tag:blogger.com,1999:blog-80222511777298599532024-02-20T17:03:29.019-06:00Value and YieldNicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.comBlogger32125tag:blogger.com,1999:blog-8022251177729859953.post-44891964677854503092011-05-14T18:46:00.000-05:002011-05-14T18:46:46.809-05:00Reading List - May 14, 2011<strong><u>YUM! bids for Little Sheep</u></strong><br />
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YUM! (ticker: YUM) bids for Little Sheep. Little Sheep is a "hot pot" concept restaurant based in China. Customers essentially dip vegetables in boiling broth. YUM has been betting on growth in the China market since the 1980's when introducing the Kentucky Fried Chicken brand to China. The company has changed the image of its US brands to fit Chinese preferences and has been successful. Simply, going to a KFC or Pizza Hut in the United States is completely different than going to one in China.<br />
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From a business standpoint, this makes sense. Acquiring the brand completely gives the company increasing exposure to the Chinese consumer. It can also bring the brand to the United States. Asian style food is definitely on the rise of consumer preferences in the United States, as evidenced by brands like Panda Express or Flat Top Grills expanding.<br />
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<em>U.S. Fast-Food Giant Yum Bids for Chinese Chain (</em><a href="http://www.nytimes.com/2011/05/14/business/global/14yum.html?_r=1&ref=global"><em>click here</em></a><em>)</em><br />
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<strong><u>Stocks vs. commodities</u></strong><br />
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From CNBC:<br />
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<div class="textBodyBlack"><span id="byLine"></span><span style="color: blue;">Commodities have lost their luster for leading investment strategists on fears that global economic growth, particularly Chinese demand, may be lower than previously expected.</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue;">"While we would wait for a better entry point, we believe the cyclical bull market in equities is not over and would buy any summer weakness in stocks, Michael Hartnett, Merrill Lynch's chief global equity strategist, wrote in a report, in which he favors U.S. and emerging markets over Europe and Japan. </span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue;">Defensive stocks are preferred to cyclical ones, JP Morgan said, arguing that the economic indicators show the global manufacturing sector is experiencing an inventory correction similar to the one seen around the middle of last year. </span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue;">Defensive stocks are not the only ones that should perform well this year, according to Merrill Lynch. Companies with strong and stable profit growth are also expected to thrive as corporate earnings decelerate in general and the Federal Reserve prepares to reduce monetary stimulus, it said.</span> </div><br />
<em>Time to Move Some Money from Stocks to Commodities (</em><a href="http://www.cnbc.com/id/43017057"><em>click here</em></a><em>)</em>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-70873192515190629242011-05-03T06:54:00.000-05:002011-05-03T06:54:12.274-05:00Reading List - May 3, 2010<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">"Negative Outlook" is not even close...</span></u></strong><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Martin Weiss, Weiss Ratings, appeared on CNBC. According to Weiss Ratings methodology, the US sovereign rating should be 'C' or similar to a BBB rating given by either Moody's or S&P. The 'C' rating is based purely on statistics and there are no qualitative factors considered. The only way to get ourselves out of this mess it appears is to cut government spending (i.e. reform entitlements) and enact pro-growth policies. No nation is history has taxed its way to prosperity. According to Weiss on CNBC:</span><br />
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<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">A 'C' is equivalent to approximately a triple-B on the S&P, Moody's and Fitch scales. It's two notches above junk and one notch above the equivalent of a single A," Martin Weiss, President of Weiss Ratings, told CNBC Tuesday.</span><br />
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<div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Weiss was quick to add that while the rating seems weak, the debt situation is not in a danger zone that would trigger panic, noting that there was still broad market acceptance for Treasurys.</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">The grade reflects the U.S. massive debt burden, low international reserves and the volatility in the American economy, he said.</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span style="color: black; font-family: "Trebuchet MS", sans-serif; font-size: x-small;"><strong><u>David Einhorn: The Fed's Policy is Backfiring</u></strong></span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">To quote CNBC:</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">A recent letter from Einhorn's Greenlight Capitol argues that fear of inflation is causing investors to sell bonds and avoid housing, leading both to slump. </span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Inflation fears are also driving up commodities prices, the letter argues.</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">From the letter:</span></div><blockquote><div class="textBodyBlack"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Here in the United States, our fears that quantitative easing would be a net harm to economic activity appear to be playing out. The prices of things people actually pay for including food, energy and healthcare continue to go up at an accelerated pace ... </span></div></blockquote><blockquote><div class="textBodyBlack"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">While Chairman Bernanke claims that quantitative easing has succeeded in raising stock prices, it seems that equities have gone up for the opposite reason he proposed. According to Mr. Bernanke, Federal Reserve purchases of government bonds were supposed to raise their price so that they would be less attractive than other investments, including housing and equities. Investors would note the disparity and “rebalance” their portfolio to buy more houses and stocks, which would appear cheap compared to higher bond prices. This would support the housing recovery and make the equity market rise. </span></div></blockquote><blockquote><div class="textBodyBlack"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Instead, it appears that in response to quantitative easing, investors now fear inflation and have sold bonds. Interest rates have risen and housing prices have declined further. The housing recovery has faltered, creating another negative wealth effect and putting additional strain on the banking system. The money that the private sector would have lent to the government, had the Federal Reserve not printed the money instead, has gone to other goods, notably commodities and stocks to the extent investors see them as a better inflation hedge than bonds. Though the Federal Reserve has produced “research” that purports to show that quantitative easing has not caused commodity prices to rise, many observers disagree. As the Bank of Japan put it in March, “[I]t is safe to say that globally accommodative monetary conditions are a key driver of the rise in commodity prices by stimulating both physical demand for commodities and investment flows into commodity markets.” </span></div></blockquote><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">David Einhorn: The Fed's Policy is Backfiring (</span></em><a href="http://www.cnbc.com/id/42862444"><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">)</span></em><br />
<em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Full letter (</span></em><a href="http://www.marketfolly.com/2011/05/david-einhorn-covers-some-shorts-buys.html"><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">)</span></em><br />
<div class="textBodyBlack"><span style="color: black; font-family: "Trebuchet MS", sans-serif; font-size: x-small;"><strong><u>Higher rates mean severe recession</u></strong></span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">According to this strategist, it may be time to end the ultra-low interest rate policy central banks around the world have pursued. Recently, the economy has underperformed what should be expected out of the economy. This strategist believes a slowdown will occur in the fall. The difference between this slowdown and the last slowdown is central banks will be raising rates going into it which may make the recession that much deeper.</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Higher Rates Mean Severe Depression (</span></em><a href="http://www.cnbc.com/id/42873564"><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">)</span></em></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Jack Welch on "free money"</span></u></strong></div><br />
<span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Jack Welch essentially believes the easy money policy of the Federal Reserve will cause problems, as "free money" in the hands of smart people causes problems. To quote Welch on CNBC:</span><br />
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<div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: x-small;">"Free money in the hands of very smart people for too long is going to create something that's not very pleasant," Welch said. "I don't know what it exactly is. But every time we get free money to lots of people who are very, very smart and know how to use it you end up with a bubble or a problem that we don't quite see in front of us."</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">'Free Money' About to Cause Big Problem: Welch (</span></em><a href="http://www.cnbc.com/id/42857171"><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">)</span></em></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Stocks signaling inflation</span></u></strong></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">Typically, stocks underperform when inflationary expectations increase. This time around it is different. As commodities prices keep rising, stocks are rising as well. So, is economic theory actually playing out?</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">What Are Stocks Saying About Inflation? (</span></em><a href="http://www.cnbc.com/id/42862451"><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: "Trebuchet MS", sans-serif; font-size: x-small;">)</span></em></div>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-57413401712420216832011-05-01T10:06:00.000-05:002011-05-01T10:06:50.165-05:00Reading List - May 1, 2010<span style="font-family: Verdana, sans-serif; font-size: x-small;">Besides, I cannot believe it is already May, I have added some new articles of interest...</span><br />
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<strong><u><span style="font-family: Verdana, sans-serif; font-size: x-small;">The Woodstock of Capitalism</span></u></strong><br />
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<span style="font-family: Verdana, sans-serif; font-size: x-small;">Warren Buffett, annual shareholder meeting has been going on. Highlights include:</span><br />
<ol><li><span style="font-family: Verdana, sans-serif; font-size: x-small;">Buffett is taking a hard line against the David Sokol/Lubrizol incident. He has said that he should have been more vigilant in knowing about Sokol's trades.</span></li>
<li><span style="font-family: Verdana, sans-serif; font-size: x-small;">His successor, although not named, is "straight as an arrow."</span></li>
<li><span style="font-family: Verdana, sans-serif; font-size: x-small;">Due to Japanese earthquake, Berkshire may have to incur the first underwriting loss in years</span></li>
<li><span style="font-family: Verdana, sans-serif; font-size: x-small;">The "elephant gun" is still loaded. The Sokol/Lubrizol incident will not slow Buffett down and look forward to future deals. Most likely, the deals will be overseas (i.e. India)</span></li>
<li><span style="font-family: Verdana, sans-serif; font-size: x-small;">Berkshire's value would go down if Berkshire paid a dividend. It would signal to the market Mr. Buffett could not re-invest capital at a high enough hurdle rate.</span></li>
</ol><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">Buffett Still Stands To Build Wealth for Shareholders: Gabelli (</span><a href="http://www.cnbc.com/id/42822917"><span style="font-family: Verdana, sans-serif; font-size: x-small;">click here</span></a><span style="font-family: Verdana, sans-serif; font-size: x-small;">)</span></em><br />
<em><span style="font-family: Verdana, sans-serif; font-size: x-small;">Berkshire Gets Tough With Sokol As Meeting Nears (</span></em><a href="http://dealbook.nytimes.com/2011/04/28/as-meeting-nears-berkshire-gets-tough-with-sokol/"><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">)</span></em><br />
<em><span style="font-family: Verdana, sans-serif; font-size: x-small;">Berkshire May Have Underwriting Loss on Disasters (</span></em><a href="http://www.bloomberg.com/news/2011-05-01/berkshire-may-have-first-underwriting-loss-in-nine-years-after-disasters.html"><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">)</span></em><br />
<em><span style="font-family: Verdana, sans-serif; font-size: x-small;">Guessing Game Builds Over Buffett's Next Deal (</span></em><a href="http://dealbook.nytimes.com/2011/04/28/amid-scandal-guessing-game-builds-over-buffetts-next-deal/"><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">)</span></em><br />
<em><span style="font-family: Verdana, sans-serif; font-size: x-small;">Berkshire Stock Would Drop If Company Began Paying Dividend (</span></em><a href="http://www.bloomberg.com/news/2011-04-30/berkshire-hathaway-stock-would-fall-on-dividend-declaration-buffett-says.html"><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">)</span></em><br />
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<strong><u><span style="font-family: Verdana, sans-serif; font-size: x-small;">Bernanke & inflation</span></u></strong><br />
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<span style="font-family: Verdana, sans-serif; font-size: x-small;">I couldn't agree with this analysis anymore! From CNBC:</span><br />
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<div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: Verdana, sans-serif; font-size: x-small;">...But quantitative easing does seem to be doing a good job of creating inflation expectations. As Larry Kudlow pointed out yesterday, “inflation-sensitive market-price indicators — like rising gold, oil, and commodity indexes, and the falling dollar exchange rate — are trying to signal higher future inflation.” </span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: Verdana, sans-serif; font-size: x-small;">I suspect that the cause of this breach between inflation expectations and reality is that we have so little experience with these unconventional policies. Markets understand pretty well how to anticipate the future consequences of the ordinary Fed policies like targeting interest rates. But the very newness of quantitative easing means that the outcome is difficult to predict...</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: Verdana, sans-serif; font-size: x-small;">The irony is that nearly everyone is misreading what has happened. </span></div><div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: Verdana, sans-serif; font-size: x-small;">What Bernanke is worried about is not that we’ll get too much inflation—he knows he can just put a stop to inflation by hiking rates—but that anticipation of inflation will get out of hand. And that is something he cannot directly control.</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><em><span style="color: black;"><span style="font-family: Verdana, sans-serif; font-size: x-small;">Inflation Expectations and New Monetary Policy (</span><a href="http://www.cnbc.com/id/42800967"><span style="font-family: Verdana, sans-serif; font-size: x-small;">click here</span></a><span style="font-family: Verdana, sans-serif; font-size: x-small;">)</span></span></em></div><div class="textBodyBlack"><br />
</div><strong><u><span style="font-family: Verdana, sans-serif; font-size: x-small;">Is the silver rally sustainable?</span></u></strong><br />
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<span style="font-family: Verdana, sans-serif; font-size: x-small;">From marketwatch.com:</span><br />
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<span style="color: blue; font-family: Verdana, sans-serif; font-size: x-small;">We have now entered just the beginning of the third [and final] phase of the bull market in precious metals” — the phase in which everyone has become aware of the bull market but aren’t yet engaged and involved in it, he said. The third phase is far from over but when it ends, “precious metals will become a bubble with heavy public participation...</span><br />
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<span style="color: blue; font-family: Verdana, sans-serif; font-size: x-small;">...Karnani never expected, however, that silver would be near $50 by the end of April. </span><br />
<span style="color: blue; font-family: Verdana, sans-serif; font-size: x-small;">“I am not bearish on silver. I am only concerned over the pace of the rise of silver,” he said. “For long-term sustainability, silver prices must fall for a week and then rise. If silver prices continue to rise, then a bubble will be formed and silver prices can crash to $25 next year.”</span><br />
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<em><span style="font-family: Verdana, sans-serif; font-size: x-small;">$50 Silver Price Screams Caution (</span><a href="http://www.marketwatch.com/story/silver-mania-may-come-to-an-abrupt-end-2011-04-29"><span style="font-family: Verdana, sans-serif; font-size: x-small;">click here</span></a><span style="font-family: Verdana, sans-serif; font-size: x-small;">)</span></em><br />
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<strong><u><span style="font-family: Verdana, sans-serif; font-size: x-small;">Weak dollar, strong stocks</span></u></strong><br />
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<em><span style="font-family: Verdana, sans-serif; font-size: x-small;">Kudlow & Co. clip feat. Rick Santelli (</span></em><a href="http://video.cnbc.com/gallery/?video=3000019215"><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">click here</span></em></a><em><span style="font-family: Verdana, sans-serif; font-size: x-small;">)</span></em>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-62398051858494690702011-04-28T07:13:00.002-05:002011-04-28T07:14:14.737-05:00Thoughts on the Fed's first press conference<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">The Federal Reserve made history yesterday by having its first press conference. Key takeaways include:</span><br />
<ul><li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Economy is weaker than planned. As a result, the Fed has reduced its full-year forecast for economic growth slightly.</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Fed intends to intend QE2, but will maintain the size of the balance sheet. There is little possibility of QE3.</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">The end of the "extended period" is a couple of Fed meetings away</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Ending reinvesting is tightening of monetary policy</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">The value of the USD is the problem of the U.S. Treasury, not the Federal Reserve.</span></li>
</ul><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">My thoughts on the press conference:</span><br />
<ul><li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Yes, the USD is more of the problem that should be dealt by the U.S. Treasury. But, the issue is that Chairman Bernanke is not taking blame for the policies that he's pursuing is one of the primary causes of the fall in value of the USD</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Chairman Bernanke did not take blame for the rise in commodity prices as calling them "transitory" or temporary. A few moot points. First, around 80% of the world's commodities are traded in USD. Second, when there are negative real interest rates, the inflation trade (i.e. commodities) is going to be on steroids. Thus, Bernanke (as with the USD) not taking at least partial blame for the rise in commodities was troubling.</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">The overall tone of his messages were not hawk-ish, but at least less dove-ish.</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">In a previous post, I posted an article that likened Fed policy to house party gone mad. I still stick with that assessment. As before, the market was usure whether there would be a QE3, this means the party could go onto in the morning. Now, at least with implicit no to QE3, the party is going to keep going, but end at 6 am and could end badly.</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">I'm bearish on the market following QE2 because of the reaction to the news of the press conference. During the conference, the USD hit a new three-year low. In addition, there is extreme complacency in the market when one looks at how gold trades, stocks continuing to go up, and little volatility as measured by the VIX.</span></li>
</ul><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">How should investors play the market:</span><br />
<div></div><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">A CNBC article highlighting last night's Fast Money show hits the nail on the head, in my opinion.</span><br />
<div></div><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>Trader Brian Kelly also found Ben Bernanke’s comments bullish for stocks. “If there's going to be even a minor uptick in inflation investors will put money to work in assets that will beat inflation and that makes the stock market the place to be. The outcome is a much higher stock market.”</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-22737163885196871402011-04-21T18:54:00.001-05:002011-04-21T20:57:37.992-05:00Company Analysis - National Presto Industries (NPK)<div class="MsoNormal" style="margin: 0in 0in 0pt; text-align: justify;"><span style="font-family: Calibri;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">I do not want to appear as a genius or sly investor.<span style="mso-spacerun: yes;"> </span>I was reading an article on thestreet.com that highlighted National Presto Industries (ticker:NPK) and felt it was a company that I would be interested in analyzing and potentially adding to my portfolio one day.<span style="mso-spacerun: yes;"> </span>Investing in these names offers huge upside as they may continue to grow (higher price and higher dividends) and may be undervalued leading to be a potential buyout target.<span style="mso-spacerun: yes;"> </span>NPK did not appear on those screeners since the regular dividend it pays is low and yields less than 1%.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt; text-align: justify;"><br />
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<div class="MsoNormal" style="margin: 0in 0in 0pt; text-align: justify;"><span style="color: red; font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;"><em>Note: I have changed the DCF model I have used to value NPK slightly.<span style="mso-spacerun: yes;"> </span>I do not believe it would have a material impact on other companies I have highlighted on this blog.<span style="mso-spacerun: yes;"> </span>I feel this new methodology is cleaner and more transparent.<span style="mso-spacerun: yes;"> </span>As always, if you feel an investment idea is worth pursuing, please do additional research and/or contact a financial advisor.</em></span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt; text-align: justify;"><br />
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<div class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Firm overview</span></span></span></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="text-decoration: none;"><span style="color: black; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">National Presto Industries (ticker: NPK) is a diversified manufacturing company.<span style="mso-spacerun: yes;"> </span>The company operates in three key segments: housewares/small applianes, defense products, and absorbent products.<span style="mso-spacerun: yes;"> </span>Housewares/small appliances include the wide variety of Presto products, which can be found at Wal-Mart; Wal-Mart is a major customer.<span style="mso-spacerun: yes;"> </span>Defense products sell products to the U.S. Department of Defense.<span style="mso-spacerun: yes;"> </span>Absorbent products include the sale and manufacture of adult diapers.</span></span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><span style="font-family: Calibri;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif;"><div class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Investment rationale</span></span></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Key reasons to initially look at this company include the low valuation and high dividend yield (after factoring in the annual special dividend).<span style="mso-spacerun: yes;"> </span>Once an investor digs deeper in the company, an investor finds a company that has solid management who generates cash effectively and effective re-invests cash in the business.<span style="mso-spacerun: yes;"> </span>This is proven by increasing returns on common equity.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">But, like most manufacturers, NPK is highly tied to the recovery of the U.S. economy.<span style="mso-spacerun: yes;"> </span>Most of its products are sold through Wal-Mart and most of household items they sell are discretionary.<span style="mso-spacerun: yes;"> </span>As consumers become more confident, they will begin to purchase discretionary items like small appliances.<span style="mso-spacerun: yes;"> </span>If Wal-Mart’s sales increase, so should NPK’s.<span style="mso-spacerun: yes;"> </span>One interesting sidenote is although NPK’s household appliances are primarily sold through Wal-Mart, the firm has found a way to increase margins over the past ten years.<span style="mso-spacerun: yes;"> </span>As a potential investor, this indicates to me the firm has effective costs controls and/or can pass on higher costs to consumers (both are pluses).</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Key risks NPK include the concentration of customers.<span style="mso-spacerun: yes;"> </span>Like the Wal-Mart scenario stated above, NPK also heavily relies on the U.S. Department of Defense.<span style="mso-spacerun: yes;"> </span>If U.S. defense spending is materially reduced or NPK loses any contracts for whatever reason, this may have a material impact on the earnings power in the future.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><div class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Sales & profitability</span></span></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Total sales have grown from $119.1 million to $479.0 million in the years 2001 to 2010.<span style="mso-spacerun: yes;"> </span>When compounded, this is 16.7% per year.<span style="mso-spacerun: yes;"> </span>The firm only had one year of negative profitability; the year was 2001.<span style="mso-spacerun: yes;"> </span></span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">In addition, the firm has increased gross margins, operating margins, and net margins during this time.<span style="mso-spacerun: yes;"> </span>Gross margins increased from 21.0% to 23.7%.<span style="mso-spacerun: yes;"> </span>Operating margins have increased from -1.9% to 20.3%.<span style="mso-spacerun: yes;"> </span>Net profit margins increased from 5.3% to 13.3%.<span style="mso-spacerun: yes;"> </span>Net profit increased from $6.3 million to $63.5 million.<span style="mso-spacerun: yes;"> </span>When compounded, this is 29.3% per year.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><span style="font-family: Calibri;"><div align="center"><table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin: auto auto auto 4.65pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; width: 285px;"><tbody>
<tr style="height: 12.75pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;"><td nowrap="nowrap" style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><br />
</div></td><td nowrap="nowrap" style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">Sales</span></div></td><td nowrap="nowrap" style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">Net profit</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 1;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2001</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$119.1</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$6.3</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 2;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2002</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$124.8</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$8.7</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 3;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2003</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$125.7</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$15.5</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 4;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2004</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$159.0</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$15.4</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 5;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2005</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$184.6</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$16.4</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 6;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2006</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$304.7</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$28.0</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 7;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2007</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$420.7</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$38.6</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 8;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2008</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$448.3</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$44.2</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 9;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2009</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$478.5</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$62.6</span></div></td></tr>
<tr style="height: 13.5pt; mso-yfti-irow: 10; mso-yfti-lastrow: yes;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2010</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$479.0</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$63.5</span></div></td></tr>
</tbody></table></div><div align="center"></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Do these trends indicate NPK has a durable competitive advantage?<span style="mso-spacerun: yes;"> </span>Sales are increasing; which is positive.<span style="mso-spacerun: yes;"> </span>A firm with a d.c.a. typically has a gross margin of 40% or greater.<span style="mso-spacerun: yes;"> </span>At year-end 2010, NPK had a gross margin of 23.7%; over the ten years analyzed, this ratio was consistent, which is a plus.</span></span></span></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Capital structure</span></span></span></u></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></span></u></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">The firm does not have any outstanding debt.<span style="mso-spacerun: yes;"> </span>In addition, the firm typically holds plenty of cash on balance sheet, in addition to investments in marketable securities.<span style="mso-spacerun: yes;"> </span>Per the Form 10-K, municipal bonds make up a majority of the investments in “marketable securities.”<span style="mso-spacerun: yes;"> </span>Per the Form 10-K, marketable securities are sold in order to meet short-term liquidity needs.</span></span></span></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Do these trends indicate NPK has a durable competitive advantage?<span style="mso-spacerun: yes;"> </span>Yes.<span style="mso-spacerun: yes;"> </span>Firms with a d.c.a. typically do not hold any debt, or little debt in general.<span style="mso-spacerun: yes;"> </span>NPK does not hold any debt, in addition to being cash rich.<span style="mso-spacerun: yes;"> </span>At year-end 2010, NPK had a current ratio of 5.2; in other words, NPK had 5.2x more current assets than current liabilities.</span></span></span></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Capital efficiency</span></span></span></u></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></span></u></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Since the firm does not have any debt, leverage should not play a huge role in capital efficiency.<span style="mso-spacerun: yes;"> </span>The most common metric for capital efficiency is return on common equity (ROCE).<span style="mso-spacerun: yes;"> </span>ROCE for NPK has increased since 2001; ROCE increased from 2.7% to 18.5%.<span style="mso-spacerun: yes;"> </span>Long-term investors typically like to see high, consistent ROCE.<span style="mso-spacerun: yes;"> </span>The fact ROCE has been increasing each year indicates NPK’s management is making productive use out of retained earnings; this should continue to increase in the future.</span></span></span></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><span style="font-family: Calibri;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><div align="center"><table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin: auto auto auto 4.65pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; width: 175px;"><tbody>
<tr style="height: 25.5pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;"><td nowrap="nowrap" style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 25.5pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div></td><td style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; height: 25.5pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">Return on common equity</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 1;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2001</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2.7%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 2;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2002</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">3.6%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 3;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2003</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">6.3%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 4;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2004</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">6.0%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 5;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2005</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">6.2%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 6;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2006</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">10.0%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 7;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2007</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">13.1%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 8;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2008</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">14.2%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 9;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2009</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">18.6%</span></div></td></tr>
<tr style="height: 13.5pt; mso-yfti-irow: 10; mso-yfti-lastrow: yes;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2010</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">18.5%</span></div></td></tr>
</tbody></table></div><div align="center"></div><div align="left"></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-size: xx-small;">A favorite metric of Warren Buffett is return on unlevered net tangible assets.<span style="mso-spacerun: yes;"> </span>Mr. Buffett has said a “great” company has a return of 25% or greater; this ratio can exceed 100%.<span style="mso-spacerun: yes;"> </span>Return on unlevered net tangible assets has increased from -1.5% to 34.3%.</span></span></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="font-size: xx-small;">Dividends and share repurchase</span></span></u></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-size: xx-small;">NPK does pay a dividend, but does not engage in a share repurchase program.<span style="mso-spacerun: yes;"> </span>Annually, the firm pays a regular dividend of $1 once a year.<span style="mso-spacerun: yes;"> </span>Given the current closing price of around $111 per share, this equates to a dividend yield of less than 1%.<span style="mso-spacerun: yes;"> </span>In addition, the firm pays a special dividend based on the previous year’s profitability once a year.<span style="mso-spacerun: yes;"> </span></span></span></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-size: xx-small;">NPK paid a total dividend of $8.25 per share earlier this year; this is a $0.10 increase from the previous year.<span style="mso-spacerun: yes;"> </span>Since 2001, the dividend grew approximately at a rate of 16.9% per year.<span style="mso-spacerun: yes;"> </span>The dividend growth rate is slower than rate in growth of net income; net income increased 26.9% during the same time.</span></span></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><span style="font-family: Calibri;"><span style="font-size: xx-small;"><div align="center"><table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin: auto auto auto 4.65pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; width: 175px;"><tbody>
<tr style="height: 12.75pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;"><td nowrap="nowrap" style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><br />
</div></td><td nowrap="nowrap" style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">Dividend</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 1;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2001</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$2.00</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 2;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2002</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$0.92</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 3;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2003</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$0.92</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 4;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2004</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$1.17</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 5;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2005</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$1.67</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 6;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2006</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$2.12</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 7;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2007</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$3.80</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 8;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2008</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$4.25</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 9;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2009</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$5.55</span></div></td></tr>
<tr style="height: 13.5pt; mso-yfti-irow: 10; mso-yfti-lastrow: yes;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2010</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">$8.15</span></div></td></tr>
</tbody></table></div><div align="center"></div><div align="center"></div></span></span><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;">Since the situation is different for NPK as most of the yield is from the special dividend, it is important to look at previous years to spot a trend.<span style="mso-spacerun: yes;"> </span>The payout ratio, when using net income, has varied fro m 40.6% to 218.8%.<span style="mso-spacerun: yes;"> </span>The payout ratio, when using free cash flow, has varied from being negative to 138.7%.<span style="mso-spacerun: yes;"> </span>In 2010, when using net income, the dividend payout ratio was 88%.<span style="mso-spacerun: yes;"> </span>This payout ratio is high, but should not be considered alarming; the firm elects to return cash to shareholders through this special dividend versus share repurchase.<span style="mso-spacerun: yes;"> </span>When combined, both dividends and share repurchase frequently exceed either 100% of net income of free cash flow.</span></span></span></div><div align="left" class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;"><div align="center"><table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin: auto auto auto 4.65pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; width: 175px;"><tbody>
<tr style="height: 25.5pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;"><td nowrap="nowrap" style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 25.5pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-left-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><br />
</div></td><td style="background: #ffcc00; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; height: 25.5pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-right-alt: solid windowtext 1.0pt; mso-border-top-alt: solid windowtext 1.0pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">Dividend payout ratio</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 1;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2001</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">218.8%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 2;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2002</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">72.4%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 3;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2003</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">40.6%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 4;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2004</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">51.7%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 5;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2005</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">69.4%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 6;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2006</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">51.8%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 7;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2007</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">67.2%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 8;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2008</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">65.8%</span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 9;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2009</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">60.7%</span></div></td></tr>
<tr style="height: 13.5pt; mso-yfti-irow: 10; mso-yfti-lastrow: yes;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48pt;" valign="bottom" width="64"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">2010</span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 83pt;" valign="bottom" width="111"><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: Calibri; font-size: 10pt; mso-bidi-font-family: Arial; mso-font-kerning: 0pt;">88.0%</span></div></td></tr>
</tbody></table></div><div align="center"></div><div align="left"><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;">If an investor is specifically looking at NPK as a dividend play, it is important to invest with a higher margin of safety.<span style="mso-spacerun: yes;"> </span>When using the methodology I used to value this stock, I considered only the $1 regular dividend in my analysis (please see valuation section below).</span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;">In the valuation section below, I make some assumptions for the valuation.<span style="mso-spacerun: yes;"> </span>If those assumptions hold true and the firm pays out 70% of earnings to shareholders, NPK should pay a dividend of approximately $7.00 in 2012.<span style="mso-spacerun: yes;"> </span>The dividend yield would be 4.9% on the intrinsic value calculated or would have a yield-on-cost of 6.34% if the investor were to buy shares at the most recent closing price.<span style="mso-spacerun: yes;"> </span>Given a payout ratio of 80%, the firm should pay a dividend of approximately $8.00 in 2012.<span style="mso-spacerun: yes;"> </span><span style="mso-spacerun: yes;"> </span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;">Valuation</span></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;">Using a DCF valuation model, I calculate the intrinsic value of NPK to be $144.20 per share.<span style="mso-spacerun: yes;"> </span>This value is approximately $32.85 higher than the most recent closing price, giving an investor an actual margin of safety of 22.8%.</span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;">Key inputs into this model include 6% annual growth and a 19% EBITDA margin.<span style="mso-spacerun: yes;"> </span>As for most investments, I like to use a 15% risk-adjusted discount rate.<span style="mso-spacerun: yes;"> </span>In my opinion, since NPK has no short-term or long-term debt, the firm has approximately 80% the financial risk of the average company.<span style="mso-spacerun: yes;"> </span>Due to broad product line, reliance on government contracts, and the impact of commodity prices, the firm has around 110% the risk of the average company.<span style="mso-spacerun: yes;"> </span>When combined, this equates to a 13.2% discount rate.<span style="mso-spacerun: yes;"> </span>Thus, given these inputs, the model produced an intrinsic value of $144.20 per share.</span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;">In addition, the price an investor should purchase NPK at given the level of risk is $112.21, or a 20.3% margin of safety to the intrinsic value.<span style="mso-spacerun: yes;"> </span>The 20.3% margin of safety was calculated as I would like a 30% initial return for any stock.<span style="mso-spacerun: yes;"> </span>After adjusting for 6% growth, the 0.9% dividend yield from the regular $1 dividend, and the business and financial risks mentioned above, the risk-adjusted margin of safety is 20.3%.</span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: Calibri;"><span style="font-family: "Trebuchet MS", sans-serif;">At current trading levels, the stock appears to be an attractive buy.</span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
<div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="color: red; font-family: "Franklin Gothic Book";"><span style="font-family: Arial, Helvetica, sans-serif; font-size: xx-small;"><strong>This information is for educational purposes only, and the opinions expressed do not constitute a recommendation to buy or sell. Author may have a position in the companies discussed, subject to change at any time. Information on this website obtained from reliable sources, but there is no guarantee of accuracy. Please consult your financial advisor before making investment decisions. Past performance is not indicative of future success.</strong></span></span></div></div></div></span></span></span></span></span></span></span></span></span></span></span></span></span></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-22627445371197971972011-04-19T01:10:00.000-05:002011-04-19T01:10:42.089-05:00Reading List - United States / Negative Outlook<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">On Monday morning, S&P put the AAA credit rating of the United States at risk by placing the United States on negative outlook. They key point in S&P's action is that the negative outlook is more of an outcome of poor behavior by both political parties in Washington DC versus the United States not being able to service debt effectively. The rating agency feels with the political gridlock that exists, a solution will not be reached by 2013 to help solve the fiscal problems facing the United States. Hopefully, this action by S&P will force policymakers in Washington to become serious about the issue.</span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">The markets may have reacted the opposite as you might expect. Investors sold risk in the form of equities, and Treasuries and the dollar rallied as a result. The question investors must ask themselves: is this event a fundamental game changer? If an investor feels given all of the problems in the United States, but the United States is still the best place to invest, this event may be a buy trigger versus a sell trigger. If an investor feels like this is a game changer and most assets are denominated in US dollars, it may be time to diversify into commodities and emerging market stocks.</span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">Will the negative outlook have a negative impact on the recovery? The answer to this question is difficult. Even given the low yields and other fiscal problems, investors still want to hold US Treasuries. But, as a result of the negative outlook, this demand may slightly decrease and bond yields will increase. SInce virtually every form of borrowing is based off of the US Treasury, it would indicate that corporate bond rates, mortgages, etc all should increase. As a result, borrowing costs for firms and households should increase; increased borrowing costs may eat into the rally. One outcome is that the Federal Reserve may need to continue to use the printing machine to help the United States get out of this fiscal mess.</span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">At this point, it is way too early to tell whether this is a positive or a massive sell signal. It is important to note that in any market conditions, investors can make money. It is being able to identify those opportunities that truly separate the winners from the losers. Given the title of this blog, "Value and Yield," it is prudent that investors play some sort of defense in this crisis by investing in dividend paying stocks. These companies should be safe companies that can grow total dividends. These companies should be a good hedge against downside risk and possible inflation.</span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>What Downgrade? Pros Shrug Off Warnings from S&P (<a href="http://www.cnbc.com/id/42646310">click here</a>)</em></span><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">S&P US Ratings Cut Good for Long-Term (<a href="http://www.cnbc.com/id/42644718">click here</a>)</span></em><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">Wilbur Ross Interview (<a href="http://www.blogger.com/post-create.g?blogID=8022251177729859953">click here</a>)</span></em>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-19391073312836212062011-04-17T17:05:00.000-05:002011-04-17T17:05:32.904-05:00Reading List - April 17, 2011<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">I know I have not done a reading list for a few weeks, but I feel most of the news in the markets have been continuation of trends that have been highlighted before. So, below are some of the more interesting articles of the past week or so.</span><br />
<br />
<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Market disruptions</span></u></strong><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">As I have tried to highlight in previous posts, there is plenty of uncertainty around the market's reaction of QE2. Below is a link to a video from CNBC of two strategists debating this very point. Bob Phillips, senior partner at Spectrum Management Group, highlighted a few key points:</span><br />
<ul><li><span style="font-family: Trebuchet MS; font-size: xx-small;">Prudential (ticker: PRU) is trading at around 10x earnings. Company previously made some acquisitions, some in Japan. Firm has strong management and is undervalued at current multiple.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Disruption when QE2 ends. Investors should raise approximately 20% of their portfolios in cash as part of the uncertainty.</span></li>
</ul><span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Market Looks 'Worrisome' - Disruptions Ahead: Stock Picker (<a href="http://www.cnbc.com/id/42609816">click here</a>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>JPMorgan's Earnings</u></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">JPMorgan (ticker: JPM) had a good first quarter as actual earnings beat analyst estimates. What is alarming is that total loans at JPMorgan actually went down. Federal Reserve statistics point to a similar trend, but JPMorgan's earnings point to this actually being the case. As a result of the contraction in credit, are we headed towards a double dip?</span><br />
<br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">JPMorgan's Earnings Point to Double Dip (<a href="http://www.cnbc.com/id/42569838">click here</a>)</span> </em><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>Michael Burry from <em>The Big Short</em></u></strong></span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">Michael Burry, the hedge fund manager who betted against subprime mortgages, recently made a speech at Vanderbilt. Below are some links to another blog, <em>Distressed Debt Investing, </em>that covered the highlights of the Burry speech:</span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><br />
<li>He was attracted to investing because he was evaluated on performance not whether or not he looked people in the eye or was socially adept</li><br />
<li>QE “seems” to be working but is really just a big gamble</li><br />
<li>Don’t tolerate blind faith, figure things for yourself</li><br />
<li>Doesn’t think large caps are as cheap as others do</li><br />
<br />
<em>Michael Burry: Notes from Vanderbilt Speech (<a href="http://www.distressed-debt-investing.com/2011/04/michael-burry-notes-from-vanderbilt.html">click here</a>)</em><br />
<br />
<strong><u>Pension funds</u></strong><br />
<br />
Jim Leech, president and chief executive at the Ontario Teachers' Pension Plan. Highlights included:<br />
<ul><li>Whatever you do, you need to have conviction.</li>
<li>One has to look far and wide to find opportunities in this uncertain environment. This plan is leaning to towards commodities. Key holdings include Toronto Dominion, Transocean, and JPMorgan.</li>
<li>Worried about commodities, but prepare for uncertainty by having a diversified portfolio. Need to be part of a run, but cannot put too much risk in your portfolio.</li>
<li>View on the US: still having housing issues, but long-term you cannot bet against the biggest economy. Concerns include state debt levels and administrations will come to grips with the issue. Federal Reserve (i.e. QE2) is in a tough position, but correctly chose there is no deflation. Issue is now does QE2 fuel inflation and it is too early to tell if it has.</li>
<li>One of the early adopters of hedge funds and investment has worked out. Fund is a large private equity investor, but through direct positions rather than fund of funds.</li>
</ul><em>View from a Pension Fund (</em><a href="http://bcove.me/oak90pou"><em>click here</em></a><em>)</em><br />
<br />
<strong><u>The Tale of the Swiss Bank Account</u></strong><br />
<br />
Its something that just needs to be seen...<br />
<br />
<em>The Secret World of Swiss Banks (</em><a href="http://video.nytimes.com/video/2011/04/15/business/100000000776643/inside-secret-world-of-swiss-banks.html"><em>click here</em></a><em>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-16082856665123904372011-04-11T21:11:00.000-05:002011-04-11T21:11:07.381-05:00Company Analysis - Procter & Gamble (PG)<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong>To see full analysis, please click on link below.</strong></span><br />
<br />
<strong><span style="font-family: Trebuchet MS; font-size: xx-small;"><u>Firm overview</u></span></strong><br />
<br />
<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">The Procter & Gamble Company (P&G), incorporated in 1905, is focused on providing consumer packaged goods. The Company’s products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores, drug stores and high-frequency stores, the neighborhood stores, which serve many consumers in developing markets. It has on-the-ground operations in approximately 80 countries. As of June 30, 2010, P&G comprised of three Global Business Units (GBUs): Beauty and Grooming, Health and Well-Being and Household Care. Sales to Wal-Mart Stores, Inc. and its affiliates represent approximately 16% of its total revenue during the fiscal year ended June 30, 2010 (fiscal 2010). In August 2009, AnimalScan, LLC announced that it has acquired Iams Pet Imaging (IPI), LLC from The Procter & Gamble Company and ProScan Imaging. In October 2009, Warner Chilcott Plc completed the acquisition of the Company’s global branded prescription pharmaceutical business. In July 2010, Sara Lee Corporation completed the sale of its air care business to The Procter & Gamble Company. <strong><em>Source: Reuters</em></strong></span><br />
<br />
<strong><span style="font-family: Trebuchet MS; font-size: xx-small;"><u>Investment rationale</u></span></strong><br />
<br />
<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Investment rationale includes based on a P/E basis, the firm appears undervalued given forecasted growth, business risk, and financial risk. When several metrics are looked at, the firm appears to benefit from a durable competitive advantage. The firm has a strong dividend that appears, for the time being, to be sustainable. Current dividend yield is 3.10%. The current dividend provides downside protection, while providing a steady growing stream of income to income oriented investors. The firm generates cash from operations and has a strong balance sheet. The firm has strong margins that appear to be growing into the future as the firm's management seeks out operating efficiencies. Given historical long-term growth and current trends in margins, the firm appears undervalued from both a risk-adjusted P/E and DCF basis.</span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>Highlights</u></strong></span><br />
<ul><li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Firm has strong gross margins. Margins are >40% indicating durable competitive advantage. Net profit is slightly <20%; net profit >20% indicates durable competitive advantage. Growing margins indicate strength. Firm seeks higher margins through operational improvements and efficiencies.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Firm has strong liquidity position. Free cash flow productivity is greater than 90% for all periods analyzed; this ratio indicates the firm generates 90% of net income into free cash flow. Current ratio is <1; companies with a durable competitive advantage typically do not need a current ratio >1. Firm has $11 billion credit facility that is a back-up for commercial paper issuance; commercial paper can be used to fund any short-term needs.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Firm has strong balance sheet. Debt-to-total capital ratio is below 50%; this level indicates firm is not overlevered. The firm has a debt-to-equity adjusted for common shares of 20%; this is well below 80%. An 80% level for this ratio indicates the firm has a durable competitive advantage. </span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Firm is efficient with capital. ROCE is lower than it was 10 yrs earlier; primary cause is acquisition of Gillette, but ROCE is increasing each year. Financial leverage index (=ROCE/ROA) is above 2 for each year analyzed indicating effective use of leverage. The return on unlevered net tangible assets (Warren Buffett's ratio) increased each year and is over the 25% threshold.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Current dividend payout ratio is under 50% allowing for future growth in the dividend. Dividend grew at 11%, while total net profit grew at 17%. Firm has ability to increase the dividend payout ratio.</span></li>
</ul><strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Valuation</span></u></strong><br />
<br />
<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;"></span></u></strong><div style="text-align: center;"></div><table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse; width: 448px;" x:str=""><colgroup><col span="7" style="width: 48pt;" width="64"></colgroup><tbody>
<tr height="17" style="height: 12.75pt;"><td class="xl136" height="17" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; width: 48pt;" width="64"></td><td class="xl137" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; width: 48pt;" width="64"></td><td class="xl138" colspan="5" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; width: 240pt;" width="320"><div style="text-align: center;"><strong><em><span style="font-family: Calibri; font-size: x-small;">Risk-adjusted discount rate</span></em></strong></div></td></tr>
<tr height="17" style="height: 12.75pt;"><td class="xl136" height="17" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt;"><strong><em><span style="font-family: Calibri; font-size: x-small;"></span></em></strong></td><td class="xl138" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><div style="text-align: center;"><strong><em><span style="font-family: Calibri; font-size: x-small;">Growth</span></em></strong></div></td><td class="xl132" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid;" x:num="8.8374999999999995E-2"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">8.8%</span></div></td><td class="xl132" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid;" x:num="9.8375000000000004E-2"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">9.8%</span></div></td><td class="xl140" style="background-color: #ffff99; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid;" x:num="0.108375"><div style="text-align: center;"><strong><span style="font-family: Calibri; font-size: x-small;">10.8%</span></strong></div></td><td class="xl132" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid;" x:num="0.11837499999999999"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">11.8%</span></div></td><td class="xl132" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid;" x:num="0.12837499999999999"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">12.8%</span></div></td></tr>
<tr height="18" style="height: 13.5pt;"><td class="xl131" height="18" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 13.5pt;"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">Downside</span></div></td><td class="xl139" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="0.05"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">5%</span></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="73.905695402549512"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$73.91</span></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="62.776857579551049"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$62.78</span></div></td><td class="xl141" style="background-color: #ffff99; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="54.505245919073253"><div style="text-align: center;"><strong><span style="font-family: Calibri; font-size: x-small;">$54.51</span></strong></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="48.120507328687388"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$48.12</span></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="43.046771857805496"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$43.05</span></div></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl136" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt;"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">Base</span></div></td><td class="xl139" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="0.09"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">9%</span></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="95.388009029368504"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$95.39</span></div></td><td class="xl134" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: #f0f0f0; border-top: windowtext;" x:num="79.75518495622255"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$79.76</span></div></td><td class="xl142" style="background-color: #ffff99; border-bottom: windowtext 1.5pt solid; border-left: windowtext 1.5pt solid; border-right: windowtext 1.5pt solid; border-top: windowtext 1.5pt solid;" x:num="68.232220582420197"><div style="text-align: center;"><strong><span style="font-family: Calibri; font-size: x-small;">$68.23</span></strong></div></td><td class="xl135" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: #f0f0f0; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="59.4148665927951"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$59.41</span></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="52.470579966041022"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$52.47</span></div></td></tr>
<tr height="18" style="height: 13.5pt;"><td class="xl136" height="18" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 13.5pt;"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">Upside</span></div></td><td class="xl139" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="0.11"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">11%</span></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="108.89059271934765"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$108.89</span></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="90.415621306168688"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$90.42</span></div></td><td class="xl143" style="background-color: #ffff99; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="76.841567899341214"><div style="text-align: center;"><strong><span style="font-family: Calibri; font-size: x-small;">$76.84</span></strong></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="66.49012109940395"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$66.49</span></div></td><td class="xl133" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext;" x:num="58.366620099138906"><div style="text-align: center;"><span style="font-family: Calibri; font-size: x-small;">$58.37</span></div></td></tr>
</tbody></table><br />
<div style="text-align: center;"><br />
</div><div style="text-align: left;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Based on a risk-adjusted discount rate of 10.8%, the intrinsic value of PG is $68.23 per share. Currently, this is 9.7% above where shares are currently trading. The risk-adjusted margin of safety is 12.9%, or the appropriate purchase price is $59.40 per share. The suggested market price is approximately $2.70 above where it is currently trading. If there is a sell-off in the stock where it is somewhere in that range, I would purchase the shares. In addition, the firm indicates a buy with a forward P/E of 14.22. This is below the "Buy P/E" calculated; the "Buy P/E" is calculated at 19.85. Given the expected 9% growth rate in addition to less risky business and financial profile, PG should trade at a premium. As indicated earlier, the stock has a strong dividend. Given the discount to its intrinsic value and adequate dividend yield, it would be prudent to buy PG on a selloff.</span></div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><strong><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">To see full analysis (<a href="https://docs.google.com/leaf?id=0B6rLcrO5_fGAYWViMDQxYmQtZTMzMC00NmRkLTkzZDEtZDUzNjAxNTkwN2I4&sort=name&layout=list&num=50">click here</a>)</span></strong> </div><div style="text-align: left;"><br />
</div><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="color: red; font-family: "Franklin Gothic Book";"><span style="font-family: Arial, Helvetica, sans-serif; font-size: xx-small;"><strong>This information is for educational purposes only, and the opinions expressed do not constitute a recommendation to buy or sell. Author may have a position in the companies discussed, subject to change at any time. Information on this website obtained from reliable sources, but there is no guarantee of accuracy. Please consult your financial advisor before making investment decisions. Past performance is not indicative of future success.</strong></span></span></div>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-31253338207772185332011-04-06T18:58:00.000-05:002011-04-06T18:58:15.911-05:00Company Analysis - SYSCO (SYY)<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong>To see full analysis, click on link below</strong></span><br />
<br />
<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><u><strong>Firm overview</strong></u></span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">Sysco Corporation, acting through its subsidiaries and divisions, is the largest North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. Sysco provides products and related services to approximately 400,000 customers, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. (Source: Form 10-K)</span><br />
<br />
<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Investment rationale</span></u></strong><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">Investment rationale includes based on a P/E basis, the firm appears undervalued given forecasted growth, business risk, and financial risk. The firm should continue to benefit from an improving economy, as consumer desires to eat out should increase. The firm has a strong dividend that appears, for the time being, to be sustainable. The current dividend provides downside protection, while providing a steady growing stream of income to income oriented investors. The firm generates cash from operations and has a strong balance sheet. Although margins are low (but very consistent), the firm appears to have a durable competitive advantage.</span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>Highlights</u></strong></span><br />
<ul><li><span style="font-family: Trebuchet MS; font-size: xx-small;">Although margins are not strong, margins are consistent. Firm has effective cost management and is working on improving efficiencies as part of the firm's growth strategy.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">The firm has a strong liquidity position; the current ratio is above 1. Firm has positive operating cash flow and free cash flow.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">The firm has a strong balance sheet. Debt-to-capital range is appropriate. Debt coverage from operating cash flow is adequate (3 years of debt for one year of operating cash flow).</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">The firm spends approximately 50% of earnings on CAPEX. This most likely represents a durable competitive advantage for the firm.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Return on common equity is approximately 30%; there were no large fluctuations. ROCE over 30% indicates durable competitive advantage.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Debt-to-common equity adjusted for treasury shares is below 80%. Any ratio below 80% typically indicates a durable competitive advantage.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">The firm grew dividends at a higher rate than earnings growth. Using net income, the dividend payout ratio is approximately 50%. A payout ratio above 50% indicates the dividend may be unsustainable. If firm grows dividends with income growth, the dividend should be safe. Yield is in the range of 3.6%-3.7%; good yield for income investors.</span></li>
</ul><strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Valuation</span></u></strong><br />
<br />
<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Using the FCFE approach, the firm's intrinsic value was calculated at $23.74. This price assumes 7.5% growth rate for the first ten years and a 3% terminal growth rate. The risk-adjusted discount rate is 11.48% (please see "Valuation assumptions). Currently, the risk-adjusted margin of safety is 14.42%; using this margin of safety, the purchase price should be $22.62. The stock closed at $28.70 on April 6, 2010. Based on the discounted future cash flows of this firm, the stock is overvalued at $28.70. Any big sell-off could create a buying opportunity.</span><br />
<br />
<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Based on a similar methodology used to determine the discount rate and margin of safety, the "Buy P/E" is estimated to be 18.19, while the "Sell P/E" is estimated to be 23.13. Based on 2011 EPS, the forward P/E is 14.9, or lower than the "Buy P/E." Based on an earnings multiple basis, the firm is undervalued.</span><br />
<br />
<em><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong>To see full analysis (</strong></span><a href="https://spreadsheets.google.com/ccc?key=0AqrLcrO5_fGAdFh4WEZ2d1ZvLW96WVpaVzhIVVNQMnc&hl=en"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong>click here</strong></span></a><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong>)</strong></span></em><br />
<br />
<div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="color: red; font-family: "Franklin Gothic Book";"><span style="font-family: Arial, Helvetica, sans-serif; font-size: xx-small;"><strong>This information is for educational purposes only, and the opinions expressed do not constitute a recommendation to buy or sell. Author may have a position in the companies discussed, subject to change at any time. Information on this website obtained from reliable sources, but there is no guarantee of accuracy. Please consult your financial advisor before making investment decisions. Past performance is not indicative of future success.</strong></span></span></div>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-31829413679265705922011-03-31T22:53:00.001-05:002011-03-31T22:53:59.789-05:00Bumps ahead?<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Given the turmoil in the Middle East and the earthquake in Japan, many market observers expected the market to have a bigger pullback. Instead, the market appears to be resilient to any "Black Swan" event. Instead, many keen market observers are beginning to put up the warning flags that big risks are ahead for investors. </span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">For example, HSBC is cutting its growth targets and increasing inflation targets. The key area of concern is the large increase in commodity prices; never in history has there been this large of an increase in commodity prices following a protraction. The high commodity prices will lead to higher input prices and higher prices will begin to erode the confidence of both firms and households. HSBC sees the scenario play out this way with oil prices: higher oil prices will lead to a reduction in disposable income which will lead to a decrease in capital spending which will lead to a decrease in imports which will lead to a decrease in world trade. In other words, there will be a redistribution of wealth from high spending economies (i.e. the U.S. and Europe) to the high saving economies (i.e. developing economies).</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">As commodity prices continue to rise, Federal Reserve Governor James Bullard is calling for the Federal Reserve to draw up an exit plan of QE2. His rationale is the economy is doing alright, thus QE2 is no longer needed. Market observers are unsure of the impact of withdrawing QE2 will have on the global equity and commodity markets. Both of these markets have been benefactors of the low interest rates and cheap dollar that QE2 has produced.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">While many investors are unsure of what the true effect of no longer having QE2 will be on the markets, two key investors are not investing in the dollar or U.S. Treasuries. The two key investors are Warren Buffett and Bill Gross. When asked about investing in U.S. Treasuries, Mr. Buffett responded by saying that in five-, ten-, or twenty-years down the line, the dollar's purchasing power will be eroded by the monetary policy being currently pursued. As a result, Mr. Buffett has begun to move out of U.S. fixed income assets. The assets remaining in his portfolio have short duration (i.e. short maturity). The price of short duration securities are less impacted by an increase in interest rates that long duration securities. Increasing inflationary expectations will increase interest rates, thus negatively impact the price of bonds. Bill Gross, the other key investor, has sold off all Treasuries in the portfolios he manages.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><em>So, where does that leave investors? </em></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">To be perfectly honest, I do not believe there is a safe place for an investor to be. As a result, I would be hesitant to hold the US dollar and would prefer to be long the Euro and other emerging market currencies for the long-term The dollar is facing uncertainty as the leadership in Washington do not seem to want to tackle both old and new problems head on. Continued overspending will lead to more borrowing, and force the dollar to continue a downward trend. In the long-term, commodities will contine to rally. As a result, there will be increased investment in emerging economies. This will cause those currencies to continue appreciating against the dollar. Central bankers in those economies will need to react and will begin to increase interest rates. This will be a positive for the currencies of emerging economies, but will be a negative to the dollar.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">As a result of a declining currency, average U.S. investors will need to hedge their investments. As I have stated before on this blog, I would begin to invest in high-quality U.S. stocks with strong franchises and high developing market exposure. First, companies with strong franchises will be able to pass on higher costs to consumers. Second, companies with strong developing market expsoure will benefit from a weaker dollar. Since the products of these companies will priced in dollars, products sold by U.S. based companies will look cheaper as a result of the weak dollar, thus increasing demand. In addition, when the non-US dollar sales are converted back into U.S. dollars, these sales will be worth more as it will take more U.S. dollars to purchase these other currencies. The net impact on these companies should be higher sales and profit, in addition to higher cash flow. Higher cash flow will enable these companies to increase dividends and repurchase shares. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">As a sidenote, look for companies that will have the ability to grow dividends at a higher compounded rate than inflation. In this case, investors will increase their purchasing power.</span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-10142314257749883142011-03-28T07:16:00.000-05:002011-03-28T07:16:45.675-05:00Reading List - March 28, 2011<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">New tech bubble?</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Many Wall St. observers are worried that the recent wave of interest by Wall St. into social media websites is going to spell doom for the industry. Although there are some similarities to the tech bubble of the late 1990's, there are several differences. First, tech companies in the late 1990's often did not have a business model. The social media websites of today often have growing revenues and viewed as actual real, growing businesses. Second, the pool of capital that is chasing these social media websites is much larger. As a result, the fall will be quicker if in fact a "social media bubble" is forming.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">The risk in the industry right now is there are so many players placing bets on such a small amount of companies. Facebook is clearly the biggest and most recognizable, but others such as Groupon and Zynga continue to have capital poured into them. As a result, private equity firms, investment banks, and hedge funds are investing in losers or simply paying too much. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Investing Like It's 1999 (</em><a href="http://dealbook.nytimes.com/2011/03/27/is-it-a-new-tech-bubble-lets-see-if-it-pops/"><em>click here</em></a><em>)</em></span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Is the market undervalued? oversold?</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Many Wall St. traders expected the market to have gained too much steam recently, and predicting a sell off in the 7-10% range. Instead, with all of the turmoil in Arab world and earthquake in Japan, the markets have sold off less than 5%. In addition, several key investors like Bill Miller have stated the market is undervalued whether it be against the past, or against factors like inflation. Inflation is the key as policymakers look to curb inflation, and debate the merits of programs like QE3. Excerpt:</span><br />
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<em><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">We are no longer in an environment where confirmation of the sustainability of economic recovery reduces risk premiums and generates a revaluation of cheaply priced assets,” Barclays told clients. “Instead, asset prices are closer to fair value and stronger growth is now accompanied by signs of higher inflation and an increased probability of policy tightening. </span></em><br />
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<div class="textBodyBlack"><span id="byLine"></span><em><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Indeed, those final two words are likely to be key as the market looks for gains in a modestly steadying economy. The real bet, then, may not be on whether growth has reached a plateau but whether stocks can keep rolling once the Federal Reserve ends its easing program and takes off the training wheels. The market has never been the beneficiary of such monetary largesse before, so cutting the cord could be a shock greater than any of the global storms that have come along. </span></em></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><em><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Stocks Are Cheap, Right? (<a href="http://www.cnbc.com/id/42253348">click here</a>)</span></em></div><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>Paulson's Legendary Parties</u></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">In the depths of the recession, John Paulson was criticized for his lavish parties. It appears the "legend" of these parties now appear on NBC's 30 Rock...</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>'30 Rock' and Paulson's Big (Fictional) Party (</em><a href="http://dealbook.nytimes.com/2011/03/25/30-rock-and-paulsons-big-fictional-party/"><em>click here</em></a><em>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-71783343125256210252011-03-22T00:55:00.000-05:002011-03-22T00:55:47.675-05:00Reading List - March 21, 2011<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong><u>AT&T Announcement</u></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">On Monday, it was announced AT&T would like to acquire T-Mobile. Deutsche Telecom, current owners of T-Mobile, want to exit the U.S. market. This deal will continue to receive scrutiny going forward, and will continue to receive attention regarding the issues of financing and the anti-trust ramifications. Expect more posts in the future. Below is an article from DealBook that I think does a good job highlighting the deal and deal's total costs.</span><br />
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<em><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">AT&T's Full Cost for Getting T-Mobile (<a href="http://dealbook.nytimes.com/2011/03/21/atts-full-cost-for-getting-t-mobile/">click here</a>)</span></em><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">I try to be slighly contrarian in my thinking, so articles like the one below perk my interest. The article is about the bridge loan JPMorgan is providing to AT&T, as the loan is the large single takeover loan ever provided by one bank. Key reasons why JPMorgan decided to go it alone include: 1) excess reserves, short-term loans; 2) dominating the replacement of the bridge loan as AT&T will need to repay the loan with proceeds from a debt or equity issuance; 3) flight to safety as AT&T is too big to fail; 4) indication of a credit bubble.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">In my opinion, all of the articles above seem very credible and make very good sense from JPMorgan's viewpoint. By being involved in an oligopoly, AT&T is a very safe company and JPMorgan will be able to earn a higher rate of return on large amount of excess cash than it currently is. Furthermore, as the economy and credit markets continue to improve, JPMorgan is trying to get the "swagger" back and show it is now the "big dog" on Wall St. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>How to Think About JPMorgan's $20 Billion AT&T Loan (</em><a href="http://www.cnbc.com/id/42198687"><em>click here</em></a><em>)</em></span><br />
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<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Fed Stress Tests</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">On Friday, it was announced that several large U.S. banks passed stress tests. Big banks included JPMorgan, Goldman Sachs, and U.S. Bank to name a few. As a result of these stress tests, these banks can begin to pay dividends and re-engage in share repurchase programs. In my opinion, the outcomes of these stress tests are both good and bad. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">On the good side, it is great these banks can begin to start paying dividends again. Going into the financial crisis, banks like Bank of America were dividend darlings. When the crisis broke, dividends were greatly reduced or suspended entirely. Allowing banks pay higher dividends should be a positive for the sector, as more institutional and retail money should flow to take advantage of the higher yields.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">On the bad side, I am weary of the share repurchase program. These programs often do not work and deplete capital. Going into the financial crisis, most banks engaged in share repurchase. Banks continued to repurchase shares at the peak, and only then issue shares at the trough. Not a good use of shareholder capital! Share repurchase programs often depleted owner's equity and cash the banks need to act as a cushion during the crisis. I just hope bank's are more prudent in all areas during this next cycle.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Thumbs up to dividends, thumbs down to share repurchase programs!</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>A Test Where the Banks Had the Questions and Answers (<a href="http://dealbook.nytimes.com/2011/03/02/a-test-where-the-banks-had-the-questions-and-the-answers/">click here</a>)</em></span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>With Fed Consent, Banks Raise Dividends and Buy Back Stock (</em><a href="http://dealbook.nytimes.com/2011/03/18/fed-to-release-results-of-bank-stress-tests/"><em>click here</em></a><em>)</em></span><br />
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<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Citi - reverse stock split and dividend re-instatment</span></u></strong><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Many investors feel Citi (C) is a buy, but there are still many issues at the bank. Monday's announcement of a reverse stock-split and re-instatment of the dividend are more symbolic gestures. </span><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Citi announced that there will be a 10-for-1 reverse stock split. In other words, for every 10 shares of C that an investor owns, they will now own one share. I would like to elaborate more on the reverse stock split.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">In a normal environment, a firm wants to have a stock-split if they expect the firm's shares to continue to peform well. This is predicated on the belief there is a "sweet spot" for the share price. The "sweet spot" varies, as I have heard all sorts of ranges. I believe a safe assumption of the "sweet spot" is a range of $20 per share to $100 per share. So, if shares rise to $110, management will often have a 2-for-1 stock split. The idea behind this is that investors like to own shares when they trade at certain prices. Shares of companies like Google or Apple that trade in the hundreds of dollars may be "too expensive" for investors.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">What does the reverse stock split signal to the markets? When a company has a reverse stock split, it is essentially is a signal to management the firm is not confident the firm can return to the bottom edge of the "sweet spot" on market conditions alone. Management "engineers" this sweet spot using a reverse stock split. As a result, researchers have found companies that undergo reverse stock splits often lag the market.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Citigroup Plans Dividend and Reverse Stock Split (</em><a href="http://dealbook.nytimes.com/2011/03/21/citi-announces-quarterly-dividend-of-a-penny-per-share/"><em>click here</em></a><em>)</em></span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Reverse Stock Splits Don't Bode Well (</em><a href="http://www.marketwatch.com/video/asset/reverse-stock-splits-dont-bode-well-2011-03-21/D2ACC062-6E09-4D0E-AC5B-E9720B775B5F"><em>click here</em></a><em>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">One interesting sidenote is the reverse stock split should reduce volatility for Citi shares. The key reason behind this is that traders often make money on trading low priced shares like Citi in two ways. The first way is through the spread, and the second way is through rebates. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Let me illustrate. For example, </span><span style="font-family: Trebuchet MS; font-size: xx-small;">I'm a trader who owns 1 million shares of Citi. The bid is $4.50 and the ask is $4.51. I continuously buy and sell shares making money "on the spread," or the $0.01 difference between the bid and ask price. In the case of 1 million shares, total profit is $10,000. As the article states, it is not always as easy as this. Because I'm acting as a market maker and providing liquidity in this situation, most U.S. exchanges will reward me for this through what's called a "rebate." Typically, it is 15 mils, or 0.15 of 1 penny. If I trade those million shares, I can earn up to $1,500 per day by providing liquidity. So, as a trader, I can make money on both the spread and providing liquidity.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Why is Citi so suitable for this trade. According to Tradeworx Founder Manoj Narang, </span><br />
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<div class="textBodyBlack"><span id="byLine"></span><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>“Suitability” comes from low price and high volume. Low price is desirable because rebates are done on a PER SHARE basis, rather than on a percent-of-price basis. Thus, stocks with low price have a very high rebate as a percentage of their volatility (i.e. very high reward:risk ratio).</em></span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>Citigroup exemplified both of these characteristics—extremely high share volume and extremely low price—in a way no other stock does. This was really a one-time anomaly created by the financial crisis, so it is not likely to be replicated in the future.</em></span></div><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Trading in Citi is a Whole Sub-Industry (</em><a href="http://www.cnbc.com/id/41155853/"><em>click here</em></a><em>)</em></span><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">High Frequecy Trading: Can Any Stock Replace Citigroup (<a href="http://www.cnbc.com/id/42196879">click here</a>)</span></em><br />
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<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Warren Buffett Watch</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">On Japan...Warren Buffett believes that Japan is still a "buy." Rare, one-time events like the earthquake and tsunami that struck Japan only create buying opportunities.</span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Why Buffett Thinks Japan is a Buy (</em><a href="http://dealbook.nytimes.com/2011/03/21/why-buffett-thinks-japan-is-a-buy/"><em>click here</em></a><em>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Goldman Repayment...Because Goldman Sachs passed the Fed's stress tests, Goldman Sachs will repurchase the $5 billion preferred stock investment, at 10% per year, from Mr. Buffett. In all of Berkshire's history, this has to be one of the most lucrative deals. In his annual letter to shareholder's, Mr. Buffett made reference to the fact he will not be happy when Goldman wants to repurchase the preferred shares. In addition, Mr. Buffett holds warrants to buy $5 billion of Goldman shares at $115 until 2013. As the article states, this would net a profit for Berkshire of about $2 billion.</span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Warren Buffett Gets an Unwanted Call from Goldman Sachs (</em><a href="http://www.cnbc.com/id/42153208/"><em>click here</em></a><em>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">On Future Deals...In the market Monday, the market was partially up due to the comments made by Mr. Buffett that he is still on the lookout for acquisitions. The acquisition of Lubrizol earlier this month depleted approximately $9 billion of cash from Berkshire Hathaway. Any new deal will likely be smaller as Berkshire will need to raise additional capital for any larger deals. Key reasons is Mr. Buffett does not like issuing equity (as he feels Berskhire is trading below its intrinsic value) and prefers to keep approximately $20 billion of cash on balance sheet. He addressed both of these issues in his most recent letter to shareholders.</span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Warren Buffett Still on the Lookout for Deals (</em><a href="http://www.cnbc.com/id/42178885/"><em>click here</em></a><em>)</em></span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">25 Guys to Avoid on Wall St.</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">No comment...</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>25 Guys to Avoid on Wall St. (</em><a href="http://www.cnbc.com/id/41759013"><em>click here</em></a><em>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-19428976456484933182011-03-14T21:23:00.003-05:002011-03-14T21:39:01.591-05:00Company Analysis - General Mills (GIS)<div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="font-size: 12pt;"><span style="text-decoration: none;"><span style="font-family: Calibri;"></span></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Firm overview</span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">According to the Form 10-K, General Mills is, “…a leading global manufacturer and marketer of branded consumer foods sold through retail stores…a leading supplier of branded and unbranded products to the foodservice and commercial baking industries.”<span style="mso-spacerun: yes;"> </span>Major product categories include ready-to-eat cereals, refrigerated yogurt, ready-to-serve soup, frozen dough products, and a wide variety of organic products.<span style="mso-spacerun: yes;"> </span>Key brands include Cheerios, Wheaties, Lucky Charms, Yoplait, Pillsbury, Betty Crocker, Nature Valley, and Progresso.</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Growth strategy</span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Strategy </span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">The firm strives to come up with new food ideas and brand them uniquely, so ensuring brand identity is important.<span style="mso-spacerun: yes;"> </span>Per the Form 10-K, there are four key parts to the growth strategy:</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;"><span style="mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">1.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span>Low digit annual growth in net sales</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">2.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="color: black;">Mid single-digit annual growth in total segment operating profit</span></span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">3.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="color: black;">High single-digit annual growth in EPS</span></span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">4.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="color: black;">Improvements in return on average total capital</span></span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">To achieve these goals, GIS intends to adapt to demographic changes in the U.S. economy, in addition to expanding product lines in emerging economies with a growing middle class.<span style="mso-spacerun: yes;"> </span>For example, in the U.S., GIS is targeting the baby boomer generation and rising number of Hispanics.<span style="mso-spacerun: yes;"> </span>To target baby boomers, GIS is focused on emphasizing the health benefits of foods it produces, in addition to offering healthier products.<span style="mso-spacerun: yes;"> </span>To target Hispanics, GIS is increasing advertising; the firm is the leading advertiser in the Hispanic media.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">GIS is also targeting emerging economies with growing middle class populations by introducing products and creating marketing materials that suit these local populations.<span style="mso-spacerun: yes;"> </span>One key growth area is China.<span style="mso-spacerun: yes;"> </span>To target the Chinese consumer, GIS is focusing on ice cream through the Haagen-Dazs brand, frozen foods through the Wanchai Ferry brand, and snacks like Bugles and Twix.<span style="mso-spacerun: yes;"> </span>For example, GIS has focused on building the Haagen-Dazs brand by creating ice cream shops that are experiences.<span style="mso-spacerun: yes;"> </span>Local consumers can order anything from a simple scoop of ice cream to an elaborate dine-in creation.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">A final area of strength is the strong relationship with Wal-Mart.<span style="mso-spacerun: yes;"> </span>Currently, Wal-Mart represents approximately 20% of all frozen food sales; over 20% of GIS’s sales are through Wal-Mart.<span style="mso-spacerun: yes;"> </span>The firm will need to be able to continue to meet Wal-Mart’s price demands; this may decrease margins.<span style="mso-spacerun: yes;"> </span>Having this close relationship with Wal-Mart will be important in the future, as Wal-Mart seeks to expand in emerging economies.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Risks</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Key risks to the strategy include failure to create products that meet customer’s desires, failure to manage the relationship with Wal-Mart effectively, and future food prices.<span style="mso-spacerun: yes;"> </span>Consumer’s tastes are always changing; consumers in the U.S. want healthier alternatives.<span style="mso-spacerun: yes;"> </span>This will be a group the company needs to effectively target and keep as the firm continues to grow.<span style="mso-spacerun: yes;"> </span>In addition, rising input costs through higher commodity prices might limit the firm’s pricing power.<span style="mso-spacerun: yes;"> </span>Higher input prices may lower margins, as the firm may not be able to effectively pass on higher input costs to consumers.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Profitability</span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="color: black;"><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">From 2006 to 2010, GIS was profitable on all levels.<span style="mso-spacerun: yes;"> </span>Total net profit increased from $1.0 billion to $1.5 billion; profit per share increased from $1.34 to $2.32 per share.<span style="mso-spacerun: yes;"> </span>Profit per share increased at a greater rate than total net profit due to share repurchase.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><span style="font-family: "Trebuchet MS", sans-serif;"></span><span style="color: black;"><span style="font-family: Calibri;"></span></span><br />
<div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Overall, management appears to have effectively managed costs.<span style="mso-spacerun: yes;"> </span>The cost of goods sold was approximately 64% of sales in each year other than 2010; cost of goods sold fell to 60% in 2010.<span style="mso-spacerun: yes;"> </span>Selling, general, and administrative expense has risen in total from 19% of sales in 2006 to 22% of sales in 2010.<span style="mso-spacerun: yes;"> </span>Net profit margin has fluctuated was in the 9%-10% in four of the five years; in 2007, net profit margin was only 7%.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<b style="mso-bidi-font-weight: normal;"><u><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Leverage</span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="color: black;"><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Balance sheet metrics</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Debt-to-total capital is a good proxy for a firm’s ability to increase debt and service debt.<span style="mso-spacerun: yes;"> </span>From 2006 to 2010, GIS’s debt-to-total capital ratio increased from 47% to 53%, peaking at 57%.<span style="mso-spacerun: yes;"> </span>The change is attributed to the increase in the total amount of debt, in addition to the decrease in equity from share repurchase.<span style="mso-spacerun: yes;"> </span>Total debt increased from $6.0 billion to $6.4 billion, while peaking at $7.0 billion in 2009.<span style="mso-spacerun: yes;"> </span>It is important to note these share buybacks may not give a true picture of what a company’s equity is; transactions made at market value mixed with historical entries may lead to negative equity.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><span style="color: black;"></span><br />
<div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Coverage metrics</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">While looking at traditional leverage metrics is important, analyzing debt coverage metrics in relation to income and cash flow is also important.<span style="mso-spacerun: yes;"> </span>From a balance sheet perspective, GIS’s leverage worsened; from a coverage perspective, GIS’s leverage improved or was flat.<span style="mso-spacerun: yes;"> </span>This indicates the increase in earnings and free cash flow is greater or equal to the increase indebtedness of the firm.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Return on capital</span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Return on equity</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">GIS’s return on common equity improved from 2006 to 2010; return on common equity increased from 14% to 27%.<span style="mso-spacerun: yes;"> </span>The firm has higher than average return on common equity.<span style="mso-spacerun: yes;"> </span>Return on common equity increased because of improved profitability, improved asset efficiency, and increased leverage.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Return on assets increased from 8% to 11% during that time period.<span style="mso-spacerun: yes;"> </span>This was partially driven by increasing efficiencies in working capital.<span style="mso-spacerun: yes;"> </span>Day sales in inventories remained flat averaging around 33 days, while day sales in receivables improved from 34 days to 25 days.<span style="mso-spacerun: yes;"> </span>This increased efficiency will allow the firm to generate more operating cash flow; the firm can use the higher operating cash flow to increase capital expenditures, increase dividends, or repurchase outstanding shares.<span style="mso-spacerun: yes;"> </span>In addition, the firm can increase leverage with the greater ability to cover debt with cash flow.<b style="mso-bidi-font-weight: normal;"></b></span></span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">So, was the increase in leverage effective?<span style="mso-spacerun: yes;"> </span>One metric to determine that is the financial leverage index.<span style="mso-spacerun: yes;"> </span>A ratio over one indicates the favorable effectives of leverage.<span style="mso-spacerun: yes;"> </span>The financial leverage index increased from 1.9 to 2.5; firm’s management has used leverage to effectively increase return on common equity and return on assets.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Return on unlevered tangible net assets</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">This is a metric Warren Buffett uses to look at companies.<span style="mso-spacerun: yes;"> </span>In his most recent letter, Mr. Buffett stated great companies have a return on unlevered tangible net assets of 25% or greater are great businesses; this ratio can exceed 100%.<span style="mso-spacerun: yes;"> </span>The firm’s return on unlevered net tangible assets increased from 76% to 202%.<span style="mso-spacerun: yes;"> </span>The increase can be attributed to increased debt and reduced equity as result of the firm’s share repurchase strategy, in addition to higher net income.<span style="mso-spacerun: yes;"> </span>By Warren Buffett’s standards, GIS is a great company.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><span style="color: black;"></span><br />
<div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Total shareholder return</span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="color: black;"><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Dividends</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">At fiscal year-end 2010, GIS paid $0.96 per share in dividends, or a dividend of approximately 2.8%.<span style="mso-spacerun: yes;"> </span>From 2001 through 2004, the firm paid a quarterly dividend of $0.1375 per share, or $0.55 per year.<span style="mso-spacerun: yes;"> </span>From 2005 to 2010, the firm started to increase dividends increasing dividends by approximately 11% annually.<span style="mso-spacerun: yes;"> </span>With an 11% annual growth rate, the dividend could almost triple from $0.96 to $2.73 by 2020.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Per the Form 10-K, GIS does not have an explicit dividend payout ratio; the firm is seeking to return cash to shareholders.<span style="mso-spacerun: yes;"> </span>From 2006 to 2010, based on net income, the dividend payout ratio decreased from 51% to 35%.<span style="mso-spacerun: yes;"> </span>A dividend payout ratio of less than 50% is preferable, as a firm’s management has the ability to increase dividends without risk of it being reduced in the near future.<span style="mso-spacerun: yes;"> </span>From 2006 to 2010, based on free cash flow, the dividend payout ratio has fluctuated; the free cash flow payout ratio had a low of 34% to a high of 55%.<span style="mso-spacerun: yes;"> </span>GIS’s dividend appears to be intact and will grow in the future.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"><br />
</span></div><span style="color: black;"></span><br />
<div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Share repurchase</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Per the Form 10-K, GIS intends to reduce total shares outstanding by approximately 2% per year, or 100 million shares in total.<span style="mso-spacerun: yes;"> </span>Committing to share repurchase is part of the GIS’s strategy.<span style="mso-spacerun: yes;"> </span>Shares were repurchased at a discount when looking at the trailing twelve month price-to-earnings multiple (TTM P/E).<span style="mso-spacerun: yes;"> </span>In 2006, the TTM P/E was 19.3 decreasing to 15.1 in 2010.<span style="mso-spacerun: yes;"> </span>In addition, the firm increased leverage to repurchase shares.<span style="mso-spacerun: yes;"> </span>In each of the years, the ratio of cash spent on share repurchase exceeded or was near 100% of net income and free cash flow.<span style="mso-spacerun: yes;"> </span>Additional borrowings were needed to meet the cash shortfall to pay for other items like capital expenditures or dividends. </span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Valuation</span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">To value GIS, I tried to use both a discount cash flow model, in addition to using P/E multiples.<span style="mso-spacerun: yes;"> </span>Each of these were adjusted to reflect the inherent business risk and financial risk in the firm.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Assumptions</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">To value GIS, I needed to make several assumptions:</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -0.25in;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="color: black; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">1.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="color: black;">Earnings growth will be 8% in 2012 and 10% each year after that.<span style="mso-spacerun: yes;"> </span>Per the Form 10-K, GIS hopes for high single digit growth.<span style="mso-spacerun: yes;"> </span>An increasing market share in China and other emerging economies should make 10% annual growth a possibility. <span style="mso-spacerun: yes;"> </span>I also assume <span style="mso-spacerun: yes;"> </span>a 10% growth rate to be the growth rate for terminal cash flows.</span></span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -0.25in;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="color: black; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">2.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="color: black;">GIS has effectively managed the cost structure for several years.<span style="mso-spacerun: yes;"> </span>I assumed cost of goods sold would be 63% of sales, in addition to selling, general, & administrative expense as 20% of sales.</span></span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -0.25in;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="color: black; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">3.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="color: black;">GIS has improved working capital management over the past five years.<span style="mso-spacerun: yes;"> </span>Management hopes that working capital increases at a lower rate than sales.<span style="mso-spacerun: yes;"> </span>Based on this, I used aggressive working capital assumptions.<span style="mso-spacerun: yes;"> </span>These include 25 days for day sales in receivables, 33 days for day sales in inventories, and 21 days for day sales in payables.</span></span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; tab-stops: list .5in; text-indent: -0.25in;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="color: black; mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">4.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span><span style="color: black;">For dividends payable, I assumed the dividend will grow at 11% per year and total dividends paid will equal the total forecasted number of shares outstanding.<span style="mso-spacerun: yes;"> </span>For share repurchase, I assumed the company will repurchase 2% of shares outstanding (per the Form 10-K) at the earnings per share for that year at a 15.9 P/E multiple.</span></span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Free cash flow to equity (FCFE) valuation</span></span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">I hope to earn 15% each year in my portfolio, thus the base discount rate I use is 15%.<span style="mso-spacerun: yes;"> </span>I adjust the 15% for business risk and financial risk.<span style="mso-spacerun: yes;"> </span>According to this model, I believe GIS has 85% the business risk as the average firm, but 110% the financial risk as the average firm.<span style="mso-spacerun: yes;"> </span>Thus, the discount rate is 14.03%.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div align="center"><table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin: auto auto auto 5.4pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; width: 242px;"><tbody>
<tr style="height: 14.25pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.8pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Risk unadjusted discount rate</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">15.00%</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 1;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.8pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">x</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 2;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.8pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Business risk factor</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">0.85</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 3;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.8pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">x</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 4;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.8pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Financial risk factor</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">1.10</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 5;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.8pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">=</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 6; mso-yfti-lastrow: yes;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.8pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><b><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Risk adjusted discount rate</span></span></b></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><b><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">14.03%</span></span></b></div></td></tr>
</tbody></table></div><div align="center" class="NoSpacing" style="margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div><div align="center" class="NoSpacing" style="margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="color: black;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Given the assumptions stated above, the intrinsic value of GIS is $43.87 per share.<span style="mso-spacerun: yes;"> </span>At market close on March 14, GIS closed at $36.92 per share, or 18.82% below the intrinsic value of the company.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">In addition, I calculated the risk adjusted margin of safety for GIS.<span style="mso-spacerun: yes;"> </span>The risk unadjusted margin of safety for any company in my portfolio is 30%.<span style="mso-spacerun: yes;"> </span>After adjusting for risk and future earnings and dividends, the risk adjusted margin of safety for GIS is 15.90%.<span style="mso-spacerun: yes;"> </span>The company is trading at a deeper value than the amount it is trading below intrinsic value.</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></div><div align="center"><table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin: auto auto auto 5.4pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; width: 285px;"><tbody>
<tr style="height: 14.25pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Initial required rate of return</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">30.00%</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 1;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">-</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 2;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Earnings growth</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">10.00%</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 3;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">-</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 4;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Dividend yield</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">3.00%</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 5;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">=</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 6;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Risk unadjusted margin of safety</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">17.00%</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 7;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">x</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 8;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Business risk factor</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">0.85</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 9;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">x</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 10;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Financial risk factor</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">1.10</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 11;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 14.25pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">=</span></span></div></td></tr>
<tr style="height: 14.25pt; mso-yfti-irow: 12; mso-yfti-lastrow: yes;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 151.8pt;" valign="bottom" width="202"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><b><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Risk adjusted margin of safety</span></span></b></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 14.25pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 61.8pt;" valign="bottom" width="82"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><b><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">15.90%</span></span></b></div></td></tr>
</tbody></table></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Price-to-equity valuation</span></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">I also want to calculate GIS value based on a P/E multiple.<span style="mso-spacerun: yes;"> </span>Similar to the FCFE valuation, I want to first calculate a “fair value P/E” in addition to a “buy P/E” and a “sell P/E.”<span style="mso-spacerun: yes;"> </span>In a historical context, a firm like GIS with 10% annual earnings growth should have a P/E of 14.5.<span style="mso-spacerun: yes;"> </span>Since GIS has a 3.0% dividend yield, the fair value P/E of GIS is 17.5.<span style="mso-spacerun: yes;"> </span>After one adjusts for the business and financial risks, the buy P/E for GIS is 15.63 and sell P/E is 20.47.</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif;"></span></div><table border="0" cellpadding="0" cellspacing="0" class="MsoNormalTable" style="border-collapse: collapse; margin: auto auto auto 5.4pt; mso-padding-alt: 0in 5.4pt 0in 5.4pt; width: 606px;"><tbody>
<tr style="height: 12.75pt; mso-yfti-firstrow: yes; mso-yfti-irow: 0;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><b><u><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Given</span></span></u></b></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><b><u><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">P/E adjustments</span></span></u></b></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 7.5pt; mso-yfti-irow: 1;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 7.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 7.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 7.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 7.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 7.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 7.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 7.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 2;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Earnings growth</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">10%</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">14.50</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 3;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">+</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 4;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Dividend yield</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">3%</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">3.0</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 5;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Basic P/E</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">17.50</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 6;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">x</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 7;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Business risk factor</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">0.85</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">1.15</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 8;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">x</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 9;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Financial risk factor</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">1.10</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">0.90</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 10;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">x</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 11;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Earnings predictability factor</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">1.00</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">1.00</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 12;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">=</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 13;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Fair value P/E</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">18.11</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Fair value P/E</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 12.75pt; mso-border-bottom-alt: solid windowtext .5pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">18.11</span></span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 14;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">/</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">x</span></span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 15;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Risk adjusted margin of safety</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">15.90%</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">115.90%</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Fundamental return</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">13.00%</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">113.00%</span></span></div></td></tr>
<tr style="height: 12.75pt; mso-yfti-irow: 16;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">=</span></span></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 12.75pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">=</span></span></div></td></tr>
<tr style="height: 13.5pt; mso-yfti-irow: 17; mso-yfti-lastrow: yes;"><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 13.5pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 132.4pt;" valign="bottom" width="177"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><b><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Buy P/E</span></span></b></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 13.5pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 13.5pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 72.8pt;" valign="bottom" width="97"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><b><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">15.63</span></span></b></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0; height: 13.5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 9.8pt;" valign="bottom" width="13"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 13.5pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 92.8pt;" valign="bottom" width="124"><div class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt;"><b><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Sell P/E</span></span></b></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 13.5pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><br />
<div></div></font></div></td><td nowrap="nowrap" style="background-color: transparent; border-bottom: windowtext 2.25pt double; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 13.5pt; mso-border-bottom-alt: double windowtext 2.25pt; mso-border-top-alt: solid windowtext .5pt; padding-bottom: 0in; padding-left: 5.4pt; padding-right: 5.4pt; padding-top: 0in; width: 48.8pt;" valign="bottom" width="65"><div align="center" class="MsoNormal" style="line-height: normal; margin: 0in 0in 0pt; text-align: center;"><b><span style="mso-bidi-font-family: Arial;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">20.47</span></span></b></div></td></tr>
</tbody></table><div></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif; mso-spacerun: yes;"> </span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">I forecast EPS for GIS to be $2.54 in FY 2011. <span style="mso-spacerun: yes;"> </span>Given the March 14 closing price of $36.92, the forward P/E is 14.54.<span style="mso-spacerun: yes;"> </span>This P/E is below the buy P/E signaling to investors that given the risk characteristics and potential earnings power, GIS is trading at a discount to intrinsic value.</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Conclusion</span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><u><span style="text-decoration: none;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></span></u></b></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">I would rate GIS as a <b style="mso-bidi-font-weight: normal;"><span style="color: #00b050;">BUY</span></b> for the following reasons:</span></div><div class="NoSpacing" style="margin: 0in 0in 0pt;"><br />
<div></div></font></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;"><span style="mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">1.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span>GIS is one of the leading brands in each of the categories it serves.<span style="mso-spacerun: yes;"> </span>It would be hard for a consumer to shop in any grocery store and not find the key brands like Cheerios, Wheaties, or Pillsbury.<span style="mso-spacerun: yes;"> </span>This strong brand recognition allows GIS to pass on price increases to customers.<span style="mso-spacerun: yes;"> </span>In other words, the firm has high pricing power and an “economic moat” around the business.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;"><span style="mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">2.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span>GIS has operations effectively under control.<span style="mso-spacerun: yes;"> </span>Regarding costs, the largest part of the cost structure includes input costs (i.e. cost of goods sold) that are highly volatile and affected by commodity costs.<span style="mso-spacerun: yes;"> </span>The consistent margins indicate GIS can pass on higher costs to consumers.<span style="mso-spacerun: yes;"> </span>Also, GIS has increased working capital efficiency over the five-year period analyzed.<span style="mso-spacerun: yes;"> </span>GIS will need to continue to maintain current operating efficiency to generate cash to help pay for capital expenditures, dividends, and share repurchase.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;"><span style="mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">3.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span>The one negative for GIS is the balance sheet.<span style="mso-spacerun: yes;"> </span>With a credit rating near the bottom of investment grade credit, the firm needs to stay focused on maintaining that rating to ensure easy access to credit markets. In addition, the aggressive share repurchase strategy has meant the firm has increased leverage to fund it.<span style="mso-spacerun: yes;"> </span>Although the firm has improved operating efficiency, dividend increases and aggressive share repurchase strategy means the firm will need to continue to access debt markets, and possibly increase total debt into the near future.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;"><span style="mso-bidi-font-family: Calibri; mso-fareast-font-family: Calibri;"><span style="mso-list: Ignore;">4.<span style="font-style: normal; font-variant: normal; font-weight: normal; line-height: normal;"> </span></span></span>The most important factor is GIS is trading at a value below its intrinsic value.<span style="mso-spacerun: yes;"> </span>According the FCFE model, GIS is trading at approximately 18.8% below intrinsic value, which is greater than the risk adjusted margin of safety.<span style="mso-spacerun: yes;"> </span>According the P/E model, the buy P/E is below the current market P/E signaling the stock is undervalued.</span></span></div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-indent: -0.25in;"><br />
</div><div class="NoSpacing" style="margin: 0in 0in 0pt 0.5in; mso-list: l0 level1 lfo1; text-align: center; text-indent: -0.25in;"><span style="color: red; font-family: "Franklin Gothic Book";"><span style="font-size: xx-small;">This information is for educational purposes only, and the opinions expressed do not constitute a recommendation to buy or sell. Author may have a position in the companies discussed, subject to change at any time. Information on this website obtained from reliable sources, but there is no guarantee of accuracy. Please consult your financial advisor before making investment decisions. Past performance is not indicative of future success.</span></span></div></font></font></font><br />
<div align="center"></div></font></font></font>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-75523721206468330442011-03-09T23:04:00.000-06:002011-03-09T23:04:57.062-06:00Reading List - March 9, 2011<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">With all of the geopolitical turmoil in the Mid East, that is not the only trigger causing volatility in financial markets. </span><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">In my opinion, a lot of the turmoil is being created by how the market will respond when Federal Reserve exits QE2. Investors are asking themselves will interest rates jump, will the risk trade continue, or will equities sell off? If equities sell off, investors will move back into risk-free assets driving Treasury yields back down. In sum, the market needs clarity on the QE2, and will there be a QE3. </span><span style="font-family: Trebuchet MS; font-size: xx-small;">This uncertainty is causing not only problems from a pure macro level, but also for large active investors like hedge funds which try to employ top-down investing strategies.</span><br />
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<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Hedge funds shut down</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">There has been a lot of news recently regarding hedge fund performance and several funds returning capital back to investors. I like to address these two issues.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Regarding hedge fund performance: several funds have underperformed the market year-to-date. I also like to note all hedge funds are not created equal, but what all hedge funds have in common are a unique strategy to each; several hedge funds employ a top-down strategy. A top-down strategy is the firm forecasts a certain view of the economy and implements bets the view will come to fruition. Given all of the "black swan" events recently (i.e. Mid East turmoil, spike in oil prices, uneasy U.S. economic data), running these funds are just becoming too dificult. In addition, several funds operate using a more traditional activist investing strategy. Thus, before active investing that hedge funds employ starts the generate outperformance, the markets will need to tame down.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Returning capital back to investors: the biggest news related to this Carl Icahn. Carl Icahn is returning capital back to investors; this change is primarily due to the increase in regulation of hedge funds. An article from <em>DealBook</em> included the following on this topic:</span><br />
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<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>More broadly, the industry has been wrestling with changes as it moves from a constellation of maverick start-ups to a body of increasingly institutionalized money managers. It is growing — money continues to flow in and its total assets stand at $1.9 trillion, near the peak before the financial crisis. But it finds itself subject to more regulation.</em></span><br />
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<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>New rules are to go into effect this summer that will force greater disclosure, and investors are demanding more transparency and questioning funds’ fees. And a sprawling investigation into insider trading has ensnared a number of hedge funds.</em></span><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">IN CARL ICAHN'S CASE, THE HEDGE FUND IS BECOMING THE FAMILY BUSINESS!</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Hedge Funds Titans Struggle To Survive (</em><a href="http://www.cnbc.com/id/41951048/%20%20(hedge%20funds%20underperform)"><em>click here</em></a><em>)</em></span><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">Icahn Capital to Return Outside Money in Hedge Fund (<a href="http://dealbook.nytimes.com/2011/03/08/icahn-to-return-outside-money-in-hedge-fund/">click here</a>)</span></em><br />
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<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Public vs. private</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">In previous posts, I have highlighted various mechanisms that companies have used to stay private longer or skip the traditional IPO process. Key reasons why companies do not want to go public include the increased government regulation and the minimum size a company must be to go to market (this has increased over the years). Ways that have aided the prolonging include the rise of exchanges for private companies, or companies skipping the IPO process by using "reverse takeovers."</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Below is a video from CNBC why some companies are not going public. Herb Greenberg, CNBC commentator, highlights three key reasons that have been expressed in previous posts:</span><br />
<ul><li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Firms can raise money elsewhere (i.e. venture capitalists, private equity)</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Avoid regulatory headaches</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Build the business versus playing Wall St. games. By going public, it becomes a game of not what can you do for me in the next 40 quarters, but what have you done for me last quarter.</span></li>
</ul><span style="font-family: Trebuchet MS; font-size: xx-small;">WALL STREET HAS BECOME ITS OWN WORST ENEMY!</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Public vs. Private (<a href="http://www.cnbc.com/id/15840232/?video=3000008608&play=1">click here</a>)</em></span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Uncle Ben says "no" to a bubble!</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Mr. Bernanke was asked whether or not he sees a new asset bubble forming, and his answer was there was no evidence. As we all knokw, the steep drop in stock prices in late 2008 to early 2009 indicated the market was in panic; in other words, the market was oversold. When the Federal Reserve came to rescue by pump-priming the system with liquidity, it only led to a recovery not many have seen. But do market watchers agree that this rise is not leading to a new bubble?</span><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Evidence several market watchers have used includes: 1) bubbles occur when there are high valuations; markets do not indicate high valuations; 2) the average bull market is up over 160%; this market has not yet hit "middle-age"; and 3) corporate balance sheets are in great shape with huge cash balances; companies can use this cash for increased dividends, share repurchases, or acquisitions (all three of these things make stocks more valuable).</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Is The Two-Year Stock Rally Just Creating Another Bubble? (</em><a href="http://www.cnbc.com/id/41938996"><em>click here</em></a><em>)</em></span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Bill Gross moves into cash</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">To essentially quote the article, Bill Gross has sold off all Treasuries in the flagship PIMCO Total Return Fund and moved into cash. The thesis behind this move is that QE2 will be the last of quantiative easing. Once the market stops QE2, the large mechanism that has pushed government bond yields down will cease and interest rates will rise. Mr. Gross thinks the U.S. Treasury market is the most overvalued part of the bond market right now. Mr. Gross stated:</span><br />
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<em><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15% gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO’s not sticking around to see the waitress’s reaction.</span></em><br />
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<em><span style="font-family: Trebuchet MS; font-size: xx-small;">PIMCO Goes to Cash, Exits Treasuries (<a href="http://www.cnbc.com/id/41988321">click here</a>)</span></em><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Howard Marks: time to be cautious?</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Howard Marks, one of the founders of Oaktree Capital, believes it is time for investors to be cautious. Mr. Marks believes the Federal Reserve will stop quantitative easing after QE2; the Fed will not pursue QE3 because there will be no appetite for it in the market. Thus, after QE2 stops, the market will be as he says, "woozy."</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">According to him, investors ought to know the future is uncertain, so it is important to diversify, not employ leverage, and hedge. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Oaktree's Howard Marks Says It's Time To Be 'Cautious' (</em><a href="http://dealbook.nytimes.com/2011/03/03/oaktrees-marks-says-its-time-to-be-cautious/"><em>click here</em></a><em>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-79240436783893198902011-02-27T10:18:00.002-06:002011-02-27T11:00:03.214-06:00Warren Buffett's Annual Letter<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">On Saturday, Warren Buffett released his annual letter to shareholders. The major theme for the letter might be, "we are turning the corner."</span><br />
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<strong><span style="font-family: Trebuchet MS; font-size: xx-small;"><u>Performance & results</u></span></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Mr. Buffett would like investors to look at the per-share intrinsic value to determine the performance of the firm against the performance of the S&P 500 including dividends. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">The three key components of Berkshire intrinsic value incloudes the value of investments, value of earnings from other than investments or insurance underwriting, and the value of how retained earnings will be deployed back into the business. The first two of these pillars of these are easy to calculate, while the final pillar is hard to calculate. Regarding deploying capital:</span><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">This "what-will-they-do-with-the-money" factor must be always evaluated along with the "what-do-we-have-now" calculation in order for us, or anybody, to arrive at a sensible estimate of a company's intrinsic value...If a CEO can be expected to do his job well, the reinvestment prospects add to the company's current value; if the CEO talents or motives are suspect, today's value must be discounted. The difference in outcome can be huge...</span></em><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Mr. Buffett alluded to the fact that in the early days of his control of Berkshire, there was much more emphasis put on the investment side versus the development of earnings from non-insurance businesses. This practice will most likely continue as Berkshire continues to grow in size, and amount of cash to invest continues to grow due to earnings from the portfolio of businesses, income from investments, and insurance float. Furthermore, the size of Berkshire will reduce the ability to generate the large outperformance it did in the earlier years. Regarding size:</span><br />
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<em><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">...shows our 46-year against the S&P, a performance quited good in the earlier years and now only satisfactory. The bountiful years, we want to emphasize, will never return. The huge sums of capital we currently manage eliminate any chance of exceptional performance. We will strive, however, for better-than-average results and feel it for you to hold us to that standard.</span></em><br />
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<span style="color: black; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">As Mr. Buffett alludes to in the letter, Berkshire's best days ended in the early 1980's. In the market's golden period in the next seventeen years, Berkshire's absolute advantage narrowed. In recent years, Berkshire's negative outperformance or lower outperformance came in years where the market did not properly reward the businesses Berkshire invests in. Berkshire's outperformance comes in the years where the market is terrfied about market events and moves towards a "flight for safety." In 2008 market turmoil, the per-share-book value of Berkshire went down -9.6% versus the -37.0% for the S&P 500 including dividends, or 27.4% of outperformance. In 2009, when the equity started in recovery, the per-share-book value of Berkshire went up only 19.8% versus the 26.5% for the S&P 500 including dividends, or -6.7% of underperformance. These results largely include the large, quality businesses that Berkshire invests in that have strong cash flow and balance sheets. </span><br />
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<span style="color: black; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Because of the size, Berkshire is looking to another big target like the acquisition of BNSF. Regarding a big acquisition:</span><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">Charlie and I hope that the per-share earnings of our non-insurance businesses contines to increase at a decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our current businesses and more major acquisitions. We're peprared. Our elephant gun has been reloaded, and my trigger finger is itchy.</span></em><br />
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<strong><u><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Corporate culture</span></u></strong><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Rather than get into an explanation about Berkshire's culture, I think the quotes below best illustrate Berkshire's culture:</span><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">Our trust is in people rather than process. A "hire well, manage little" code suits both them and me.</span></em><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">Berkshire's CEOs come in many forms. Some have MBAs; others never finished college. Some use budgets and are by-the-book types; others operate by the seat of their pants. Our team resembles a baseball squad composed of all-stars having vastly different batting styles. Changes in our line-up are seldom required.</span></em><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">Cultures self-propagate...bureaucratic procedures beget more bureacracy, and imperial corporate palaces induce imperious behavior...at Berkshire's "World Headquarters" our annual rent is $270,212. Moreover, the home-office investment in furniture, art, Coke dispenser, lunch room, high-tech equipment - you name it - totals $303,363.</span></em><br />
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<strong><u><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Successors</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">With the recent retirment of Lou Simpson, the next generation of leaders at Berkshire still remains in question. It appears the next Berkshire CEO will have "x" amount of money to manage, and the firm may hire additional portfolio managers. Mr. Buffett, along with Charlie Munger, intend to do the primary investing at Berkshire until neither one of them are in the role. Regarding the criteria for successors:</span><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">...But past results, though important, do not suffice when prospective performance is being judged. How the record has been acheived is crucial, as is the manager's understanding of - and sensitivity to - risk (which is no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.</span></em><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Todd Combs was chosen as one of those successors. Previously, Mr. Combs ran a hedge fund. Regarding hedge funds:</span><br />
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<span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">...The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich...investors who put money with such managers should be labeled patsies, not partners.</span><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Most investment professionals have some sort of style that is theirs. Regarding that style:</span><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">...fund consultants like to require style boxes such as "long-short", "macro," "international equities." At Berskhire, our only style box is "smart."</span></em><br />
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<strong><u><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Leverage</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Mr. Buffett speaks about how much he does not like Berkshire to use leverage. To illustrate his point, Mr. Buffett includes a letter from his grandpa to his Uncle Fred. The point of the letter was that there is peace of mind when people have cash they can put their hands on, it is important not to spend all a person makes, and do not sacrifice your business because of some one-time event. Thus, "...liquidity is a condition for assured survival." Furthemore:</span><br />
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<em><span style="color: blue;"><span style="font-family: Trebuchet MS; font-size: xx-small;">At Berkshire, we have taken his $1,000 solution a bit further and will hold at least $10 billion of cash, excluding that held at our regulated utility and railroad businesses. Because of that commitment, we customarily keep at least $20 billion on hand so that we can both withstand unprecedented insurance losses...and quickly seize acquisition or investment opportunities even during times of financial turmoil.</span> </span></em><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Mr. Buffett maintains a relatively riskless strategy for investing short-term cash. To his point:</span><br />
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<em><span style="background-color: white; color: blue; font-family: Trebuchet MS; font-size: xx-small;">We keep our cash largely in U.S. Treasury bills and avoid other short-term securities yielding a few mere basis points, a policy we adhered to long before the frailties of the commercial paper and money market funds became apparent in September 2008...At Berkshire, we don't rely on bank lines, and we don't enter into contracts that could require postings of collateral except for amounts that are tiny in relation to total liquid assets.</span></em><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">By being so cautious in respect to leverage, we penalize our returns by a minor amount. Having loads of liquidity, though, lets us sleep well...we will be equipped both financially and emotionally to play offense while others scramble for survival.</span></em><br />
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<strong><u><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">On America</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">The most important them from the letter I think the biggest them that permeates Mr. Buffett's letter is his bullish attitude for the United States. Now, a person in Mr. Buffett's position is in a different situation than an unemployed construction worker, but he is putting his money where his mouth is.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Mr. Buffett believes there is plent of of opporunity in the United States. Regarding that opportunity:</span><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">Money will always flow toward opportunity, and there is an abundance of that in America. Commentators today often talk about "great uncertainty." But think back, for example, December 6, 1941, October 18, 1987 September 10, 2011. No matter how serene today may be, tomorrow will always be uncertain.</span></em><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">Don't let that reality spook you. Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential - a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War - remains alive and effective....America's best days lie ahead.</span></em><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">The biggest news in 2010 for BNSF was the acquisition of BNSF railway. Mr. Buffett is extremely optimistic about the acquisition and the earnings power of the business. As a result, Berkshire is increasing CAPEX spending in BNSF railway, but most CAPEX spending for the portfolio of businesses will be in the United States.</span><br />
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<em><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Both of us are enthusiastic about BNSF's future because railroads have major cost and environmental advantages over trucking, their main competitor...When traffic travels by rail, society benefits.</span></em><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">Over time, the movement of goods in the United States will increase, and BNSF should get its full share of the gain. The railroad will need to invest massively to bring about this growth, but no one is better situated than Berkshire to supply the funds required. However slow our economy, or chaotic the markets, our checks will clear.</span></em><br />
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<em><span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">...we demonstrated our enthusiasm for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount, $5.4 billion - or 90% of the total - was spent in the United States. Certainly our businsses will expand abroad in the future, but an overwhelming part of their future investments will be at home. In 2011, we will set a new record for capital spending - $8 billion - and speand all of the $2 billion increase in the United States.</span></em><br />
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<strong><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;"><u>What does all of this mean?</u></span></strong><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">There are several themes in this letter that relate to the average retail investor. First, </span><span style="font-family: Trebuchet MS; font-size: xx-small;">I would not bet against America. Nor would I make a pure play on America. Instead, I would continue to look at large U.S. based companies that have a good portion of their revenues generated outside of the United States and have sustainable dividend yields. By looking at these companies with this type of sales mix, you will be exposed to an ever growing stream of non-US revenues, while seeing a recovery in sales from the United States. Regarding the dividend point, we will be seeing some sort of inflation in the coming years. These firms will be able to increase dividends the easiest, allowing investors to hedge inflation. I would still look at select small-cap companies in areas that will benefit from a U.S. recovery. Some sectors include rail, housing, and consumer discretionary.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Second, do not buy into trends. It is important to develop your own style of investing, which may include investing in all different asset classes. Rather than pack a particular asset class, develop an approach that is uniform to all asset classes. Most people would associate Mr. Buffett as an equity investor. In this year's letter, he speaks about bets he made using derivatives. He used his approach to these instruments as well.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Third, be liquid and do not overly rely on leverage. This can be applied several different ways to investing. One way to interpret this is to invest in liquid companies meaning invest in companies that have strong cash flow and balance sheets. As a result, these companies can internally provide the cash for operations, capital improvements, or be able to return cash to shareholders. Another way to interpret this is it is ok to have cash drag on your portfolio. I look at the cash allocation or cash drag problem like a football game. As a value investor, it is important to follow a list of companies, determine their appropriate valuation, and when the time comes, buy the company. Often times, these companies hit their appropriate valuation when a crisis hits. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Warren Buffett's Annual Letter (</em><a href="http://www.berkshirehathaway.com/letters/2010ltr.pdf"><em>click here</em></a><em>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-87867772699477545952011-02-15T19:24:00.000-06:002011-02-15T19:24:55.040-06:00Liquidity Induced Bubbles<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Contrary to Chairman Ben Bernanke's recent comments, investors are beginning to feel the inflation threat is real. Unlike Mr. Bernanke and the Federal Reserve, the market looks at different factors. What does the Federal Reserve use to sniff out inflation? The Federal Reserve looks at core inflation excluding food and energy. In addition, the Federal Reserve looks at the output gap (i.e. actual output versus potential output). In the Federal Reserve's mind, as the economy is bumping along at the current rate, there will be a large output gap (and high unemployment) minimizing the perceived inflation rate.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">So, what does the market use to sniff out inflation? The market actually uses market factors like commodity prices and interest rates. Recent movements in these markets all indicate investors feel the inflation threat is real. Let's first look at Treasury bonds. At December 31, 2010, the 10-yr Treasury closed at 3.31%. On February 15, the 10-yr Treasury closed at 3.62%. On December 31, 2010, the 30-yr Treasury closed at 4.36%. On February 15, the 30-yr Treasury closed 4.66%. These movements indicate traders are realizing the inflation risk and moving out of Treasuries, and into commodities.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">In my opinion, a recent CNBC article summed up the movement in the bond market:</span><br />
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<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>While inflation today looks pretty benign, what bond investors don't like right now is the uncertainty factor around the future inflation picture.</em></span><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">These factors will not inhibit the Fed to continue to pursue the policies it has been pursuing. First, the Fed has to maintain stable prices. As long as core CPI is under two percent, the Federal Reserve is going to maintain the current interest rate policy. Second, the Fed has the mandate to maintain prices. As long as unemployment is high, the Fed will continue to puruse quantitative easing and zero interest rates to increase growth and lower unemployment. </span><span style="font-family: Trebuchet MS; font-size: xx-small;">The end game for the Federal Reserve is to create a wealth effect. The idea is that asset prices will go up, which will encourage investors to spend and firms to be more ambitious about expansion plans. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Good questions to ask right now include: 1) are commodities and equities going up because an underlying bubble is being formed?; 2) how should policymakers respond?; and 3) how is an investor able to protect themself in either high inflation or asset bubble?</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Pedro de Noronha, Noster Capital, believes the market is currently in a bubble. According to him, the valuations do not support 2012 and 2013 earnings. So, as a value investor, it is important to let the market indicate the firm's intrinsic value. Until it does, it is important to get paid through dividends. Also, it is important to note Mr. de Noronha's point:</span><br />
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<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>If we are indeed witnessing the third liquidity-induced bubble in a little over ten years (this time fuelled by public, not private sector debt), we are fearful that there could be severe consequences for the market over the medium term...We won't hesitate forsaking some upside for the fund in order to ensure that we will be in good standing to take advantage of very compelling opportunities that will arise should such a financial event occur</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">So, if there is an asset bubble being created, what are the mechanics of one? In my senior year of college, I wrote a paper about inflation targeting. I wrote how Mr. Bernanke does not believe central banks can prevent one from forming, in addition to the behavior of their creation and aftermath:</span><br />
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<div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>A debate exists among central bankers who believe asset prices should play a role in creating an inflation forecast.<span style="mso-spacerun: yes;"> </span>Ben Bernanke, Federal Reserve Chairman and a leading proponent of inflation targeting, has argued against a central bank’s focusing on asset prices, “…only to the extent they affect a central bank’s forecast for inflation.”<span style="mso-spacerun: yes;"> </span>Bernanke argues a central bank does not know the level of price increases in volatile assets that constitute an asset bubble or when the bubble will burst.<span style="mso-spacerun: yes;"> </span>Claudio Borio and Philip Lowe argue that a central bank should not “target” asset prices such as stocks or real estate, but instead focus on their changes.</em></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><span style="font-family: "Trebuchet MS", sans-serif;"><span style="font-size: xx-small;"><em><span style="color: blue;">A central bank should take asset prices into consideration for specific reasons.<span style="mso-spacerun: yes;"> </span>First, asset price bubbles have occurred when credit increased at a greater rate than inflation.<span style="mso-spacerun: yes;"> </span>Since the central bank can control inflationary expectations, firms and households feel optimistic when high GDP growth can be accompanied by low inflation; this causes firms to increase investment.<span style="mso-spacerun: yes;"> </span>Due to the influx of credit, lenders, firms and households begin to make poor decisions by overvaluing assets and not assessing risk.<span style="mso-spacerun: yes;"> </span></span></em></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>Second, the supply side of the economy improves because of low inflation. One impact is workers and firms are more willing to enter into contracts when current inflation is low.<span style="mso-spacerun: yes;"> </span>Because the nominal price inputs like labor are held constant or grow at a specific rate, corporate profitability increases.<span style="mso-spacerun: yes;"> </span>Increased profitability makes investment in stocks more attractive to the public.<span style="mso-spacerun: yes;"> </span>Capital gains from the stock and bond markets become “self-reinforcing” and feed into each other.<span style="mso-spacerun: yes;"> </span>Also, it is more attractive for firms to increase their investment in assets such as land and equipment.<span style="mso-spacerun: yes;"> </span>Because of their increased profitability, firms predict overall demand will continue to increase and may borrow funds to purchase these investments.</em></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>Third, when an asset bubble bursts, deflation usually occurs, which creates various problems.<span style="mso-spacerun: yes;"> </span>To fund expansion, many firms may finance part of the expansion with debt.<span style="mso-spacerun: yes;"> </span>Because inflation improved their outlook for the future, it may have caused a misallocation of assets.<span style="mso-spacerun: yes;"> </span>Furthermore, lenders make the decision to lend to firms and households based on increases in nominal income.<span style="mso-spacerun: yes;"> </span>The end result is more debt than before the bubble and deflation causes the real value of the debt to increase.<span style="mso-spacerun: yes;"> </span>As the value of debt increased, firms and households cannot afford to make regular interest payments.<span style="mso-spacerun: yes;"> </span>The end result is deflation, an increase in defaults and tightened lending standards.</em></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-layout-grid-align: none; mso-pagination: none; punctuation-wrap: simple;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>These three arguments make a case that asset prices should play a role in creating inflation forecasts and determining monetary policy.<span style="mso-spacerun: yes;"> </span>Since asset prices play a major role in daily decisions that affect firms and households, an asset bubble created by inflation is not good for the economy in the long run.<span style="mso-spacerun: yes;"> </span>As the prospect of deflation increases, the central bank will have to reverse the trend it created.<span style="mso-spacerun: yes;"> </span>As Cecchetti and others argued, the central bank should not target asset prices, but only take them into consideration when determining monetary policy.<span style="mso-spacerun: yes;"> </span>If equities, real estate or any other volatile assets are increasing at a rate higher than historical levels, the central bank should raise interest rates.<span style="mso-spacerun: yes;"> </span>If any of these assets are increasing at a rate lower than historical levels, the central bank should lower interest rates.</em></span></div><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Inflation Threat: Investors Starting to Show Inflation Threat Is Real (<a href="http://www.cnbc.com/id/41459941">click here</a>)</em></span><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">Liquidity Induced Bubble Could Burst: Fund Manager (<a href="http://www.cnbc.com/id/41594548">click here</a>)</span></em>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-24338689984760118582011-02-14T21:52:00.000-06:002011-02-14T21:52:26.876-06:00Q4 2010 Form 13F Filings<span style="font-family: "Trebuchet MS", sans-serif;"> <span style="font-size: xx-small;">One way for an average investor to be successful is to look at professional investors that have an investment philosophy/strategy that most mimmicks theirs. Most average people who want to get involved in investing do not know large investors have to disclose their stakes to the SEC each quarter through a Form 13F.</span><br />
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<span style="font-size: xx-small;">According to Investopedia, a Form 13F is: </span><br />
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<em><span style="color: blue;"><span style="font-size: xx-small;">An SEC reporting form filed by institutional investment </span><span style="font-size: xx-small;">managers in accordance with the provisions of section 13(f) of the Securities and Exchange Act of 1934, which states that all institutional investment managers who are managing over $100 million on the last trading day of any month of the calendar year must disclose their holdings on a quarterly basis. </span></span></em><br />
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<span style="font-size: xx-small;">Due to their value tilt, I have highlighted changes in Warren Buffett's, John Paulson's, and Bill Ackman's holdings below.</span><br />
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<strong><u><span style="font-size: xx-small;">Warren Buffett</span></u></strong><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">There were no key additions to Berkshire Hathaway portfolio of publicly traded companies during Q4 2010. Instead, most of the major changes came from the elimination of core holdings in the portfolio. Key eliminations included the entire share of Bank of America, Comcast, Loews Companies, Nalco Holdings, Nestle and Nike. Other positions that were reduced some include Bank of New York Mellon.</span><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Most of the positions that were eliminated were in the $200-$300 million range. These are the typical size of the stakes managed by Lou Simpson, the former GEICO stockpicker. Some of these holdings included Bank of America, Comcast, and Nike. Essentially, as some analysts have pointed out, Buffett is simply eliminating the positions he is not comfortable with as other portfolio managers will begin to take over the Berkshire portfolio.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">The largest stake that was eliminated included Bank of America, which was purchased in 2007. Mr. Buffett did not approve of the "crazy price" Bank of America paid for Merrill Lynch. As Buffett said, "He could have bought them the next day for nothing because Merrill was going to go when Lehman went."</span><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>Buffett Closes Out His Bank of America Stake (<a href="http://dealbook.nytimes.com/2011/02/14/buffett-closes-out-his-bank-of-america-stake/">click here</a>)</em></span><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">Berkshire Hathaway Form 13-F (<a href="http://sec.gov/Archives/edgar/data/1067983/000095012311013623/v58511e13fvhr.txt">click here</a>)</span></em><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>John Paulson</u></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">In an earlier post, I commented on the annual letter sent to investors in the Paulson & Co funds. Several of the additions and reductions in positions represent the themes that were stated in the letter.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Merger arbitrage positions</em> - Mr. Paulson stated he expected M&A activity to be high in 2011, thus creating a strong environment for merger arbitrage. Two key merger arbitrage trades by the fund right now include J. Crew Group and Del Monte foods. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Distressed situations - </em>As borrowing costs continue to decrease for lower rated companies, these firms valuations continue to look more attractive; this creates a lower cost of capital and higher firm value. In addition, Mr. Paulson stated companies that were formerly in distressed situations have repaired their balance sheets, so the upside risk is much larger than the downside risk. One position that illustrates this point is the addition of Alcoa Inc. bonds into the portfolio. Leading up to the financial crisis, Alcoa management engaged in a significant stock repurchase program using leverage to do so. When the economy went into a recession, the demand for aluminum fell and the company experienced losses. Because of the increased leverage and decreased equity, the rating agencies downgraded Alcoa many levels. The weakened credit picture forced Alcoa to have problems accessing the short-term debt markets (i.e. commercial paper). As a result of all these factors, Alcoa's credit spreads have widened greatly creating value in their bonds. </span><span style="font-family: Trebuchet MS; font-size: xx-small;">Finally, the extension of the Bush-era tax cuts, Mr. Paulson is more bullish in the U.S. economy. Thus, if the economy improves, Alcoa's future improves and the company credit spreads should decrease causing the bond's value to increase. This is a pure play of an improving economy helping poor credits improve</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Other examples of these type of positions include Lear Corporation (i.e. the auto industry) and International Paper.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Financials - </em>Key reductions include reducing the common stock position in Bank of America and Citigroup. Mr. Paulson increased his position in Wells Fargo and Capital One, while adding a position in Royal Bank of Scotland. Key positions that were maintained included JPMorgan Chase, Northern Trust, and State Street. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">In my opinion, Mr. Paulson saw the earnings powers of these banks diminish and had some "profit-taking" over the past quarter. JPMorgan Chase is a solid franchise that is just as strong or stronger than before the crisis. In addition, Northern Trust, State Street, and Wells Fargo are well positioned if inflationary pressures cause a large increase in interest rates; this should increase the net interest margin, thus profitability.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Inflation trade - </em>Mr. Paulson's portfolios are positioned for the inflation trade. For example, key trades in Gold Fields Ltd, IAMGOLD, and the SPDR Gold Trust were all maintained.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>John Paulson Trims Citigroup and BofA Stakes (<a href="http://blogs.wsj.com/deals/2011/02/14/john-paulson-trims-citigroup-stake-buying-alcoa-blackrock-j-crew/">click here</a>)</em></span><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">Paulson & Co. Form 13F (<a href="http://sec.gov/Archives/edgar/data/1035674/000103567411000001/pco123110.txt">click here</a>)</span></em><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>Bill Ackman</u></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Bill Ackman's Pershing Square portfolio saw a good amount of change. Positions in Automatic Data Processing (ADP), Citigroup, Kraft Foods, and Target Corp were all down. Positions in Fortune Brands and JCPenney were up. </span><br />
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<span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><em>Fortune Brands - </em>Recently, Fortune Brands announced in its Q4 2010 earnings release that it would split itself into three brands: the spirits group that owns Jim Beam whiskey; the golf equipment unit that owns Titleist; and the home products operations that own the likes of Moen faucets. </span></span><br />
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<span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Regarding the golf equipment part of the business, the company is seeking out large bidders (i.e. Nike) or private equity firms. If the company cannot get the right price for the golf part of the business, the firm intends for an IPO. Regarding the home products part of the business, the firm intends an IPO by late 2011. The intent is that increasing home starts will lead to an increase in demand for home products, thus creating the most value of shareholders. So, what is left of the spirits business? If firms like Diageo can overcome antitrust issues, the spirits business will be a likely target.</span></span><br />
<em><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Fortune Brands on Track For Breakup (cli<a href="http://dealbook.nytimes.com/2011/02/04/fortune-brands-on-track-for-break-up/">ck here</a>)</span></em><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">Video: Fortune Brands Big Breakup (<a href="http://dealbook.nytimes.com/2011/02/02/fortune-brands-big-breakup/">click here</a>)</span></em><br />
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<em><span style="font-family: Trebuchet MS; font-size: xx-small;">Pershing Square Adds GM, Almost Triples General Growth Holding (<a href="http://online.wsj.com/article/SB10001424052748703703804576144980007511772.html?mod=googlenews_wsj">click here</a>)</span></em><br />
<em><span style="font-family: Trebuchet MS; font-size: xx-small;">Pershing Square Form 13F (<a href="http://sec.gov/Archives/edgar/data/1336528/000117266111000236/pers4q10.txt">click here</a>)</span></em><br />
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<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">What does this mean?</span></u></strong><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Overall, I think the investment community is very bullish on financials going forward. These three investors all reduced their positions in financials that faced the brunt of the crisis (i.e. Citi and Bank of America). If positions were added or maintained, they were to more traditional lenders (i.e. Wells Fargo) or service providers (i.e. Northern Trust or State Street) with earnings that are levered to higher interest rates and increase mortgage origination. These stocks have not performed well against the general market. To position a portfolio, I think these are great names. Other names include Bank of Hawaii (BOH) or Hudson City Bancorp (HCBK). Finally, JPMorgan should continue to deserve a look.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Overall, these investors are very bullish on the U.S. economy. One such area is in housing. For example, Mr. Paulson holds a large position on Beazer Homes. Mr. Ackman is the major driver of the Fortune Brands break-up, including pushing for an IPO for the home security business predicated on an increase in new home starts. Thus, another area to look to value right now is housing.</span><br />
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An area of concern I have is in the area of M&A. Although the economic picture is looking brighter for the U.S., large multinationals are going to struggle for organic growth. Instead, they will need to look at acquisitions to have earnings growth, particularly in emerging market economies. To help get a foot in these markets, buyers will often overpay for companies and may never receive the benefits. While this is good from a merger arbitrage perspective, it is bad from a value investor's perspective that looks at companies to either grow organically or allocate capital efficiently.</span><br />
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<span style="color: red; font-family: Trebuchet MS;"><div class="MsoNormal" style="margin: 0in 0in 0pt; text-align: left;"><b style="mso-bidi-font-weight: normal;"><span style="color: red; font-family: "Franklin Gothic Book";"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">This information is for educational purposes only, and the opinions expressed do not constitute a recommendation to buy or sell. Author may have a position in the companies discussed, subject to change at any time. Information on this website obtained from reliable sources, but there is no guarantee of accuracy. Please consult your financial advisor before making investment decisions. Past performance is not indicative of future success.</span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt; text-align: left;"><b style="mso-bidi-font-weight: normal;"><span style="color: red; font-family: "Franklin Gothic Book";"><span style="font-family: Trebuchet MS; font-size: xx-small;"></span></span></b> </div><div class="MsoNormal" style="margin: 0in 0in 0pt; text-align: left;"><b style="mso-bidi-font-weight: normal;"><span style="color: red; font-family: "Franklin Gothic Book";"><span style="font-family: Trebuchet MS; font-size: xx-small;">I am long JPM.</span></span></b></div></span></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-74905440455321814772011-02-09T23:45:00.001-06:002011-02-09T23:47:21.351-06:00Fly like a cheesehead...<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">I am a Packers fan, btw. I have not had any posts considering their Super Bowl victory, so I thought it would be cool to share some cool stuff I have read about the Packers since they won the Super Bowl.</span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Fly like a cheesehead...</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">A group of students at the University of Wisconsin came up with a parody to the song, "Like a G6." Instead of going like, "...like a G6," the song goes, "...like a cheesehead." Being a Packer fan, I remember the Packarena from the 1990's. It is interesting to note that without the internet or sites like YouTube, things like this would not be possible. As we all know, the internet creates a venue and mass marketing opportunity for anybody out there. </span><br />
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<a href="http://www.youtube.com/watch?v=Y3pFD-xdPRE"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">http://www.youtube.com/watch?v=Y3pFD-xdPRE</span></a><br />
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<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Owning the Packers</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">The Green Bay Packers are a team that is owned by the public. The article explains, I think in a great way, the tangible and intangible benefits of owning a business:</span><br />
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<em><span style="color: #38761d; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">So<span style="color: #38761d;">metimes, though, the sentiment may be what you're most interested in. Witness all the online services that will sell you a single framed stock certificate of the company of your choice. You'll probably never get rich off that sole share, but at least you can proudly say you own a small piece of your favorite company.</span></span></em><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Btw - I would love to own a piece of the Packers!</span><br />
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<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>The Packers and Pride of Ownership (<a href="http://www.fool.com/investing/general/2011/02/09/the-packers-and-pride-of-ownership.aspx">click here</a>)</em></span><br />
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<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">A Packer Fan on Wall St.</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Aaron Nagler works at Blackstone and runs cheeseheadtv.com, which is the largest Packer fan website. Because of working at Blackstone, Mr. Nagler lives in NY. Besides not having the money to go to the game, I really liked the reason of why he stayed in New York to watch the Packers win the Super Bowl:</span><br />
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<span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><em><span style="color: #38761d;">To put it as simply as possible — I want to watch the Packers win the Super Bowl with my family...call me foolish, tell me I’m angering the football Gods — I don’t care. I like our chances. The Packers are ready to start winning championships. Plural. And I want to watch the first one with my girls.”</span></em></span></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Checking in with Wall Street's Cheesehead (<a href="http://dealbook.nytimes.com/2011/02/07/checking-in-with-wall-streets-cheesehead/">click here</a>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-57571396704584317842011-02-09T23:27:00.000-06:002011-02-09T23:27:02.561-06:00Reading List - January 8, 2010<strong><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><u>Bill Ackman, Michael Porter & efficient markets</u></span></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Below is a link to a video from "Squawk Box" on CNBC with Michael Porter and Bill Ackman. For those of you who don't know who Michael Porter is, Michael Porter is a professor at Harvard Business School and today's leading expert on competitive strategy. Bill Ackman was mentioned in an earlier post because of buying a large portion in JCPenney and gaining a few seats on JCPenney's board. The video centers around are capital markets efficient and are useful for businesses to raise capital today. Interesting points from the article include:</span><br />
<ul><li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Bill Ackman had Michael Porter as a professor at Harvard while earning his MBA. What struck me is how much Ackman said Porter was influential on him. Ackman said Porter's strategy emphasis really made him look at the business (or franchise) he was investing in. To take that a step further, it is just as important to understand the industry your investing in and the external forces that impact that industry.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">The point was brought up about the increased frequency in trading that occurs in today's markets, essentially separating short-term traders and long-term investors. Ackman said this dualism in the markets in the market is actually a good thing by creating arbitrage opportunities. Because so many traders and short-term investors are focused on quarterly earnings, the stock is sold off and does not reflect the intrinsic value of the business. Long-term investors can purchase the business at these depressed valuations and drive the price towards the intrinsic value.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">The whole notion of guidance is a bad idea and investors should do their own homework. Also, by setting quarterly earnings targets, a firm often deserves the type of investors it gets. By setting quarterly earnings targets, it may force management to make the wrong decisions to essentially game the share price. You have to think, "If I were running this business privately, what would I do?"</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Ackman goes against the Benjamin Graham notion of intrinsic value and realization of value. Instead, Ackman believes you purchase an undervalued company at the current moment, but do not sell the company when the company reaches the intrinsic value at which you bought. Businesses are not static. Instead, it is important to find businesses that will continually create value and re-assess the intrinsic value on an ongoing basis.</span></li>
</ul><span style="font-family: Trebuchet MS; font-size: xx-small;"><em>JCPenney a 'Cheap Stock': Ackman (<a href="http://www.cnbc.com/id/41491791">click here</a>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>Private equity: stage left?</u></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">The article highlights a company's management teaming with private equity plaers for a private equity buyout. The issue has come to forefront as Kinder Morgan and HCA, both part of management led buyouts, will be seeking to tap the IPO market. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">The risk to a management led buyout is often management is friends with the directors. This creates a problemdddd as management might try to force a low bid. If the directors refuse the deal, they may in effect be firing key managers. There is another additional agency cost. Often times, management will steer directors to accepting a deal from private equity versus a strategic buyer because private equity will retain that management.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">So, can management led buyouts create value? According to the article:</span><br />
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<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>Yet management-led buyouts can be economically beneficial, others argue. The primary justification is that a private company can be more efficient than a public one because of the capacity for an increased debt load, lower regulatory costs and diminished public scrutiny. And management is best positioned to reap these gains. After all, this is what private equity is about — creating benefits by taking companies private.</em></span><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;"><em>In Kinder Morgan and HCA IPO's, a Cautionary Tale (<a href="http://dealbook.nytimes.com/2011/02/08/a-cautionary-tale-as-private-equity-exits-2-deals/">click here</a>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>A Drilling Boom</u></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Ensco will buy rival Pride International for $7.3 billion. The future for offshore drilling looks bright as we are building up offshore rigs at a level last seen in 2007.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>The Beginning of a Deepwater Drilling Boom (</em><a href="http://dealbook.nytimes.com/2011/02/08/the-beginning-of-a-drilling-boom/"><em>click here</em></a><em>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><u><strong>Goldman to Playboy</strong></u></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">On a lighter note, just read it.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Goldman Intern Turns Playboy Bunny (<a href="http://www.cnbc.com/id/41472358/">click here</a>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-58801416666585688642011-02-06T10:00:00.000-06:002011-02-06T10:00:39.951-06:00The Fed's Third Mandate?<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>So far on this blog, I have not posted a lot of articles or written about macroeconomic policy, particularly Federal Reserve policy. Today will be the start, as I intend to post more about Fed policy, inflation, and how inflation can impact an investor's decisions.</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">When I was an economics major in college, I learned all about the Federal Reserve's mandate and the Humphrey-Hawkins Act. The Humphrey-Hawkins charges the Fed with two major policy mandates. The first mandate is a stable price level. The second mandate is full employment, or a low unemployment rate that does not cause inflation. Recently, with quantitative easing, creating a wealth effect appears to be a new mandate.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Most of you have probably heard of quantitative easing (QE), but what exactly is QE? QE is the Federal Reserve purchasing medium- to long-term Treasury bonds with the goal that interest rates will remain low. The goal of QE is to create a wealth effect in riskier assets (i.e. equities, real estate, etc.) The wealth effect will be a positive for the investor class, which should then lead to broader economy. The problem the Federal Reserve now faces is long-term interest rates have risen, and commodity prices have risen. The side effects of QE have created a wealth effect for upper income earners and investors, while creating a poverty effect for lower income earners because of rising commodity prices. </span><span style="font-family: Trebuchet MS; font-size: xx-small;">So, does the emperor have any clothes? The emperor might still have clothes, but he is getting caught with his pants down! </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">A CNBC blog, NetNet, had an interesting article titled, "Is the Fed's Real Target 1,755 for the S&P?" The article highlights the corner the Federal Reserve has backed itself into points that the only way to get out is higher asset prices. It tries to answer the question: do rising stocks lead to lower unemployment, or does lower unemployment lead to rising stocks? Although the correlation is not strong (somewhere in the 28% range), the correlation points to higher stock prices leading to lower unemployment. Considering the Federal Reserve has expanded its balance sheet by $2 trillion and unemployment has actually gone up, what are implications for QE3, QE4 or QE5? As the article points out:</span><br />
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<em><span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">....If the economy does get to Fed Chairman Ben Bernanke’s target of 8 percent unemployment by 2012, that would mean the Standard & Poor’s 500 would have to rise to 1,755—a stunning 35 percent gain from current levels and beyond even the already-bullish prognostications for this year. </span></em><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">The problem for investors is there is no real way to determine the true effects of QE. One indicator is to look at the US Treasury market, and the twos-tens spread. The twos-tens spread is the difference in yield between a ten-year Treasury and two-year Treasury. Because the Federal Reserve is buying so much debt around the ten-year space of the yield curve, it creates a ceiling of how much rates can actually rise. The market will only truly understand when QE2 is stopped in mid-year 2011.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Dick Fisher, president of the Dallas Federal Reserve and an inflation hawk, has stated he would no longer support QE after QE2 ends. He compared the program to a <em>fait accompli</em>. In addition, he stated he would not support it considering the improvement in the overall economy: </span><br />
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<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>You can never say never, but I cannot imagine a convincing argument for further quantitative easing after this round, given what is developing now in the economy...</em></span><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Stay posted!</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Is the Fed's Real Target 1,755 for the S&P? (</em><a href="http://www.cnbc.com/id/41426974"><em>click here</em></a><em>)</em></span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Dallas Fed's Fisher Says He Won't Support Further Asset Buying After June (</em><a href="http://www.bloomberg.com/news/2011-02-03/dallas-fed-s-fisher-says-he-won-t-support-further-asset-buying-after-june.html"><em>click here</em></a><em>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-45862078584483399892011-02-05T17:34:00.001-06:002011-02-05T20:03:25.390-06:00Reading List - February 5, 2011<u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong>Merger Update </strong></span></u><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">In Bloomberg Brief: Mergers, Howard Lanser of Robert Bard & Co. gives thoughts on the middle-market deal pipeline:</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>On the deal pipline:</em> In typical M&A recoveries, there are a lot of $10 billion plus deals (i.e. mega deals). Instead, around 60 percent of the deals have been middle market deals under $1 billion. There is still reluctance for large companies to do large deals, as most are looking for strategic deals that will be accretive in a low-growth environment.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>On financial sponsors:</em> The economic environment of 2009 and 1H 2010 was not favorable to sell a business. The economic data and earnings in 2H 2010 create a lot more favorable conditions, and will even be more favorable in 2011. Many business owners are beginning to ask how long are the ideal financing conditions going to last, which could limit the ability for buyers.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>On Asian deals:</em> The Japanese prefer local deals, and will go after deals they only want. The Chinese view this space differently. As we all know, China is a low-cost producer. China wants to have technologies and processes that will help move them up the value chain.</span><br />
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<u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong>Private equity IPO's</strong></span></u><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Recent developments in the private equity markets have shown how much the industry shape has improved from the depths of the recession. Over the past week, Kinder Morgan and Neiman Marcus announced plans for IPO, in addition to Blackstone posting strong quarterly earnings. Although some of the deals that were completed at the peak in 2007 will never be profitable, favorable financing conditions have allowed these companies to refinance and extend debt maturities at lower rates.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Equity Deals Rebounding with IPOs (</em><a href="http://dealbook.nytimes.com/2011/02/03/kinder-morgan-readies-for-initial-public-offering/"><em>click here</em></a><em>)</em></span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Kinder Morgan to Go Public (</em><a href="http://dealbook.nytimes.com/2010/07/19/kinder-morgan-to-go-public/"><em>click here</em></a><em>)</em></span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Blackstone Posts 56% Rise in Quarterly Profit (</em><a href="http://dealbook.nytimes.com/2011/02/03/blackstones-quarterly-profit-jumps-56/"><em>click here</em></a><em>)</em></span><br />
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<u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong>Reverse takeovers</strong></span></u><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Reverse takeovers are something that are gaining more and more prominence in U.S. capital markets. Primarily, reverse takeovers have been used by Chinese companies and some Israeli tech companies. Since the majority of these reverse takeovers are Chinese companies, there have been more and more people telling investors to be alert for these takeovers.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">A reverse takeover (RTO) is: </span><br />
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<span style="color: blue; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>...accomplished when a privately-held operating company acquires a publicly-traded entity. The idea is that the latter not be a legitimate business but, essentially, a corporate shell. These aren’t hard to find. If you remove all liquidity filters from your own screens, you may find many penny stocks that are little, if any, more than shells. After the takeover is completed, the managers of the acquiring firm take control over the newly merged entity and usually change its name to match that of the privately-held business. Voila! A privately held business is now associated with trade-able U.S. stock. If the stock already has a NASDAQ listing, so much the better. When the RTO is completed, listing applications are filed for those that aren’t yet listed.</em></span><br />
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<span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">The article goes into the pros and cons for reverse takeovers. Pros include a fast and inexpensive way for a company to gain access to capital markets, less time than an IPO, and brings more companies into securities markets. The one I found most interesting is its a fast and easy way for a company to gain access to capital markets. The story highlighted the struggles that companies like Apple had when going public because regulators were scared that normal retail investors did not possess the knowledge to fully understand their investments. Between the fraud of the tech bubble and recent Wall St. bailouts, no wonder why RTO's have come under increased scrutiny. But, what is important is that growing companies need access to capital markets. If the RTO is the way for them to do so, then great! </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">The long-and-short of it is investing in companies that go through an RTO are risky, and investing in those that do not is is risky. But, buyer beware because these companies often are in the corners of the market most unfamiliar to regular investors.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Reverse Takeovers: The Poor Man's IPO Deserves Some Respect (<a href="http://blogs.forbes.com/investor/2011/02/02/reverse-takeovers-the-poor-mans-ipo-deserves-some-respect/">click here</a>)</em></span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Government IPO's</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Ally Financial (the former GMAC) has chosen the lead banks for its IPO. The banks that will complete the Ally IPO, in addition to the other IPO's for the bailed out companies, will only receive a fraction of the fees if they were private businesses. Banking chiefs actually consider this an honor as they feel they will help taxpayers earn a profit on these deals.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>The Bailout Stock Sale Action (</em><a href="http://dealbook.nytimes.com/2011/02/04/picking-up-pieces-of-the-bailout-stock-sale-action/?src=dlbksb"><em>click here</em></a><em>)</em></span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Treasury Warrior at the Negotiating Table (</em><a href="http://dealbook.nytimes.com/2011/01/31/treasurys-warrior-at-the-negotiating-table/"><em>click here</em></a><em>)</em></span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">John Paulson's January</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">I have recently has a few posts on John Paulson highlighting strong performance for 2010. The new year has not been so kind to Mr. Paulson, as his funds showed negative returns for January. The declines are primarily due to the decrease in gold prices over the month of January.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>January Not Golden for Paulson (<a href="http://dealbook.nytimes.com/2011/02/04/january-was-not-golden-for-paulson/?src=dlbksb">click here</a>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-49554519967517420702011-02-05T13:56:00.000-06:002011-02-05T13:56:56.011-06:00What is Merger Arbitrage?<div class="MsoNormal" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">What is arbitrage?</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">In its simplest form, arbitrage is the purchase of a security in one market and sale of the same security in a different market.<span style="mso-spacerun: yes;"> </span></span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">For example, Special Microbrew Co. makes a large array of microbrews.<span style="mso-spacerun: yes;"> </span>Management decides to list the company in both New York and Paris.<span style="mso-spacerun: yes;"> </span>At one point in time, Special trades at $5.00 per share in New York.<span style="mso-spacerun: yes;"> </span>At that same point in time, Special trades at $5.01 in Paris.<span style="mso-spacerun: yes;"> </span>An arbitrageur would purchase the shares in New York at $5.00 and sell them in Paris at $5.01, netting a $0.01 profit.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Obviously, a penny profit per share is not a large amount.<span style="mso-spacerun: yes;"> </span>Arbitrageurs of this sort need large amounts of capital to make real money.<span style="mso-spacerun: yes;"> </span>There are other forms of arbitrage.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">What are the different types of arbitrage?</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Different types of arbitrage including pure arbitrage, pairs trading, liquidation arbitrage and merger (or risk) arbitrage.<span style="mso-spacerun: yes;"> </span>This post will focus on merger arbitrage.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">What is merger arbitrage?</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Merger arbitrage is the trading of companies involved in mergers and acquisitions.<span style="mso-spacerun: yes;"> </span>For retail investors, it is the simplest form of arbitrage.<span style="mso-spacerun: yes;"> </span>It essentially involves one company that another company decides to acquire, because the company could be undervalued.<span style="mso-spacerun: yes;"> </span>The acquiring company announces the deal and the price of the company being acquired should increase to the intrinsic value.<span style="mso-spacerun: yes;"> </span></span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><u><span style="font-family: "Trebuchet MS";">A simple example:</span></u><span style="font-family: "Trebuchet MS";"> Special Microbrew Co. is trading at $5.00 per share.<span style="mso-spacerun: yes;"> </span>Big Brewery Co. decides it would like to expand in microbrew business and wants to acquire a microbrewery.<span style="mso-spacerun: yes;"> </span>Big Brewery’s investment team looks at potential targets and decides Special is the appropriate target.<span style="mso-spacerun: yes;"> </span>Big Brewery’s investment team and a selected team of banks decide what Special’s intrinsic value is, and decide Special’s value is $7.50 per share.<span style="mso-spacerun: yes;"> </span>Big Brewery announces the deal that it will acquire Special for $7.50 per share in cash in three months.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Early traders, primarily hedge funds, try to take advantage of their first mover advantage and connection to instant information and bid up the price to $6.50 per share.<span style="mso-spacerun: yes;"> </span>Currently, there is a $1.00 difference between the market price and target price, thus creating an opportunity for arbitrage.<span style="mso-spacerun: yes;"> </span>A retail investor can purchase the shares of Special shares for $6.50 and receive $7.50 in cash in three months.<span style="mso-spacerun: yes;"> </span>This would work to over a 15% return, or over 60% when annualized.<span style="mso-spacerun: yes;"> </span></span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Details of the deal</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">The example given above only explains the situation if there is a cash deal.<span style="mso-spacerun: yes;"> </span>Different types of deal structures are:</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><ul style="margin-top: 0in;" type="disc"><li class="MsoNormal" style="margin: 0in 0in 0pt; mso-list: l0 level1 lfo1; tab-stops: list .5in;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">All cash deal</span></span></span></li>
<li class="MsoNormal" style="margin: 0in 0in 0pt; mso-list: l0 level1 lfo1; tab-stops: list .5in;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">All stock deal</span></span></span></li>
<li class="MsoNormal" style="margin: 0in 0in 0pt; mso-list: l0 level1 lfo1; tab-stops: list .5in;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Combination of cash and stock</span></span></span></li>
</ul><div class="MsoNormal" style="margin: 0in 0in 0pt; mso-list: l0 level1 lfo1; tab-stops: list .5in;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><u><span style="font-family: "Trebuchet MS";">All cash deal</span></u><span style="font-family: "Trebuchet MS";"></span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">An all cash deal is where the buyer offers the investors in the company being acquired all cash for the shares.<span style="mso-spacerun: yes;"> </span>The example above is the simplest form of an all cash deal.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><u><span style="font-family: "Trebuchet MS";">All stock deal</span></u><span style="font-family: "Trebuchet MS";"></span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">An all stock deal is where the buyer offers the investors in the company being acquired some fraction of shares in the buyer’s company.<span style="mso-spacerun: yes;"> </span>For example, in the above example, Special Microbrew is trading at $5.00 per share.<span style="mso-spacerun: yes;"> </span>Big Brewery is trading at $75.00 per share.<span style="mso-spacerun: yes;"> </span>Keeping consistent with the idea that Special is worth $7.50 per share, Big Brewery offers Special’s investors 0.10 shares of Big Brewery ($75.00/$7.50 = 0.10).</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">These deals are more complex than an all cash deal.<span style="mso-spacerun: yes;"> </span>In an all stock deal, an investor is betting on the stock price of the acquirer.<span style="mso-spacerun: yes;"> </span>In these events, the share price of the company being acquired often increases and the share price of the buyer often decreases.<span style="mso-spacerun: yes;"> </span>Thus, investors frequently purchase (or are long) the company being acquired and be short the buyer.<span style="mso-spacerun: yes;"> </span>Shorting the buyer protects against changes in the buyer’s stock price, which will ultimately impact the final price of the deal.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">In the all stock example above, Big Brewery is trading at near $75.00 per share and will offer Special’s shareholders 0.10 shares.<span style="mso-spacerun: yes;"> </span>For example, a retail investor has $650 to invest.<span style="mso-spacerun: yes;"> </span>He would purchase 100 shares of Special and short 0.10 shares (100 * 0.10 = 10) of Big Brewery.<span style="mso-spacerun: yes;"> </span>After the deal is announced, Big Brewery falls in price from $75.00 to $65.00.<span style="mso-spacerun: yes;"> </span>Thus, Special’s investors only would receive $6.50 per share versus the $7.50 at the time of announcement.<span style="mso-spacerun: yes;"> </span>By shorting Big Brewery, the retail investor is protected.<span style="mso-spacerun: yes;"> </span>See below the comparison of the mechanics of the all cash deal and all stock deal.</span></span></span><br />
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<table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse; width: 405px;" x:str=""><colgroup><col style="mso-width-alt: 8484; mso-width-source: userset; width: 174pt;" width="232"><col style="mso-width-alt: 2486; mso-width-source: userset; width: 51pt;" width="68"><col style="mso-width-alt: 1792; mso-width-source: userset; width: 37pt;" width="49"><col style="mso-width-alt: 2048; mso-width-source: userset; width: 42pt;" width="56"></colgroup><tbody>
<tr height="20" style="height: 15pt;"><td class="xl24" height="20" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: windowtext 1pt solid; height: 15pt; width: 174pt;" width="232"><strong><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></strong></td><td class="xl25" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; width: 51pt;" width="68"><strong><span style="font-family: Trebuchet MS; font-size: x-small;"># of shares</span></strong></td><td class="xl25" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: windowtext 1pt solid; width: 37pt;" width="49"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Price</span></strong></td><td class="xl26" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: windowtext 1pt solid; width: 42pt;" width="56"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Total</span></strong></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl27" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl29" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl30" colspan="4" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: black 1pt solid; border-top: #f0f0f0; height: 15pt;"><strong><em><u><span style="font-family: Trebuchet MS; font-size: x-small;">All cash deal</span></u></em></strong></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl27" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">Special at time of completion</span></td><td class="xl33" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="100"><span style="font-family: Trebuchet MS; font-size: x-small;">100 </span></td><td class="xl34" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="7.5"><span style="font-family: Trebuchet MS; font-size: x-small;">$7.50 </span></td><td class="xl35" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;" x:fmla="=B4*C4" x:num="750"><u><span style="font-family: Trebuchet MS; font-size: x-small;">$750.00 </span></u></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl36" height="20" style="background-color: yellow; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Total received at closing</span></strong></td><td class="xl37" style="background-color: yellow; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><strong><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></strong></td><td class="xl37" style="background-color: yellow; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><strong><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></strong></td><td class="xl38" style="background-color: yellow; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;" x:fmla="=D4" x:num="750"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">$750.00 </span></strong></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl27" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td><td class="xl34" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl29" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl30" colspan="4" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: black 1pt solid; border-top: #f0f0f0; height: 15pt;"><strong><em><u><span style="font-family: Trebuchet MS; font-size: x-small;">All stock deal</span></u></em></strong></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl27" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">Special at time of announcment</span></td><td class="xl33" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="100"><span style="font-family: Trebuchet MS; font-size: x-small;">100 </span></td><td class="xl34" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="6.5"><span style="font-family: Trebuchet MS; font-size: x-small;">$6.50 </span></td><td class="xl39" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;" x:fmla="=B8*C8" x:num="650"><span style="font-family: Trebuchet MS; font-size: x-small;">$650.00 </span></td></tr>
<tr height="6" style="height: 5.1pt; mso-height-source: userset;"><td class="xl27" height="6" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 5.1pt;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl29" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl40" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><em><span style="font-family: Trebuchet MS; font-size: x-small;">If investor shorts Big Brewery</span></em></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><em><span style="font-family: Trebuchet MS; font-size: x-small;"></span></em></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><em><span style="font-family: Trebuchet MS; font-size: x-small;"></span></em></td><td class="xl29" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl27" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">Big Brewery at time of announcement</span></td><td class="xl33" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="10"><span style="font-family: Trebuchet MS; font-size: x-small;">10 </span></td><td class="xl34" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="75"><span style="font-family: Trebuchet MS; font-size: x-small;">$75.00 </span></td><td class="xl39" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;" x:fmla="=B11*C11" x:num="750"><span style="font-family: Trebuchet MS; font-size: x-small;">$750.00 </span></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl27" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">Big Brewery at time of completion</span></td><td class="xl33" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="10"><span style="font-family: Trebuchet MS; font-size: x-small;">10 </span></td><td class="xl34" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="65"><span style="font-family: Trebuchet MS; font-size: x-small;">$65.00 </span></td><td class="xl35" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;" x:fmla="=B12*C12" x:num="650"><u><span style="font-family: Trebuchet MS; font-size: x-small;">$650.00 </span></u></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl27" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">Profit for shorting Big Brewery</span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl39" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;" x:fmla="=D11-D12" x:num="100"><span style="font-family: Trebuchet MS; font-size: x-small;">$100.00 </span></td></tr>
<tr height="6" style="height: 5.1pt; mso-height-source: userset;"><td class="xl27" height="6" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 5.1pt;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl29" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td></tr>
<tr height="20" style="height: 15pt;"><td class="xl27" height="20" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">Investor receives 0.10 shares of Big Brewery</span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num=""><span style="font-family: Trebuchet MS; font-size: x-small;">10</span></td><td class="xl34" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;" x:num="65"><span style="font-family: Trebuchet MS; font-size: x-small;">$65.00 </span></td><td class="xl35" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;" x:fmla="=B15*C15" x:num="650"><u><span style="font-family: Trebuchet MS; font-size: x-small;">$650.00 </span></u></td></tr>
<tr height="6" style="height: 5.1pt; mso-height-source: userset;"><td class="xl27" height="6" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 5.1pt;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl28" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"></span></td><td class="xl29" style="background-color: transparent; border-bottom: #f0f0f0; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></td></tr>
<tr height="21" style="height: 15.75pt;"><td class="xl41" height="21" style="background-color: yellow; border-bottom: windowtext 1pt solid; border-left: windowtext 1pt solid; border-right: #f0f0f0; border-top: #f0f0f0; height: 15.75pt;"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Total received at closing</span></strong></td><td class="xl42" style="background-color: yellow; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><strong><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></strong></td><td class="xl42" style="background-color: yellow; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: #f0f0f0; border-top: #f0f0f0;"><strong><span style="font-family: Trebuchet MS; font-size: x-small;"> </span></strong></td><td class="xl43" style="background-color: yellow; border-bottom: windowtext 1pt solid; border-left: #f0f0f0; border-right: windowtext 1pt solid; border-top: #f0f0f0;" x:fmla="=D13+D15" x:num="750"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">$750.00 </span></strong></td></tr>
</tbody></table></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><shapetype coordsize="21600,21600" filled="f" id="_x0000_t75" o:preferrelative="t" o:spt="75" path="m@4@5l@4@11@9@11@9@5xe" stroked="f"><stroke joinstyle="miter"></stroke><formulas><f eqn="if lineDrawn pixelLineWidth 0"></f><f eqn="sum @0 1 0"></f><f eqn="sum 0 0 @1"></f><f eqn="prod @2 1 2"></f><f eqn="prod @3 21600 pixelWidth"></f><f eqn="prod @3 21600 pixelHeight"></f><f eqn="sum @0 0 1"></f><f eqn="prod @6 1 2"></f><f eqn="prod @7 21600 pixelWidth"></f><f eqn="sum @8 21600 0"></f><f eqn="prod @7 21600 pixelHeight"></f><f eqn="sum @10 21600 0"></f></formulas><path gradientshapeok="t" o:connecttype="rect" o:extrusionok="f"></path><lock aspectratio="t" v:ext="edit"></lock></shapetype><shape id="_x0000_i1025" style="height: 270pt; width: 444pt;" type="#_x0000_t75"><imagedata o:title="" src="file:///C:\Users\npalumbo\AppData\Local\Temp\msohtml1\01\clip_image001.wmz"><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"></span></imagedata></shape><u><span style="font-family: "Trebuchet MS";"></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><u><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Combination of stock and cash</span></span></span></u></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">A combination of stock and cash is the most complex.<span style="mso-spacerun: yes;"> </span>It is where the buyer offers some stock and cash to the investors of the company being acquired.<span style="mso-spacerun: yes;"> </span>Instead of offering 0.10 shares of Big Brewery, Big Brewery’s management could offer 0.05 shares ($75.00 * 0.05 = $3.75) and $3.75 in cash per share.<span style="mso-spacerun: yes;"> </span>Thus, the investor is still receiving $7.50 per share.<span style="mso-spacerun: yes;"> </span>In addition, as in the all stock deal above, an investor would have to short the buyer’s share by the appropriate amount.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">What are the risks involved in merger arbitrage?</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">The primary risk in merger arbitrage is the deal not being completed causing prices of both the company being purchased and buyer to move in unknown directions.<span style="mso-spacerun: yes;"> </span>Thus, there are risks for large losses.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">For example, assume the purchase of Special by Big Brewery will be an all stock deal.<span style="mso-spacerun: yes;"> </span>The arbitrageur is long Special and short Big Brewery.<span style="mso-spacerun: yes;"> </span>Assume the deal falls through due to the rating agencies believing Special could pose a credit risk to Big Brewery.<span style="mso-spacerun: yes;"> </span>Big Brewery’s credit rating is too important and management decides to withdraw the purchase.<span style="mso-spacerun: yes;"> </span>In this case, the share price of Special could decrease from the $6.50 to $5.00 or where it was trading before the deal was announced.<span style="mso-spacerun: yes;"> </span>The share price of Big Brewery could increase from $75.00 to $80.00 because investors were worried that Big Brewery has less credit risk.<span style="mso-spacerun: yes;"> </span>Thus, there are large losses on both sides of the trade.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Another risk for merger arbitrage is the “realization of value” problem.<span style="mso-spacerun: yes;"> </span>The “realization of value” problem, according to Benjamin Graham, is investors place a value on a security at sometime in the future.<span style="mso-spacerun: yes;"> </span>If the security does not reach the estimated value at that time, the annualized return will continue to fall.<span style="mso-spacerun: yes;"> </span>For example, in the Special example above, the deal will be completed in three months and net approximately a 60% gain.<span style="mso-spacerun: yes;"> </span>If the deal takes six months instead, the annualized return falls to 30%.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Key reasons deals may fall through or be delayed include ability of the buyer to obtain financing, issues that surface during the due diligence phase, regulatory problems, or competing offers.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Why should an investor consider merger arbitrage?</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">With all the risks associated with merger arbitrage, why should an investor consider it?<span style="mso-spacerun: yes;"> </span>Well, most investors would like to commit their capital to the long-term.<span style="mso-spacerun: yes;"> </span>The market may create conditions where investors cannot allocate capital to enough attractive long-term commitments.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">The market conditions that many find advantageous for merger arbitrage include when equity markets are going down.<span style="mso-spacerun: yes;"> </span>Down equity markets typically include a rally in risk-free bonds (i.e. US Treasuries), thus increasing the price of Treasuries and reducing the yield.<span style="mso-spacerun: yes;"> </span>In addition, management of companies may be concerned with the decreasing share price and could consider selling portions of the business or acquisition offers. </span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Warren Buffett sometimes engages in arbitrage situations.<span style="mso-spacerun: yes;"> </span>According the book, “The Essays of Warren Buffett,” in his 1988 and 1989 letter to shareholders, he outlines the reasons for arbitrage:</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif;">Our insurance subsidiaries sometimes engage in arbitrage as an alternative to hold short-term cash equivalents.<span style="mso-spacerun: yes;"> </span>We prefer, of course, to make long-term commitments, but we often have more cash than good ideas.<span style="mso-spacerun: yes;"> </span>At such times, arbitrage sometimes promises much greater returns than Treasury Bills, and equally important, cools any temptation we may have to relax our standards of long-term investments…</span></span></span></i></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="color: blue;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif;">(after discussing the RJR Nabisco arbitrage) considering Berkshire’s good results in 1988, you might expect us to pile into arbitrage during 1989.<span style="mso-spacerun: yes;"> </span>Instead, we expect to be on the sidelines.</span></span></span></i></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="color: blue;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif;">One pleasant reason is that our cash holdings are down – because our position in equities that we expect to hold for a very long time is substantially up. <span style="mso-spacerun: yes;"> </span>As regular readers of this report know, our new commitments are not based on a judgment about short-term prospects for the stock market.<span style="mso-spacerun: yes;"> </span>Rather, they reflect an opinion about long-term business prospects for specific companies…</span></span></span></i></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="color: blue;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif;">Even if we had a lot of cash we probably would do little arbitrage in 1989.<span style="mso-spacerun: yes;"> </span>Some extraordinary excesses have developed in the takeover field…</span></span></span></i></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="color: blue;"><br />
</span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="color: blue; font-family: "Trebuchet MS", sans-serif;">We have no idea how long the excesses will last…But we do know that the less prudence with which others conduct their affairs, the greater prudence with which we should conduct our own affairs.<span style="mso-spacerun: yes;"> </span>We have no desire to arbitrage transactions that reflect the unbridled – and, in our view, often unwarranted – optimism of both buyers and lenders…</span></span></span></i></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;"><i style="mso-bidi-font-style: normal;"><span style="font-family: "Trebuchet MS";"><span style="mso-spacerun: yes;"> </span></span></i><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";">How is return in merger arbitrage situations calculated?</span></b><i style="mso-bidi-font-style: normal;"><span style="font-family: "Trebuchet MS";"></span></i></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">The most straightforward way to calculate the return in arbitrage situations is the formula provided by Benjamin Graham.<span style="mso-spacerun: yes;"> </span>It is simply:</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">G = expected gain if deal is completed</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">L = expected loss if deal is not completed</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">C = expected chance deal is completed</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Y = expected time when value will be realized</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">P = current price per share</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="color: red; font-family: "Trebuchet MS", sans-serif;">Annual return = (CG – L(100%-C)) / YP</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">In the above example, the return would be expressed as the following:</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">G = $1.00, expected gain if deal is completed</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">L = $1.50, expected loss if deal is not completed</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">C = 95%, expected chance of success</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Y = 0.25 year, expected time when value will be realized</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">P = $6.50, current share price</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Annual return = ((95% * $1.00) - $1.50(100%-95%)) / (0.25 * $6.50)</span></span></span></div><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Annual return = ($0.95 - $0.075) / ($1.625)</span></span></span></div><div align="center" class="MsoNormal" style="margin: 0in 0in 0pt; text-align: center;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="color: red; font-family: "Trebuchet MS", sans-serif;">Annual return = 53.85%</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Based on the risk characteristics of the trade, the investor could expect an annual rate of return of approximately 54% if the purchase of Special by Big Brewery is completed on schedule.</span></span></span></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><b style="mso-bidi-font-weight: normal;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">Conclusion</span></span></span></b></div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><br />
</div><div class="MsoNormal" style="margin: 0in 0in 0pt;"><span style="font-family: "Trebuchet MS";"><span style="font-size: xx-small;"><span style="font-family: "Trebuchet MS", sans-serif;">There is a reason merger arbitrage is called risk arbitrage – there is a large amount of inherent risk.<span style="mso-spacerun: yes;"> </span>But, if done correctly, merger arbitrage can provide solid returns over the long-term.</span></span></span></div>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-57311819663415740382011-02-02T18:20:00.001-06:002011-02-05T20:04:00.299-06:00Reading List - February 2, 2011<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong><u>Time for value to lead to market?</u></strong></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">For most of 2010, several investors were overweight growth stocks compared to value stocks (i.e. stocks included in the Russell 1000 Value Index), primarily due to these companies having more earnings power and increasing international exposure. Over time, the valuations of these companies should become stretched, and investors will look to value stocks for increasing returns. 2010 earnings for Corporate America have been positive and economic news has been increasingly positive. These two factors largely drive "value outperformance."</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Key reasons why I believe value will outperform growth include:</span><br />
<ul><li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">These companies are trading at historically low valuations based on a P/E basis and cannot trade at these levels forever</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Several of these "value" companies have attractive dividend yields (often higher than where Treasuries are currently trading). In research done by Jeremy Siegel, half of an investors return typically comes from dividends. Earnings for these companies will increase and companies will be able to pay out these higher earnings through higher dividends. In addition, investors will be more concerned with preserving capital and will look to dividend stocks as one way to do that.</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Large companies that would be included in this category have large emerging market exposure. Over time, these large multinationals will be levered to emerging market economies and should see higher earnings. In addition, the USD should decline relative to these other currencies making these earnings worth more when converted to USD.</span></li>
<li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">These companies have fortress balance sheets with tons of cash. As Jamie Dimon, companies are going to realize they are earning zero and can invest in several ways including re-investing in the business, acquisitions, or share repurchases.</span></li>
</ul><span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Growth Trade Poised to Fizzle in Recovery Where Stock Market Goes to Value (</em><a href="http://www.bloomberg.com/news/2011-01-31/growth-trade-poised-to-fizzle-in-recovery-where-stock-market-goes-to-value.html"><em>click here</em></a><em>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><strong><u>Yum profit rises</u></strong></span><br />
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<div style="text-align: left;"><span style="font-family: Trebuchet MS; font-size: xx-small;">I do not like to get to caught up in quarterly earnings, but was impressed by the earnings YUM reported. Essentially for 4Q, YUM EPS was $0.63 versus analyst consensus of $0.60. Most of the growth came from China. As one analyst noted:</span></div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><span style="color: red; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>Their brand name is very strong there and they’re taking advantage of that by opening a lot of new stores</em></span></div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><em><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Yum Profit Rises on Growing Sales in China at KFC, Pizza Hut (<a href="http://www.bloomberg.com/news/2011-02-02/yum-quarterly-profit-rises-on-growing-sales-in-china-at-kfc-pizza-hut.html">click here</a>)</span></em></div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Pact with the devil?</span></u></strong></div><div style="text-align: left;"><br />
</div><div style="text-align: left;"><span style="font-family: Trebuchet MS; font-size: xx-small;">Bill Gross of PIMCO just unleashed in his latest commentary. I would recommend reading the article below because I cannot agree with it more! Here is a taste:</span></div><div style="text-align: left;"><br />
</div><div class="textBodyBlack"><span style="color: red; font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><em>We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely. </em></span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">And I cannot agree more than with his opposition "devils" at central banks use to battle deficits!</span></div><div class="textBodyBlack"><br />
</div><div class="textBodyBlack"><span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Central Bankers Strike 'Devil's Bargain'; 'US Heart Transplant': Gross (<a href="http://www.cnbc.com/id/41387362">click here</a>)</em></span></div>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-90813798509821625892011-02-02T17:33:00.000-06:002011-02-02T18:32:37.570-06:00John Paulson Letter<span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">In a previous post, I noted John Paulson released his annual letter to investors. Mr. Paulson likes to keep this letter secret. In the past, he has allowed investors only to print one copy or read it from one computer. A copy of this year's letter has found its way to the internet.</span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>The Paulson Funds 2010 letter (</em><a href="http://www.zerohedge.com/article/complete-john-paulson-2010-year-end-letter"><em>click here</em></a><em>)</em></span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">As backgroud, who is John Paulson? John Paulson is head of The Paulson Funds, which is the combination of several hedge funds focusing on event arbitrage or special situations. This includes merger arbitrage, investing in distressed companies, and restructurings. Funds can be net long or short at any given time, or invested in equities and/or fixed income at any time. Recently, Mr. Paulson made large sums betting against mortgage credit and then banks with large sub-prime exposure.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">News coverage of the letter focused primarily on returns for 2010. The performance could be primarily attributed to gold-denominated funds. Shortly after the first round of quantitative easing of the Fed, Paulson reasoned the increased printing of money by the Federal Reserve would devalue the dollar. Thus, he offered investors the option of being invested in gold-denominated funds, versus dollar denominated funds. For example, these gold denominated funds outperformed dollar-denominated funds by up to 46%. According to the letter, only about one-third of investors were invested in these funds.</span><br />
<br />
<span style="color: blue; font-family: Trebuchet MS; font-size: xx-small;">On page 7 of the report, there is a chart titled "Paulson & Co. Roadmap." This roadmap is the illustration of the implement phases and monetization phases mentioned in the earlier post about Mr. Paulson. This roadmap is important as it illustrates the investment success in Paulson and team to identify market events before the general market does and implement strategies to monetize that mismatch.</span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Assets under management (AUM)</span></u></strong><br />
<ul><li><span style="font-family: Trebuchet MS; font-size: xx-small;">Some have questioned the firm size and whether or not the firm was too large to make meaningful investments. Results of 2009 and 2010 indicate the opposite, as several smaller firms did not outpeform the market and are struggling to survive.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Key is not asset size for investors, but rather firm's management team understands market conditions. The size of the firm has its advantages including: 1) lead investor in several bankruptcies; 2) management teams want Paulson to offer capital at attractive to terms to either repay debt or repair balance sheets</span></li>
</ul><strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Market outlook</span></u></strong><br />
<ul><li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">High yield bonds yields how lessened and are trading at or near par causing companies in the categories of restructurings, merger arbitrage, and event arbitrage to increase in value. <span style="color: blue;">(The mechanics: <em>These firms now have a lower cost of capital because bond yields have come down. When discounting the future cash flow of the firm, the cash flow will now be worth more. Thus, the underlying value of the equity in the firm should increase).</em></span></span></li>
<li><span style="color: black; font-family: Trebuchet MS; font-size: xx-small;">Inflation remains a concern, and the firm has implemented stratgies to preserve capital should inflation become a bigger issue.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Extending the Bush-era tax cuts, in addition to the other tax benefits in the recent tax compromise should help increase growth. These tax benefits should lead to somewhere around $900 billion addition in the system. According to the letter, the general growth rate consensus has gone up 0.5% as a result.</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">Equity-risk premium is at the highest it has been in fifty years. <span style="color: blue;"><em>(Equity risk premium = earnings yield - risk free bond yield. Earnings yield is the inverse of the P/E ratio, so earnings per share divided by current price. I used the 10-yr Treasury for the risk free bond yield).</em></span></span></li>
</ul><strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Portfolio positioning</span></u></strong><br />
<ul><li><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Make restructuring investments in high-quality assets at deeply distressed prices to take advantage of economic recovery</span></li>
<li><span style="font-family: Trebuchet MS; font-size: xx-small;">As the economy moves towards normalization, companies have repaired balance sheets. Equity, especially in former distressed situations, offers substantial upside versus downside risk.</span></li>
</ul><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;"><strong><u>Equity risk premium</u></strong></span><br />
<br />
<span style="font-family: Trebuchet MS; font-size: xx-small;">I calculated the equity-risk premium for each Dow component, excluding Caterpillar. Based on the Paulson formula, several stocks are attractively priced against government bonds. In addition, three of the top five companies on the list are also "Dogs of the Dow," indicating low risk due to high dividend yields and attractive valuations (Dogs of the Dow are highlighted in grey). In fact, JPMorgan is held by Paulson.</span><br />
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<table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse; width: 548px;" x:str=""><colgroup><col style="width: 48pt;" width="64"><col style="mso-width-alt: 7021; mso-width-source: userset; width: 144pt;" width="192"><col span="2" style="width: 48pt;" width="64"><col style="mso-width-alt: 2998; mso-width-source: userset; width: 62pt;" width="82"><col style="mso-width-alt: 2998; mso-width-source: userset; width: 62pt;" width="82"></colgroup><tbody>
<tr height="36" style="height: 27pt;"><td class="xl30" height="36" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid; height: 27pt; width: 48pt;" width="64"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Ticker</span></strong></td><td class="xl30" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid; width: 144pt;" width="192"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Company name</span></strong></td><td class="xl31" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid; width: 48pt;" width="64"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Price</span></strong></td><td class="xl31" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid; width: 48pt;" width="64"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">TTM EPS</span></strong></td><td class="xl30" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid; width: 62pt;" width="82"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Earnings yield</span></strong></td><td class="xl32" style="background-color: #ffcc00; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: windowtext 0.5pt solid; width: 62pt;" width="82"><strong><span style="font-family: Trebuchet MS; font-size: x-small;">Equity risk premium</span></strong></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">T</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">AT&T</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="27.67"><span style="font-family: Trebuchet MS; font-size: x-small;">$27.67 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.35"><span style="font-family: Trebuchet MS; font-size: x-small;">$3.35 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="0.12106975063245391"><span style="font-family: Trebuchet MS; font-size: x-small;">12.1%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="8.6179750632453922E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">8.6%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">TRV</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Traveler's</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="56.71"><span style="font-family: Trebuchet MS; font-size: x-small;">$56.71 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="6.62"><span style="font-family: Trebuchet MS; font-size: x-small;">$6.62 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="0.11673426203491448"><span style="font-family: Trebuchet MS; font-size: x-small;">11.7%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="8.1844262034914489E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">8.2%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">INTC</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Intel</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="21.56"><span style="font-family: Trebuchet MS; font-size: x-small;">$21.56 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.05"><span style="font-family: Trebuchet MS; font-size: x-small;">$2.05 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="9.508348794063079E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">9.5%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="6.0193487940630792E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">6.0%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">JPM</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">JP Morgan</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="45.45"><span style="font-family: Trebuchet MS; font-size: x-small;">$45.45 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.96"><span style="font-family: Trebuchet MS; font-size: x-small;">$3.96 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="8.7128712871287123E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">8.7%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.2238712871287125E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.2%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">CVX</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Chevron</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="96.48"><span style="font-family: Trebuchet MS; font-size: x-small;">$96.48 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="8.37"><span style="font-family: Trebuchet MS; font-size: x-small;">$8.37 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="8.6753731343283569E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">8.7%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.1863731343283571E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.2%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">KFT</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Kraft</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="30.56"><span style="font-family: Trebuchet MS; font-size: x-small;">$30.56 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.59"><span style="font-family: Trebuchet MS; font-size: x-small;">$2.59 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="8.4751308900523556E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">8.5%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.9861308900523559E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.0%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">MSFT</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Microsoft</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="27.94"><span style="font-family: Trebuchet MS; font-size: x-small;">$27.94 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.34"><span style="font-family: Trebuchet MS; font-size: x-small;">$2.34 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="8.3750894774516818E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">8.4%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.8860894774516821E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">4.9%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">JNJ</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Johnson & Johnson</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="60.62"><span style="font-family: Trebuchet MS; font-size: x-small;">$60.62 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.78"><span style="font-family: Trebuchet MS; font-size: x-small;">$4.78 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="7.8851864071263614E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">7.9%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.3961864071263616E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">4.4%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">HPQ</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Hewlett-Packard</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="46.89"><span style="font-family: Trebuchet MS; font-size: x-small;">$46.89 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.69"><span style="font-family: Trebuchet MS; font-size: x-small;">$3.69 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="7.869481765834932E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">7.9%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.3804817658349322E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">4.4%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">AXP</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">American Express</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="43.72"><span style="font-family: Trebuchet MS; font-size: x-small;">$43.72 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.35"><span style="font-family: Trebuchet MS; font-size: x-small;">$3.35 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="7.6623970722781334E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">7.7%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.1733970722781337E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">4.2%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">MRK</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Merck</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="33.82"><span style="font-family: Trebuchet MS; font-size: x-small;">$33.82 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.59"><span style="font-family: Trebuchet MS; font-size: x-small;">$2.59 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="7.6581904198698994E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">7.7%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.1691904198698997E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">4.2%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">WMT</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Wal-Mart</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="55.86"><span style="font-family: Trebuchet MS; font-size: x-small;">$55.86 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.04"><span style="font-family: Trebuchet MS; font-size: x-small;">$4.04 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="7.2323666308628715E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">7.2%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.7433666308628717E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">3.7%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">IBM</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">International Business Machines</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="163.3"><span style="font-family: Trebuchet MS; font-size: x-small;">$163.30 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="11.52"><span style="font-family: Trebuchet MS; font-size: x-small;">$11.52 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="7.0545009185548069E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">7.1%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.5655009185548071E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">3.6%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">XOM</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Exxon-Mobil</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="83.41"><span style="font-family: Trebuchet MS; font-size: x-small;">$83.41 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.65"><span style="font-family: Trebuchet MS; font-size: x-small;">$5.65 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="6.7737681333173483E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">6.8%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.2847681333173485E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">3.3%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">MMM</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">3M</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="87.75"><span style="font-family: Trebuchet MS; font-size: x-small;">$87.75 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.63"><span style="font-family: Trebuchet MS; font-size: x-small;">$5.63 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="6.4159544159544155E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">6.4%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.9269544159544157E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">2.9%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">CSCO</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Cisco</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="21.62"><span style="font-family: Trebuchet MS; font-size: x-small;">$21.62 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="1.37"><span style="font-family: Trebuchet MS; font-size: x-small;">$1.37 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="6.3367252543940794E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">6.3%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.8477252543940797E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">2.8%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">DD</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">DuPont</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="51.85"><span style="font-family: Trebuchet MS; font-size: x-small;">$51.85 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.28"><span style="font-family: Trebuchet MS; font-size: x-small;">$3.28 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="6.3259402121504341E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">6.3%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.8369402121504343E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">2.8%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">BA</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Boeing</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="71"><span style="font-family: Trebuchet MS; font-size: x-small;">$71.00 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.46"><span style="font-family: Trebuchet MS; font-size: x-small;">$4.46 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="6.2816901408450698E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">6.3%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.7926901408450701E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">2.8%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">MCD</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">McDonald's</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="73.64"><span style="font-family: Trebuchet MS; font-size: x-small;">$73.64 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.58"><span style="font-family: Trebuchet MS; font-size: x-small;">$4.58 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="6.2194459532862574E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">6.2%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.7304459532862577E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">2.7%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">PG</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Procter & Gamble</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="62.79"><span style="font-family: Trebuchet MS; font-size: x-small;">$62.79 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.67"><span style="font-family: Trebuchet MS; font-size: x-small;">$3.67 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.844879757923236E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.8%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.3558797579232363E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">2.4%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">UTX</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">United Technologies</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="82.16"><span style="font-family: Trebuchet MS; font-size: x-small;">$82.16 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.74"><span style="font-family: Trebuchet MS; font-size: x-small;">$4.74 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.7692307692307696E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.8%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.2802307692307698E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">2.3%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">KO</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Coca-Cola</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="62.86"><span style="font-family: Trebuchet MS; font-size: x-small;">$62.86 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="3.25"><span style="font-family: Trebuchet MS; font-size: x-small;">$3.25 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.1702195354756605E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.2%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="1.6812195354756608E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">1.7%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">GE</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">General Electric</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="20.71"><span style="font-family: Trebuchet MS; font-size: x-small;">$20.71 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="1.06"><span style="font-family: Trebuchet MS; font-size: x-small;">$1.06 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.118300338000966E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.1%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="1.6293003380009663E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">1.6%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">HD</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Home Depot</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="36.56"><span style="font-family: Trebuchet MS; font-size: x-small;">$36.56 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="1.85"><span style="font-family: Trebuchet MS; font-size: x-small;">$1.85 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.0601750547045951E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.1%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="1.5711750547045954E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">1.6%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">DIS</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Walt Disney</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="40.49"><span style="font-family: Trebuchet MS; font-size: x-small;">$40.49 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.03"><span style="font-family: Trebuchet MS; font-size: x-small;">$2.03 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.0135836008891078E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">5.0%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="1.5245836008891081E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">1.5%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">PFE</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Pfizer</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="18.96"><span style="font-family: Trebuchet MS; font-size: x-small;">$18.96 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="0.76"><span style="font-family: Trebuchet MS; font-size: x-small;">$0.76 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="4.0084388185654005E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">4.0%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="5.1943881856540072E-3"><span style="font-family: Trebuchet MS; font-size: x-small;">0.5%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl33" height="19" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">VX</span></td><td class="xl33" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Verizon</span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="36.16"><span style="font-family: Trebuchet MS; font-size: x-small;">$36.16 </span></td><td class="xl34" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="0.9"><span style="font-family: Trebuchet MS; font-size: x-small;">$0.90 </span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="2.4889380530973455E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">2.5%</span></td><td class="xl35" style="background-color: silver; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="-1.0000619469026542E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">-1.0%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl24" height="19" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">AA</span></td><td class="xl24" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Alcoa</span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="17.21"><span style="font-family: Trebuchet MS; font-size: x-small;">$17.21 </span></td><td class="xl25" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="0.24"><span style="font-family: Trebuchet MS; font-size: x-small;">$0.24 </span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="1.3945380592678674E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">1.4%</span></td><td class="xl26" style="background-color: transparent; border-bottom: #f0f0f0; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="-2.0944619407321324E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">-2.1%</span></td></tr>
<tr height="19" style="height: 14.25pt;"><td class="xl27" height="19" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext 0.5pt solid; border-right: windowtext 0.5pt solid; border-top: #f0f0f0; height: 14.25pt;"><span style="font-family: Trebuchet MS; font-size: x-small;">BAC</span></td><td class="xl27" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;"><span style="font-family: Trebuchet MS; font-size: x-small;">Bank of America</span></td><td class="xl28" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="14.24"><span style="font-family: Trebuchet MS; font-size: x-small;">$14.24 </span></td><td class="xl28" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="-0.37"><span style="font-family: Trebuchet MS; font-size: x-small;">($0.37)</span></td><td class="xl29" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="-2.5983146067415731E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">-2.6%</span></td><td class="xl29" style="background-color: transparent; border-bottom: windowtext 0.5pt solid; border-left: windowtext; border-right: windowtext 0.5pt solid; border-top: #f0f0f0;" x:num="-6.0873146067415729E-2"><span style="font-family: Trebuchet MS; font-size: x-small;">-6.1%</span></td></tr>
</tbody></table><br />
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<span style="background-color: white; color: blue; font-family: Trebuchet MS; font-size: xx-small;"><em>For the chart below, the prices are as of February 2 close. EPS is based on the trailing twelve month EPS. Bond yield is the ten-year Treasury. All information is from Yahoo! Finance.</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0tag:blogger.com,1999:blog-8022251177729859953.post-62474361709028253602011-01-31T23:20:00.000-06:002011-01-31T23:20:12.681-06:00Reading List - January 31, 2010<strong><u><span style="font-family: "Trebuchet MS", sans-serif; font-size: xx-small;">Hedge Funds</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">This week, the Managed Funds Association (MFA) is holding its conference in Palm Springs, FL. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Recently, the SEC and CFTC issued a new form stating that hedge funds should disclose their holdings quarterly to determine which ones are "too big to fail." Richard Baker, president of the MFA, believes no oversight is needed. Believers of more regulation over hedge funds often point to the failure of Long-Term Capital Management. In this instance, the Federal Reserve instituted a "Wall Street-style" bailout of the hedge fund. To counter this, Mr. Baker stated there are no hedge funds that are systemically important as Long-Term Capital was. In addition, hedge funds use less leverage today and investors are often pension funds and endowments. The industry is more transparent as a result of these pension fund and endowment investments as investors often perform more due diligence.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Is No Hedge Fund Too Big to Fail? (</em><a href="http://dealbook.nytimes.com/2011/01/31/is-no-hedge-fund-too-big-to-fail/"><em>click here</em></a><em>)</em></span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">At this conference, much time appears to be spent to tell managers how to "woo" future investors. The jist of the story out of the conference is managers of large pension funds or endowments often have a strategy of their own. In addition, because of their large investment, they want concessions on pricing individual investors often cannot get. To help bag the "whale," an investment from a substantial client, hedge fund managers simply need to be patient and do their homework. This includes initiating the relationship with the pension fund, knowing the size of the fund and understanding the fund's investment strategy. </span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>For Fund Managers, a Class in Raising Money (<a href="http://dealbook.nytimes.com/2011/01/31/for-fund-managers-a-class-in-raising-money-101/">click here</a>)</em></span><br />
<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>How a Hedge Fund Can Land a Whale (<a href="http://dealbook.nytimes.com/2011/01/31/how-a-hedge-fund-can-land-a-whale/">click here</a>)</em></span><br />
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<strong><u><span style="font-family: Trebuchet MS; font-size: xx-small;">Massey Energy</span></u></strong><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;">Massey Energy, which has faced safety problems, will sell itself to Alpha Resources. When the deal is completed, the two companies will create the largest American coal producer. Also, Massey has a strong presence in metallurgical coal, which is used in steel.</span><br />
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<span style="font-family: Trebuchet MS; font-size: xx-small;"><em>Massey Energy Is to Be Sold to Alpha Natural Resources (<a href="http://dealbook.nytimes.com/2011/01/29/massey-energy-is-to-be-sold-to-alpha-natural-resources/">click here</a>)</em></span>Nicholashttp://www.blogger.com/profile/16914585372166059253noreply@blogger.com0