Companies Investing Right Along With You
Nov 30th 2011 8:05PM
Updated Nov 30th 2011 8:06PM
Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
Today, we'll draw up a list of companies that have announced new or expanded stock-buyback programs and then consult Motley Fool CAPS to see which of those firms the 180,000-strong investor community favors most. If CAPS' top investors endorse the prospects of companies announcing buybacks, maybe Fools should take notice.
Here are some of the latest companies to announce share repurchase programs over the past month:
CAPS Rating (out of 5)
New or Expanded
|Career Education (NAS: CECO)||***||$100 million||Expanded||$6.90|
|Pfizer (NYS: PFE)||****||$500 million-$2 billion||Expanded||$19.40|
|Starbucks (NAS: SBUX)||**||20 million shares||Expanded||$42.21|
But don't forget, Fools -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use this list as a reason to buy by itself -- rather, use it as a launching pad for additional research.
Shining a light on growth
Shares of for-profit educator Career Education lost nearly half its market cap in one day after issuing a disastrous earning report and seeing its CEO resign for unspecified reasons. It's continued to drop since the announcement, sliding an additional 17% to its lowest point in more than a decade.
The for-profit education sector has long been under attack from the Obama administration, which charges that schools like those run by Career Education, Apollo Group, and Bridgepoint Education (NYS: BPI) are overly aggressive in recruiting and have higher than average default rates among former students. Although they only account for 10% of the country's college enrollments, half of the student loan defaults come from for-profit students.
Career Education now trades for little more than the cash and short-term investments it has in its bank and brokerage accounts. At almost a quarter of its sales and half of its book value, the educator looks cheap on any number of metrics -- unless you think it's going to get expelled and head to zero.
While I've marked Career Education to outperform the broad indexes from here, CAPS member Jeffrey2012 offers a very cogent argument of why that might not be the case.
It's a very simple play, for profit colleges are enrolling ever fewer students because they are not only expensive, but of dubious value. This is not something seen at just one college, but look at all the for profits. They may beat eps, but ever declining new students will mean continue decline in earnings creating a vicious cycle of ever lower p/e. Until they fundamentally prove their worth and get it out, I don't see how they are going to succeed in the long term.
Add Career Education to your watchlist to see if the buyback signals the stock has hit an inflection point.
No generic opportunity
Lipitor has been the blockbuster drug of all blockbuster drugs for Pfizer. Since it was introduced in 1997, the cholesterol-lowering drug has generated more than $130 billion in sales for the pharmaceutical. Today, though, it loses its patent protection, and generics of Lipitor will soon flood the market.
Pfizer is working to salvage something of its Lipitor empire as it has reached a settlement with Ranbaxy and contracted with Watson Pharmaceuticals (NYS: WPI) to sell authorized generics, meaning it can hold back the tide for another six months. It's also trying to extend the life of the drug beyond that by guaranteeing that insured patients can pay just $4 a month for their prescription, a price significantly below the typical $10 a month co-pay for a generic version.
Shares of Pfizer have bounced up about 20% from their recent lows, but with analysts expecting virtually flat growth in sales and profits for the next few years, it seems they're expecting the stock to go nowhere. Management apparently thinks differently, perhaps anticipating that its shares will become more of a bargain in the months ahead.
While there might not be another Lipitor in its portfolio, CAPS member tbonci still believes it has a stable of highly regarded products to carry it forward: "Huge pharma company with over a dozen household name brands, who have managed to grow operating margins. A health care giant who is well positioned to support the growing/aging population."
Tell us on the Pfizer CAPS page or in the comments section below if it will overcome the loss of Lipitor, and then go add it to your watchlist to see how it plays out.
A steaming cup of growth
Coffee peddler Starbucks has certainly been able to stifle its critics (I've been one) who've viewed the company as enticing as day-old joe. Despite some ups and downs, shares have been hot, rising 40% over the past year -- remarkable considering the market has been flat.
Where Dunkin' Donuts parent Dunkin' Brands (NAS: DNKN) might have grabbed the spotlight momentarily with its IPO, its stock has lost its cachet. Indeed, Starbucks has performed admirably in the face of increasing competitive pressures and the ever-present threat posed by lower-priced alternatives, from the McDonald's (NYS: MCD) dollar menu to the swill served up at the local bagel shop.
Yet investors need to ask: With its shares at some of their highest levels ever, is a buyback a good use of shareholder money? More than three quarters of the nearly 7,500 CAPS members rating Starbucks would say so, as they see it beating the market indexes, but Roeshambow still thinks some of its rivals are a better bet: "Doomed to lose by its own prices and overhead. [McDonald's] has quicker service and an acceptable product without the tip jar for waiting in line."
Add Starbucks to the Fool's free portfolio tracker to see whether the coffee maker can brew up new growth.
You've heard from your fellow investors -- now it's your turn. Start your research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Sign up for CAPS today and share your best pitch for why a company's share buyback is a reason for you to buy, too -- or not!
At the time this article was published Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Bridgepoint Education and Starbucks. Motley Fool newsletter serviceshave recommended buying shares of McDonald's, Pfizer, and Starbucks and writing puts in Bridgepoint Education. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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