It's been one of the most overlooked aspects ofearnings season
... I'm not talking about the market's strong gains or the recent
robust employment growth. I'm talking about stock buyback
announcements. I've counted more than 30 companies that have
announced plans to buy back at least $1 billion in stock since late
October. And such big buybacks are often a harbinger of stock price
gains, as analysts look to boost their
(earnings per share) forecasts that result from smaller share
I decided to take a final look at the companies buying back big
chunks of stock, specifically, the biggest stock buybacks in
February. I narrowed my focus to companies with plans to buy at
least $900 million in stock, and in each case, the buyback must
represent at least 10% ofshares outstanding. That percentage tells
you precisely how much EPS can be boosted -- all other things being
It's telling that major retailers account for some of the
biggest current buybacks. These companies continue to throw off
oodles of cash, yet their
are lagging the broader market while retail spending remains weak.
Buying back stock now -- before consumer spending picks up -- may
turn out to be a great move.
Here are two names from the table above that look quite appealing
simply on the fundamentals (the buyback plans are purely icing on
I've always been a fan of this department store operator. Not
because its merchandising touch is always on the mark, allowing
Kohl's to perennially takemarket share from less savvy rivals.
Instead, management has always run a really impressive operation in
terms of financial performance: Ever-improving product sourcing has
pushed costs down and allowed gross margins to rise for seven
return on equity (ROE)
routinely hovers around 15%,
revenue per employee
hits new highs every year, and Kohl's now sports a robust $2.3
billion in cash.
That's enabled management to offer up adividend for the first time
in the company's history, while also committing to a massive $3.5
billion stock buyback (to be completed in the next three years),
which could reduce the share count by about 20%. Despite that,
shares remain some 30% below levels seen three years ago, as
investors focus on the still-weak consumer. Yet Kohl's is still
managing to bring in customer traffic, posting a 5% jump in
same-store sales in February. Further growth is expected to come as
the result of the company's website, which saw a 50% jump in
traffic this past holiday season compared with a year ago, and an
even deeper push into private-label apparel in 2011.
Shares trade for just 12 times projected (January) 2012
consensusprofit forecasts, though the new buyback plans could help
Kohl's stay ahead of the consensus forecast. This isn't a home run
stock that's about to zoom ahead, but rather a slow and steady
runner that is likely to re-visit its 2007 highs of $75 to $80 in
the next year or two. That works out to be a nearly 40% gain.
Cable and phone companies are faced with a bewildering array of
technology challenges. They have to develop the best platform to
best manage internal resources, the best methods of interacting
with customers and they need to strive to avoid any major glitches
that could disrupt operations. Amdocs' suite of software services
provides one of the industry's strongest platforms to manage these
needs, helping the company to march toward $3 billion in annual
sales.Free cash flow has risen every year, to a recent $600
Trouble is, pushing past the $3 billion sales mark has been a real
challenge. As a result, new management has taken charge and laid
out plans to generate more organic growth. "New CEO Eli Gelman
wasted no time in making some difficult (but in our opinion
necessary) decisions," note analysts at UBS. UBS came away
impressed from a meeting with analysts late February that outlined
a more aggressive strategy, especially in
, which currently represent Amdocs' fastest growing segment.
Goldman Sachs' analysts are also impressed by management's new
approach: "There are significant secular pockets of growth in the
explosion of wireless, connected devices, and international
expansion... (and) we believe that DOX is taking the right steps in
configuring its model around these long-term drivers." It could
take a while, but analysts increasingly see Amdcos as
better-positioned to retain or even take
from rivals such as
In the interim, Amdocs is putting its $1.4 billion in cash to use,
having announced a plan a few weeks ago to re-acquire roughly 20%
of shares outstanding. Near-term expectations are muted: Amdocs is
expected to boost sales just 5% this year and next, with per-share
profits staying flat in fiscal (September) 2011 and rising roughly
10% in fiscal 2012. Yet, the current new growth plans are expected
to boost sales and profits in subsequent years, before
evenaccounting for the benefits of the major buyback.
Action to Take -->
Buying back an ample percentage of the share count while shares
trade for a below-market multiple is often a recipe for success.
Kohl's and Amdocs are letting investors know that their cash-rich
balance sheets will be a strategic weapon to help move the share
price higher. As a result, either one of these stocks is a worthy
-- David Sterman
P.S. -- We've just identified six surprising events that could
break your portfolio wide open in 2011. Knowing these pivot points
in advance lets you focus your investing strategy like a beam of
light in the dark... and make a lot of money in a hurry. Get them
free by simply watching this video presentation.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.