Huge June out-performance
Cablevision is up by "just" 26% year-to-date (YTD) but in the last four weeks, the stock has gone up by a breathtaking 34%. The reason? It looks like the cable industry is set to consolidate and Cablevision, with its $5 billion market capitalization, looks like a great target for bigger firms such as Liberty Media or Time Warner Cable. As a matter of fact, Cablevision still is a high operating cash flow generator with around three million stable customers in New York, New Jersey and Pennsylvania.
Of course, the Madison Square Garden's spin-off, higher dividends (the yield stands at 3.15%) and more share-repurchases have also helped the stock performance but the main reason behind the share's recent out-performance has been related to takeover rumors. Selling for 2013 9.1 times EV/EBITDA, I think the price of the shares already reflect the company's value, hence, I would sell Cablevision at the current market price. After all, the cable operator still suffers from high indebtedness (its debt is at around $10 billion) and slow growth.
Optimism imbedded into current market prices
Hewlett Packard is up by a stunning 82% YTD. The reason for such out-performance is better expectations about Hewlett's business. The market had clearly exaggerated the weaknesses of the company. Nowadays, management is indeed making progress on their focus areas, aligning the cost structure with the company's revenue trajectory, and seeing stability and growth potential through key new areas such as the Enterprise Services business. Moderating declines in the PC market are also expected to help Hewlett's top and bottom lines going forward.
First quarter results were proof that the stock deserved to recover. During the last quarter, cash generation was strong and the company generated $5 billion of free cash flow (FCF) in the first half of its financial year 2013. Even when the pace of cash generation improvement is not expected to continue (given that much of the benefit came from a re-leveling of working capital) I think full year FCF of $8 billion is reasonable figure. On the other hand, with Hewlett continuing to eliminate operating company debt, there is scope for a return to more robust capital distributions (buybacks and dividends).
Trading at 2013 7 times P/E, I think there is more compelling alternatives within Hewlett Packard's sector. I would sell the shares at current market prices.
Stunning operating results
Micron , which is up by 97.9% YTD, is the out-performance champion. There are good reasons for such wonderful stock behavior. Micron reported non-GAAP EPS of $0.15, significantly better than street's expectations (at $0.03) on revenue and margin upside. Besides, the company generated FCF of $389 million, implying a 2013 yield of 19.5%. In addition, the company released an EPS guidance for next quarter of $0.23 versus Street consensus of $0.14.
Micron is incredibly well positioned for the future since supply and demand in memory continue to support higher prices, demand drivers in DRAM are stronger than expected for both smartphones and gaming, a product refresh from Apple (the world’s largest consumer of NAND) is coming soon and its ability to deleverage the balance sheet as FCF growth continues.
Trading at 2014 8 times P/E, I think Micron still has a wonderful upside potential.
Foolish bottom line
Clearly, past results are not always a great proxy for future results. When analyzing stocks that have out-performed the market strongly, you should forget about performance and focus on fundamentals. High M&A probabilities can, of course, be an exception to simple fundamentals since high M&A probabilities do justify a generous valuation. Looking at fundamentals and M&A probabilities, I would sell Cablevision and Hewlett Packard while buying more Micron shares.
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