Showing posts with label HFC. Show all posts
Showing posts with label HFC. Show all posts

Best Wall St. Stocks Today: GM

The wooden but plucky CEO of GM (GM), Rick Wagoner, told the press that if his company is allowed to go into Chapter 11, it will end up being a simple liquidation. GM will be torn into pieces and sold off as scrap. He made one good point to support his point of view. If a bankruptcy of the No. 1 US car company drags on for several months, potential auto buyers will purchase vehicles from competitors that they view as being �safe�.” No one wants to buy a car that won�t be serviced. Wagoner has made this point before, but it is more compelling now that the deadline for the government to approve or disapprove GM�s restructuring plan is only two weeks away.
GM has effectively taken a page out of the AIG playbook for gaming the Administration and Congress. Henry Paulson and his associates were led to believe, perhaps rightly, that if AIG failed it would cost other financial companies so significantly that the government would have to bailout almost every large financial firm in the country. GM�s argument is even simpler. A liquidation of the car firm would probably cost tens of thousands of jobs at the company, and many times that at suppliers. That argument is also old, but with the chance of liquidation in the next few months becoming more likely, it refreshes the strength of the logic.
GM has been in the middle of quietly challenging the government�s plan to close it down for three months now. The Administration has now sent its car experts to Detroit, and they have said that a bankruptcy of either GM or Chrysler is undesirable. They did not elaborate much on this analysis, but, from the standpoint of the car companies, they do not need to. It is enough that the blue chip analysts sent by the President to evaluate the car companies have a belief system that matches the one in The Motor City.
The financial and car industries have effectively ganged up on the government. They would seem to be weak because of their remarkable failures and reliance on out! side hel p to keep them alive. The opposite is true. By being terribly crippled, they are sucking all of the money out of the US Treasury because the Administration knows that if these parts of American business fail, replacing the jobs and capital will be insurmountable tasks. The recession would get much, much worse. Staying ahead of the job losses would become impossible.
AIG has led the way for GM. It has taken government money and made it clear that a great deal of the cash has been wasted. Even with the evidence of that completely uncovered, the Administration has so little power that it cannot let AIG go under, as a punishment for taking taxpayer money and using it for multimillion dollar bonuses.
No one at GM is going to get a raise because the government will give it another $20 billion or $30 billion. The car industry embezzlement is more artful. With more than one million jobs at risk and unemployment rising at a pace rarely seen in American history, letting GM fail would completely compromise any chance of keeping the unemployment rate below 10%. If this figure rises above that number, it will make every American shudder.

Does Frontier Communications Pass Buffett's Test

We'd all like to invest like the legendary Warren Buffett, turning thousands into millions or more. Buffett analyzes companies by calculating return on invested capital, or ROIC, in order to help determine whether a company has an economic moat -- the ability to earn returns on its money above that money's cost.
In this series, we examine several companies in a single industry to determine their ROIC. Let's take a look at Frontier Communications (NYSE: FTR  ) and three of its industry peers, to see how efficiently they use cash.
Of course, it's not the only metric in value investing, but ROIC may be the most important one. By determining a company's ROIC, you can see how well it's using the cash you entrust to it and whether it's creating value for you. Simply put, it divides a company's operating profit by how much investment it took to get that profit. The formula is:
ROIC = net operating profit after taxes / Invested capital
(You can get further details on the nuances of the formula.)
This one-size-fits-all calculation cuts out many of the legal accounting tricks (such as excessive debt) that managers use to boost earnings numbers, and it provides you with an apples-to-apples way to evaluate businesses, even across industries. The higher the ROIC, the more efficiently the company uses capital.
Ultimately, we're looking for companies that can invest their money at rates that are higher than the cost of capital, which for most businesses is between 8% and 12%. Ideally, we want to see ROIC above 12%, at a minimum, and a history of increasing returns, or at least steady returns, which indicate some durability to the company's economic moat.
Here are the ROIC figures for Frontier and three industry peers over a few periods.
Company
TTM< /p>
1 Year Ago
3 Years Ago
5 Years Ago
Frontier Communications 4% 2.8% 6.9% 8.2%
Windstream (Nasdaq: WIN  ) 6.9% 7.2% 12.4% 7.9%
CenturyLink (NYSE: CTL  ) 2.9% 7.5% 6.7% 6%
AT&T (NYSE: T  ) 5.6% 5.9%* 6% 6.5%
Source: S&P Capital IQ. TTM=trailing 12 months.
*Because T did not report an effective tax rate for one year ago, we used its 35% effective tax rate from three years ago.
Frontier's returns on invested capital are less than half of what they were five years ago. The other companies have also seen declines in their ROIC from five years ago, suggesting that the telecom space is particularly difficult.
One thing that makes Frontier so attractive to investors is its high dividend yield. Unfortunately, its low returns, which are shrinking over time, suggest that Frontier may not be able to grow its dividend in the future. In fact, Frontier already had to decrease its dividend by 25% last year, and its shrinking ROIC suggests that it may have to reduce those yields even more.
On the upside, Frontier's acquisition of Verizon assets last year gives it the potential to take advantage of economies of scale, which could help it improve its returns on invested capital in the future. Its increase in returns! from la st year offers some hope in Frontier's ability to improve its ROIC to a more attractive level.
Businesses with consistently high ROIC show that they're efficiently using capital. They also have the ability to treat shareholders well, because they can then use their extra cash to pay out dividends to us, buy back shares, or further invest in their franchise. And healthy and growing dividends are something that Warren Buffett has long loved.
So for more successful investments, dig a little deeper than the earnings headlines to find the company's ROIC. Feel free to add these companies to your Watchlist:
  • Add Windstream to My Watchlist.
  • Add AT&T to My Watchlist.
  • Add Frontier�Communications to My Watchlist.
  • Add CenturyLink to My Watchlist.

Best Stocks to buy 2012 Labels