News Analysis date published New: 
Thursday, January 31, 2013 - 13:00
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Monday, February 4, 2013 - 09:23
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Thursday, January 31, 2013 - 13:00

Kinross Gold Corp. (KGC) Shares Enter Oversold Territory

Thursday, January 31, 2013 - 1:00pm

Across the country, many corporate boards are faced with the same conundrum: Cash is piling up quite fast, but clear uses of that cash are lacking. Few companies want to make major acquisitions in these still-uncertain times, and though dividend hikes are a logical option, they still don't have a meaningful effect on cash balances.

That's why you still hear about many companies issuing seemingly robust stock buyback programs.

Though the number of buyback announcements (and the dollar value of them) slipped about 10-12% in 2012 compared with the record year of 2011, they still remain near peak levels.

And January 2013 has brought more of the same. In the past four weeks, these four companies announced plans to initiate or extend stock buyback programs worth almost $10 billion on a collective basis.

Frankly, they shouldn't bother. The size of the buybacks won't make a meaningful dent in the share count, these stocks already trade near multi-year highs. Besides, they don't look like bargains in the context of price-to-earnings ratios.

The only buyback announcements worthy of further research involve companies buying back huge amounts of stock, or at least a stock that is clearly cheap.

In this context, eight companies are buying back stocks that are surely worth further research. Each one of them has the potential to reduce the share count by at least 10%. They may not all appear undervalued in the context of price-to-earnings (P/E) ratios, but their earnings per share (EPS) will surely rise in coming years (and the P/E ratio will surely shrink) if they aggressively reduce the share count.

I'll skip any discussion about Herbalife (NYSE: HLF) in this article. Enough ink has already been spilled on this controversial company elsewhere (but you can also read my colleague Michael Vodicka's take on the stock here.). The last four stocks on this table are worth further research. But investors should surely ramp up their research efforts on Tupperware (NYSE: TUP), Lear (NYSE: LEA), and Unifi (NYSE: UFI).

Here's why…

A smoother global economy changes the risk profile for Tupperware

Although North American growth remains quite modest for Tupperware, the company is booming in other markets. Sales in Brazil, India, Indonesia, Malaysia and Singapore rose in excess of 25% in the fourth quarter of 2012. (Sales in Russia and Eastern Europe also rose at a double-digit pace). We've written extensively about how fast-rising middle classes in emerging economies will fuel sales for U.S. multinationals, and Tupperware is proof positive, as emerging markets now account for 60% of sales.

Tupperware's management is so confident the company's current base of sales and profits can be maintained, that it is raising the maximum target level of debt it will carry on its balance sheet. And by expanding the use of leverage, this company plans to sharply hike its dividend (by a hefty 72%) and buy back up to $2 billion in stock. That's almost half of the entire market value of the company.

Tupperware already managed to shrink its share count from 61.4 million in 2011 to 56.4 million in 2012, and as the share count continues to go down, a company boosting sales at a single-digit pace can keep boosting EPS at a double-digit pace.

Auto parts supplier Lear is also taking up its debt load to bring in more cash for heightened buybacks. The company recently announced plans to boost the current share buyback from $800 million to $1.5 billion. Lear's share count has already fallen from 156 million in 2007 to under 100 million as of September, 2012, and the current share buyback should push the figure down to 95 million.

Cost cuts fuel buybacks
Yarn maker Unifi (NYSE: UFI) has been streamlining its operations for several years and is now in a position to reward shareholders. The company generated $37 million in free cash flow in fiscal (June) 2012, which is greater than the prior seven years' free cash flow -- combined. And that sets the stage for a $50 million share buyback. That should shrink the current 20-million share count to below 17 million.

All other things being equal, per share profits should rise by at least 15%, or whatever percentage the share count ultimately shrinks. In fact, per share profits are expected to rise more than 15% in fiscal (June) 2014, to around $2.30. That's no coincidence. As long as shares continue to trade at just six times forward profits (and below tangible book value), a stock buyback makes ample sense.

Risks to Consider: These buybacks may continue even if shares rise sharply from here, making the buyback plans less salutary.

Action to Take --> So many buyback plans are a mistake, as they are done simply because no other use of cash exists. Yet Tupperware, Lear and Unifi provide examples of a buyback plan that can materially boost EPS. In the event that the broader market falls and these stocks slump in tandem, then the buyback plans will prove to be of even greater value.

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David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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