The Lato Letter: Volume 3, Issue 4.

The Lato Letter: Volume 3, Issue 4.

The following is an expanded version of my post-Market Call Tonight appearance write-up that will appear in the online version of the Report on Business on April 11, 2014.

Market Overview

In spite of the recent volatility in the equity markets, Padlock remains constructive for the balance of the year. After a very strong year last year for equities, investors should expect more muted but positive returns for the balance of the year. Valuations remain favourable, as do monetary conditions. It may be five years from the market bottom but overall equity market conditions do not suggest a market top but rather the continuation of a long term secular bull market. These views will be expanded in the Spring Quarterly issue of The Lato Letter that will be sent out next week.

Apple Inc. (AAPL-NASDAQ, $523.48)

Apple’s valuation continues to be compelling as the stock is held back by the market’s desire for new product categories which have not yet arrived. An expected dividend increase in the next few days should help but the true catalyst will be new products and/or services promised in 2014; a very reasonable assumption given that arguably the world’s best engineering teams has been spending record amounts of capital on R&D for the last few years.

Apple will report its second quarter results on April 23rd after the market close. The current consensus estimates for the September 30, 2014 and 2015 year ends are $42.77 and $46.56 respectively providing price/earnings multiples of 12.3 X and 11.3 X which are well below the average S&P 500 multiple.


Bauer Performance Sports (BAU-TSX, $14.79)

This company has dominated the hockey category for many years but recent diversification efforts into lacrosse and team apparel have provided a further boost to earnings. The acquisition of Easton’s baseball and softball business will close this month and will be immediately accretive to earnings and provide another platform for this excellent management team to continue to grow earnings. Valuation of 11.5X May 2015 is extremely attractive for a world class company with earnings growth expected in the low teens.

Bauer reported third quarter earnings this morning. The earnings for their seasonally slowest quarter were essentially in line but importantly, the company also announced that bookings for the 4th quarter, the seasonally strongest quarter are up 18% over last year. With the addition of Easton baseball, whose seasonally strong periods are the opposite of the hockey market, Bauer will be modelling more consistent quarter to quarter results which could also help its valuation.


NCR Corp. (NCR-NYSE, $35.00)

From its roots as the National Cash Register Company, the company’s diversification efforts into a products and services company have created a very good business model. Point of sale terminals (primarily self-serve) and ATM machines continue to provide modest growth but recent acquisitions of enterprise software companies such as Radiant, Retalix and Digital Insight provide complementary ongoing service revenues with higher growth potential.

With consensus earnings expected to be in excess of $3.50 for the year ending December 31,2015, the stock is trading at less than 10.0X December 2015 earnings. This extremely low price/earnings ratio more than adequately compensates for the increased debt load resulting from the most recent Digital Insight acquisition. As NCR becomes viewed as more of a recurring revenue services oriented business model, then the combination of growing earnings with an expanded price/earnings multiple, shareholders could be handsomely rewarded.


This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change without notice.

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