Forecasting the Market: A Thought Experiment Revisited
by Chart School - June 18th, 2013 12:35 am
Courtesy of Doug Short.
With 99% of companies reporting for Q1-13 earnings season, here is the latest update of my ongoing “thought experiment” for forecasting the S&P 500 price based on earnings fundamentals.
The chart below is based on the latest trailing twelve-month earnings (TTM) data published on the Standard & Poor’s website as of June 13, 2013. The numbers are from the spreadsheet maintained by senior analyst Howard Silverblatt. See dshort’s monthly valuation update for instructions on downloading the spreadsheet.
Here are the key assumptions in the calculations:
- The 10-year average of nominal TTM earnings is 61.26 at the end of 2012, rising to 66.88 by the end of 2013, based on “as reported” earnings forecasts.
- The average nominal cyclical P/E10 is currently 18.17.
- The S&P 500 historic prices used in the calculations are monthly averages of daily closes.
- Standard & Poor’s estimates of TTM earnings for Q4 2012 through Q4 2014 are:
- The months between the quarterly earnings estimates are linear interpolations.
The blue line represents Standard & Poor’s TTM forecast earnings by month multiplied by the historical nominal 10-year P/E ratio. At 2013 year-end earnings of $102.40 and an average nominal P/E of 18.17, we would see the S&P 500 at 1861. At this level, the nominal P/E10 would be 31.45, and the index would be about 45% above a hypothetical price multiple of the extrapolated 10-year earnings average.
The red line represents a hypothetical S&P 500 price that is a multiple of the average nominal P/E10 of 18.17 and the 10-year average earnings of 87.96 for December 2012. The monthly index price estimates thereafter are linear extrapolations based on average 10-year earnings growth and earnings estimates from Standard & Poor?s.
The optimistic view (blue line) would put us around 1654 in the S&P 500 by the end of June, the assumptions being that the Standard & Poor’s earnings forecasts are correct the nominal P/E10 ratio is the multiple we see.
The pessimistic view (red line) is a reversion to the historic earnings and nominal P/E10 multiple.
But history shows us…
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Starboard Value Tells Smithfield Foods to Ditch China Bid and Break Up For More Value
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
Noted activist investor Starboard Value wrote a letter to the board of Smithfield Foods (NYSE: SFD) urging the company to ditch its previously agreed takeover from Chinese company Shuanghui International and to break the company up into three separate entities.
Starboard sees the move generating about $10-$20 more in value for shareholders than the Shuanghui offer.
Break Up Instead of Sale
Based on Starboard’s sum of the parts analysis, they value Smithfield Foods at between $44 and $54 per share. This is well in excess of the buyout offer from Shuanghui of $34 and offers more potential value for shareholders of the ailing pork producer. Last week, the company reported dismal earnings adding fuel to the fire for either the sale to go through or for a break up of the company.
Starboard Value wants Smithfield to separate its three main business lines apart. Smithfield currently operates in the U.S. pork production, pig farming, and packaged meats sectors. Starboard Value sees little correlation between these as the pig farming business actually weighs on the others.
As whole pig prices rise, the pig farming segment does better due to higher market prices. However, the higher prices decrease consumer demand for final products including packaged foods and other pork products, meaning that the businesses are actually counter-productive for shareholders.
Vertical Integration
Chinese conglomerate Shuanghui wants to keep the company whole and vertically integrate it into its current form. China is a large consumer of pork and the move would ensure that Shuanghui has a solid supply of the other white meat to meet demand.
The Starboard deal does raise uncertainty risk that the Shuanghui offer avoids. Splitting a company is much more difficult than selling one however selling to a foreign entity raises its own risks.
Market Uncertain
The uncertainty surrounding the execution of any deal increased this morning and shares reacted to reflect this increase in proposed shareholder value. However, shares quickly receded from day’s highs and traded higher by 1.27 percent in late-afternoon trading heading into the close as investors digest the new uncertainty surrounding the deal.
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Benzinga’s M&A Chatter for Thursday June 13, 2013
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
The following are the M&A deals, rumors and chatter circulating on Wall Street for Thursday June 13, 2013:
Gannett to Acquire Belo for $13.75/Share in Cash
The Deal:
Gannett (NYSE: GCI) and Belo Corp. (NYSE: BLC) announced Thursday that they have entered into an agreement under which Gannett will acquire all outstanding shares of Belo for $13.75 per share in cash, or approximately $1.5 billion, plus the assumption of $715 million in existing debt for an enterprise value of approximately $2.2 billion. The transaction is expected to close by the end of 2013.
Belo Corp closed at $13.77 Thursday, a gain of 28% on 91 times average volume.
Juniper Affirms $2.25/Share to $2.30/Share Bid for Theragenics, Extends Exclusivity Period to June 18
The Offer:
Theragenics (NYSE: TGX) announced Thursday that Juniper Investment Company has reaffirmed its offer to acquire all of the Company’s outstanding common stock for $2.25 to $2.30 per share in cash. The parties have agreed to extend the exclusivity period until 5:00 PM ET on June 18, 2013.
Theragenics closed at $2.04 Thursday, a gain of $0.01 on average volume.
Reporting Strategic Hotels Hires Eastdil to Evaluate Sale
The Rumor:
Shares of Strategic Hotels & Resorts (NYSE: BEE) surged higher Thursday on a Reuters report that the company has hired Eastdil as an advisor to explore a possible sale.
Strategic Hotels is a REIT which has ownership interests in 18 properties in the United States, Mexico and Europe. Bill Gates’ Cascade Investment is a BEE shareholder.
Strategic Hotels & Resorts closed at $8.44 Thursday, a gain of 9.5% on 3 times average volume.
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UPDATE: Summit Partners Sells 6,000,000 Ubiquiti Shares, Reports Direct Ownership of 5,664,688 and indirect Ownership of 3,430,875 Shares
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
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Benzinga’s M&A Chatter for Friday May 31, 2013
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
The following are the M&A deals, rumors and chatter circulating on Wall Street for Friday May 31, 2013:
CBS Acquires TV Guide Digital
The Deal:
CBS (NYSE: CBS) announced Friday it acquired TV Guide Digital, including TVGuide.com and TV Guide Mobile properties. Under the terms of the deal, CBS acquired the remaining 50% stake in TV Guide Digital shares from Lionsgate (NYSE: LGF), though CBS and Lionsgate’s 50/50 partnership for TVGN cable network will continue.
CBS Corporation closed at $49.50 Friday, a loss of 1.5% on average volume.
American Realty Capital Properties to Acquire $807M GE Capital Portfolio
The Deal:
American Realty Capital Properties (NASDAQ: ARCP) announced Friday that it has entered into an agreement to purchase GE Capital’s (NYSE: GE) $807 million portfolio of 471 net lease properties, including assets net leased to tenants who operate IHOP; Jack in the Box; Golden Corral; Burger King; Arby’s; Taco Bell; Applebee’s; Wendy’s; Logan’s Roadhouse; and Denny’s. These brands comprise approximately 64% of the net operating income of the portfolio.
American Realty Capital Properties closed at $15.23 Friday, a loss of 3.5% on 4 times average volume.
Dell Files Proxy Materials in Connection with July 18 Meeting to Vote on $13.65/Share Dell/Silverlake Bid
The Proxy Filing:
Dell (NASDAQ: DELL) announced Friday that it has filed definitive proxy materials with the SEC in connection with a Special Meeting to be held on July 18, 2013 to approve a transaction under which Founder and CEO Michael Dell in partnership with Silver Lake, will acquire Dell for $13.65 per share in cash. The Special Committee of Dell’s Board of Directors issued an open letter to shareholders recommending that shareholders vote to approve the transaction and outlining the reasons for the recommendation.
Shareholder Southeastern Asset Management also issued an open letter to Dell stockholders, urging them not to take any action in response to Dell’s proxy materials. Southeastern, along with shareholder Carl Icahn, submitted an alternate bid for Dell on May 10, including a $12 per share cash distribution or $12 in additional shares worth $1.65 per share.
Dell closed at $13.36 Friday, a gain of $0.08 on…
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Chief Executive Officer of Trio Merger Purchases 100,000 Shares of Common Stock
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
Trio Merger (NASDAQ: TRIO) announced today that Eric S. Rosenfeld, Trio’s Chief Executive Officer, has purchased an aggregate of 100,000 shares of common stock of Trio on May 28, 2013 for an aggregate purchase price of approximately $1,007,000. As previously announced, Trio has entered into a definitive merger agreement with SAExploration Holdings Inc. (“SAE”), providing for a business combination in which SAE will become a wholly owned subsidiary of Trio upon closing of the business combination. The business combination is expected to close in June 2013.
About Trio Merger Corp.
Trio was incorporated in Delaware on February 2, 2011 as a blank check company whose objective is to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. Trio’s initial public offering was declared effective June 20, 2011 and was consummated on June 24, 2011, receiving net proceeds of $57.43 million through the sale of 6.0 million units at $10.00 per unit and $3.55 million from the sale of private placement warrants to the initial stockholders and the underwriters. On June 24, 2011, the underwriters exercised their over-allotment option and on June 27, 2011, Trio received net proceeds of $8.69 million from the sale of 900,000 units. Each unit was comprised of one share of Trio common stock and one warrant with an exercise price of $7.50. As of March 31, 2013, Trio held approximately $61,676,800 in a trust account maintained by an independent trustee, which will be released upon the consummation of the business combination.
The closing of the transaction with SAE is subject to, among other matters, approval by the stockholders of Trio and holders of 496,032 or more of the shares of Trio’s common stock issued in Trio’s initial public offering of securities not exercising their rights to convert their shares into a pro rata share of the trust account in accordance with Trio’s amended and restated certificate of incorporation.
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Long Setup in Herbalife Still Attractive; Stock Breaks Out as New Auditor Hired
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
Few stocks have attracted more news over the last six months than nutritional supplement maker Herbalife (NYSE: HLF).
Even casual market observers are aware of the circumstances surrounding the the initial bout of extreme volatility in the name back in December 2012. The shares went into free-fall at the end of the year after hedge fund manager Bill Ackman revealed in typical sanctimonious fashion that his firm Pershing Square Capital Management was short around $1 billion worth of the stock.
Amid much pomp and circumstance, Ackman laid out his short thesis at a New York investment conference and immediately made the rounds in the financial media. The noted investor called the multi-level marketing company’s business model a “pyramid scheme” and boldly proclaimed that his price target for the stock was “$0.”
The way that the Pershing Square founder went about attacking Herbalife sure made it seem like he was trying to inflict maximum damage to the company in a very short period of time.
While Ackman’s strategy was initially brutally effective, it quickly backfired on him. Herbalife shares swan-dived from above $42 on December 18, the day before the hedge fund manager’s presentation, to a low of roughly $26 by Christmas Eve.
The news caused the heaviest high-volume selling in Herbalife’s history as a publicly traded company. The stock bounced back nearly as quickly as it plunged, however, as numerous other investors and market observers came out in support of the company. Herbalife itself also aggressively refuted Ackman’s allegations.
When two of the world’s top hedge fund managers, Dan Loeb and Carl Icahn, revealed that their firms had bought large stakes in the Cayman Islands-based company the short-squeeze of Pershing Square was on.
It did not take long before the stock was trading back above levels seen pre-Ackman. While Loeb subsequently flipped the stock for a quick profit, Icahn appears to be in the trade for the long-term and he is applying the screws to his old nemesis Bill Ackman, with whom he had previously been involved in an acrimonious lawsuit.
Icahn was able to get two of his representatives elected to Herbalife’s board and…
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Benzinga’s M&A Chatter for Monday May 20, 2013
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
The following are the M&A deals, rumors and chatter circulating on Wall Street for Monday May 20, 2013:
Actavis to Acquire Warner Chilcott for $8.5B or $20.08/Share in Stock Deal
The Deal:
Actavis (NYSE: ACT) and Warner Chilcott (NASDAQ: WCRX) announced Monday an agreement under which Actavis will acquire Warner Chilcott. Under the terms of agreement, Warner Chilcott shareholders will receive 0.160 shares of New Actavis for each Warner Chilcott share they own, which equals $20.08 per Warner Chilcott share based on Actavis’ closing share price of $125.50 on May 17, 2013.
Actavis closed at $127.15 Monday, a gain of 1%, while Warner Chilcott gained 2%, closing at $19.60.
Dell Special Committee Seeks Additional Information from Carl Icahn and Southeastern Asset Management
The Letter:
The Special Committee of the Board of Directors of Dell Inc. (NASDAQ: DELL) sent a letter to Carl Icahn and Southeastern Asset Management on Monday, asking for additional information regarding the proposed leveraged recapitalization transaction submitted to the Board on May 9, 2013.
The letter stated: “Unless the Board of Directors of Dell determines that your proposal could reasonably be expected to result in a “Superior Proposal” as defined in the Company’s existing merger agreement with affiliates of Silver Lake and Michael Dell, we are not permitted to provide you with information or engage in discussions concerning your proposal.”
Dell closed at $13.41 Monday, a gain of $0.01 on lower than average volume.
Yahoo to Acquire Tumblr for $1.1B
The Deal:
Yahoo! (NASDAQ: YHOO) and Tumblr announced Monday that they have reached a definitive agreement for Yahoo! to acquire Tumblr, which allows users to post text, photos, quotes, links, music, and videos, for $1.1 billion in cash.
The transaction is expected to close in the second half of the year.
Yahoo closed at $26.58 Monday, a gain of $0.06 on 1.5 times average volume.
Royalty Increases bid for Elan to $12.50/Share in Cash
The Offer:
Royalty Pharma announced Monday its intention to increase its offer for Elan Corporation (NYSE: ELN) to $12.50 per share in cash. Elan’s Board said it will assess the Royalty Pharma announcement and will advise…
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Benzinga’s M&A Chatter for Monday June 17, 2013
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
The following are the M&A deals, rumors and chatter circulating on Wall Street for Monday June 17, 2013:
Starboard Says Sum of Smithfield Parts Worth More than $34/Share Offer
The Shareholder Letter:
Smithfield Foods (NYSE: SFD) shareholder Starboard Value LP announced Monday that it sent a letter to Smithfield’s Board of Directors. The letter states Smithfield could be worth $44 to $55 per share, well in excess of the $34.00 per share offered by Shuanghu. Starboard wants the Company to shop its operating divisions to all potentially interested parties.
Smithfield acknowledged receipt of the Starboard letter, and reiterated its recommendation in favor of the Shuanghui offer.
Smithfield Foods closed at $33.08 Monday, a gain of $0.28 on 3.5 times average volume.
Johnson & Johnson to Acquire Aragon Pharmaceuticals for Upfront Cash Payment of $650M
The Deal:
Johnson & Johnson (NYSE: JNJ) announced Monday a definitive agreement to acquire Aragon Pharmaceuticals for an upfront cash payment of $650 million, plus additional contingent payments of up to $350 million based on reaching predetermined milestones. The deal is expected to close in the third quarter of 2013.
Johnson & Johnson closed at $85.63 Monday, a gain of $0.72 on average volume.
Lowe’s to Acquire Orchard Supply Hardware Assets for $205M
The Deal:
Lowe’s announced Monday it has entered into an asset purchase agreement with Orchard Supply Hardware (NYSE: OSH) to acquire the majority of Orchard’s assets for approximately $205 million in cash, plus the assumption of accounts payable to nearly all of Orchard’s supplier partners. Lowe’s plans to have Orchard operate as a separate, standalone business, retaining its brand under the leadership of Orchard’s current management team.
Orchard Supply Hardware closed at $2.11 Monday, a gain of 12% on 8.5 times average volume.
Viropharma Reportedly Attracting Interest
The Rumor:
Viropharma (NASDAQ: VPHM), a biotech company specializing in drugs for rare diseases, has reportedly drawn takeover interest from several pharmaceutical companies, according to sources reported by Reuters.
A spokesperson for Viropharma declined comment on the rumor.
Viropharma closed at $28.87 Monday, a gain of 6% on 7.5 times average volume.
EMCOR Group to Acquire RepconStrickland for $455M in Cash
The…
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Bernstein Considers Implications of AT&T for Telefonica Blocked Deal Rumor
by Insider Scoop - June 18th, 2013 12:00 am
Courtesy of Benzinga.
In a report published Monday, a Bernstein analyst suggested the rumor the Spanish government blocked a massive bid for Telefonica (NYSE: TEF) from AT&T (NYSE: T) indicates AT&T might be interested in emerging market exposure.
AT&T is currently seeking ways to spend its money in Europe as the company struggles domestically, according to the Bernstein analyst. Similarly to the move by Spanish regulators, Bernstein believes both the Italian and Portuguese governments would likely reject AT&T from bidding on Telecom Italia (NYSE: TI) and Portugal Telecom (NYSE: PT), respectively.
Shares of Telefonica are up 3.5 percent at last check; elsewhere in the telco space, shares of Telecom Italia are up 3.6 percent, and shares of Portugal Telecom are up 2.7 percent.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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