Tom Konrad CFA
The silver lining of all market declines is the chance to buy stock
in quality companies at attractive prices. That opportunity
has been notably absent over the last two years, which is why my
focus has shifted to smaller and smaller companies in search of
reasonable valuations over that time. Although I still don’t
believe the market is cheap by any measure other than comparing it
to a couple months ago, the volatility is starting to bring some
individual bargains, especially on heavy selling days.
For instance, I’ve started to acquire some of the
management stocks that I looked at last week, although I’m
still waiting on another round of selling to purchase others.
In particular, I am looking for companies with high dividend yields
that are well covered by free cash flow and earnings. I also
want companies with low levels of debt to ensure that income would
be relatively stable, even when revenues drop.
I like the waste sector because I think it will benefit as higher
commodity and energy prices lead to more profitable recycling and
waste to energy operations.
In contrast, the companies I’ll look at today are not in any one
sector, but rather they are broader industrial companies with a
range of businesses in the clean energy arena that have drawn my
attention over the years.
Because these companies are large and well covered by mainstream
analysts, I don’t feel that I have the resources to gain an
informational advantage over other market participants.
Instead, my strategy with companies like these is to wait until a
general market downturn produces good valuations, and buy those
companies which have decent dividends supported by healthy capital
structures, earnings, and cash flow, with the intent on holding them
for the long term.
In particular, I’m looking for a dividend yield around 3% or more,
with earnings and Free Cash Flow (FCF) yields considerably higher
than the dividend, so that there is room for earnings and cash flow
to fall without imperiling the dividend. I’m also looking for
moderate levels of debt, preferring companies that are mostly equity
rather than debt financed.
I looked at the following seven companies:
Ltd. (ABB), which attracts me because of their
in electricity transmission and distribution, especially
high voltage DC transmission. They’ve recently been
expanding their cleantech offerings with
acquisitions in smart grid, electric vehicle, and efficient
Technology (ACM) provides planning and technical support
services in the sectors as diverse as transportation,
facilities, environmental, and energy markets. Since
efficient infrastructure requires careful planning, a shift
towards greater efficiency should mean more business for AECOM.
Many renewable energy projects (such as
also require a level of planning expertise not necessary in
traditional fossil fuel projects.
Industries (ROP) makes medical and scientific imaging
equipment, energy systems and controls, and radio frequency
products and services. Many of their activities are
focused on saving money for utilities, such as better ways to
deliver water, better logistics, and leak detection
systems. Such efforts do a lot to improve energy and
resource efficiency as they help their customers’ bottom lines.
Deere (DE) provides services and products to the
agriculture and forestry industries, so I see it as a potential
beneficiary of increased demand for biomass for biofuels and
(SI) is an electronics and electrical engineering company
with significant wind turbine, electric transmission, and
building efficiency offerings.
Electric (GE) has been pushing their commitment to energy
efficiency and renewable energy for most of the last decade,
with green technologies accounting for a growing share of
Controls (JCI) is both a leading battery manufacturer, and
is a leader in building automation, a key technology in
increasing building efficiency.
I compare the companies’ dividend, earnings, and cash flow yields,
and Debt/Equity ratios in the chart below.
Of the companies listed, only ABB, Deere, Siemens, GE, and Johnson
Controls have even moderately attractive dividends. Of these,
only ABB and Siemens have a level of debt I consider low enough to
give it flexibility to cope with a sluggish world economy. Yet
both these companies have uncomfortably low FCF to support their
dividends. Free cash flow can be quite volatile, so I would
want to take a closer look to decide on the cause of the current low
cash flows at the companies before making an investment.
Furthermore, neither stock is particularly attractive on the basis
of earnings, since analyst’s predicted growth may not materialize,
and both trade near 17 times 2010 earnings.
Of all the companies I consider here, Roper Industries looks the
healthiest, with strong alignment between earnings and cash flow and
low debt, but as with ABB and Siemens, the current valuation is
Especially when you consider that
analysts tend to be overly optimistic as a whole, we should
probably discount the 2011 and especially 2012 earnings
estimates. None of these stocks looks like a great value at
current prices, despite having fallen between 12% (ABB) and 35%
(AECOM) year to date.
I take the lack of great values as a sign that this market decline
likely has farther to go.
DISCLAIMER: Past performance is
not a guarantee or a reliable indicator of future results.
This article contains the current opinions of the author and such
opinions are subject to change without notice. This article
has been distributed for informational purposes only. Forecasts,
estimates, and certain information contained herein should not be
considered as investment advice or a recommendation of any
particular security, strategy or investment product.
Information contained herein has been obtained from sources
believed to be reliable, but not guaranteed.