Notes from Barron’s 2/24/2014
CAT – CAT is up 7.4% this year after a slow 2013 when it advanced just 3.3%. You would think it shouldn’t be advancing given the problems with emerging markets and with miners. But Deutsche Bank’s Vishal Shah, says that nonresidential construction could be accelerating and that generates 40% of revenue. Commercial construction usually lags behind the residential construction rebounds by 15 to 18 months, which would be later this year. Shah thinks CAT could trade up 25% to $122 this year.
REVIEW
DJ30 -0.32% to 16,103
SP500 -0.13% to 1,836.25
Most of the economic reports last week came in less than consensus.
Facebook will buy WhatsApp for $19b and some are calling that a bargain. That comes to $42 per user which is comparable to the price Google bought YouTube for and less than the $131 per user that Twitter is going for.
PREVIEW
| DAY | EVENT | CONSENSUS | LAST PERIOD |
| T | FEBRUARY CONSUMER CONFIDENCE | 80.1 | 80.7 |
| W | JANUARY NEW HOME SALES | 400K | 414K |
| TH | JANUARY DURABLE GOODS | -1.05% | -4.20% |
| F | Q4 GDP PRELIMINARY | 2.50% | 3.20% |
| F | FEBRUARY CHICAGO PMI | 57 | 59.6 |
| F | FEBRUARY MICHIGAN SENTIMENT | 81.2 | 81.2 |
FOUR STOCKS WITH DIVIDENDS THAT COULD DOUBLE
Dividend growers will do better in a interest rate rising environment as compared to high yielders. They are also are usually more expensive based on forward p/e ratios, by about 20%, according to a Bank of America Merrill Lynch analysis.
Four stocks with dividends that could double their yields in next five years:
AIG, DFS, HAL and IR. Also mentions CVS.
YIELD OF DREAMS
Growth is slowing at Kinder Morgan. KMP trades at $79 and yields 6.9%. Kinder Morgan Inc (KMI) controls KMP. KMP has an unfavorable relationship with KMI, it pays for most of all of the new projects but almost half of the distributions go to KMI.
Distributable cash flow, which is an internal measure, might be too aggressive in its calculation. CapEx that is considered for maintenance reduces distributable cash flow, while CapEx for expansion does not. KMP might be understating the maintenance and overstating the expansion. Expansion capital is funded with new debt and equity, they raised $540m last week.
Typical MLP calculation of distributable cash flow is equal to net income + depreciation – maintenance capex.
KMI determines what is maintenance and what is expansion capex. KMP projects DCF of $5.61 per unit with an expected distribution off $5.58. But an analyst at Hedgeye says a more accurate number is $4, putting a 15 multiple on that gets to a price of $60 and the analyst thinks KMP deserves a lower multiple than 15. If the distribution gets cut, look for a big price drop.
MANAGED WITH METTLE – KALU is priced at $69. Value is $80 per Stephen Levenson of Stifel, Nicolaus based on 8x ebitda. EPS to rise to $3.99 and $4.33 next year. 2% dividend.