First Solar Upgraded by Goldman Sachs, Resulting in a Nice Jump!

Today, First Solar got upgraded by Goldman Sachs.  If you've been keeping up with my posts on First Solar, you'll know that my feeling towards the stock has been essentially reiterated by Goldman.  I quote, "First Solar is our top pick based on one of our key themes for solar stocks in 2011: owning long-term structural winners that are low-cost, well-funded producers with visible demand and credible capacity growth."

Since Goldman Sachs is such a powerhouse in the financial world, this resulted in a nice 6% jump in the stock.  If you look at the chart below, you can see that the stock has broken the $152 resistance, and with conviction (large volume)!  The upcoming weeks will be crucial in seeing how well the stock holds above the resistance level.  If you start to see the $152 mark turn into a support (i.e. when the stock drops, it swiftly bounces back up from this level), then it is likely the stock will go significantly higher.  Of course, this is based on technical analysis...but the fundamentals are there to justify the nice jump upwards.

Figure 1: First Solar (FSLR) 1-Year Chart

I have to confess that I haven't updated my Rule #1 spreadsheet for First Solar lately, but from keeping abreast with earnings, etc., I'm pretty sure it's still below sticker price...probably way below.  Maybe you can run an analysis and see if you should own this "wonderful" company!

Rule #1 Analysis Blitz #10: Coca-Cola (KO)

This is the concluding post of the Rule #1 Analysis Blitz Series.  I had intended to write 10 posts in 10 weeks, but due to sickness and various other reasons, I was unable to stick to that goal.  Luckily, I was only behind a week or two.  So, I'll give myself 8 out of 10 for punctuality! :)

This week, I'll end with the company with which everyone is familiar: Coca-Cola (Ticker: KO).  Coca-Cola happens to be one of Warren Buffet's favourite companies and we will explore why that is the case.  Let's see if it meets Rule #1 standards!

Moat

You can download the completed Rule #1 spreadsheet here.

Coca-Cola is the ultimate example of a company with a brand moat.  Time after time, Pepsi has shown through blind taste tests that people generally prefer the taste of Pepsi.  However, most people I know, when ordering fast food, will order a "Coke" and not a "Pepsi".  When it happens that the fast food place only sells Pepsi, I get a little annoyed when I'm asked, "Is Pepsi ok?", when I asked for a Coke.  Heck, I don't even know if there's any difference in the taste, but just the thought that I'm not going to get a Coke frustrates me.  I won't go much further, but I think you understand well the power of Coca-Cola's brand.

Looking at the numbers, they look pretty darn good.  Considering Coca-Cola is a more than 100 years old, the growth is pretty spectacular.  ROIC is very high in the high teens to low 20s for the past 10 years.  EPS growth is at an impressive 14.3% over last 9 years.  BVPS and free cash flow growth are both excellent.  The only yellow flag I have is sales growth.  Sales dropped a bit last year and grew at single digits for the past decade.  As I said, this is a mature company, the sales growth numbers are not bad.  However, this is truly a yellow flag.  This trend cannot continue indefinitely.  If sales growth is slow, EPS growth will eventually slow because gross/operating margins cannot increase indefinitely towards 100%.  And of course, we all know that earnings is pretty key in the valuation of a stock.  So, it can be expected that, unless sales growth accelerates, EPS growth will likely decrease to the levels of sales growth.

Recently, Coca-Cola bought the North American operations of Coca-Cola Enterprises, which is the bottling company for Coca-Cola's products.  This is seen as a move to gain more control of how product move through the pipeline and also to enable better adoption of non-carbonated drinks as demand shift.  So, management sees this as a move to accelerate revenue growth.  At least, Coke knows what requires work in their numbers!

Coca-Cola gets a 10 for the qualitative portion of Moat, but overall, I'm going to give it an 8.

Moat Score: 8 / 10

Figure 1: Rule #1 Analysis of Coca-Cola (KO)

Margin of Safety

Unfortunately, Coca-Cola is overpriced right now.  At $63 right now, the stock has a P/E ratio of 19.4.  It's fairly high for a company whose EPS growth has been single digits.  For comparison, Apple (Ticker: AAPL) has a P/E of 22 right now and its year-over-year EPS growth was 78%!

Using somewhat conservative numbers of EPS growth of 9.0% and P/E ratio of 16.7, we come up with a sticker price of $33.03 and entry price of $16.52.  So, the share price is almost double that of its current value and almost 4 times that of its entry price!

Payback time is also at 10.9 years, which is way too long for stockpiling of the stock.

Coca-Cola gets a 2 out of 10 for Margin of Safety.

Margin of Safety Score: 2 / 10

Management

Muthar Kent is the CEO and Chairman of Coca-Cola.  He has a long track record with the company, starting his employment there as an entry level employee some 30 years ago.  He worked his way up the ranks, left the company for about 6 years in the late 90s to mid 2000s, and finally returned to Coca-Cola and assumed the CEO position in 2008.

Kent comes from an interesting and noble background.  His father, Necdet Kent, is nicknamed "Turkish Schindler" for helping saved many Jews during the second World War.  Kent was born in New York City, when his father was consul-general there.  He grew up in Turkey, was educated in the UK, and worked in the US (later back in Turkey).  He definitely has led a cosmopolitan career, which is almost a requirement for the CEO of such an international company.

Kent has ownership of about 68000 shares of KO, which is worth about $4.3 million.  If you compare this to ownership of, say, Google executives, this is peanuts.  Is this a cause for concern?  Maybe...But do keep this in mind: Kent only rejoined Coca-Cola a few years back and has been CEO for less than 3 years.  Also, he has not sold many KO shares recently.  So, my guess is that he has only started to accumulate his ownership of KO shares.  As much as most of us think executives of big companies are billionaires, they are probably far and few between.  These billionaires are likely produced "overnight", when their creation transformed from a startup to being an industry stalwart within a few years (read Microsoft, Google, Facebook, etc.).  Kent is not one of these billionaires! His net worth, I'm guessing, is probably around $20 to $50 million.  Having $4 million, or 8 to 20% of ones net worth in his own company stock is probably pretty significant.

Looking from all angles, Kent seems to be a trustworthy, reliable, and ethical leader.  There is some degree of uncertainty due to his short tenure as CEO at Coca-Cola, but I believe in the years to come, he will demonstrate his leadership.

Management Score: 8 / 10

Meaning

Who doesn't like Coke in this room?  Didn't think there were many of you!  Unlike some people I know (my cousin), I don't live on Coke.  It takes a couple of parties at my house to clear out the 2 cases of Coke in my basement, but that is exactly the power of the brand.  I consume maybe 1 to 2 Cokes in a month, and yet, I still have 2 cases of it sitting in my basement.  It is the universal beverage!  When someone comes over to your house, what do you offer them as a drink?  It's either a coffee/tea (depending on your ethnic background) or a Coke.  Coca-Cola is universal.  Does it have meaning to me?  You bet!

On the ethical side of things, is the drink itself ethically positive, negative, or neutral?  No one has ever praised Coca-Cola for being a healthy drink.  It has plenty of calories, lots of sugar, some caffeine, etc.  Diet Coke or Coke Zero is no better.  Just the thought of drinking something tasty but has zero calories tells me something is wrong.  However, many products out in the world are not good for you.  You can argue that oysters are not good for health because they have high levels of cholesterol.  But as with all things, Coke needs to be taken in moderation.  Like myself, I can freely enjoy a Coke whenever I have it, because I don't drink it 3 times a day.  So, I don't necessarily buy the argument that because Coke does not contribute positively to your health, then it is an unethical product.  The product itself is neutral at worst.  Having said that, Coca-Cola also produces healthier products like Minute Maid, Dasani, Nestea, Powerade, etc.

Coca-Cola is a company that supports gay/homosexual rights.  I talked a bit about this issue in my Google post.  Although this is not something Catholics would like to see, it is not something that would cause the USCCB to withdraw its investment funds.

There has been some complaints in Coca-Cola's business practices.  One example involves a Coca-Cola bottling plant (which may not even have been owned by Coca-Cola, but rather, Coca-Cola Enterprises, which is a separate company...but, we'll assume Coca-Cola is the culprit) in India where the bottling plant has caused a decrease in groundwater, in an already poor area.  Another example is allegations that union activists were dealt with in a violent manner in Latin America.  Where there's smoke, there is fire...so, I'm sure that these allegations have some merit.  In a corporation as large as Coca-Cola, you can be sure to find some part of the company that has less than desirable business practices, especially in developing countries.  This is not to give Coca-Cola an excuse, but it does not appear that the problem is systemic.  In North America and Europe, Coca-Cola has had a good reputation in its business practices and all-in-all, I don't see too great of a concern over the company's ethics.

Meaning Score: 6 / 10

Summary

Moat Score: 8 / 10

Margin of Safety Score: 2 / 10

Management Score: 8 / 10

Meaning Score: 6 / 10

OVERALL (not an average): 4 / 10

If only the shares were not overpriced, I'd probably invest in Coca-Cola too.  Warren Buffet has about $11 billion in Coca-Cola.  So, there's probably some merit to owning KO.  I'd wait for a dip in price!

And so, this concludes my Rule #1 Analysis Blitz.  If you've enjoyed it and would like to see more, please leave me a comment and also the company you'd like to see.  I'm probably going to continue this kind of post, but it'd be done in a lesser frequency.  I'm also open to constructive criticism!  Thanks for reading!

Rule #1 Analysis Blitz #9: Exxon Mobil (XOM)

As you may have noticed, many of the stocks that I picked for my Rule #1 Analysis Blitz were tech stocks.  It wasn't really on purpose, but this is what Rule #1 is all about.  It's about stocks that have meaning for you.  To me, a youngish male engineer, tech is where it's at!  It's probably not a good thing since we want to diversify in our portfolio.  We want top-notch Rule #1 stocks, but preferably companies in different industries.  A good mix may include a stock from each of the following industries: tech, energy, healthcare, retail, banking/finance.  In my own portfolio, I have 3 out of 5 categories...so I'm trying.

So, in this post, we're going to shift gears a little bit and head to something I'm not too familiar with: an energy stock!  Let's choose the biggest one...in fact, let's choose the world's biggest company by market capitalization: Exxon Mobil (Ticker: XOM)!  If you don't know what Exxon Mobil does (which I doubt), in short, it drills for and sells petroleum and lots of it!

Moat

You can download the completed Rule #1 spreadsheet here.

Oil is a commodity.  It doesn't matter whether Exxon Mobil, Shell, or BP makes it; oil is oil.  You hear about the price of crude going up.  Yep, that's the price of crude oil, regardless of its maker.  As long as its composition falls within some specification, it's considered to be the same stuff.  That's the essence of a commodity.  Phil Town doesn't like investing in commodity or commodity stocks.  Why?  The profits are highly subject to the price of the commodity.  As you'll soon see, Exxon Mobil is no exception.  But why is that a bad thing?  Well, when you invest in a company, you'd like the company to be in more control of its destiny.  If you own a commodity stock, even a very well run company can suffer if, through no fault of its own, the price of its product falls.  So, first off, the fact that Exxon Mobil sells a commodity warrants a couple of points being docked off.

A second disadvantage of selling a commodity is the absence of a moat in the product itself.  Unlike shopping for the Apple iPod, you can get the same oil if you went next door to Shell or BP; you can't get an iPod from Sony, Creative, or Sandisk! 

The only real moat that a company like Exxon Mobil can have is its cost structure, much like Walmart has.  If it can make commodity items at a much cheaper price, it can make much more money than its competition.  Let's see if Exxon's numbers show this.  Last year's numbers were bad, real bad.  We had a couple of yellows and 3 negative growth numbers.  Sales, EPS, and free cash flow all declined from previous years.  Looking farther back, the 5-year numbers look a little better, but not by much.  ROIC is the only number that is above 10%.  The rest are below that threshold and free cash flow continues to decline.  Ditto for 9-year numbers.

Looking a little deeper, you'll see in Figure 2, the EPS history of the last 10 years.  You will notice that EPS dropped significantly in 2009 and 2002, which happens to be the end of the last 2 bull cycles.  So, Exxon Mobil is a highly cyclical stock which depends greatly on the economic circumstances of the day.  I'm not an economist and therefore, I cannot see what's going to happen to the macroeconomic environment a year from now.  Sometimes, even the experts can't tell.  So, why pick a business where it depends largely on this great unknown?  Rule #1 investors want to find companies that do well regardless of the economy.  Obviously, no company is immune from economic downturns, but you want some kind of trend or moat to help defend against economic uncertainties.

Exxon Mobil doesn't have much of a moat, but it has been a profitable company for the last 10 years.  So, it does have some merit.  If you can get in at a good price, the stock may produce good gains for you.  But let's continue in our analysis before we get to that.

Exxon Mobil gets a 3 out of 10 for Moat.

Moat Score: 3 / 10

Figure 1: Rule #1 Analysis of Exxon Mobil (XOM)

Figure 2: EPS History of Exxon Mobil (XOM)

Margin of Safety

To calculate the margin of safety, I used an estimate growth of 8.3%, which was the analysts' estimate, and a P/E of 12.  For a company like XOM, the growth of earnings is not very predictable.  If the price of oil skyrockets, its earnings would do the same.  Conversely, if the price of oil tanks, the revenues generated by selling it may not cover the costs of running drills, refineries, etc. and the company may end up losing money.  Some already believe that we have reached "peak oil", which is the term that designates when the overall worldwide consumption of oil will start to decrease as time passes.  If this is true, the macro conditions may not bold well for Exxon Mobil.  However, Philip Morris (Ticker: PM) is in a similar situation with number of cigarette smokers declining, but still managing to grow its business.  So, Exxon Mobil may still be able to do the same.

In any case, the sticker price calculated was $37.13 and entry price was $18.57.  The stock is currently trading in the $70s.  There is a large gap between those numbers.  Even if the growth rate were15% and P/E were 20, the entry price would still only be at $56.40, which is lower than the current share price.  There's absolutely no margin of safety for this stock.  Stay away!  2 out of 10!

Margin of Safety Score: 2 / 10

Management

Rex W. Tillerson is the CEO of Exxon Mobil.  He joined the company in 1975 as an engineer.  That was before I was born!  If anything, Tillerson has shown to be very loyal to the company.  Over the years, he has moved steadily up the ranks in the company, until he was elected as CEO in 2006.

It was recently reported that he owned about 1.5 million shares of Exxon Mobil, which equates to about $113 million!  There also hasn't been any recent selling of shares of a significant value.  So, things look good from an ownership standpoint.  He has a large amount of money vested in the company and doesn't seem to be offloading much at this time.

Just recently, Tillerson was awarded the Corporate Citizenship Award by the Woodrow Wilson International Center for Scholars.  It was awarded for his and Exxon's work on improving education, empowering women, and fighting malaria in developing countries.  Seems like an all-around nice guy!

Although there was not much that I could find on Tillerson on the internet, from what I could find, he is a leader who has earned his position at the company, is very loyal, and has vested interest in the company.  Pretty good if you ask me!  I'll give him an 8 out of 10.

Management Score: 8 / 10

Meaning

After Al Gore lit up a fire on the topic of climate change in his Inconvenient Truth, there has been increased momentum to increase adoption of renewable energy and to decrease impact of fossil fuels.  Complement this With the recent BP oil spill in the Gulf of Mexico and the high cost of gasoline, oil companies have definitely shifted into the role of the antagonist.  Oil, in and of itself, is a good thing.  It gives us things like fuel, plastics, asphalt, etc.  Rather, it is our use (or mis-use) of oil that may present ethical concerns.

The USCCB socially responsible investment guidelines have a category specifically on protecting the environment.  So, if we determine that Exxon Mobil's business has an adverse effect on the environment, we may not want to invest in it.  About 81% of each barrel of oil goes into making fuel including gasoline, jet fuel and diesel fuel, all of which produce carbon dioxide when burned.  Is it unethical to produce a product that contributes to global warming?  Well, is it unethical to drive a car that burns gasoline?  It's sort of in a grey area, but there is some responsibility on all parties, whether it is Exxon Mobil making the fuel or the end user burning the fuel.

Exxon Mobil is an oil company, but it can also be argued that it is an energy company.  Unlike its counterparts, such as British Petroleum, it invests relatively little in renewable energy.  It was also alleged that it funded global warming skeptics.  Exxon Mobil itself was ranked poorly by the Political Economy Research Institute as a pollutant emitter.  Overall, Exxon Mobil does not have a very good image in terms of protecting our environment.

In the end, is Exxon Mobil harming our environment?  Directly...probably, with its own emissions.  Indirectly...absolutely, because its main products are fuels.  What is worse is that it has very interest in shifting its own paradigm from fossil fuels to renewable energy.  It is both harming the environment, and also not striving to protect it.  It gets a 3 out of 10 for Meaning.

Meaning Score: 3 / 10

Summary

Moat Score: 3 / 10

Margin of Safety Score: 2 / 10

Management Score: 8/ 10

Meaning Score: 3 / 10

OVERALL (not an average): 3 / 10

The only good score that Exxon Mobil obtained was Management.  Otherwise, this company is most definitely not "investable"!  It has little moat because its products are commodities; the stock is overvalued; and it is not the most environmentally friendly company out there.  I'd stay away from it!