14 May The Lato Letter: Volume 1, Issue 14.
In a slight departure from the normal Lato Letter and in conjunction with my appearance on BNN’s Market Call Tonight, here’s a review of my “Top Picks” from tonight’s show.
Apple Inc., $558.22
As long as Apple remains the most heavily weighted stock in clients’ portfolios, it will continue to be in the running as a Top Pick. Following a spectacular rise in conjunction with its dividend announcement and outstanding second quarter earnings release, the stock is down almost 12% from its high of $644. Not much has changed since then, other than the share price and the fact that consensus estimates continue to rise so that Apple is trading at just over 12 times Sept 30, 2012 earnings and that is before stripping out the $116 per share in cash.
The new iPad has been another successful product launch and will contribute to another solid quarter, while rumours of a new iPhone and iTV continue to swirl. Continued new product launches into the ever important Apple ecosystem combined with further penetration into new markets (China) will provide the basis for continued earnings growth. With the initiation of a $10.60 dividend in the second half of the year, Apple is arguably cheaper today than it was when I first purchased the stock for clients almost six years ago.
Tempur Pedic International Inc., $51.03
The world’s largest manufacturer of non-coil premium mattresses has seen a sharp sell-off in its share price in the last month. On April 19th, Tempur Pedic reported its first quarter results which were in line with analysts and reiterated its guidance for 2012. For a company that has traditionally exceeded consensus estimates and consistently raised guidance, this release was viewed as a disappointment and the stock sold off. Early last week, the company announced a major price promotion starting on Memorial Day which was greeted with another sell-off.
With consensus estimates for this year at $3.94 and next year at $4.71, the stock is trading at very reasonable multiples of 13.2 times this year’s earnings and 11.1 times next year’s earnings. Non-coil mattresses are continuing to gain market share in the overall mattress market and while competition may be increasing, Tempur Pedic is well positioned to continue to grow its business. As that growth continues, investors can benefit from both higher earnings and an expanding multiple. The recent sell-off has provided a great entry point for new investors.
Coincidentally, the cover and lead article of this week’s Barron’s was “Sex or Sleep”. The article presented a great overview of the mattress industry and Tempur Pedic’s still dominant position within the premium segment.
Tourmaline Oil Corp., $24.33
Despite very weak natural gas prices, Tourmaline reported another excellent quarter last week. Production per share was up 64% over last year and cash flow, even with natural gas prices 44% lower, was still up 12% over last year.
Tourmaline has one of the strongest balance sheets in the industry and with possibly the lowest cost structure in the industry, will persevere through the current pricing environment and flourish as prices rebound and they are able to capitalize on their incredible inventory of drilling locations. The company’s official guidance for this year’s production is 50,000 boe/day (boe – barrels of oil equivalent) and with current production at 53,000 boe/day, that target is very much within reach.
Tourmaline cannot do much, if anything, about the commodity price but they are managing their cash flow and drilling inventory to sustain growth until a better pricing environment fosters more rapid growth. The company’s biggest concern is that they could be prone to an unwanted acquisition before they have an opportunity to realize the true potential of their assets and truly reward shareholders.
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