Monday, January 26, 2009

Look who is out calling for a stock-market bottom now......?

Unfortunately, the stock-market bottom was subsequently intercepted and returned for a six-points by the other team.

In all seriousness, this chart doesn't look like the "preferred scenario" for many people calling a bottom.....

Sunday, January 25, 2009

XOM long-short idea- Barron's published over the weekend with the title "Buy Oil". Ironic, given the last Barron's cover to blithely beg readers to "buy" anything was its "Buy GM" issue, when the stock was in the teens. Not a good omen, but the proof is in the pudding.

In fact, there may be buys in the oil sector, but they might require more intellectual insight than simply "buying the sector". One idea that stands out slightly is to short XOM (Exxon Mobil). Currently, Exxon is trading at a market capitalization of $400Bln. After netting out $36Bln cash, less $10Bln debt we derive an enterprise value of $375Bln. This suggests that Exxon alone is worth more than 5% of the S&P 500.

Interestingly, at $78/share, Exxon stock is trading roughly 15% below its mid-2008 price (when oil prices were above $100/barrel). Given that oil is close to $50/barrel now, this alone suggests that the price may have further to fall.

Another signal that Exxon may be overvalued is that you could construct an oil conglomerate by purchasing BP($106Bln), Chevron ($144Bln), and Conoco($72Bln) for a combined $322Bln. The combined reserves of this "conglomerate) is roughly 39.2Bln BOE (17.6, 10.8, 10.8, respectively). This reserve total is 73% greater than XOM's reported reserves of 22Bln BOE.

From a revenue standpoint, this "conglomerate" would have generated combined revenue of $886Bln in 2008, vs $457Bln for XOM (94% higher).

While Exxon has the strongest cash position, it is not nearly large enough to justify the valuation differential. Thus, either Exxon is dramatically overvalued, or the other oil companies (collectively) are significantly undervalued. My guess is that the answer is somewhere in between. As such, there is a compelling case for doing a long-short (buying a basket of oil names vs. selling XOM), or simply selling Exxon (buying puts)

Monday, January 05, 2009

Recommendation to buy USM bonds- UZV, UZG, GJH

USM analyis-
Recommendation to buy USM bonds- UZV, UZG, GJH
I previously recommended buying UZV preferred (see earlier post for cursory credit analysis). As a refresher, UZV is a preferred-stock whose underlying asset is 30-year senior unsecured notes of US Cellular (USM 7.5% notes). Based on current price of $15 (60% of par), the yield on this senior note is approximately 12.5%, whereas peer-company bond yields for Verizon, Telefonica, Vodafone, DT (Tmobile), and AT&T average nearly 6.5% (+350bps over 30yr treasury rate of 3%).

US Cellular is a good credit risk, with minimal leverage relative to the underlying value of the business. For example, Verizon recently purchased Alltel (in cash) for $28Bln, which equates to a valuation multiple of $2,500 for each of Alltel's 11Mln subscribers. Although Verizon dramatically overpaid for Alltel, let's assume that US Cellular is worth at least half of this multiple ($1,250/subscriber). Based upon 6.3Mln subscribers x $1,250/subscriber=$7.9Bln implied enterprise value. Since US Cellular has only $1bln in debt and a core business intrinsically worth at least $7.9Bln, its debt is well-protected and safe (by a factor of 7.9x). In addition, the company also owns a 5.5% interest in a major Verizon wireless asset (SMSA LP) that generates an additional $80Mln income per year. I assume this is worth an additional $800 Mln ($80Mln/10% discount rate).

In total, US Cellular's enterprise value is worth $8.7Bln ($7.9Bln for core business + $800Mln for partnerships owned). After subtracting out net debt of $820Mln ($1Bln gross debt- $180Mln cash), the remaining intrinsic value of the equity is $7.9Bln. This equates to $90/share in intrinsic value per share ($7.9Bln/87Mln shares outstanding). Currently, USM stock is at $45/share, which implies a 50% discount to the intrinsic value of the company.

Recommendation- USM bonds appear to have at least 50% upside and are generating significant current income, regardless of whether management maximizes the value of the company. As such, I recommend buying UZV. Full disclosure- I have owned UZV since $11.50 and have been a buyer as high as $14.50. I would only buy the stock if it fell into the $30s (200% upside), as the bonds (traded on NYSE under UZV, UZG, GJH are more attractive and safer at current levels)