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Making Another Call on Precision Castparts; Raising Our Fair Value Estimate Materially

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Best Ideas Newsletter portfolio holding Precision Castparts (click ticker for report: ) reported solid fiscal third-quarter results Thursday that showed strong top-line and operating-income expansion and left us feeling quite optimistic about its recently-announced acquisition of Titanium Metals (TIE). We’re raising our fair value estimate for Precision Castparts to $246 per share (was $200) on the basis of better future margin forecasts associated with the deal. The metal-bender’s sales advanced 13% from the year-ago period, while consolidated segment operating income jumped at the same pace. Though the firm’s 25.5% operating margin was flat from the year-ago quarter, the most recently-reported period included $18 million in higher corporate and financing expense from its acquisitive activity. For investors in micro-cap peer (and … Read more

Bottom in Sentiment Has Been Reached in Boeing’s 787; Orders for Planes Surge at the Airframe Makers

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What a wild ride it has been for Boeing (click ticker for report: ) in the past few years. In a move widely applauded for choosing to build the incredibly efficient, mostly-composite, revolutionary 787 Dreamliner (instead of a gargantuan super-jumbo like the double-decker Airbus A380), the engineering, development, and production of the plane has been filled with more than its share of costly problems. Not only was the plane delayed at least a half dozen times during the engineering and development of the aircraft to first flight, but the company is dealing with highly-publicized “teething” pains now that the plane is in service. This morning, Europe, Japan and India have joined the US Federal Aviation Administration (FAA) in grounding the … Read more

Alcoa’s Guidance Bodes Well for Aerospace

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Industrial stalwart Alcoa (click ticker for report: ) reported solid fourth quarter results and relatively optimistic 2013 guidance. Revenue exceeded expectations, falling 2% year-over-year to $5.9 billion. Earnings, after excluding several one-off items, were $0.06, roughly in-line with consensus estimates and favorable compared to the same period a year ago. Upstream products continue to feel the pressure of weaker commodity pricing, which has obviously negatively impacted earnings. However, the company has been able to lower its position on the cost curve, leaving it with considerable leverage to the upside in the event of price appreciation. Though upstream revenue remains mostly weak (even with favorable supply/demand dynamics), Alcoa continues to drive strong earnings from its midstream and downstream products, particularly in … Read more

Fiscal Cliff Averted; Aerospace Rallying

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After a volatile December, two of our favorite aerospace names, Astronics (click ticker for report: ) and EDAC Technologies (click ticker for report: ), are rallying significantly after a deal was finally reached to avert the fiscal cliff. Precision Castparts (click ticker for report: ), which had steadily moved higher during the fiscal-cliff ordeal thanks to optimism surrounding its planned acquisition of Titanium Metals (TIE), is also seeing strength today. We assumed both profit taking and overblown fears of defense cuts were the culprit behind the increased volatility, and it seems as though that could be the case. We continue to see substantial upside at these firms thanks to the massive, multi-year commercial aerospace backlogs of the large airframe makers. Our Best Ideas portfolio … Read more

You Are Ahead of the News As a Valuentum Member

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Remember When We Said Economic Prognosticators Were Off Their Rockers? From the September 2012 edition of our Best Ideas Newsletter (see page 2), released September 15, 2012: “Could you imagine if you had listened to bond-king Bill Gross (please note he is not the equity king), Marc Faber (author of the Gloom, Boom & Doom report) or the Economic Cycle Research Institute (ECRI), which called for a recession in September 2011 – some 30% in the S&P 500 ago (yes, 30%!). Aside from being incorrect, bearish economic prognosticators fully admit that their expectations have little to do with what may happen to the equity markets in the future (as Bernanke’s unlimited QE has shown). Still, such admissions do not stop … Read more

FAQ: Why Doesn’t the ‘Percentage Undervalued/Overvalued’ Match Up to the Actual Discount/Premium to Valuentum’s Fair Value Estimate of the Company?

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We view the intrinsic value of a firm as a range, not a single point estimate. So instead of us saying that a company is worth exactly $55 per share, for example, instead we’d say it is worth between $50 (low end) and $60 per share (high end) — think of this range as our margin of safety. We use a margin of safety due to the inherent uncertainty of predicting with absolute precision a firm’s future free cash flow stream — a firm’s future free cash flows determine our estimate of the company’s intrinsic value, and the future is not known yet. As a result, the ‘percentage undervalued/overvalued’ (as shown on our 16-page reports) is calculated by comparing the firm’s current price with the … Read more

FAQ: How Is Your Best Ideas Portfolio Doing This Year?

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At Valuentum, we task ourselves with a tall order. While most investment newsletters compare themselves to a market benchmark, we go one step further. We want to deliver positive returns to you, our subscriber, year after year, in addition to outperforming the market benchmark. Below, we outline a table that shows the outperformance we provided to our members since the time they joined.  So, for example, if you joined as a member on April 13, 2012 our Best Ideas portfolio has offered 3.8 percentage points of outperformance. Or, if you joined on July 13, 2011, our Best Ideas portfolio has offered 22 percentage points of outperformance. Importantly, did you know that, according to Advisor One, only 13% of hedge funds are beating the S&P … Read more

A Dual Focus on Valuation and Yield Is the Best Way to Combat Changes in Future Dividend Tax Rates

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With a potential hike in the dividend tax rate just around the corner, there is no more important time than now for income investors to evaluate their existing portfolio holdings to determine whether they are well-positioned for a higher-tax environment. Assuming there are no changes to the current trajectory, the top dividend tax rate is expected to rise to 39.6% next year (up from 15% currently), and the highest-income earners will see a Medicare surtax on top of that. Evaluate All Aspects of a Dividend Investment First of all, we think those investing in high-yielders (firms) at any price (HYAAP) may be most affected by this change in tax rates. These high-yielders at any price (HYAAP) tend to be favorites of those at or near retirement, particularly given the paltry payouts on fixed … Read more

Boeing Reports Solid Third Quarter; Commercial Aerospace Backlog Remains Strong

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On Wednesday, aerospace giant Boeing (click ticker for report: ) reported excellent third-quarter results that showed solid backlog trends and improving cash flow. We continue to think aerospace is one the strongest sectors in the global economy, boasting significant visibility as a result of the tremendous backlogs of the airframe makers. We do not expect to make a change to our fair value estimate of Boeing at this time. Boeing’s revenue advanced 13% during the period thanks to commercial airplane sales, which jumped 28% on higher delivery volume. Operating earnings rose roughly 6% in its commercial business, while defense earnings were roughly flat from the year-ago period. Excluding pension expense, earnings per share advanced 5% during the quarter. We continue … Read more

Honeywell Shows Continued Strong Execution; Revenue Environment Weakens

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Last Friday, Honeywell (click ticker for report: ) reported mixed third-quarter results that showed weakness in Europe (as expected) but strength in commercial aerospace, infrastructure spending, and oil and gas investments. Though revenue was roughly flat from the same period a year ago, organic sales edged up 2% and earnings per share from continuing operations jumped nearly 40%, though the firm benefited from a more-favorable tax rate in the most recently reported quarter. The company lowered its 2012 revenue guidance modestly, but it only narrowed the range of its 2012 proforma earnings per share outlook to $4.45-$4.50 per share (was $4.40-$4.55 per share), still representing a double-digit increase from last year. Free cash flow for the year is expected to … Read more