excels at underwriting. I like this pick and am considering taking a position.


Links:
https://www.morningstar.com/stocks/xnys/all/valuation
https://finance.yahoo.com/quote/ALL/key-statistics?p=ALL
https://www.allstate.com
https://www.insurancejournal.com/news/national/2020/02/10/558054.htm
https://www.nerdwallet.com/blog/insurance/top-home-insurance-companies/
https://www.valuepenguin.com/largest-auto-insurance-companies

Intel Corporation (INTC)

The Company: Intel Corporation (INTC) is an electronic hardware design and manufacturing company. Although Intel is primarily known for its processors, it has many products in the semiconductor and electrical hardware field such as electrical server products, chipsets, wireless products, memory storage, networking, and etc. For many years it has been the leader in providing processors for computers. Over the past decade, it has been exposed to a handful of competitors in the industry.

Company Mote/Advantages: Intel has a well-established infrastructure from a tangible and intangible asset prospective. For a number of years Intel has been the predominant provider of processors for computers. This allowed them to build a reputation for themselves. Everyone knows of the Intel sticker on their computer. With the variety of products Intel is offering, it reduces the volatility of their revenue, and shows they are willing to adjust to the industry. With their magnitude of cash flow and knowledge base they have the ability to adjust to the industry and introduce new products. With their new CEO, I could see a culture shift in the near future, in a positive way. Over the past decade, Intel hasn’t been as innovative as the companies around them. Some say management could be a cause of this. The new CEO is reputable and has extensive experience at Intel, which could change things around putting them back on top. 

Disadvantages: The biggest downfall for Intel recently has been primarily 3 things. Let’s start with competition. With the high profit margin and lack of competitors, this naturally attracted competition. It didn’t seem like a problem before due to the complexity of these products and the large amount of capital it takes to make it in this industry. But, give companies like AMD enough time and they will prevail, as they have. Both processors have their pros and cons, but for right now AMD has Intel beat on a performance/price ratio. This doesn’t mean they are doomed. It just means they are finally being challenged and they need to become more innovative and cheaper to compete. Secondly, is the lack of production. In the last year they have announced that they are delayed on a new product line. Lastly and probably one that scared most investors the most is Apple announcing they will be designing and manufacturing their own processors. Apple has always used Intel in their products which means in the future Apple will no longer be a large revenue stream.

Valuation and current state: Enterprise multiple and every other valuation measure screams deep value, EV/ebitda, P/E, P/CF are 7, 12.5, 7.4 respectively which are lower than the 5 year averages. The company also has an impressive ROE 26%. Although there have been some downfalls, Intel is still a growing cash pumping machine that will continue to be innovative. Running conservative DCF models double digit returns are seen in a variety of situations. If the company does turn things around, impressive return could occur. Lastly, with a consistent dividend, it adds to the attraction.

Final thoughts: I understand the concerns many people have after recent years. I think that the competition will challenge the company in a good way. They have the infrastructure to “out” innovative AMD and others, it just needs to. A good thing to remember is that will never be a crazy growth stock that is common now days, it will be a steady slow growth cash pumping machine that has a more potential due to its experience and history.

Links:

https://app.tikr.com/stock/multiples?cid=21127&tid=2621295
https://www.gurufocus.com/stock/intc/dcf
https://www.morningstar.com/stocks/xnas/intc/valuation
https://simplywall.st/stocks/us/semiconductors/nasdaq-intc/intel/news/is-weakness-in-intel-corporation-nasdaqintc-stock-a-sign-that-the-market-could-be-wrong-given-its-strong-financial-prospects
https://www.fool.com/investing/2021/01/24/why-intel-stock-spiked-then-crashed-last-week-afte/
https://www.youtube.com/watch?v=1wt8KHIB0G8

Dollar General Corporation (DG)

The Company: Dollar General Corporation (DG) is a discount retailer having a large-cap market size. The company was founded in 1939 and went public in 1968. As of last year, the company is operating around 16,300 stores in the United States. Dollar General offers a wide variety of products but with limited inventory. Its business model focuses on convenience and great prices.

Advantages: Dollar General can open stores in a wide variety of locations due to its smaller size. Combine that with its convenienceand great price business model, I think that puts it in its own little niche of the industry. Their prices points arecompetitive - allowing it to attract a wide variety of customers in both good and bad economic times. Remote areas which larger stores such as Walmart won’t even consider due to the lack of people, are great locations for Dollar General. Since a store only needs limited land, construction, and inventory; it isn’t a significant capital allocation relative to its market cap. In summary, there is a limited financial risk to plant a store.

Disadvantages:
Its biggest competitors are stores like Dollar Tree, Five Below, and mom and pop local grocery stores. Dollar Tree and Five Below offer lower quality and fewer products, but generally at a lower price. I wouldn’t say these stores are fierce competitors but they could steal potential revenue if located near a Dollar General. I don’t see much turmoil from Mom and Pop stores unless they have a local producer or a loyal customer advantage. The biggest risk from an investor’s perspective is the management. Since it can plant stores pretty much anywhere, it could get it in trouble if they are not placed strategically.

Valuation and Current State: DG currently has an enterprise multiple of around 15 putting it at a reasonable valuation at first glance. Valuation ratios such as P/E, P/S, P/B, ROE, and P/CF, are at reasonable values but are currently a little higher than their 5 year average. The debt is something to pay attention to. When looking at the debt to EBITDA ratio, we see something close to 0.5, which is reassuring. With the amount of FCF the company creates, it can pay down debt if needed to be. The company offers a dividend that is only a small portion of net income - around 14%. The dividend has consistently increased over the years. The highlight of this company is the growth over the past few years and projected future growth. The growth levels are seen in the net income as well; around 14% over the past 5 years and are projected to be the same, if not better. Lastly, the company has consistently bought back shares over the years which is always a good sign.

Final Thoughts: With the simple business model, I see the growth projections staying on the track. Since the industry niche that it’s in isn’t incredibly attractive; I don’t see competitors interfering. I’m drawn to unpopular companies and industries so you could say I’m naturally drawn to this pick. Especially with the consistency I see in the financial statements, I would like to see a correction before taking on a position but overall I like this pick.


Links:
https://www.morningstar.com/stocks/xnys/dg/valuation
https://finance.yahoo.com/quote/DG/key-statistics?p=DG
https://www.gurufocus.com/stock/DG/summary?search=dg
https://www.fool.com/investing/2021/01/06/better-buy-costco-vs-dollar-general/
https://www.dollargeneral.com
https://finance.yahoo.com/news/why-dollar-general-analyst-turning-195628496.html
https://simplywall.st/stocks/us/retail/nyse-dg/dollar-general/news/is-dollar-general-nysedg-using-too-much-debt
https://simplywall.st/stocks/us/retail/nyse-dg/dollar-general/news/if-you-like-eps-growth-then-check-out-dollar-general-nysedg/amp

PulteGroup (PHM)

The company: PulteGroup (PHM) is large cap public company that operates in the development and construction business. The company was founded in 1956 and became public in 1972. Since then, PHM has acquired a handful of construction companies. The company primarily operates in the residential portion of the industry; they buy land, develop it, and build on it. The types of construction vary, but primarily include homes, townhouses, duplexes, and condominiums. They also assist customers with financing. From what I can see, they build high quality homes that their customers are happy with.

Advantages: With interest rates as low as they are, one could say the Federal Reserve is PHM’s greatest advantage. Ever since the FR lowered rates back in March of last year, this has allowed buyers to borrow money at incredibly cheap rates. Low borrowing rates are a catalyst for home buying. I don’t see these rates changing, especially with the economy still recovering from COVID-19. There’s still a lot of development to do in the US; as long as there are reasonable rates, people will be buying houses. From what I can tell, they have a good reputation as home builders and a strong customer base, both of which will help bring in new customers. I expect the housing market will stay strong with minimum fluctuation for the next few years.

Disadvantages: The success of this company is dictated by interest rates. Although I think the rates will be favorable for this company in the near future, I don’t like the success of a company being so depended on external factors or political factors. With the baby boomer generation getting older and the excessive amount of houses being built, I’m concerned that there will be too many houses on the market at some point. Combine that with a rise in interest rates and it could cause disturbances in the market. With the jump in excitement during the past year, I’m not confident that the trend can continue. A slow-down in the near future is reasonable to suspect.

Valuation and current state: I consider this a value stock with an enterprise multiple of 8. When observing valuation measures such as P/S, P/FCF, PEG, and P/B, all are less than the industry average and the company’s 5 year average. If this stock reverts to its mean, there will be good returns. When I look at ROE, profit margins, growth prospects, share buybacks, and their debt situation, they seem to be in great shape. When running a conservative DCF, I get double digit returns. This stock seems to check all my quantitative boxes, which doesn’t happen often.

Final thoughts: This stock pick is quantitatively attractive. I can see this company being successful and I don’t see any significant changes to the industry in the foreseeable future. Yes, I’m sure some fluctuation in the housing market will occur, but nothing too crazy. I’m personally not too confident in the housing and construction industry due to a lack of knowledge, but I like this pick - especially if a correction were to occur.

Links:
https://simplywall.st/stocks/us/consumer-durables/nyse-phm/pultegroup/news/heres-why-i-think-pultegroup-nysephm-might-deserve-your-atte
https://simplywall.st/stocks/us/consumer-durables/nyse-phm/pultegroup/news/is-it-too-late-to-consider-buying-pultegroup-inc-nysephm
https://finance.yahoo.com/m/eba527c9-38f7-30dc-a131-f6b71eaad98f/2020-existing-home-sales.html
https://finance.yahoo.com/quote/PHM/key-statistics?p=PHM
https://www.morningstar.com/stocks/xnys/phm/valuation

Hewlett-Packard HP (HPQ) Inc.

The company: Hewlett-Packard HP (HPQ) Inc. is a large cap computer hardware company that was established in 1939. The company builds and sells personal computers, servers, hard drives, networking products, printers and software. With the industry evolving, HP is having to adapt, and luckily, it has the cash flow to do so. In recent years they have expanded into the 3D printing field and software. Although it’s classified as a computer hardware company, it’s evolving into an electrical consumer producer and SaaS company.

Advantages: A good thing about this company is the industry it operates in. Nearly 75% of the US population have a computer, and with computers lasting around four years, it puts in perspective the potential revenue just from computers. The servers, hard drives and networking products support the fast-growing cloud infrastructure. If HP keeps pushing for innovation in these products, it’ll stay prominent. One product that HP has expanded into is 3D printers. These products have really gained a ton of attraction. Something else that’s promising is their reputation in the industry. They work with a handful of large customers that keep a steady stream of revenue coming in. The world has changed since COVID. We depend on computer related products, the revenue in this industry will only grow.

Disadvantages: I think the computer industry is well established but HP has suffered before. In 2014 revenue dropped significantly due to competition. Another main product of HP are printers. I think people are trying to print less, not more. I’m not saying it’s a dying product, I just don’t think it’s one that’ll grow at a noticeable rate. Also, when it comes to printers, most people want just a basic cheap printer, not the nice expensive one. This company has the FCF to invest back into the company, but if they don’t focus on the right products, there is a chance they could see another significant drop in the revenue.

Valuation and current state: The company is currently at around an enterprise value of 8.15. When looking at other valuation measures such as P/E, P/S, ROE, it is lower than the industry average, but it’s still higher than the company’s average. From these valuation measures, it seems like an undervalued stock, and from the conservative DCF I ran, I nearly got double-digit returns. Something that I definitely liked was the consistent share buybacks and easily payable dividend that is offered. One thing that is not attractive is the negative equity. I still haven’t identified how and where in the balance sheet this is, so further investigation is needed.

Concluding thoughts: I think this stock has the potential to produce great returns. I do get concerned about how innovative this company can be. Nowadays capital is cheap, so it’s not a problem for other companies to try and expand into this industry. Although this company seems to be at a fair price, I would like to see the valuation get cheaper before a small or full position is acquired.

Links:

https://financials.morningstar.com/ratios/r.html?t=0P000002O2&culture=en&platform=sal
https://www.omen.com/us/en/omen-gaming-hub.html
https://www8.hp.com/us/en/home.html
https://finance.yahoo.com/quote/HPQ?p=HPQ&.tsrc=fin-srch
https://www.morningstar.com/stocks/xnys/hpq/quote
https://www.bustle.com/p/when-is-it-time-to-buy-a-new-computer-these-are-the-tell-tale-signs-you-need-to-say-goodbye-6457626

Qurate Retail Group (QRTEA)

The Company: Qurate Retail Group (QRTEA) is a Mid-Cap e-commerce company that curates a special selection of products from many different companies and present them in a unique way using mobile applications, TV shows, videos, websites, etc. Qurate personalizes its products which gives the users a unique shopping experience. This has made the Qurate community strong. Ultimately you could say Qurate markets in a way that personalizes their products. This gives the customer a rememberable personal shopping experience.

Company Advantages: The culture of the company is its greatest advantage. The customers that shop with Qurate are loyal. Amazon primarily owns web shopping, but it does lack the experience of shopping in person. I would say Qurate is a blend between physical and web-based shopping. With Qurate offering multiple platforms to shop on, it allows users to conveniently use the platform whenever. It’s also good to see the company adapt to the future. Although I am personally not a user, I hear raving reviews form their loyal customer base. The biggest issue with web shopping is the lack of human connection, Qurate changes that with its users.

Disadvantages: Although this company is unique, it still operates in an extremely competitive industry. Amazon has consumed a large portion of the available revenue and will continue to do so. With that said, I would classify Amazon and Qurate in different parts of the retail industry. Two things that worry me when it comes to this company is whether they can handle the debt that have acquired and whether the company will attract more customers to keep their revenue steady. With the competitiveness of this industry the company will have to continue to be innovative and find ways to connect to younger generations.

Valuation and Current State: At the time of writing this summary the enterprise multiple is 6.07. This is one of the reasons this company showed up when I did a value screen. When looking at other valuation measures such as P/E, P/Cash Flow, P/B, and enterprise multiple, the company is lower than its five year average and the industry average. If the company were to revert back to its mean, attractive returns would occur. When doing a conservative DCF I also arrive at attractive returns. This past year the company announced it would start buying back stock. With value stocks this is definitely a plus. When looking at the debt/equity ratio, it’s around 2. This is not ideal but with the amount of FCF the company creates it shouldn’t have a problem paying off the debt. Overall, I think this stock is undervalued.

Final Thoughts: I think the stocks discounted price is due to the lack of interest in companies like this, along with the debt this company has acquired. The biggest concern would be regarding the company being able to maintain the revenue, that’s where you’d be taking a bet. If there were a large decrease in revenue, you would be in trouble. But, the currentcash flow supports its ability to handle the debt. However, I personally like companies that are unappreciated like this; with the valuation I see, I like this investment.

Links:
https://www.morningstar.com/stocks/xnas/qrtea/quote
https://finance.yahoo.com/quote/QRTEA?p=QRTEA&.tsrc=fin-srch
https://www.qurateretailgroup.com
https://simplywall.st/stocks/us/retail/nasdaq-qrte.a/qurate-retail/news/we-think-qurate-retail-nasdaqqrte-a-is-taking-some-risk-with-its-debt
https://www.youtube.com/watch?v=4FZtdnTzAcI