In the past seven years,
Home Depot (
has bought back a whopping 600 million
. That's really impressive until you realize many of the shares
were bought back right when the stock was trading at a
Sadly, this example applies to many companies right now.
I've been looking at all of the companies that have announced
buyback plans in the past two months, and most of the stocks in
question are trading near their 52-week highs. Considering that the
S&P 500 has more than doubled in the past three years,
companies are conducting major buybacks because they have too much
cash, and not because their shares are necessarily bargains.
However, I have found 10 companies with fresh recent buyback plans,
all of which trade at least 20% from the 52-week high. In these
instances, the companies are in a position to make their buyback
dollars go a lot further. Take a look...
It's interesting tospot a pair of names in the for-profit education
sector. This whole industry has been rife with crisis, as high
student loan default rates led Congress to scrutinize lending
practices more closely. This should create a healthier industry as
schools become more focused on accepting the best candidates and
better track their loan
The current stock buybacks at
Capella Education (Nasdaq: CPLA)
Education Management (Nasdaq: EDMC)
appear well-timed. Both firms have seen sharp drops in student
enrollment, keeping their stocks out of favor. However, the cycle
of negative year-over-year comparisons appears close to bottoming
out, so both of these schools are expected to show enrollment gains
starting in a quarter or two from now. For this reason, this is a
perfect time to research these stocks.
Free cash flow = steady buybacks
Greeting -card company
American Greetings (
is the poster child for stock buybacks. The company has generated
more than $100 million in
free cash flow
for seven of the past eight years, and since it's a largely mature
enterprise, much of this cash has been used to repurchase company
stock. In fact,
have steadily fallen, from 82 million back in fiscal (February
2005) to a recent 39.5 million. The current stock buyback
program could take that figure below 30 million.
To be sure, with minimal top-line growth, this is more of a value
play, trading at less than eight times projected
and around five times free cash flow. The free cash flow supports
more than the buybacks: American Greetings sports a 3.9%
as well. Another key marker for value investors: The stock trades
at a 21% discount to tangible
Along with the buyback and the
, management is also spending more than $50 million a year to
develop a strong set of online brands. Consumers may be buying
fewer traditional greeting cards, but they are spending increasing
amounts on online greetings, known as e-cards. These investments
to slump in the most recent and current quarter, which is the key
reason why shares fell to fresh lows when fiscal third-quarter
results were released in mid-December.
Investors are wrestling with a growth target for this mature model,
but it's still highly profitable. The company is seizing the
opportunity to take its share count even lower while the stock
remains out of favor.
This auto-parts supplier also sports a rock-solid
(with $1.1 billion in net cash) and produces robust cash flow.
Lear's business has rebounded in tandem with the resurgent auto
industry, so as industry volumes keep rising further in 2012 and
2013, Lear could see free cash flow approach the $500 million mark
by 2013 or 2014.
Right now, analysts expect Lear to boost sales just 3% in 2012 (to
$14.5 billion) and around 6% in 2013 (to around $15.4 billion). But
this may prove to be too conservative a forecast, not only because
the auto industry is expected to grow at a faster pace, but because
Lear is also looking to take
Merrill Lynch expects the major auto makers "to continue shifting
toward fewer, well-capitalized partners in the supply base, which
should favor strong companies like LEA." Merrill's $69
is roughly 50% above current levels. Lear may wish the stock to
stay down in the near-term, though. If the company can complete the
planned $700 million stock buyback at current prices, then the
share count could fall by as much as 15%, helping to boost the
stock in the future.
Risks to Consider:
These companies appear to be buying shares at a discount, but
heads south in 2012, then current buyback activity will have looked
Action to Take -->
Quickly falling share counts are a sure-fire way to boost
earnings per share (
, even if
is growing at a slower rate. Moreover, buybacks ensure a degree of
downside support because these companies are in the market every
day defending their stock and creating a degree of support. You
could do well by riding their coattails.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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