Boeing, Facebook, AT&T And Amazon – Four Riddles Wrapped In An Enigma
I’m not sure anymore how it exactly happened, but I’ve got 25% of my assets in Boeing, Facebook, AT&T and Amazon. All four tick in the middle of 12-month price ranges, but if your entry points sucked, you’ve dropped serious money, at least on paper. Volatility can kill you, sometimes overnight as in Boeing, but even AT&T rests 15% off its high of $36 and change.
Lemme start with macros that mean something to me. Low interest rates are a given throughout the world. Commodities and wage inflation seem dormant. You can get a home mortgage at 4% interest. Negative interest rates on 10-year Treasuries just spread from Japan to Germany. Crazy stuff considering my memory on interest rates over 50 years is they spike readily.
I remember establishing nine-figure credit lines at 7.5% on a hostile tender I had initiated. Another layer of preferred stock debt cost me 8%. Paul Volcker in 1982 put interest rates on Treasuries up to 15%.
You don’t want to own stocks when interest rates range much higher than 5% because price-earnings ratios get compressed, sometimes to as low as 10 to 12 for the market. Currently, the S&P 500 Index sells at 17 or 18 times earnings. This is insanity even in our historically low interest rate setting. The reason is there’s no earnings story to hang a hat on.
And so, I own what you call one-off stocks. They are saddled with operating uncertainties, which make them too difficult to model with any confidence. It can also make them undervalued which is a good thing for those of us who like to stand alone and think big.
Of the four stocks in question, ironically, what looks like the cheapest with so-called yield protection, AT&T, so far hasn’t made me a dime on paper. But it does yield 6.4% which is more than single B junk bonds with a five-year duration schema. When I surveyed even a hundred BB bonds with yield to maturity of five years, yields hardly exceeded 5% and 90% of the names were unrecognizable.
I leave this sector to Carl Icahn and other junk peddlers. I prefer to make love in the primary position. Nothing exotic at my age.
What is the market saying? Well, AT&T leveraged itself with the Time Warner acquisition. Who knows whether this traditional management is up to running a show-business operation? Meanwhile, we’re seeing disconnects from cable TV subscribers.
DISH Network rests 20% below its high, down 15% to date. This is wait ‘n’ see stuff. First smell of fish in terms of safety of the 51-cent quarterly dividend you head for the hills. The dividend payout ratio stands around 60% of earnings. Unlikely to rise more than pennies per share next several years. In short, this is a “show me” investment you monitor quarter-by-quarter. So far, the market’s right and I’m a little wrong.
When I bought Boeing around $300, down from $360 past November, I thought I was home free, owning the preeminent aerospace property with a free cash flow yield approaching 10% (on my numbers). You find growth stocks like Microsoft with a 4% or 5% free cash flow yield but few others with great fundamentals.
Microsoft actually is my biggest investment at 10% of assets because it’s a clean growthie with great fundamentals, selling at a reasonable premium to the S&P 500. You don’t find this in e-commerce or internet paper which can’t be valued on a price-earnings construct as yet, but maybe in a couple of years. For Amazon, maybe three to five years out.
Nobody can dope out whether Amazon’s e-commerce revenues here and abroad will ever yield a bottom line like Walmart’s or Costco’s. With Walmart, you start with a pretty constant 24% gross margin on revenues which becomes a 6% Ebitda margin and 3% of net income. Walmart trades around a third of Amazon’s market value so Amazon is the favorite in number one post position for the mile and a half race on a fast track at Belmont.
Amazon cleverly reports its operating cash flow in its financial report, updated on a 12-month running construct. I’m assuming $35 billion for 2019, but mine is a horseback number derived from recent years’ momentum. If I’m close to right, Amazon with a market capitalization not much different than Microsoft, around $900 billion, sells around 25 times operating cash flow.
But its free cash flow yield is closer to 2.5% with Microsoft at 4%. All the more reason to own Microsoft unless you feel Amazon’s e-commerce business is close to giving birth to serious numbers. Internationally, over a $60 billion revenue run rate with losses still serious. North America’s quarterly revenue run is over $35 billion with operating earnings over $2 billion, huge improvement over 2017.
Comparing Amazon’s e-commerce profitability with Walmart is instructive. After all, Walmart needs a couple of million associates to man its retail floors. Amazon makes do with forklift truck jockeys who are $15 an hour men, disgruntled and prone to strikes. In the 1940s they were called dollar-an-hour men.
How model the e-trade revenue base now running at a $200 billion annualized clip? Well, Walmart revenues run around $500 billion. Put net income at $15 billion so this has to be Amazon’s goal, maybe now half that or around $8 billion.
Assume $30 billion in net income for 2019 on nearly a $900 billion market cap. We’re at a valuation of 30 times earnings. The fillip from retailing is nice but not as earth shaking as I expected. Momentum from its cloud computing sector is more impressive. Even assuming 2019 operating cash flow of $35 billion we’re over a 25 multiple.
Net, net, Amazon is a heady momentum story that looks doable, but pricey and tough to model. The final irony is that what may become the reigning market cap in the S&P 500 is impossible to model with a sharp pencil. Jeff Bezos will go often treating the analysts’ fraternity like stepchildren, withholding guidance of any consequence.
As for Boeing, management took what looked like an easy $500 price point down below $400 and then as low as $300 after the first 737 MAX crash. Operationally, you could model a free cash flow yield of 10% which is unheard of. It’s going to take several months for the dust to settle as to how intact the order book remains. I assume insurance covers much of Boeing’s legal liabilities that unfold and the plane is re-certified in two to three months. Hopefully, next year’s earnings run close to normalized.
I counted my money too soon on this baby, now reduced to writing covered calls on my holdings. Management’s rush to certification on the 737 MAX surprised everyone, including regulators. Boeing’s 707 jet was introduced around 1960, changing the face of aviation and sporting an impeccable safety record, nothing rushed on the assembly line or in software development and engineering.
My old partner, Milton, used to say you can always be taken in by management. You’re on the outside looking in. Just close it out, subway home and ponder the next story stock on your list.
There’s probably more risk in AT&T’s management screwing up Time Warner than in Jeff Bezos’s breakneck new ventures or Mark Zuckerberg finally positioning Facebook with total integrity, but keeping advertising revenues flowing freely over a 2 billion daily user base.
Think of stocks like Alcoa, U.S. Steel, Halliburton and General Electric. They were cut into halves, no dreams attached. Complacency in investing kills you bar none. Our rallying cry in the airborne infantry was “Follow me. You can’t live forever.” Still sounds right.
Telling perceptions on Facebook are the stock trades 25% below its past summer’s high, but it has stopped reacting to management’s misuse of its 2 billion daily users base. To be sure, Facebook faces fines here and in Europe ranging into the billions. But, monetary slaps on the wrist carry no impact. Facebook is capable of earning $6 billion, quarterly. This is a debt-free operator with over $40 billion in liquid assets.
Unless advertisers flee, there’s $8 plus a share in earnings power. This puts it at a 20 times earnings multiplier. Not much more than the valuation of a smoothly greased railroad or a manufacturer of farm tractors. Zuck now talks like he’s the most conservative self-regulator walking around Silicon Valley.
Operating cash flow at Facebook runs at a $30 billion clip, around 15 times earnings. This is my favorite metric for an internet operator. Meantime, the R&D spend is a heady 20% of revenues, an enormous ratio. How they can increase head count 45% some quarters is mind boggling. My conclusion here is you’re not overpaying to see the next few cards face up. I’m going with the gutter fighters.
Sosnoff and / or his managed accounts own: Boeing, Facebook, AT&T, Amazon, DISH Network bonds and Microsoft.