Bank of America Corp. (NYSE: BAC) is down 2% premarket to $7.08, relative to a 52-week range of $6.01-$15.31.

Citigroup, Inc. (NYSE: C) is down 2.5% premarket to $28.27, relative to a 52-week range of $25.40 – $51.50.

Caterpillar, Inc. (NYSE: CAT) is down 2.2% premarket to $84.00, relative to a 52-week range of $71.09 – $116.55. Raymond James downgraded the company from “strong buy” to “outperform.”

Netflix, Inc. (NASDAQ: NFLX) is up .5% premarket to $155.98, relative to a 52-week range of 140.02 – 304.79.

Tyco International Ltd. (NYSE: TYC) is up 7.35% before market open to $46.91, relative to a 52-week range of $36.28 – $53.38. The company announced it would be splitting into three parts.

Supervalu, Inc. (NYSE: SVU) is down 1.7% premarket to $7.56, relative to a 52-week range of $6.40 – $12.45. Logitech International (NASDAQ: LOGI) is down 4.4% premarket to $156.06, relative to a 52-week range of $7.85 – $23.29.

One company will be the ADT North America residential security business with annualized revenue of approximately $3 billion and approximately 16,000 employees. Naren Gursahaney, the current president of Tyco’s security solutions segment, will become the new company’s chief executive officer.

The second will be a provider of flow control products and services with annualized revenue of approximately $4 billion and approximately 15,000 employees. Patrick Decker, the current president of Tyco’s flow control segment, will become the new company’s chief executive officer.

The third company will be commercial fire and security business with annualized revenue of approximately $10 billion and approximately 69,000 employees. George Oliver, the current president of Tyco’s fire protection segment, will become the company’s chief executive officer.

What is interesting is that this move comes at a time right after rumors that United Technologies Corporation (NYSE: UTX) is out raising a large financing.  Reports over the weekend noted that the $68 billion United Tech is examining a bid for Goodrich Corporation (NYSE: GR) with a market cap of $11.6 billion.  Other companies were on the rise last week as potential buyout candidates as well.

Calls have been made for General Electric Co. (NYSE: GE) to also deconglomerize itself.  The company has made divesting moves like the NBC Universal (still partial sale) and others, although in recent months Jeff Immelt has said that he is happier with GE’s business portfolio than he has ever been.  If Immelt did not decide to break up GE shortly after the recession, he is unlikely to make such a move during better times or during less-bad times unless the benefit is overwhelmingly more.

Some conglomerates get larger while some shrink.  Former CEO Dennis Kozlowski put Tyco together by acquisition after acquisition.  His empire was taken away from him when he was ousted and sent to prison.  What remains of his former empire is now being broken up yet again.

JON C. OGG

This of course has speculation that Tyco Corporation (NYSE: TYC) could fall into the prey category, and we would caution that this is not the first time that Tyco has been in the M&A rumor mill. Honeywell International (NYSE: HON) or Textron Inc. (NYSE: TXT) could also be in the target group if you consider their size and markets.  Keep in mind that General Electric Co. (NYSE: GE) once tried to acquire Honeywell but that deal was blocked in the European Union.

Keep in mind that Diebold, Incorporated (NYSE: DBD) was given a $2.6 billion ($3 billion enterprise value) hostile buyout offer from United Tech, but that was withdrawn in late-2008 after Diebold fended the buyout off.  Its shares are now higher than when the buyout offer was first made, but the stock is still well down from its highs. Diebold was also worth more than $50 a share back in 2007.  United Tech also paid $1.8 billion to acquire GE’s security operations in 2009, which closed in 2010.

Another situation that comes to mind is the break-up of ITT Corporation (NYSE: ITT).  The market cap is ‘only’ about $8 billion and the $44.50 price compares to a 52-week trading range of $42.08 to $64.00.

Rockwell Collins Inc. (NYSE: COL) is another name which might fit in and the 6% gain to $55.33 today should actually be noted that the stock was under $48.00 as recently as this last Tuesday.

Again, the implication is that there is value in the conglomerate sector.  Taking out a loan for M&A (or for a huge buyback) is currently cheaper than it has almost ever been.  Imagine a ten-year debt financing for under 3% or 4% in annual borrowing costs for a corporation… Then add in other accretive acquisition opportunities.  The strong companies can prey on the weaker companies right now.

Our value analysis take is that GE still remains the best value in the conglomerate sector, but that is a different matter entirely.

United Technologies is not even down 1% at $74.88 on the news, and its 52-week range is $67.12 to $91.83.  The summer market drop was particularly harsh on this company.  We recently opined that United Tech could be one of the next megacap stocks (over $100 billion in stock value) and that it might it acquire its way there.  Maybe it isn’t too far off base after all.

Your email address

subscribe

terms and conditions

JON C. OGG

We have reviewed and identified the following conglomerates for our value review: General Electric (NYSE: GE), United Technologies (NYSE: UTX), Berkshire Hathaway (NYSE: BRK-A), Honeywell International (NYSE: HON), and 3M (NYSE: MMM). Also included were reviews of Textron (NYSE: TXT) and Tyco International (NYSE: TYC). ITT Corp. (NYSE: ITT) was not reviewed because of its ongoing restructuring ahead, although there may be a significant special situation still developing there. The top valuation winner will be shown after reviewing all of them.

We used a Finviz.com screening tool for year ahead estimates (next year), price-to-book ratios, and for the return on equity. We also reviewed the consensus price target objectives from Thomson Reuters to see what sort of implied upside remains if the analysts are still accurate. In most cases, we would have a fair value under most research targets today due to the headline shock factors that spook the markets each week now. We have taken a review of dividend yields and looked at many ongoing challenges in the sector today. September is said to be a cursed market month, and searching for value alone does not ever imply that the lowest dollar price on the stock has been seen.

Aetna Inc. (NYSE: AET) Reiterated Buy with $51 target at Argus.
Aixtron SE (NASDAQ: AIXG) Raised to Buy at Goldman Sachs.
Cognizant Technology Solutions (NASDAQ: CTSH) Removed from Conviction Buy List at Goldman Sachs.
F5 Networks, Inc. (NASDAQ: FFIV) Raised to Neutral at Goldman Sachs.
Green Dot Corporation (NYSE: GDOT) Raised to Buy at Goldman Sachs.
HollyFrontier Corporation (NYSE: HFC) Reiterated Buy as Value at Zacks.
Illinois Tool Works Inc. (NYSE: ITW) Cut to Underperform at BofA/ML.
International Business Machines Corporation (NYSE: IBM) Raised to Buy at Goldman Sachs.
Lexmark International Inc. (NYSE: LXK) Cut to Sell at Goldman Sachs.
MeadWestvaco Corporation (NYSE: MWV) Raised to Buy at BofA/ML.
NetApp, Inc. (NASDAQ: NTAP) Raised to Overweight at Piper Jaffray.
Optimer Pharmaceuticals (NASDAQ: OPTR) Maintained Outperform as Bull of the Day at Zacks.
Oracle Corporation (NASDAQ: ORCL) Raised to Top Pick at FBR.
Pier 1 Imports, Inc. (NYSE: PIR) Cut to Equal-Weight at Barclays.
Tyco International Ltd. (NYSE: TYC) Raised to Buy at BofA/ML.
Under Armour, Inc. (NYSE: UA) Raised to Outperform at FBR.
Unisys Corporation (NYSE: UIS) Cut to Underperform as Bear of the Day at Zacks.
Visa, Inc. (NYSE: V) Raised to Conviction Buy List at Goldman Sachs.
VMware Inc. (NYSE: VMW) Raised to Outperform at Credit Suisse.
W.W. Grainger Inc. (NYSE: GWW) Raised to Buy at BofA/ML.

You are invited to join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

We have featured earnings estimates from Thomson Reuters, shown prices and relative trading history and color on each of the reports.  If analyst price target has been provided, that is also a Thomson Reuters target.

MONDAY, JULY 25

Baidu, Inc. (NASDAQ: BIDU) has estimates of $0.66 EPS and $502 million in revenues; next quarter estimates are $0.74 EPS and $568 million in revenues.  With shares around $153.00, its 52-week trading range is $74.50 to $156.04.  With all of the accounting issues out of China, one might expect that Baidu would be way off.  Presto, it is not and in fact it is very close to its highs.  Without competition in China it seems that the Baidudians trust the accounting folks just fine at Baidu.  The high-beta and high market premium valuations have always been a concern here.

Netflix, Inc. (NASDAQ: NFLX) has estimates of $1.11 EPS and $790 million in revenues; next quarter estimates are $1.11 EPS and $844 million in revenues.  With shares around $277.00, its 52-week trading range is $95.33 to $304.79. Netflix is another high valuation and high performance stock.  The key is that since its price change was announced it seems that the tone and bias from analysts and from momentum traders has lightened up.  Still, the pullback is now close that magic 10% level.

TUESDAY, JULY 26

3M Co. (NYSE: MMM) has estimates of $1.60 EPS and $7.60 billion in revenues; next quarter estimates are $1.69 EPS and $7.84 billion in revenues.  With shares around $95.50, its 52-week trading range is $78.40 to $98.19. 3M has already had conglomerates report ahead of it now.  You can also see based on the price and the 52-week range that its shares have held up very well.  If any blow-ups are coming, it does not seem as though investors have priced in any bad surprises for this DJIA component.

Amazon.com Inc. (NASDAQ: AMZN) has estimates of $0.35 EPS and $9.37 billion in revenues; next quarter estimates are $0.48 EPS and $10.32 billion in revenues.  With shares around $212.00, its 52-week trading range is $105.80 to $220.20.  Amazon.com continues to perform well after earnings.  It seems that the investment for around the cloud and for its buildout take a much higher precedent than the worries we have about the contracting margins.  Amazon is one of those great companies that is still within striking distance of becoming the next mega-cap stock with a $100 billion valuation. 

Biogen Idec Inc. (NASDAQ: BIIB) has estimates of $1.40 EPS and $1.19 billion in revenues; next quarter estimates are $1.49 EPS and $1.21 billion in revenues.  With shares around $105.00, its 52-week trading range is $52.40 to $109.63. Biogen-Idec has just been an incredible performer that almost came back from nothingness.  Our concern is that the performance was solid enough that it probably needs to blow the doors off the hinges to keep everyone happy.

We evaluated General Electric Co. (NYSE: GE); United Technologies Corp. (NYSE: UTX); Berkshire Hathaway Inc. (NYSE: BRK-A); Honeywell International Inc. (NYSE: HON); and 3M Co. (NYSE: MMM).  Also included were reviews of Textron Inc. (NYSE: TXT) and Tyco International Ltd. (NYSE: TYC).

In our analysis, we considered prices, forward P/E ratios, dividend yields, and return on equity.  We also then considered the fundamentals of each and included an implied upside to the Thomson Reuters consensus price targets.  Conglomerates are in a different position that they were in 2010 and now the field is mixed.  Some stand out above and beyond peers, and some look tired in the current market.

General Electric Co. (NYSE: GE) pays a 3.2% dividend.  The company sells at a price to book ratio of about 1.6 to 1.  Its forward price earnings multiple is 11.4 and its return on equity is 11.25%.  GE’s shares recently traded at $18.63.  The 52-week price range is $13.83 to $21.33. Thomson Reuters has a consensus price target of $23.87, implying roughly 28% upside.  General Electric is also in the midst of solar investing as well as other new financings, but that is the norm for a company the size of GE.  This price-to-book value seems rather low, and we would be the first ones to admit that trying to accurately place a book value on G.E. at any given time would not be an easy feat.  With much still tied to consumer and customer financings, investors have to also understand that G.E. remains more of a bank compared to other conglomerates. It also has the highest market capitalization of all conglomerates again at $197 billion.

United Technologies Corp. (NYSE: UTX) pays a 2.13% dividend.  The company sells at a price to book ratio of 3.7 to 1.  Its forward price earnings multiple is 14.6 and its return on equity is 21.5%.  United Technologies recently traded at $90.35.  The 52-week price range is $63.53 to $91.83. Thomson Reuters has an average price target of $97.83, implying that it has almost 10% upside.  United Tech is one that we recently noted could become one of the next mega-caps with a $100 billion market capitalization, which is really not too much higher than the consensus price target objective when you consider a $82 billion market cap.  That will not happen if the economic worries morph into something worse.

Berkshire Hathaway Inc. (NYSE: BRK-A) sells at a price to book ratio of about 1.2 to 1, but it pays no dividend to its shareholders.  Its forward price earnings multiple is 15.2 and its return on equity is 7.06%.  This Warren Buffet progeny has not yet announced a dividend, though many industry observers believe it’s about time they did.  Berkshire Hathaway recently traded at $113,000.00.  The 52-week price range is $109,925.00 to $131,463.00. Without an official price target, the upside depends upon your interpretation of what sort of premium this one should trade at against book value.  The biggest trick about Berkshire Hathaway is to remember that net income on any given quarter is not the metric to use because Warren Buffett has said it could be almost whatever they wanted due to mark-to-market and due to quarterly fluctuations in all of its units.  That is fortunate considering that the company’s insurance losses cut its earnings in half at the last earnings report.  There are two words that the media has not used in a month or more and the company has to be happy about it: David Sokol.  This pending acquisition of Lubrizol has not yet closed, although it is not a huge transaction despite the $8.6 billion market cap.

The ballpark figure is around $30 billion, but this likely includes debt assumption.  Schneider’s statement of not being in any discussions does not matter one bit.  It does not mean that the company hasn’t talked with bankers nor that its board of directors haven’t discussed a deal behind closed doors.

Tyco deconglomerized itself in a three-way split back in 2007.  This stock was just at $47.15 last Friday and rose to above $53.00 yesterday when the news surfaced.  Shares are back under $51.00 after a near-3% drop today and the market cap is right at $24.1 billion currently.

If you just straight-line the equity value to $30 billion then the equity buyout could be as high as $63.00 per share.  That would be a post-split high since the 2007 summer when it split itself apart.  There is more than $7 billion in direct long-term debt when you combine its long-term obligations and deferred liabilities.  This implies that Tyco is fully priced right now.

Before the news of a possible offer broke, Thomson Reuters had a mean target of just over $49.50 and a media target of $50.50.  The highest price target is $54.00.  A blended 2011 to 2012 annual estimate from Thomson Reuters also generates a forward implied P/E ratio of just over 15 today.  This is generally deemed to be close to full value, short of synergies and carve-outs that can unlock more value.

Where the deal gets interesting is in the break-up values here.  The  ADT Worldwide business is perhaps the Holy Grail here but it has four other units: Flow Control, Fire Protection Services, Electrical and Metal Products, and Safety Products.  The fire protection has arguable synergies, but any buyer could decide that its electrical and metals unit should go, along with the safety products and/or the Flow Control operations.  Our take is not based upon Schneider alone.  Any buyer could carve out operations here.

In 2010, Tyco had $17.016 billion in revenues.  Operating income was almost $1.6 billion and net income for holders was down at $1.13 billion. Tyco claims better gross margins than other quasi-conglomerates and any carve-outs could change how the business is truly valued to a buyer.

Tyco could feasibly fetch as high as $60.00 in a transaction.  The problem is that it starts getting very expensive on EBITDA, earnings, revenues, and even in break-up or carve-out values.  Tyco’s stock was in the mid-$30′s as recently as October 2010.  The stock was well under $30 two summers ago but it was above $50 when it broke up in 2007.

It is too bad that these interested buyers have to always wait until share prices are high and when valuations are extended.  The flip-side is that sellers don’t want to sell at the bottom and they seek to sell when they think the peak is near.  Investors also should consider that Tyco has the option of trying to unlock value on its own with spin-offs or carve-outs.

JON C. OGG

Apollo Group Inc. (NASDAQ: APOL) is up surprisingly very little so far after Goldman Sachs put a Buy rating on the stock.  Shares were up 0.9% at $42.50 in thin volume trading versus a 52-week range of $33.75  to $66.69.  Maybe no one believed thee research in this sector.

Barclays PLC (NYSE: BCS) was indicated up about 3% to 4% around $20.15 to $20.20 after a government report did not call for a break-up of the large banks.  Royal Bank of Scotland Group plc (NYSE: RBS) was up about 2% around $14.50 in early trading on the same news.

Biogen Idec Inc. (NASDAQ: BIIB) is up after releasing positive top-line results from the first Phase 3 trial of its oral BG-12 in multiple sclerosis.  The two-time and three-time daily administration met the primary study endpoint in the proportion of patients with RRMS who relapsed at two years compared with placebo.  Shares are up almost 6% at $77.50 in early trading.

Level 3 Communications, Inc. (NASDAQ: LVLT) is making a play for Global Crossing as the acquirer and its shares are actually up over 20% at $1.75 on the news with well over 10 million shares traded in pre-market.  We are usually skeptical of this name and usually the acquirer sees a drop in shares.  Not here, not so far.

QuickLogic Corp. (NASDAQ: QUIK) issued an earnings warning and it has shares of the software solutions provider for mobile electronics down about 12.5% at $4.26 in light-volume trading.

Tasty Baking Co. (NASDAQ: TSTY) is up some 140% around $3.90 after the acquisition by Flowers Foods in a $4.00 per share buyout after closing at $1.61.

Tyco International Ltd. (NYSE: TYC) is trading higher on reports that Schneider Electric SA in France is considering a bid for the company.  Shares are up 8% at $51.00 on more than 1 million shares in the pre-market.

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG

Tyco International Ltd. (NYSE: TYC) is the most recent of the dividend hikes from large corporations.  Shareholders just approved a annual payout to $1.00 from a rate of $0.84, which translates to $0.25 per quarter rather than the $0.21 rate.  The new yield comes to above 2.2% based on a $45.30 share price.

Trinity Biotech plc (NASDAQ: TRIB) was recently named as “Bull of the Day” by Zacks, in part due to its dividend initiation.  While only about 1%, this is another diagnostic products company paying shareholders in he form of dividends.

Staples, Inc. (NASDAQ: SPLS) just hit its own investor Easy-Button by hiking its payout to $0.10 per share per quarter from a rate of $0.09.  The new $0.40 annualized rate comes to a tad under 2.0% based upon its $20.20 share price.

Prudential plc (NYSE: PUK) must have more liberty to determine its own payout even though the United Kingdom is not immune from the woes and regulations of the world.  It is in pence as it is an ADR and that makes the rate already variable for US-holders.  Still in local currency the payout went to 23.85 pence from 19.85.  It must have said “Eat your heart out!” to the U.S. regulatory framework.

Bank of Nova Scotia (NYSE: BNS) joined the big Canadian banks boosting payout this year as a sign that it has shined over its US-counterparts.  The dividend has always fluctuated a bit for US investors because of currency exchange rates.  The new payout went to C$0.52 from C$0.49 per share per quarter.  That comes to about 3.3%.

QUALCOMM Incorporated (NASDAQ: QCOM) approved a 13% increase in the quarterly payout from $0.19 to $0.215 per share per quarter.  The new annual rate of $0.86 per share in dividends comes to a dividend yield of 1.5%.  That may be lower than some of the top semiconductor payouts we have featured before with 3% yields but is still a move in the right direction.

Applied Materials, Inc. (NASDAQ: AMAT) also hiked its payout to $0.08 from $0.07 per share per quarter.  This is actually taking the semiconductor equipment maker’s yield up to above 2.0% and that is after close to a 50% share gain since the lows seen just last summer.

You can join our free daily email distribution list to hear more about analyst upgrades and downgrades, top day trader and active trader alerts, dividend trends, news on Buffett and other investment gurus, IPOs, secondary offerings, private equity, and more.

JON C. OGG