Warren Buffett recently sat down with Yahoo Finance editor-in-chief Andy Serwer.
One of the discussions in the interview was about stock buybacks, a practice that has both fans and detractors. Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) CEO is definitely in the fan camp suggesting that “when you’re buying dollar bills for 60 or 70 cents” with your excess cash, it’s always a good thing.
A fact that’s especially true when you’re as smart as Warren Buffett. Serwer commented that Berkshire Hathaway bought back $233 million of its stock between December 13 and December 24 of last year, right at the bottom of the fourth-quarter market decline.
Serwer asked Buffett how he knew to buy at that point in the market cycle?
“If I knew that I would’ve bought a lot more than $233 million.”
The point is that Buffett sees stock buybacks as a smart capital allocation lever to pull when the shares of a company are trading below their intrinsic value.
With that in mind, I’ve put together a list of stocks to buy that ought to be repurchasing their shares given current prices.
Acuity Brands (AYI)
You can’t keep a good stock down.
Atlanta-based Acuity Brands (NYSE:AYI) is a company that specializes in lighting solutions for commercial buildings as well as new residential projects. Its stock came under fire the past three years with AYI shareholders paying the price losing almost 17% annually (including dividends) between 2016 and 2018.
At its height in August 2016, Acuity Brands’ stock was trading close to $300. Today, even with the 28% total return in 2019 through April 23, it’s only worth half that amount.
In the first six months of fiscal 2019, Acuity repurchased $48.7 million of its stock at an average price of $121.75, which means it’s already made a 20% return on its investment. In the first six months of fiscal 2018, Acuity bought back 1.2 million of its shares at an average price of $161.92. On those, it’s underwater by 10%.
Through the first half of 2019, its top- and bottom-line results have improved including delivering record sales and adjusted EPS in the second quarter. It expects sales and profitability to continue in the second half of the year.
Trading at just 16 times cash flow or about two-thirds its five-year average, some of Acuity’s increased free cash flow in 2019 should go to repurchasing more of its shares.
Landstar System (LSTR)
Landstar System (NASDAQ:LSTR) is a Florida-based company that provides third-party transportation solutions to customers in the U.S., Canada, and Mexico. By utilizing third-party capacity, Landstar’s able to maintain an asset-light business model.
In 2018, Landstar grew its revenues by 27% to $4.6 billion. On the bottom line, it grew EPS by 47% to $6.19. Financially, it’s as solid as they come with long-term debt of just $85 million compared to $240 million in cash and short-term investments.
Every segment of its transportation business generated growth in 2018 averaging $2.078 per load, 17% higher than in 2017.
In 2018, Landstar repurchased 2 million of its shares at an average price of $104.04 a share, a return of 10% through April 24. Landstar had $288 million in free cash flow in 2018, more than double the amount in 2017, and the most in its history.
Although Landstar didn’t repurchase any of its stock in 2017, it tends to use 60-70% of its annual free cash flow to buy back its stock.
Its free cash flow yield — defined as free cash flow divided by market cap — is currently 6.3%. While 8% is generally considered the low-end for value stocks, it’s still relatively low given the company’s growth.
With a forward P/E ratio of 17.5 and a PEG ratio of 1.8, Landstar will take 9.8 years to repay a dollar’s worth of today’s earnings. Put another way; it will take 9.8 years of earnings to equal its current share price of $114.
Medpace Holdings (MEDP)
If you own shares in MedPace Holdings (NASDAQ:MEDP), you’re probably hoping that the provider of full-service clinical trial outsourcing to biopharmaceutical and medical device companies is buying back its shares in 2019.
That’s because MEDP stock traded above $70 as recently as the end of February; it’s down 20% from February’s 52-week and an all-time high.
This past year was a successful one for the Cincinnati company in terms of dollars and cents.
On the top line, it grew revenues by 26% to $549.4 million. On the bottom line, it increased adjusted net income by 72% to $103.8 million providing shareholders with a healthy 19% net margin.
Interestingly, MedPace didn’t repurchase any of its stock in 2018, despite having free cash flow of $141 million, 64% higher than the year before. Yet, it bought back almost $156 million of its stock in 2017, paying an average of $29.34 a share. Based on its April 24 closing price of $57.17, MedPace has generated a 96% return on its investment.
With a backlog of $1.1 billion, net new business awards of $899.4 million, and a book-to-bill ratio of 1.28 times revenue, Medpace’s free cash flow should continue to grow exponentially.
Pan American Silver (PAAS)
I don’t usually recommend precious metals stocks but given Pan American Silver (NASDAQ:PAAS) is down almost 14% year to date (including dividends) through April 24, I couldn’t help myself. Here’s why.
In February, Pan American completed its $1.07 billion acquisition of Tahoe Resources. The company paid $275 million in cash and 56 million shares. Almost 92% of Tahoe’s shareholders elected to take shares rather than cash. Tahoe shareholders own 27% of the merged entity.
The acquisition makes Pan American the largest publicly traded silver miner in the world, doubling its silver reserve base to 576 million ounces. In 2019, it expects to produce at least 26.5 million ounces of silver, 162,500 ounces of gold, and also some zinc, lead, and copper.
The tricky part of the acquisition is Tahoe’s Escobal mine in Guatemala. The production’s been halted since July 2017 as a result of the Guatemalan Ministry of Energy and Mines failing to consult with the Xinca indigenous people before granting Tahoe its license to mine Escobal.
CEO Michael Steinmann believes Pan American’s 25-year track record in Latin America will allow it to get Escobal, the world’s second-largest silver mine, restarted.
“Pan American’s acquisition of Tahoe Resource could be a very opportunistic transaction…assuming the company is able to address recent social, geopolitical and operational challenges,” RBC analyst Mark Mihaljevic wrote in a note to clients in November when the deal was first announced.
With a solid balance sheet and increased cash flow on the horizon, Pan American ought to be buying back its stock.
Canadian LPGA golfer Brooke Henderson recently won the Lotte Championship in Hawaii, her eighth career win, tying her with Sandra Post and Mike Weir for most professional wins by Canadian.
I never thought of Skechers as a company that makes serious golf shoes, but Henderson’s victory says otherwise.
Skechers, the company, I recommended investors buy-on-the-dip last July because it had a rock-solid balance sheet and was doing just fine on the top and bottom line. Since then it’s had its ups and downs, but I still believe it’s a company that wins more than it loses.
In the second quarter ended March 31, Skechers announced record sales of $1.3 billion, 5.2% higher than a year earlier excluding currency. Internationally, its sales rose by 15.0% in the quarter. On the bottom line, it had an operating profit of $165.9 million, 11.5% higher than in Q1 2018.
While its business went off the rails a bit in 2018, it appears to have righted the ship, and things are getting stronger.
In Q1 2019 it bought back $15 million of its stock. It currently has $35 million left on its share repurchase program. With cash and short-term investments of $879.8 million and long-term debt of just $94 million, Skechers has more than plenty to buy back the $35 million left on the share repurchase program.
In 2018, Skechers bought back $100 million of its stock at an average price of $27.34 a share, a 14% return based on a current share price of $31.
SVB Financial (SIVB)
In the context of that article, I wasn’t necessarily trying to pick the five best stocks to buy, but rather the five best if you included two small caps, two mid-caps, and one large cap. At the time, SIVB was trading around $100.
So, while it’s done well in the five years and a bit since, it’s well off its September 2018 high of $333.74. Last fall it was flying high prompting me to name it one of seven bank stocks to own for the long haul.
Like clockwork, SIVB stock took a tumble on valuation concerns, falling to $180 by the end of the fourth-quarter stock market meltdown. Up 38% since then, the bank’s on a run that should take it over $300 by the end of 2019.
Analysts expect SVB Financial to deliver revenue and earnings growth of approximately 30% in the first quarter, a sign that the bank is still very much in growth mode.
In the past three fiscal years, SVB Financial didn’t repurchase its stock in two of them. In 2018, it did repurchase $147.1 million at an average price of $205.67, a return of 21% on its investment. It finished 2018 with $353 million left on its share repurchase program.
I expect it to buy some more in 2019.
Urban Outfitters (URBN)
Urban Outfitters (NASDAQ:URBN) closed out fiscal 2018 as a more balanced retailer.
The company’s total sales increased by 9.3% to $3.95 billion with all three of its banners: Urban Outfitters, Anthropologie, and Free People showing solid increases in sales.
On the same-store sales front, comps were up 8% year over year thanks to double-digit growth from its digital sales along with 10% growth from its wholesale business. Comps increased by 11.4% at Free People, 8.0% at Urban Outfitters, and 7.5% at Anthropologie.
A solid showing in 2018 hasn’t translated into an excellent performance from its stock in 2019, which is down 10.2% year to date through April 24. Shares fell in February after the company reported Q4 2018 same-store sales of 3.0%, 150 basis points lower than analyst expectations.
However, Urban Outfitter’s operating margin in 2018 was 9.7%, its best margin since fiscal 2015. I’d expect the company to generate a double-digit operating margin in fiscal 2019. And while it won’t be anywhere near the high teens as it was earlier in the decade, it’s still plenty.
Over the past decade, Urban Outfitter’s reduced its share count by 36% from 171 million shares outstanding to approximately 110. With its free cash flow stronger than it’s ever been and its stock down in 2019, I expect it to be buying its stock in bunches.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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