Just How Overvalued is ConEd?

There has been a lot of talk about how utility stocks are overvalued, and I agree with it. I thought I would put together a little free cash flow analysis of one of the most well-known of the Utes in order to illustrate the issue: Consolidated Edison (ED).

The resulting link is here; that spreadsheet is my standard sheet, which I try to keep pretty simple.

By my calculation, which is generous in terms of the starting free cash flow figure it gives to ED, you can roughly say that ED is fairly valued if it manages to grow free cash flow at a rate of 4%/year for the next ten years.  That is with no margin of safety.  To buy with a 20% margin of safety you would need to pay $42.82/share, whereas as of this writing it trades just shy of $60.  

But here’s the thing:  ED has had NEGATIVE free cash flow in six of the last ten years!  And if you average out its free cash flow over the last five years, it has averaged about $54.5 million in free cash flow per year.  Keep in mind that my above valuation assumes a starting point of $757 million in free cash flow, because that is the trailing twelve month figure.  I ask you, do you think ED is going to do 4% free cash flow growth for the next ten years, from that baseline?  Morningstar, it should be noted, does think ED will have positive free cash flow through 2016, four more years, so that at least is something.  But I think it’s a little optimistic to think that Ed is going to grow this much, and there is certainly no room for error.

Oh and the dividend yield is about the same as Intel’s as of this writing.

No thank you.

Abbott Labs Is Cheap, Not Quite Cheap Enough

Please see my latest post, in which I do a brief analysis and valuation of Abbott Labs.  Abbott has been in my portfolio since early 2010.  I conclude that while my previous investments have strongly outperformed the index (I added in January 2011), right now the stock is no more than 11% undervalued, which means it is not a buy for me.  I also briefly analyze the Humira situation, and conclude, as many have, that AbbVie is likely to be dumped by people after the spin-off.  At that time, AbbVie may present a short-term opportunity, as pessimism may well price in all of the potential downside and then some.  See the full piece here.

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ExxonMobil Remains a Buy Below $80/Share

I’m continuing my process of reevaluating all current positions.  I conclude in this recent article that I still really like ExxonMobil.  At $84/share I think it is undervalued, but not quite at my margin-of-safety buy level, based upon my discounted free cash flow analysis, which says it’s worth about $100/share.  Accordingly it’s a great buy at $80/share or below, and it’s a strong, strong buy below $70/share.  For the full article and link to my calculations spreadsheet, see the link above. 

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Yup, Intel Remains a Great Buy

In my new article I talk about why I think that Intel remains a great buy, despite its recent share-price appreciation.  As always huge risks exist, but I think the company is at the current price of around $28/share, because it is 20% or greater below my best guess as to the fair value of the company, of $35/share.  I also highlight the three best analyst questions from the recent conference call, and I express my worries about recent stock options/sales by the CEO.  For my full article, see here.

Procter & Gamble Has More Problems Than You Think

I have been holding stock in the so-called Obvious Buy, Procter & Gamble (PG), for nearly six years.  While it did not tank during the financial crisis, it has essentially gone nowhere.  So has its free cash flow…gone nowhere that is….

Now I have a new premium article on Seeking Alpha in which I put a somewhat gloomy valuation on PG of $63/share.  I also look at the seemingly-permanent damage to some of its profitability metrics such as return on assets, which has occurred since the merger/buyout of Gillette in 2005.  And I hypothesize that what ails PG is most likely its inability over last half-decade to fruitfully digest that Gillette transaction.  Yet another case of corporate empire-building gone awry. 

For the full article see here.

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McDonalds Is Worth More Than You Think

Also check out Seeking Alpha for my new premium post on McDonalds.  McDonalds is investing in growth and therefore it’s appropriate to do a modified free cash flow analysis that takes into account new investments in growth.  This shows McDonalds’ free cash flow growth is much stronger than it otherwise looks!

Intuitive Surgical: Updated Analysis

I just published an updated analysis of Intuitive Surgical (ISRG) on Seeking Alpha.  Please take a look!  In short, while I am pleased with my prior purchases, I think the stock is even more richly valued than when I bought in, and at this point I plan to hold and look for a pullback before buying any more.

Coke is Fairly or Over Valued

Please go to Seeking Alpha to see my new Seeking Alpha Premium analysis of Coke.  I conclude it is at best fairly valued, though it is never a bad idea for one’s portfolio.  For the article see here.

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A Few Brief Thoughts On Coke. Er, Hold, Not a Buy

I’m running through my holdings, evaluating my thoughts on them.  And so.  A few brief thoughts on Coke…..

I think both Coke and Pepsi seriously hampered their profitability by purchasing their bottlers.  For Coke the changes in ROE and ROA were Tony S.T.A.R.K.  Serious drop.  But what I’m really interested in here is free cash flow.  (Related, over the long term.)  As that linked-to sheet shows, if you assume a 10% discount rate, and growth only equaling what we have seen annualized in the last nine year (i.e., no slowing), so, 6%, then he stock is only fairly valued.  And THAT’S if you assume a 7% WACC for your discount rate, brother!

If you assume a 10% discount rate, which is what I’m generally using, you get a situation whereby Coke is SERIOUSLY over valued.  Now, I like WACC.  If the WACC is 7%, I’ll use 7% as the discount rate, because das da WACC.  But it is EXTREMELY hard to construct a scenario whereby this puppy is a buy.  My buy price if $60.  My sell price is $90.  (We are, today, at $73.82/share.)

I will continue to hold for now, but as strange as it might sound to you, Coke is on my list of things to potentially get rid of if a better opportunity presents itself.  Now I bought in at $45/share during the crisis.  And I don’t like paying capital gains taxes.  And I don’t like paying commissions.  But I’m, just, saying.  Not a buy.  A definite hold only as of today, based on FCF through 11/2012.

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