Valuentum Exclusive Analysis for the Discerning Investor

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Feb 19, 2024

The Price-to-Earnings Ratio Demystified
Let's examine the price-to-earnings (P/E) ratio. The key takeaways are: 1) without using a discounted cash-flow model, the P/E ratio that should be applied to a company's future expected earnings stream can never be appropriately calculated, and by extension, 2) when investors assign an arbitrary price-to-earnings multiple to a company’s earnings (based on historical trends or industry peers or the market multiple), they are essentially making estimates for all of the drivers behind a discounted cash-flow model in one fell swoop (and sometimes hastily). As earnings for next year are often within sight and can be estimated with some confidence (though this certainly varies among firms), calculating the price-to-earnings ratio via a discounted cash-flow process, in our opinion, is of far greater importance than worrying about whether a firm will beat or miss earnings in its next fiscal year. Because the P/E ratio is a discounted cash-flow model that considers the long-term qualitative dynamics of a particular entity, cash-flow analysis remains the first and most important pillar of our Valuentum Buying Index. And finally, investors cannot ignore valuation analysis or the future. Valuation is an important driver behind stock prices, and it is based on future expectations that can only be estimated. This is just a fact of the markets.

Feb 16, 2024

Dividend Increases/Decreases for the Week of February 16
Let's take a look at firms raising/lowering their dividends this week.

Nov 1, 2023

Caterpillar's Pricing Power Remains Phenomenal
Image: Price realization remains a key driver behind Caterpillar’s strong performance. On October 31, Caterpillar reported better-than-expected third-quarter results, with revenue advancing 12% and non-GAAP diluted earnings per share handily beating the consensus forecast. Caterpillar continues to benefit from significant pricing power, but the firm is also experiencing volume increases. The firm's adjusted operating profit margin expanded to 20.8% in the third quarter compared to 16.5% for the third quarter of 2022. Caterpillar ended the third quarter with $6.5 billion in cash and cash equivalents, short-term borrowings of ~$4.2 billion, and long-term debt of ~$1 billion and ~$7.6 billion in its ‘Machinery, Energy & Transportation’ and ‘Financial Products’ divisions, respectively. Its balance sheet, while not showcasing a net cash position, remains very healthy, in our view, especially in the context of its free cash flow generation. Through the first nine months of 2023, the maker of mining and construction equipment’s cash flow from operations soared to ~$8.9 billion, as it shelled out just ~$1.06 billion in capital expenditures, a number that excludes equipment leased to others (~$1.2 billion). Free cash flow generation at the firm remains excellent, and we like that it continues to focus on dividend growth. We continue to like the pricing power witnessed within Caterpillar’s operations of late, and we’re sticking with our above-market $262 fair value estimate for now.

Feb 17, 2023

Dividend Increases/Decreases for the Week of February 17
Let's take a look at firms raising/lowering their dividends this week.

Dec 24, 2022

Raising Our Fair Value Estimate of Dividend Aristocrat Caterpillar
Image: Caterpillar’s financial momentum is impressive. Image Source: Caterpillar. Things are looking good for Caterpillar, and the company’s free cash flow strength continues to support its payout and Dividend Aristocrat status. Caterpillar’s results are cyclical and exhibit operating leverage, which cuts both ways, but the firm’s pricing power is working wonders on its financials at the moment. Higher dealer inventories due in part to timing and labor shortages, foreign currency headwinds, and weakening dynamics in the residential construction market and in Europe and China are concerns, but the company’s strong performance warrants a fair value estimate increase, in our view. Though we like Caterpillar quite a bit, we’re not looking to add shares to any simulated newsletter portfolio at this time, however.

Mar 11, 2022

Dividend Increases/Decreases for the Week March 11
Let's take a look at companies that raised/lowered their dividend this week.

Feb 19, 2021

Dividend Increases/Decreases for the Week February 19
Let's take a look at companies that raised/lowered their dividend this week.

Feb 8, 2021

Stock Market Outlook for 2021
2020 was one from the history books and a year that will live on in infamy. That said, we are excited for the future as global health authorities are steadily putting an end to the public health crisis created by COVID-19, aided by the quick discovery of safe and viable vaccines. Tech, fintech, and payment processing firms were all big winners in 2020, and we expect that to continue being the case in 2021. Digital advertising, cloud-computing, and e-commerce activities are set to continue dominating their respective fields. Cybersecurity demand is moving higher and the constant threats posed by both governments (usually nations that are hostile to Western interests) and non-state actors highlights how crucial these services are. Retailers with omni-channel selling capabilities are well-positioned to ride the global economic recovery upwards. Green energy firms will continue to grow at a brisk pace in 2021, though the oil & gas industry appears ready for a comeback. The adoption of 5G wireless technologies and smartphones will create immense growth opportunities for smartphone makers, semiconductor players and telecommunications giants. Video streaming services have become ubiquitous over the past decade with room to continue growing as households “cut the cord” and instead opt for several video streaming packages. We’re not too big of fans of old industrial names given their capital-intensive nature relative to capital-light technology or fintech, but there are select names that have appeal. Cryptocurrencies have taken the market by storm as we turn the calendar into 2021, but the traditional banking system remains healthy enough to withstand another shock should it be on the horizon. Our fair value estimate of the S&P 500 remains $3,530-$3,920, but we may still be on a roller coaster ride for the year. Here’s to a great 2021!

Jun 24, 2020

Steel Dynamics Bets Big on North America’s Industrial Economy
Image Source: Steel Dynamics Inc – June 2020 IR Presentation. Investor sentiment towards the steel industry is rebounding as the medium- and long-term outlook for global industrial activity has improved markedly since March 2020. The ongoing coronavirus (‘COVID-19’) pandemic has significantly hampered near-term industrial activity, though major fiscal stimulus packages (made feasible through major monetary stimulus programs) launched in various developed nations could provide some relief. Shares of Steel Dynamics have recovered meaningfully since their March 2020 lows and are trading a tad below our fair value estimate as of this writing. Shares of STLD yield ~3.6% on an annualized forward-looking basis as of this writing and we give the steel maker a Dividend Cushion ratio of 1.3x providing for a “GOOD” Dividend Safety rating. The company has made great strides in improving its financial position over the past several years. We will first provide some background on the fiscal stimulus measures that have either been approved and or proposed in key economies across the world, before digging deeper into Steel Dynamics.

Feb 21, 2020

Dividend Increases/Decreases for the Week Ending February 21
Let's take a look at companies that raised/lowered their dividend this week.