Buy Like Buffett

While Bank of America (BAC), JPMorgan Chase (JPM), and Wells Fargo (WFC) dominate the headlines, there is one large bank that just slowly continues to grow away from the limelight. That bank is US Bancorp (USB). US Bank took TARP funds just like the other big banks but unlike the other big banks has been able to escape the public backlash.

US Bank has been a longtime Buffet holding because of the company’s great management team and conservative approach to lending. The company’s management is a big reason why the banking giant’s loan portfolio has been outperforming that of its banking peers. It’s non performing loans percentage is much lower than Citigroup and Bank of America. US Bank is the 5th largest bank in the US based on asset size and US Bank has been quietly increasing its size by buying up failed banks over the past year. There have been continuous rumors that US Bancorp may acquire a larger regional bank to expand its operations.

US Bancorp has reported nearly two consecutive years of profitability. Last quarter’s earnings were very solid. USB had earnings of $648 million dollars and an EPS of 34 cents per share. Profitability increased 55% and total deposits increased almost 14%. The encouraging news was that consumer loan delinquency was decelerating even as the bank was increasing its reserves for loan losses. Investors should pay attention to the July 21st earnings release to see how US Bancorp’s sizeable commercial loan portfolio is holding up.

US Bank pays out a much higher dividend than its banking competitors. Shares of US Bancorp are not expensive but are not particularly cheap either at $23. Shares trade at 11 times forward earnings and 1.8 times book value.

It’s always important for value investors to be able to tell the difference between a value stock and a value trap. Value stocks are stocks that are trading below their true intrinsic value. These stocks are sometimes unfairly beaten down due to market events. Value traps are stocks that look like good investment opportunities and may appear to be cheap but really are not. Value traps deserve to trade at low prices. A value stock is a good company trading at a distressed price. A value trap is a distressed company trading at its proper price.

Value Stock or Value Trap?

Take Research in Motion for example. Research in Motion (RIMM) trades at $52 a share as shares plunged over 10% after releasing subpar earnings Thursday. Sales and subscribers slightly underperformed Wall Street expectations. Research in Motion continues to lose market share to the iPhone and Android phones. Analysts have been rushing to downgrade the stock hitting it with sell ratings. Research in Motion is a stock that is close to becoming a value play. If investors get an opportunity to buy shares in the 40’s, that would be a solid purchase.

Despite all of the negativity over Research in Motion, the company is still adding subscribers. The company is still growing just at a slower rate. 2011’s EPS is expected to come in at $5.90. Research in Motion is cash rich with $1.5 billion in cash and no long term debt. The company has even started buying back 3% of the outstanding shares. The key for RIMM is its new Blackberry phone. Will its new Blackberry phone be able to take market share from the Google’s and Apple’s of the way? Analysts believe that will all depend on how successful RIMM’s new apps and browser is.

My Take

I have to admit there is some risk in buying RIMM but the opportunity to buy a solid tech company trading at just 7.5 times earnings would be attractive to me in the mid 40’s.

Do you think that Research in Motion is a value stock or a value trap?

Buffalo Wild Wings (BWLD) investors sold off shares yesterday after the company announced earnings yesterday. Earnings per share came in at 58 cents which was 1 cent higher than analyst expectations. Revenue came in light at only $152.3 million dollars vs. the $154.3 million dollar sales figure expected. The revenue miss is due to a decline in comps. Same store sales were basically flat for the quarter as the restaurant chain saw decreased foot traffic.

Comps are continuing their downward slope declining 3.7% for the month of April. After the earnings announcement, Buffalo Wild Wings shares have dropped over $10 a share. Shares are down nearly 20% already. Ouch! Shares were trading at a rich valuation of over 25 times the current year’s earnings. Now at $41 per share, the stock looks fairly valued for investors. The PE ratio has dropped to under 20 and revenue growth is still expected to come in at 20% for the year. Price to earnings growth is almost at 1. The balance sheet is great with $52 million in cash and no debt. Even the reduction in foot traffic is most likely a temporary problem as the restaurant chain is a customer favorite.

The recent price drop appears to be an opportunity for investors that are looking for a chance to get long shares. Shares have not been at this level since January of this year. Investors have a chance to buy a high growth company at a decent earnings multiple. I would wait for see where shares settle at over the next week and would start buying if I had a chance to buy shares in the mid 30′s.

Disclosure: I do not own any shares of Buffalo Wild Wings.

Photo by: mcsquishee

When is a 37% increase in profits a bad thing? It is when you are Google and expectations for your company are totally out of whack. Google reported earnings yesterday and the earnings were solid. Top line growth was impressive with sales coming in at $5.06 billion dollars beating the $4.95 billion dollar average estimate. EPS came in at $6.76 beating most Wall Street estimates. Just about any other company’s stock would have rallied on such a report but not Google. Google’s stock declined nearly $30 after the earnings announcement. Why did Google drop so precipitously? it appears that Google has set the bar so high in the past that the company has become a victim of its own success.

The search engine giant failed to meet analysts top line projections. The highest estimates for Google’s were for $5.12 billion dollars in revenue and earnings per share of $6.91. Google is still a growth stock but the growth is slowing. With a $189 billion dollar market cap, analysts should set reasonable growth targets for Google going forward. Google’s earnings are expected to grow just shy of 20% over the next 5 years. Most tech firms would kill for this kind of growth. For Google however, this is just one half of the growth rate for the previous 5 years. Google’s earnings grew 43% per year over the past 5 years.

With shares retreating nearly 5% after hours and Google trading at $566, the stock may represent a compelling buying opportunity for long term investors.

I do not own any shares of Google.

National Bank of Greece

With Greece on the verge of insolvency, the European Central Bank and International Monetary Fund stepped in and provided Greece with $61 billion in liquidity. This is just a drop in the bucket to the total funding that Greece needs but it is a positive development. How did Greek bank stocks react to the news? They responded with barely a whimper. National Bank of Greece (NBG) and Credit Agricole barely moved at all. There may be some upside potential in NBG for the speculative investor. National Bank of Greece stands to benefit the most from any sort of rescue package. NBG is the biggest lender in Greece and its balance sheet is saddled with risky debt. A bailout for Greece is a bailout for NBG.

Advanced Micro Devices

Is Intel’s blowout quarter is a harbinger of things to come for the chip sector? Can AMD show the top line growth that Street is looking for? Analysts are expecting an 8 cent loss for AMD when the tech company reports on Thursday. If AMD reports a positive earnings number the stock should skyrocket. AMD is hoping to benefit from increased corporate IT spending. Intel has set the bar high for other chip companies, so AMD had better be prepared to deliver.

Palm Inc.

Palm Inc. (PALM) has surged over 34% amid takeover rumors. There has been talk of Dell, HTC, Lenovo, Google, Research in Motion and Motorola buying out the smartphone maker. There are even rumors that the Asian company Huawei Technologies is interested in acquiring Palm. Now Palm has reportedly put itself up for sale. It’s amazing that a company with such a high cash burn rate and huge operating losses has so many potential suitors. Things will only get progressively worse for Palm, the longer that this process drags on. The problem with Palm is that there is no reliable metric that allows you to value the stock. Palm is worth whatever a competitor will pay for the firm. The bigger question for potential buyers is, will Palm’s developers and CEO Jon Rubinstein stay on board long term if Palm is acquired by a larger competitor?

Photo by conorwithonen