Across the country, many corporate boards are faced with the
same conundrum:Cash is piling up quite fast, but clear uses of that
cash are lacking. Few companies want to make major acquisitions in
these still-uncertain times, and thoughdividend hikes are a
logicaloption , they still don't have a meaningful effect on cash
balances.
That's why you still hear about many companies issuing seemingly
robuststock buyback programs.
Though the number of buyback announcements (and the dollar value
of them) slipped about 10-12% in 2012 compared with the record year
of 2011, they still remain near peak levels.
And January 2013 has brought more of the same. In the past four
weeks, these four companies announced plans to initiate or extend
stock buyback programs worth almost $10 billion on a
collectivebasis .
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Frankly, they shouldn't bother. The size of the buybacks won't
make a meaningful dent in the share count, thesestocks already
trade near multi-year highs. Besides, they don't look like bargains
in the context of price-to-earnings ratios.
The only buyback announcements worthy of further research
involve companies buying back huge amounts of stock, or at least a
stock that is clearly cheap.
In this context, eight companies are buying back stocks that are
surely worth further research. Each one of them has the potential
to reduce the share count by at least 10%. They may not all
appearundervalued in the context of price-to-earnings (P/E )
ratios, but theirearnings per share (
EPS
) will surely rise in coming years (and the P/E ratio will surely
shrink) if they aggressively reduce the share count.
I'll skip any discussion about
Herbalife (NYSE:
HLF
)
in this article. Enough ink has already been spilled on this
controversial company elsewhere (but you can also read my colleague
Michael Vodicka's take on the stock
here
.). The last four stocks on this table are worth further research.
But investors should surely ramp up their research efforts on
Tupperware (NYSE:
TUP
)
,
Lear (NYSE:
LEA
)
, and
Unifi (NYSE:
UFI
)
.
Here's why…
A smoother globaleconomy changes the risk profile for
Tupperware
Although North American growth remains quite modest for
Tupperware, the company is booming in other markets. Sales in
Brazil, India, Indonesia, Malaysia and Singapore rose in excess of
25% in the fourth quarter of 2012. (Sales in Russia and Eastern
Europe also rose at a double-digit pace). We've written extensively
about how fast-rising middle classes in emerging economies will
fuel sales for U.S. multinationals, and Tupperware is proof
positive, asemerging markets now account for 60% of sales.
Tupperware's management is so confident the company's current
base of sales and profits can be maintained, that it is raising the
maximum target level of debt it will carry on itsbalance sheet .
And by expanding the use ofleverage , this company plans to sharply
hike its dividend (by a hefty 72%) and buyback up to $2 billion in
stock. That's almost half of the entiremarket value of the
company.
Tupperware already managed to shrink its share count from 61.4
million in 2011 to 56.4 million in 2012, and as the share count
continues to go down, a company boosting sales at a single-digit
pace can keep boostingEPS at a double-digit pace.
Auto parts supplier Lear is also taking up itsdebt load to bring
in more cash for heightened buybacks. The company recently
announced plans to boost the current share buyback from $800
million to $1.5 billion. Lear's share count has already fallen from
156 million in 2007 to under 100 million as of September, 2012, and
the current share buyback should push the figure down to 95
million.
Cost cuts fuel buybacks
Yarn maker
Unifi (NYSE:
UFI
)
has been streamlining its operations for several years and is now
in a position to reward shareholders. The company generated $37
million infree cash flow in fiscal (June) 2012, which is greater
than the prior seven years' free cash flow -- combined. And that
sets the stage for a $50 million share buyback. That should shrink
the current 20-million share count to below 17 million.
All other things being equal, per share profits should rise by
at least 15%, or whatever percentage the share count ultimately
shrinks. In fact, per share profits are expected to rise more than
15% in fiscal (June) 2014, to around $2.30. That's no coincidence.
As long asshares continue to trade at just six times forward
profits (and below tangiblebook value ), a stock buyback makes
ample sense.
Risks to Consider:
These buybacks may continue even if shares rise sharply from
here, making the buyback plans less salutary.
Action to Take -->
So many buyback plans are a mistake, as they are done simply
because no other use of cash exists. Yet Tupperware, Lear and Unifi
provide examples of a buyback plan that can materially boost EPS.
In the event that the broadermarket falls and these stocks slump in
tandem, then the buyback plans will prove to be of even greater
value.
-- David Sterman
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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.