Are Riverbed & JA Solar Wasting Your Money?
Jun 19th 2012 1:06PM
Updated Jun 19th 2012 1:12PM
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.
But don't forget -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use the announcement as a reason to buy by itself, rather use it as a launching pad for additional research.
More, more, more!
It seems Riverbed Technology's (NAS: RVBD) board of directors agrees with the assessment of the Fool's Rich Smith that shares of the wireless network equipment maker are "ridiculously cheap" and has doubled the size of its repurchase program authorization to $150 million.
Earlier this month I highlighted Rich's CAPS pitch for Riverbed to outperform the market that noted both its price-to-free cash flow ratio and its enterprise value-to-FCF ratio signaled that a significant discount was available on the stock.
Riverbed is in the midst of a product transition phase, causing customers to hesitate on making purchases and leading to a 47% drop in net income in the first quarter. It's also allowing rivals like Cisco to gain share, though as Fool blogger Lee Samaha points out, "With a market share more than twice that of Cisco, it is fair to assume that Riverbed is the bellwether rather than Cisco."
Lee also notes that Riverbed launched a Steelhead cloud product with Akamai (NAS: AKAM) and its new products already have orders for them, though they're not expected to amount to much until next year. CAPS member WealthLift believes Riverbed will continue to play a large role in network optimization and will increasingly benefit from "the 'smart boom', in which a global smart grid continues to be developed." He sees rapid price appreciation.
I agree that Riverbed's stock offers a great opportunity here, so I'm making an outperform CAPScall, but you can add its stock to your Watchlist and let us know in the comments section below or on the Riverbed Technology CAPS page whether you think it can reverse course in short order.
Delivering the goods
I'm not so hopeful about the huge $100 million share buyback JA Solar (NAS: JASO) announced the other day. Oh, it's a popular enough idea among solar shops to give their stocks a boost -- JA jumped 25% on the news -- but just because LDK Solar (NYS: LDK) and ReneSola (NYS: SOL) also announced buyback plans doesn't mean JA Solar should be doing the same.
JA is the world's third-largest solar-cell maker and the biggest in China, and like its peers carries a heavy debt burden, though it's not as bad as some. Yet while LDK is perhaps the most indebted, JA Solar has run a string of losses for four quarters now and analysts don't see it returning to profitability before 2014. That's a long time in today's market, and analysts think JA in particular, but also solar companies in general, shouldn't be using their scarce cash on buybacks.
These big bets by insiders don't make a lot of sense right now, even if their shares are depressed, and I'll be maintaining my underperform rating on JA despite the nice little pop it got from the news. It undoubtedly didn't hurt either that short-sellers got a little squeezed as indicated by the days-to-cover ratio falling from almost nine days to six after it made the announcement. All that covering lent a hand to raising the stock price.
You can add your opinion in the comments section below, then add JA Solar to the Fool's free portfolio tracker to see whether this turns out to be a waste of money for shareholders.
Waste not, want not
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At the time this article was published Fool contributor Rich Duprey owns shares of Cisco Systems, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Riverbed Technology and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Riverbed Technology. Motley Fool newsletter services have recommended creating a stock position in Riverbed Technology. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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