Friday, August 31, 2007

CSR - a value trap?

For a few hours on Wednesday morning this week the CSR share price dipped below 600p. This is quite extraordinary seeing as for a day in July it peaked above 900p and nothing very bad has happened in the meantime. Someone somewhere is really not sure what to make of CSR.

Obviously the recent fall has a lot to do with the current market uncertainty and as a technology stock on a higher PE than the market CSR gets punished more than most.

So is it a bargain now? Probably - but maybe not of the back-up-the-truck variety.

CSR's guidance is certainly rosy with revenue predicted to rise by 15 to 20% over the next 5 years. The problem is that CSR management have been over-optimistic before - most notably last year when they had to give two profit warnings as revenue ended up being nowhere near their guidance.

The other problem is that costs are increasing rapidly as CSR has made a number of acquisitions that are not helping the bottom line.

However I think CSR is right to invest in other wireless technologies like WIFI, GPS and UWB. By integrating several wireless solutions on one chip CSR can provide a cheap and differentiated product.

So revenue growth looks good at the moment but cost growth is significant as CSR invest in the future.

EPS for Q2 2007 was $0.25. EPS for Q3 should be significantly higher due to the seasonality of the business. If CSR makes 45p per share this year it is currently on a 2007 PE of 14. Tesco is on a 2007 PE of 17 and is growing at a mere 12% clip.

So CSR does look nice. Unfortunately it has already jumped back up to 640p but there may still be a chance of a quick 10% at these levels.

Saturday, August 25, 2007

BHP Billiton strikes gold

Early this year I made a big mistake. I did not buy enough BHP Billiton (BLT.)

Soon after buying into BLT at below 900p the share price jumped up 20% so I decided to wait for the price to come back down before buying any more. The problem is that the price never came back down and in July touched 1500p.

Anyone who thinks blue chip companies are boring investments would have had their perceptions challenged by the volatility of miners and banks this year. But that is another story.

On Wednesday BLT issued the kind of yearly report that investors live for.

Profit is up 30%, cash flow is up 50%, the dividend is up 30% and over 5% of outstanding share have been repurchased!

This is all mainly due to rising commodity prices which begs the question - will commodity prices remain elevated? BLT management think that the growth of the Indian and Chinese economy is strong enough to maintain these prices in the medium term.

BLT has ten major projects scheduled to come online this financial year so sale volumes should increase significantly. In conjunction with the ongoing share repurchase program EPS growth should be in the low double figures even if commodity prices are static.

Is BLT good value? Assuming BLT makes 130p this financial year it is on a forward PE of just over 10. That seems a nice price for a company of this quality. I am buying more anyway!

Thursday, August 16, 2007

Sell, buy, hold or just cry?

What to do?

The market is jumping around like a ferret on speed, but mostly down. When will this correction end? Or will it turn into a crash? Can the bargains available be resisted?

If there were easy answers to questions like these then investing would not be so difficult and so potentially rewarding.

Personally I do not see a crash coming. Valuations are too cheap and the economy is not doing badly enough for that. I could be wrong though.

Assuming that a crash is not coming it would make sense to buy some bargains. The problem with that is that this correction might not be over. I bought some British Airways on Friday at bargain basement prices. This move looked great on Monday when the stock jumped up but after today's fall they are showing a small loss.

If I had a cash position at the moment I would probably do some bargain hunting at these levels but hold at least half the cash back in case the market drops further.

Potential bargains? Where do I start? CSR look good at 625p. It should earn 60p per share next year and is growing at a rate of 15 - 20% which makes its 2008 PE of 11 look nice. And as a UK technology stock it has absolutely no exposure to the US sub-prime mortgage sector!

Airlines look over-sold here - British Airways or Continental Airlines might be worth a punt.

Banks obviously are crazily cheap. British mortgage bank Northern Rock is on a 2008 PE of 6.5 and is supposed to be growing at 15%! If you are not quite brave enough to buy a mortgage bank then RBS is more solid and has a 2008 PE of 7!

For nervous types it is hard to go wrong with Tesco at 404p!

If, like me, you invest in the stockmarket in a monthly saving plan then probably the best thing to do is to keep buying something that has really got hammered and hold tight. In a few years it will look like you got a bargain.

Sleep well!

Saturday, August 11, 2007

British Airways ready to take off

What is the best thing to do when the market is tumbling and everyone is running for cash? If you are crazy like me then you sell a stock that is holding up and buy a bargain.

So yesterday I sold half my Google position and bought into British Airways. There are plenty of bargain banks around as well but even I am not crazy enough to increase my exposure to banks in the current climate.

Google has been relatively untouched by all this market uncertainty while BA is down over 30% since the start of the year for a variety of reasons.

BA is on a 2007 PE of less than 8 and is about to resume paying dividends. As for growth - well this is an airline! Lets just hope Bin Laden leaves it alone.

What do I like about BA?

- Bargain basement valuation
- £2 billion in cash
- CEO Willie Walsh is keeping a close eye on costs
- Modern fleet
- Strong brand
- S & P has upgraded its debt to investment grade
- Should yield over 2% now dividends are resumed
- Moving into new terminal at Heathrow next year. This will put an end to changing terminals for connections.

What do I not like about BA?

- It is an airline!
- Subject to intense competition, especially in the short haul market
- Exposed to terrorist events
- Will be hit hard in a recession

I think BA has the potential to hit 500p in the next year, giving it a 30% upside.

BA has been good to me in the past; hopefully it will produce the good again.

Saturday, August 04, 2007

Tesco safety net

With the markets looking volatile and uncertain now is not the time for panic selling. It may be a good time to get into Tesco though.

I sold my Tesco holding earlier this year when the share price sailed through 440p. The share price is now down to just above 400p and the story is essentially unchanged.

Tesco is growing slowly in the UK (about 9%) and rapidly overseas (about 25%.) International sales are now about one quarter of total group sales.

In November this year Tesco are launching their US operation. I expect significant media interest and an associated share price uplift when this happens so now would be a good time to jump in, before people start talking about it.

Tesco's property portfolio is worth about 300p per share, and people always need to buy food, making them a popular defensive choice. I expect Tesco to outperform the market if it drops further and to do fine if the market rises.

The only problem with buying into Tesco is finding something to sell to make way for it! Now is not a good time to sell one of my bank holdings or British Land. Maybe I will take some profits on BHP Billiton and put the money in the safe hands of Terry Leahy.