Happy Days are Here Again

I love the smell of Napalm in the Morning

Gudovac's price targets remain more or less similar to those of 9-12 months ago. price in paretheses is the current price.

Owners might just observe good prices in the near term future.

The price that follows is Gudovac's buy target. In Green are the Stocks that are close to a buy target.

Red indicates stocks that are have a very long way to drop before Gudovac believes they represent good value.

ABB ($16) buy at $5

AA ($11) - $9

ALS - 30 Euros

AMSC ($28)- $5

CSX ($49)- $44

DOW ($25) - $12

EMR ($46)- $34

GE ($16) - $6

RBC ($57) - $31

Economics - Job Losses versus other Cycles

 Unemployment is a lagging indicator.  This is true. We are going to hear a lot about that as the sell side tries to generate optimism for a glorious recovery. 

Owners should understand the scale and scope of joblessness in the United States today.  Gudovac does not know if a structural change has occured in the workforce, but believes a return to full employment levels of the boom years will take a number of years.  

The following chart, courtesy of CalculatedRisk, describes the percent job losses versus other post-war declines. Clearly we are in a cycle which has some scope and scale differences with any post 1948 cycle.  The red line represents the current cycle. Owners would do well to be prudent and careful these days. 

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Don't Get Massacred !

Gudovac1941@gmail.com

Gudovac on his Methodology and General Investment Thoughts 

Economics - Why did Buffet Buy BNI ?

Warren Buffet successfully made an offer for the 70% of BNI Berkshire does not own.  He made the offer at a 30% premium to the market price. He made the offer 70/30% cash-BRK shares or 100% cash - depending on the seller's wishes.  For the rough purposes of this article, We can therefore consider Berkshire's offer an all cash offer. 

Modern US rail is an immensely profitable business for certain. 

Berkshire is paying more for BNI than BNI was worth at the absolute insane peak of the Market.

Berkshire is paying close to double the low price of just a few months ago. 

Gudovac wrote about CSX a few days before Berkshires announcement.  Gudovac concluded CSX (and likely BNI) would return about 8.37% CAGR to Owners.  It is reasonable to believe that all 4 railroads would produce similar returns for their Owners. A 30% premium suggests approximately a paltry 5-6% CAGR on Berkshire's investment. 

Why would Berkshire pay what appears to be a hefty premium for BNI ?

Berkshire's famous Owners Manual illuminates Buffet's screening tools for acquisitions.  It is useful to examine the salient passages again: 

Gudovac can accept that Berkshire is respecting the principles outlined above.  

Why would Berkshire accept 1/2 the return it gets from the Goldman Sachs preferred  of a year ago ? 

It isn't because Railroads are going to be a booming growth business.  There are some good arguments that Rail will capture market share from Long Haul trucking. However, these market share gains are likely to be made slowly over many years - perhaps decades.  

Why is he accepting a 5% CAGR ?  Couldn't Warren Buffet negotiate a better deal for BNI ? Why is he making an  all cash offer ? 

Perhaps it is because Warren Buffet doesn't want cash.

Perhaps Warren Buffet believes holding cash, and especially dollars, is making a high risk bet with little upside and plenty downside. 

Perhaps Warren Buffet has concluded that hard assets are going to become very valuable in relative to Cash Dollars.  Railroads are the ur-hard asset enterprise. 

Warren Buffet by buying BNI has simply switched his dollars holdings into hard assets in one fell swoop.  

Brilliant. 

Owners can reasonably conclude that Warren Buffet has determined Dollars are going to lose value 'significantly' and 'soon'. 

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Don't Get Massacred !

Gudovac1941@gmail.com

Gudovac on his Methodology and General Investment Thoughts 

Emerson Electric (EMR) - 4Q Results - Buy Now ?

Management reported their 30.Sept results this morning. They were in line with Gudovac's expectations from last July and August.  Gudovac believes EMR is a well run mature enterprise that will return approximately 6 5/8% to Owners of common when bought at $34. 

Management is restructuring the Enterprise to be nicely profitable with 20-25% lower revenues.  The operating story for Emerson is quite simple - solid. 

The Board of Directors felt confident enough to increase the dividend by 1.5%  Yet, even with the growth in dividends the payout ratio dropped slightly to 50%. 

At $34, Owners would be paying around 1.9x Owners Book Value which is a premium to Gudovac's usual book target of close to 1.0x. However, Emerson should be looked at as a steady dividend payer compared to a Debt instrument.  In some ways, Emerson's dividend might be considered less risky than US Treasuries which are subject to inflation - devaluation risks. In a inflationary-devaluation environment, Emerson's dividends should come close to growing near the rate of US dollar inflation or devaluation. Nearly all of Emerson's expected revenue growth comes from customers outside the USA. 

In sum, not much excitement in today's results. Emerson is a great dividend stock whose Managers have the situation well under control. Owners would do well to examine Gudovac's August 20th report referenced in the first paragraph. 

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Don't Get Massacred !

Gudovac1941@gmail.com

Gudovac on his Methodology and General Investment Thoughts 

Regal Beloit (RBC) - 3Q results Still a Buy at $31 ?

Management released their 3Q results this morning. They are consistent with Gudovac's predictions from September and July.  Regal Beloit has flat lined onto a reduced level of output and profits. Revenues and Operating Income are down 25% y.o.y. Gross margins are up due to a one time benefit from lower material prices. S, G, and A still has not been reduced in line with decrease in revenues.  EBITDA for the quarter is on order of $50 million. 

Most Troubling is the news that Emerging Markets orders are down 28%. This has profound implications for Regal's future growth.  Every other industrial Enterprise Gudovac tracks has increased orders in Emerging Markets, despite the downturn. Regal is an outlier in this respect.  If Regal can not compete in Emerging Markets, then Owners need to be very careful. 

Back to the numbers - Owners can expect the new Regal Beliot to generate for the next 12 months between $130 and $150 million in FCF. This is in line with Gudovac's prediction of $144 million. 

When to Buy Regal ?

The 3Q results indicate very little has changed since Gudovac established his $31 per common as a sensible price to buy.  $31 remains a prudent purchase price. 

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Don't Get Massacred !

Gudovac1941@gmail.com

Gudovac on his Methodology and General Investment Thoughts 

General Electric - 3Q Industrial Results; Dousing the Flames ?

General Electric released their 3Q results a few days ago.   This article will address only the Industrial side of GE. GE capital will be examined in an another article.  Gudovac described the pleasures of hearing GE managers present their results back in July. It is worth quoting Gudovac's thoughts from that article: 

"Gudovac always gets a pleasure from hearing polished Managers presenting quarterly results. These presentations can lull even the most jaded owner into a benign torpor. That Middle American quiet confidence. The array of perfectedly composed charts. The team spirit. The situation at the enterprise in question is always the very model of a modern major general corporation. GE's managers are the unquestioned masters of this craft.

Therefore, one should treat any GE presentation as one would a lush summer pitcher of Gimlets - Enjoyable for certain, but don't even think of driving until the next morning."

Segment Profit and Revenues:

The segment profit and revenue information illustrates the situation at GE.  The most profitable business - NBC with a 17.9% segment margin is being disposed. Gudovac discussed the ramifications of  the disposal of NBC some weeks ago. The 2 remaining Industrial Businesses: Energy Infrastructure with segment margins of 17.7% Technology Infrastructure  at 17.1% are experiencing difficult bookings. 

Gudovac also notes that both Energy and Technology should have higher margins given that an increasing percentage of their revenues derive from high-margin service business.  Owners can reasonably expect further downward pressure on margins in Energy and Technology .

Backlog and Bookings:

The headline of Management's backlog slide suggests the backlog is growing.  Strictly speaking the backlog has grown. The news that CSA backlog is up 3% qtr to qtr to a record $127 billion is welcome. CSA tends to have higher margins than New Equipment. Owners need to be careful about the large increase in CSA backlog. Some Services orders represent multi-year contracts. GE managers are well known for their pushing the limits of conservative accounting practices in recognizing revenue and profit. Gudovac suspects that the CSA backlog is filled with multi-year agreements fully recognized when booked. 

The bad news about the Order Book remains new equipment which is down 8% since year end. New equipment orders have dropped 36% from their peak. Finally, the Book-to-Bill ratio remains under 1.0. Owners can expect top line revenues to continue to shrink over the next few quarters. 

Cash Flow:

'Organic' Cash Flow at GE remains healthy at $11 Billion for the last 9 months.  ( for Managment's definition of Industrial COFA see page 9 of 8-K) Subtract 'normal' CAPEX of approx. $9 billion and ones arrives at a Free Cash Flow of $2 Billion for 9 months.  This works out to approx. $2.7 annualized FCF for the industrial side of the enterprise - call it $3 billion.

Whither GE Capital ? 

Gudovac believes that GE Capital is not going to be cash flow positive anytime soon. Owners can sensibly discount to zero any GEC cash flows for the moment.  GEC is more than likely going to consume cash over the next 36 months. Gudovac estimated, as of last quarter, that GEC would requires  $15 billion of  reserves to cover losses.  $7.3 has been reserved as of 30.September. $8 Billion remains to be reserved to cover loan loses for GE Capital.  Gudovac will examine this GE Capital is a follow up article. Management is "selling" its NBC stake which will generate much of the necessary $8 Billion needed to cover additional loan loses. Therefore, Owners can ignore (to some extent) GEC for the purpose of determining what price to buy. 

Let's give management a free ride on GEC and consider it 'cash flow neutral'

Price to Buy ?

What is a sensible price to buy common shares in a Enterprise that currently generates about $3 Billion of annual Free Cash Flow with more than $500 Billion in Debt ? 

Gudovac thinks about $6 a share. 

True, its pulling a number more or less out of the air - but $3 billion of Cash Flow isn't a heck of a lot to support debt service on $500 billion. 

and  GE does pay a 40 cent dividend...paying six bucks means a 6 2/3% yield.

That seems to be just about right.

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Don't Get Massacred !

Gudovac1941@gmail.com

Gudovac on his Methodology and General Investment Thoughts