Juicy Yields By a Mortgage REIT: Invesco Mortgage Capital

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An attractive dividend provider is a hold at the moment

Stock: Invesco Mortgage Capital (ticker IVR) 

The Maryland-incorporated REIT focused on residential and commercial mortgage-backed securities and mortgage loans recently declared a 2.5% increase in its dividend. Initially, this could be just easily taken for granted, but at 9.4% dividend yield, 0.9 PB ratio, and a mouth-watering 3.7 PE ratio should appeal to even the most conservative investors.

These valuations were not always these consistent and historical annual losses have indicated that the current attractive valuations may not hold or maybe even irrelevant. So it could be more rational to simply assess Invesco’s balance sheet.

As of June, Invesco had $64 million in cash and cash equivalents, and $2.05 billion in long-term debt with debt-equity ratio 0.8 times compared to 0.93 times a year earlier. Overall long-term debt rose $178 million while equity shrunk by $130 million to $2.2 billion.

In addition, Invesco carries no goodwill nor intangibles in its assets but $16.08 billion (96.5%) of its assets in mortgage-backed and credit risk transfer securities. These assets vary in figure in recent years as it had shown a decline of 4.7% in total in the past three years.

Invesco Mortgage Capital

According to filings, Invesco Mortgage Capital is externally managed and advised by Invesco Advisers, Inc., its Manager, a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd., a leading independent global investment management firm.

Further, Invesco Mortgage’s objective is to provide attractive risk-adjusted returns to its investors, primarily through dividends and secondarily through capital appreciation. Its objective, the company primarily invests in the following:

Agency RMBS (41% of Invesco Mortgage equity)

-Residential mortgage-backed securities that are guaranteed by a U.S. government agency such as the Government National Mortgage Association or a federally chartered corporation such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (Agency RMBS).

Commercial Credit (2; 33% of equity)

-RMBS that are not guaranteed by a U.S. government agency (non-Agency RMBS).

-Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (GSE CRT).

Residential Credit (3; 26% of equity)

-Commercial mortgage-backed securities (CMBS).

-Residential and commercial mortgage loans

-Other real estate-related financing arrangements.

What is more attractive is that Invesco Mortgage has elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain its REIT qualification, the company is generally required to distribute at least 90% of its REIT taxable income to its stockholders annually.

As per filings, the company conducts its business through an IAS Operating Partnership LP (the Operating Partnership), as its sole general partner.

As of June 30, 2017, the REIT owned 98.7% of the Operating Partnership, and a wholly-owned subsidiary of Invesco owned the remaining 1.3%. Invesco Mortgage also has one operating segment.

Invesco Mortgage’s operating results can be affected by a number of factors and primarily depend on the level of our net interest income and the market value of its assets.

Net interest income

The company’s net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate (CPR) on the company’s target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.

Meanwhile, the market value of Invesco Mortgage’s assets can be impacted by credit spread premiums (yield advantage over U.S. Treasury notes) and the supply of, and demand for, target assets in which the company invests.

In the first half, Invesco Mortgage’s net interest income rose 8.3% year over year to $169.2 million brought mostly by an 8% decline in interest expenses and a 2.3% rise in interest income. Net interest margin, meanwhile, was at 1.94% compared to 1.85% a year earlier.

Book value

Invesco Mortgage calculates its book value by deducting preferred shares in its equity divided by all diluted shares outstanding. The company’s book value per share as of June grew 4.5% year over year to $18.27 a share.

Cash flow

In the first half, Invesco Mortgage’s cash flow from operations declined by 4.6% to $154.4 million. In addition, dividends and distributions represented 66% of its cash flow from operations.

The REIT does not have capital expenditures but has allocated net $895.5 million in the urchase of mortgage-backed and credit risk transfer securities for the period and raised $63.2 million in repurchase agreement proceeds.

Repurchase agreements are short- and long-term borrowings made by Invesco Mortgage to finance its investments. Under repurchase agreement financing arrangements, certain buyers require the borrower to provide additional cash collateral in the event the market value of the asset declines to maintain the ratio of value of the collateral to the amount of borrowing.

Conclusion

Invesco Mortgage’s recent half operations, including the company’s net interest income and book value performance, strongly indicated a healthy appreciation of profitability for the company.

It is important to highlight though that the REIT has experienced a slow decline in its overall net interest income in recent years, but interest expenses has shrunk faster therefore leading to a supportive net interest income figures.

Average analysts have an overweight recommendation on Invesco Mortgage with a target price $17.58 a share vs. $17.12 at the time of writing.

In summary, Invesco Mortgage is a hold with $17.5 target.

Quotes

 John Anzalone, Chief Executive Officer (second quarter results)

“Our portfolio was well positioned to benefit from market conditions during the second quarter.”

“Our diversified sector allocation and security selection led to favorable economic return performance and continued book value stability. We have maintained a steady dividend of $0.40 per common share for the last eight quarters. Our consistent approach and execution has generated core earnings covering our dividend in seven of those eight quarters.”

DisclosureI do not have shares in any of the companies mentioned.

 

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Back to Growth: Affiliated Managers Group

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Stock: Affiliated Managers Group (ticker AMG)

Asset manager rewards shareholders with dividend payouts

Share price of Affiliated Managers Group has hovered near one-year highs in recent times as the $10 billion Florida-based asset manager delivered 1.4% revenue rise in its recent first-half operations and a more impressive 17.2% profit increase to $248.8 million resulting in 22.3% margin compared to 19% a year earlier.

The asset management group recorded $13.6 million investment and other income, and $1.3 million lower in operating expenses resulting in more profitability in the period.

Assets under management, a critical metric for asset managers, grew 19% year over year to $772 billion.

Nonetheless, Affiliated Managers Group outperformed the S&P 500 index nearly twice so far this year having generated 24.21% total gains compared to the index’s 13.33% (Morningstar).

Meanwhile, the company trades at a slight discount compared to its peers with PE 20 times vs. industry average 21.3 times, and a good 40% discount compared to its three-year average.

Affiliated Managers Group
Affiliated Managers Group was founded in 1993. As per company filings, the company is a global asset management company with equity investments in leading boutique investment management firms, which the company refers to as its “Affiliates.”

Affiliated’s innovative partnership approach allows each Affiliate’s management team to own significant equity in their firm and maintain operational autonomy.

Further, the company’s strategy is to generate shareholder value through the internal growth of existing Affiliates, as well as through investments in new Affiliates, and additional investments in existing Affiliates.

In addition, Affiliated provides centralized assistance to its Affiliates in strategic matters, marketing, distribution, product development and operations.

The company holds meaningful equity interests in each of its Affiliates.

In certain cases, Affiliated owns a majority of the equity interests while in other cases it owns a minority of the equity interests.

In all cases, Affiliate management retains a significant equity interest in its own firm.

In 2016, Affiliated generated 67% of its revenue in the United States, 26% in the United Kingdom, and the other in remaining other countries. Affiliated derives most of its revenue from asset-based and performance fees from investment management service.

According to filings, Affilated has determined to report just one segment from three in its previous fiscal year.

Sales and profits
In the past three years, Affiliated registered 0.09% revenue growth average, profit growth average of 9.5%, and profit margin average of 20.1% (Morningstar).

Cash, debt and book value (equity)
As of June, Affiliated Managers Group had $365 million in cash and cash equivalents and $2 billion in long-term debt with debt-equity ratio 0.73 times compared to 0.56 times a year earlier. Long-term debt fell by $105 million year over year while equity rose $681 million to $3.6 billion.

In addition, 48% of the company’s $8.6 billion assets were labeled as goodwill and intangibles.

Cash flow
In the first half, Affiliated’s cash flow from operations increased by 30% year over year to $444 million brought by higher profits, and cash flow from the company’s distributions of earnings received from equity method investments among others.

Capital expenditures were $7.2 million leaving the company with $437 million in free cash flow compared to $332 million a year earlier.

In addition, Affiliated allocated $354 million in debt reduction (net issuances/other financing activities), and dividends and share repurchases represented 39% of its free cash flow.

The cash flow summary
In the past three years, Affiliated allocated $77 million in capital expenditures, reduced its debt by $614 million net issuance/others, raised $565 million in share issuances, generated $3.55 billion in free cash flow, and paid out $638 million (mostly share repurchases) at an average payout ratio of 18%.

Conclusion
Affiliated did seem to exhibit a good turnaround in both revenue and profits. The company’s business generator and critical metric–assets under management–has been steadily growing in recent years.

Meanwhile, it is important to remember that the company had a poor performance in its prior year brought by its consolidation of Affiliate average assets under management at existing Affiliates. Investors should try to foresee if this trend would continue moving forward as this activity may potentially result in lower profits.

As of its recent filing period, Affiliated also exhibited a leveraged balance sheet and nearly half of its assets were labeled as goodwill and intangibles while having kept a relatively conservative payout ratio.

The company’s recent dividend payouts are welcoming for its shareholders as it has maintained this payout ratio in recent years.

Analysts have an average overweight recommendation with a target price of $201.33 vs. $179.87 at the time of writing. Multiplying previous PS multiples to the average revenue estimates with a 25% margin indicated a per share figure of $127.21.

In summary, Affiliated is a hold with $190 price target.

Quotes
Sean M. Healey, Chairman and Chief Executive Officer of AMG.
“AMG generated strong results in the second quarter across our key operating metrics, including Economic earnings per share of $3.33, positive net client cash flows, and a year-over-year increase of 19% in our assets under management, to a record $772 billion.”

“Through the ongoing execution of our growth strategy, including consistent alpha generation by our Affiliates, positive organic growth from net flows, and the continued success of our strategy to partner with the leading boutique firms worldwide, we have meaningfully increased the earnings power of our business.”

“During the second quarter, AMG generated positive net client cash flows of $1.8 billion, as ongoing strong demand for a wide range of alternative strategies from both institutional and retail clients was partially offset by continued net outflows in U.S. equities.”

“In a dynamic market environment, our Affiliates are well-positioned to outperform peers and benchmarks, building further on their long-term track records of leading investment performance. With our Affiliates’ outstanding offerings across attractive alpha-oriented product areas, we have excellent prospects for continued strong organic growth going forward.”

“Looking ahead, given the significant and growing scale of our global business, we are confident in our ability to continue to generate meaningful earnings growth through accretive investments in outstanding new Affiliates, while also consistently returning capital to shareholders through our quarterly cash dividend and share repurchases. With this disciplined commitment to capital allocation, along with the organic growth of our Affiliates, we are uniquely positioned to create long-term shareholder value.”

Disclosure: I do not have shares in any of the companies mentioned.

Susceptibility in Operations: Stericyle

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Stock: (ticker SRCL) 
Business as usual in more than 70% of its operations should provide some comfort

Stericycle’s share price has experienced one-year lows recently. As a result, the company has underperformed the broader S&P 500 market so far this year having generated 6.4% total losses compared to the index’s 13.33% (Morningstar).

The company recorded losses in its recent quarter leading to no trailing earnings multiple but now trades nearly 50% off from its three-year PS and PB averages.

The $6 billion Illinois-based waste management company reported $95.4 million in losses for its recent nine months of operations despite its 2.5% increase in revenue to $1.81 billion.

Total costs and expenses for the waste collector were 24% higher resulting to its losses for the period.

According to filings, the company recorded $295 million litigation and professional services expenses related to a Proposed MDL Settlement.

According to BusinessWire, Stericycle and certain of its executives were sued in a securities class action lawsuit charging them with failing to disclose material information, violating federal securities laws. Further, Stericycle executives have been accused of insider sales of more than $55 million. Stericycle was also sued in class action lawsuits by its customers and recently announced a $295 million proposed settlement of the litigation.

Stericycle
Stericycle was founded in 1989. According to filings, Stericycle is a business-to-business services provider with a focus on regulated and compliance solutions for healthcare, retail, and commercial businesses. This includes the collection and processing of regulated and specialized waste for disposal and the collection of personal and confidential information for secure destruction, plus a variety of training, consulting, recall/return, communication, and compliance services.

Further, the company operates integrated operations and customer service networks in the United States and 21 other countries.

Stericycle’s worldwide networks include a total of 252 processing facilities, 102 other service facilities, 340 transfer sites, and 3 landfills.

The company has two segments: Domestic and Canada RCS, and International RCS.

Stericycle’s Domestic and Canada, and International Regulated Waste and Compliance Services segments include medical waste disposal, pharmaceutical waste disposal, hazardous waste management, sustainability solutions for expired or unused inventory, secure information destruction of documents and e-media, training and consulting through its Steri-Safe® and Clinical Services programs, and other regulatory compliance services.

The company’s Domestic Communication and Related Services segment consists of inbound/outbound communication, automated patient reminders, online scheduling, notifications, product retrievals, product returns, and quality audits.

Domestic and Canada RCS
In the first half, revenue in the segment grew 2.9% year over year to $1.28 billion (71% of sales) and registered an EBITA margin of 30% (same as year-earlier period).

International RCS
In the first half, revenue in the international segment fell 5.5% year over year to $361.6 million (20% of sales) and EBITA margin of 11% compared to 9% a year earlier.

According to filings, the company experienced about 5.6% secondary to the effects of foreign exchange rates, which unfavorably impacted international revenues, as foreign currencies declined against the U.S. dollar.

Sales and profits
In the past three years, Stericycle registered 18.46% revenue growth average, contrasting 12.8% decline average, and profit margin average of 8.8% (Morningstar).

Cash, debt and book value (equity)
As of June, Stericycle had $44.2 million in cash and cash equivalents and $2.86 billion in debt with debt-equity ratio 1.04 times compared to 1.11 times a year earlier. Overall debt declined by $258 million year over year while equity decreased by $68 million to $2.75 billion.

77.8% of Stericycle’s $7.04 billion assets were goodwill and intangibles.

Cash flow
Despite the losses, Stericycle’s cash flow from operations declined by 3.3% year over year to $237.1 million in the first half. The company recorded higher cash flow in relation to its receivables, asset impairment charges and loss on disposal, and significant amount of accrued liabilities compared to its year earlier operations.

Capital expenditures were $63.1 million leaving the company with $174 million compared to $179 million a year earlier. The company raised $5 million in share issuance while allocated $121 million in debt reduction (net repayment and other financing activities. Dividend payouts represented 10% of its free cash flow in the period.

The cash flow summary
In the past three years, Stericycle allocated $337 million in capital expenditures, raised $1.3 billion in debt net repayments and $897 million in share issuances, generated $1.05 billion in free cash flow, and paid out $446 million in dividends and share repurchases at an average payout ratio 44%.

Conclusion
At first glance, Stericycle could have been unappealing brought by its declining sales operations overseas. A closer look, however, should tame this specific concern brought by unfavorable foreign currency fluctuations that the company could control less about. Further, international revenue generated 20% of the company’s sales in the period.

Stericycle exhibited a leveraged balance sheet with significant amounts of goodwill and intangible assets while having kept relatively conservative payouts to shareholders in recent years while having raised much cash from debt and share issuances.

Meanwhile, according to Businesswire, Stericycle has been susceptible to consumer backlash and litigation resulting from fraudulent billing practices reportedly dating back many years (consisting of hidden and/or unfounded rate increases, fees, and surcharges imposed on purportedly flat-fee customers). This resulted in widespread customer complaints and cancellations culminating in significantly lower financial results for Q3 2015 though Q2 2016.

Further, on June 12, 2017, the SEC issued a subpoena to Stericycle, requesting documents and information relating to the Company’s compliance with the Foreign Corrupt Practices Act (FCPA) or other foreign or domestic anti-corruption laws with respect to certain of the Company’s operations in Latin America. In addition, the Department of Justice has notified the Company that it is investigating this matter in parallel with the SEC.

These historical and current troubles could be very well present the red flag signs that investors should consider.

Meanwhile, Stericycle has an average analyst overweight recommendation with a target price of $91 a share vs. $72.12. Applying three-year average multiple on average revenue estimates this fiscal year with a 50% margin indicated a per share figure of $71.82.

In summary, Stericycle is a cautious buy with $85 a share target price.

Quotes
Charlie Alutto, President and Chief Executive Officer
“This quarter we continued to see strong performance from our Secure Information Destruction Services and Communication and Related Services. We also reached a preliminary settlement to the small quantity medical waste customer class action lawsuit.”

“This preliminary settlement not only reduces the uncertainty and expense of continued litigation, it is an important step toward putting this matter behind us and allowing our team to focus on our customers and the growth of our business.”

Disclosure: I do not have shares in any of the companies mentioned.

A Humbling Moment: Equifax

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Stock: Equifax (ticker EFX) 

A look at Equifax pre-crisis

“This is the most humbling moment in our 118-year history.

“We apologize to everyone affected.”

Chief Executive Officer Richard Smith wrote in an op-ed posted to USA Today’s website Sept. 12. (Bloomberg)

Equifax has been mired with ongoing troubles since its data breach that could have potentially exposed 143 million sensitive personal information. This sent Equifax’s shares down 34.85% as of Friday since the crisis hit.

To add, Equifax’s chief information officer and chief security officer are now leaving the company, and a group of attorneys general has asked for the company to stop selling its credit monitoring services.

Equifax also revealed on Friday that as many as 400,000 United Kingdom customers may also have been hacked (Bloomberg).

Morgan Stanley also provided a possibly much more dire outlook on Equifax having indicated a further 50% decline in the already wrecked share price.

All of these findings are turning worse and worse for Equifax as incrementally this is a direct assault on the company’s capability of taking good care of its clients’ personal information.

Equifax prior to recent blunder
Looking back, Equifax delivered healthy revenue and profit growth at rates 10% and 37%, respectively, as of its recent six months operations.

Equifax
According to filings, Equifax was originally incorporated under the laws of the State of Georgia in 1913, and its predecessor company dates back to 1899.

Equifax is a leading global provider of information solutions and human resources business process outsourcing services for businesses, governments and consumers.

The company has a large and diversified group of clients, including financial institutions, corporations, governments and individuals.

Equifax’s products and services are based on comprehensive databases of consumer and business information derived from numerous sources including credit, financial assets, telecommunications and utility payments, employment, income, demographic and marketing data.

Further, Equifax helps consumers understand, manage and protect their personal information and make more informed financial decisions.

The company also provides information, technology and services to support debt collections and recovery management. Additionally, Equifax is a leading provider of payroll-related and human resource management business process outsourcing services in the United States of America.

In 2016, Equifax generated 73% of its revenue in the United States, and the rest in other countries.

Equifax has four operating segments:

USIS
U.S. Information Solutions (USIS) — provides consumer and commercial information solutions to businesses in the U.S. including online information, decisioning technology solutions, fraud and identity management services, portfolio management services, mortgage reporting and financial marketing services.

In the first half, USIS grew 6.5% to $642 million or 38% of Equifax’s gross revenue and delivered an operating margin of 43.5% compared to 42.6% a year earlier.

International
International —which includes our Canada, Europe, Asia Pacific and Latin America business units, provides products and services similar to those available in the USIS operating segment but with variations by geographic region. In Europe, Asia and Latin America, we also provide information, technology and services to support debt collections and recovery management.

In the first half, International revenue grew 18.8% to $447.7 million (27% of sales) and operating margin of 17% compared to 14.1% a year earlier.

Equifax stated that it recorded better profitability in its international operations brought by reduction in costs related to its $1.9 billion acquisition of an Australian credit information company Veda Group, a gain on the sale of an asset, as well as a decrease in people costs.

Workforce Solutions
Workforce Solutions — provides services enabling clients to verify income and employment (Verification Services) as well as to outsource and automate the performance of certain payroll-related and human resources management business processes, including unemployment cost management, tax credits and incentives and I-9 management services and services to allow employers to ensure compliance with the Affordable Care Act (Employer Services).

In the first half, Workforce revenue grew 10.4% to $394.5 million (23% of revenue) and operating margin 45.2% compared to 43.9% a year earlier.

Global Consumer Solutions
Global Consumer Solutions — provides products to consumers in the United States, Canada, and the U.K., enabling them to understand and monitor their credit and monitor and help protect their identity. We also sell consumer and credit information to resellers who combine our information with other information to provide direct to consumer monitoring, reports and scores.

Revenue in the Global Consumer Solutions rose 1.1% to $204.8 million (12% of sales) and registered a margin of 28.4% vs. 26.1% a year earlier.
Sales and profits

Sales and profits
In the past three years, Equifax registered 10.93% revenue growth average, 11.6% profit growth average, and profit margin average of 15.6% (Morningstar).

Cash, debt and book value (equity)
As of June, Equifax had $404 million in cash and cash equivalents and $2.83 billion in debt with debt-equity ratio 0.94 times compared to 1.16 times a year earlier. Overall debt fell by $115 million while equity rose by $479 million to $3.02 billion year over year.

77% of Equifax’s $7.06 billion assets were goodwill and intangibles.

Cash flow
In the first half, Equifax’s cash flow from operations climbed 17.9% year over year to $329 million brought mostly by higher profits in the period.

Capital expenditures were $100 million leaving the company with $229 million in free cash flow compared to $197 million a year earlier.

The company raised $139 million in financing activities net repayments and borrowings while it provided 41% of its free cash flow in dividends.

The cash flow summary
In the past three years, Equifax allocated $406 million in capital expenditures, raised $1.12 billion, generated $1.75 billion in free cash flow, and provided $915 million in dividends and share repurchases at an average payout ratio of 53.8%.

Conclusion
Excluding recent events, Equifax seemed to be an excellent steadily growing profitable company. After a significant amount of share price drop and still trading at 3.7 times book value, Equifax still does look like less of a bargain.

Further, the company has a leveraged balance sheet accompanied by more than three-quarters in goodwill and intangibles having kept a somewhat conservative dividend payouts to its shareholders.

Average analysts estimates indicated an overweight recommendation with a target price of $141.36 a share vs. $92.80 at the time of writing. Applying four-year PB multiple average and a 20% margin indicated a per share figure of $80.

In summary, Equifax would be a very very cautious buy at $120 a share target price.

Disclosure: I do not have shares in any of the companies mentioned.

Ferrari: Italian Car Maker Speeds On

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(Image Source: Ferrari)

Stock: Ferrari (ticker RACE)

Strong business growth accompanied by leverage reduction makes Ferrari an appealing investment

Ferrari recently rolled out its $234,000 Portofino. According to Bloomberg, Ferrari aims to boost its sales to 9,000 cars in 2019, up from a target 8,400 this year.

Meanwhile, the Italian car company reported 17% revenue growth to €1.74 billion and a more impressive 48% rise in profits to €259.6 million.

In addition, Ferrari also sees its net revenue this fiscal year ending in December at more than €3.3 billion (vs. €3.11 billion in 2016), adjusted EBITDA of more than €950 million (vs. €880 million), and net industrial debt of ~€500 million.

Returns
Ferrari has incredibly outperformed the broader S&P 500 index so far this year has provided 90.47% total gains vs. the index’s 13.1% (Morningstar).

Cash, debt and book value (equity)
As of June, Ferrari had €422.9 million in cash and cash equivalents and €1.76 billion in debt with debt-equity ratio 3.4 times compared to 23.4 times a year earlier. Debt fell €728 million compared to the same period last year while equity climbed 381% to €510 million.

Ferrari also had 30% of its assets in goodwill and intangibles.

Cash flow
In the first half, Ferrari’s cash flow from operations declined by 13% year over year to €275 million brought by higher cash outflow in its inventories, receivables from financing activities, operating assets and liabilities, finance costs, and income taxes paid.

Capital expenditures were €79 million leaving Ferrari with €119 million in free cash flow compared to €156 million a year earlier.

The company also allocated €158 million in debt repayments (net any borrowings and financing activities).

The cash flow summary
In the past three years, Ferrari allocated €1.03 billion in capital expenditures, reduced overall debt by €884 million (net issuance/financing activities), and generated €1.11 billion in free cash flow.

Conclusion
Ferrari certainly has been attractively increasing its business and profitability as of its recent months of operations. This helped propagate its stock in stratospheric heights surpassing the $100 share mark valuing the company more than $20 billion with projected sales of $3.9 billion this year.

The luxury car maker also has markedly improved its leveraged balance sheet and appears to continuously aim to do so.

Analysts have an average hold recommendation on Ferrari’s shares with a target price of $110.78 a share vs. $110.05 at the time of writing. Applying past multiple averages to company’s current sales projection with a 10% margin indicated a per share figure of $69.44 a share.

In summary, Ferrari is a hold with $106.65 per share value.

Disclosure: I do not have shares in any of the companies mentioned.

Invesco: A Cautious Buy

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Stock: Invesco (ticker IVZ) 

Increasing asset under management should help deliver growth

Invesco, the $13 billion Georgia-based asset management company, delivered 4.7% revenue increase to $2.45 billion in its recent six months of operations and a more impressive 16.8% profit increase to $451.6 million.

Operating expenses rose 6%, while the company recorded $28.6 million higher other income such as from its unconsolidated affiliated equity earnings and others, resulting in higher overall profitability.

So far this year, Invesco has underperformed the broader S&P 500 index has generated 10.9% total returns vs. the index’s 13.2% (Morningstar).

The asset manager also trades at discount compared to industry averages such as 14.6 in PE vs. industry’s 21.2.

Invesco

Invesco was founded 82 years ago and according to filings, Invesco Ltd. is an independent investment management firm dedicated to delivering an investment experience that helps people get more out of life.

Invesco has specialized investment teams managing investments across a broad range of asset classes, investment styles, and geographies.

The company provides a comprehensive range of investment capabilities and outcomes, delivered through a diverse set of investment vehicles, to help clients achieve their investment objectives.

Invesco has a significant presence in the retail and institutional markets within the investment management industry in North America, EMEA (Europe, Middle East, and Africa) and Asia-Pacific, serving clients in more than 100 countries.

In 2016, Invesco generated 53% of its operating revenue in the United States, 22% in the United Kingdom, 13% in Continental Europe/Ireland, and the remaining in other countries.

Assets under management (AUM)

Invesco’s ending AUM as of June 2017 rose 10.1% year over year to $858.3 billion.

Sales and profits

In the past three years, Invesco logged 0.64% revenue growth average, (-)3.15% profit decline average, and 18.6% (Morningstar).

Cash, debt and book value (equity)

As of June, Invesco had $1.97 billion in cash and cash equivalents and $6 billion in long-term debt with debt-equity ratio 0.75 times compared to 0.73 a year earlier. Overall long-term debt rose $402 million while equity increased by $316 million to $7.97 billion.

Meanwhile, 27% of Invesco’s $28.2 billion assets were identified as goodwill and intangibles.

Cash flow

Invesco’s cash flow from operations rose 350% year over year in its six months of operations to $781.6 million brought mostly by higher cash flow from the company’s cash held by consolidated investment products, sale of trading investments (net), and payables.

Capital expenditures were $60 million leaving Invesco with $722 million in free cash flow compared to $109 million a year earlier.

The company allocated $297 million in debt reduction net issuance and other financing activities while having dividends and share repurchases represent 40% of the free cash flow in the period.

The cash flow summary

In the past three years, Invesco allocated $405 million in capital expenditures, raised $4.05 billion in debt (net repayments and other financing activities), generated $1.98 billion in free cash flow, and provided $2.7 billion in dividends and share repurchases.

Conclusion

Invesco’s recent half operations indicated steady growth in operations so far, and along with its other income generating assets, further improve the company’s level of profitability for the period.

Nonetheless, certain metrics indicated a slow decline in recent years. Invesco’s ROA and ROE dropped to 3.36% and 11.1% in 2016 compared to 4.97% and 11.82% in 2014.

Invesco also carried a leveraged balance sheet accompanied by more than a quarter of goodwill and intangibles. The company also has maintained significantly generous payouts to shareholders in recent years.

Analysts have an average buy recommendation with a target price of $38.12 a share vs. $32.78 at the time of writing. Average revenue estimates multiplied with past multiples with a 20% margin indicated a per share figure of $21.

In summary, Invesco is a cautious buy with $36.9 target price.

Quotes

Martin L. Flanagan, president and CEO of Invesco (IIC)

“Our focus on delivering the outcomes clients seek by providing strong, long-term investment performance helped us achieve an adjusted operating margin of 39.3% during the second quarter.”

Disclosure: I do not have shares in any of the companies mentioned.

Credit Card Bargain Hunting

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Stock: Capital One Financial Corp. (ticker COF)

Capital One may be of value to possible high teens percentage upside

A recent Barron’s article indicated a 50% upside in Capital One. This blog entry will dissect Capital One’s recent operations and with a layman’s opinion indicate whether the stock is indeed undervalued using traditional and low growth assumptions.

The $38 billion Virginia-based credit services company has performed poorly this year having provided 8.4% total losses to its shareholders compared to Buffett’s recommendation of index investing whereby the S&P 500 provided 13.2% gains.

This performance led to an undervalued 0.8 price to book ratio compared to Capital One’s industry average of 3.8 and a price-earnings ratio of 11.7 times vs. 23.8 times.

Capital One also reported an unappealing 7.7% profit decline in its recent six months of operations on the back of a 6.1% revenue increase to $13.2 billion.

The company’s credit losses provisions rose by 22% to $3.79 billion along with a 5% increase in non-interest expenses, therefore, dampening its profits in the recent first half.

Capital One

According to filings, Capital One Financial Corporation is a Delaware corporation established in 1994 and headquartered in McLean, Virginia.

The company is a diversified financial service holding company with banking and non-banking subsidiaries.

Capital One Financial Corporation and its subsidiaries offer a broad array of financial products and services to consumers, small businesses and commercial clients through branches, the internet, and other distribution channels.

As one of the nation’s ten largest banks based on deposits as of December 31, 2016, Capital One service banking customer accounts through the internet and mobile banking, as well as through cafés, ATMs and branch locations primarily across New York, Louisiana, Texas, Maryland, Virginia, New Jersey and the District of Columbia.

The company also operates the largest online direct banking institution in the United States by deposits. In addition to bank lending, treasury management, and depository services, the company offers credit and debit card products, auto loans and mortgage banking in markets across the United States.

Capital One was the third largest issuer of Visa® and MasterCard® credit cards in the United States based on the outstanding balance of credit card loans as of December 31, 2016.

Capital One has three segments: Credit Card, Consumer Banking, and Commercial Banking

Credit Card: Consists of Capital One’s domestic consumer and small business card lending, and international card lending businesses in Canada and the United Kingdom.

As of June, Credit Card loans represented 41.6% of Capital One’s total loan portfolio.

Revenue in the credit card business grew 6% in the first half to $8.25 billion (63% of gross unadjusted revenue) and delivered income margin of 10% compared to 14% a year earlier.

Consumer Banking: Consists of branch-based lending and deposit gathering activities for consumers and small businesses, national deposit gathering, national auto lending and consumer home loan lending and servicing activities.

As of June, Consumer Banking loans represented 30.7% of Capital One’s total loan portfolio.

Revenue in the consumer business grew 7.7% to $3.47 billion (26% of unadjusted revenue) and margin of 15% compared to 16% a year earlier.

Commercial Banking: Consists of lending, deposit gathering and treasury management services to commercial real estate and commercial and industrial customers. Our commercial and industrial customers typically include companies with annual revenues between $10 million and $1 billion.

As of June, Commercial Banking loans represented 27.7% of Capital One’s total loan portfolio.

Revenue in commercial business grew 9.9% to $1.48 billion (11% of unadjusted revenue) and 24% margin compared to 15% a year earlier.

Selected performance metrics as of first half 2017 (9 items)

Purchase volume

Purchase volume consists of purchase transactions, net of returns, for the period for loans both classified as held for investment and held for sale. Excludes cash advance and balance transfer transactions.

Increased by 7% to $156.3 billion

Net interest margin

Net interest margin is calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.

Increased by 14 basis points to 6.88%

Return on average assets

Declined by 14% to 1.10%

Return on average tangible common equity

Declined by 53% to 11.75%

Efficiency ratio

Efficiency ratio is calculated based on non-interest expense for the period divided by total net revenue for the period.

Declined by 52% to 51.73%

Net charge-offs

Rose 34% to $3.13 billion

Net charge-off rate

Rose 55 basis points to 2.59%

Common equity Tier 1 capital

Rose 60 basis points to 10.7%

Tier 1 capital

Rose by 60 basis points to 12.2%

30+ day delinquency rate

Decreased by 28 basis points to 2.99%

Sales and profits

In the past three years, Capital One had 4.4% average revenue growth, (-)3.38% average decline in profits, and 16.6% profit margin average (Morningstar).

Cash, debt and book value (equity)

As of June, Capital One had $6.72 billion in cash and cash equivalents and $49 billion in long-term debt with debt-equity ratio 1 compared to 1.21 times a year earlier. Overall equity increased by $1.03 billion to $49.14 billion while debt fell by $9.19 billion.

Cash flow

Capital One’s cash flow from operations rose 6.9% to $7 billion in its first half of operations brought mostly by higher provisions for credit losses, proceeds from sales and paydowns, and changes in other assets.

Capital expenditures were $483 million leaving the company with $6.54 billion in free cash flow compared to $6.24 billion a year earlier. Further, dividend and share buyback represented 11% of its free cash flow for the period.

Capital One also allocated $10.5 billion in debt repayments and other activities (net issuances) and raised $79 million in share issuances.

The cash flow summary

In the past three years, Capital One allocated $1.8 billion in capital expenditures, raised $18.7 billion in debt (net repayments and other financing activities), raised $3.75 billion in share issuances, generated $29.5 billion in free cash flow, and provided $10.9 billion in dividends and share repurchases at an average free cash flow payout ratio of 36.5%.

Conclusion

Investors have the right to get afraid of Capital One’s recent hike in loss provisions, but the company’s capital ratios should soothe this concern. Nonetheless, Capital One’s decreasing profitability in recent years should be further observed in the coming quarters.

Capital One remained leveraged despite its impressive debt reduction in recent months. The company also has remained tight grip in its payouts to shareholders in recent years.

Analysts have an average overweight recommendation with a target price of $95.05 per Capital One share vs. $78.7 at the time of writing. Average revenue estimates for this fiscal year multiplied with three-year P/S multiple followed by a 20% margin indicated a per share figure of $85.2.

In summary, Capital One is a buy with $90 target price.

Quote/s

Chairman and Chief Executive Officer (second quarter results)

“We delivered another quarter of resilient growth across our businesses,” said Richard D. Fairbank, Founder.

“We’re investing to grow and transform our company as banking goes digital, we’re driving improving efficiency, and we are building an enduring customer franchise. We continue to be in a strong position to deliver attractive growth and returns, as well as significant capital distribution, subject to regulatory approval.”

Disclosure: I do not have shares in any of the companies mentioned.