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What happens when you get economic data heading in the right direction and the Federal Reserve whispering sweet nothings into the ears of investors? You get the S&P 500 within six points of a record closing high. For skeptics like me, that's an opportunity to see whether companies have earned their current valuations.
Keep in mind that some companies deserve their current valuations. Big pharmaceutical company Sanofi (NYSE: SNY ) , for example, advanced to multiyear highs after announcing the completion of enrollment in its mid-stage ovarian cancer trial for MM-121. With few drugs falling off patent, a robust drug pipeline, and perhaps the snazziest dividend in all of big pharma, Sanofi looks like it could head even higher.
Still, other companies might deserve a kick in the pants. Here's a look at three companies that could be worth selling.
Is this as good as it gets?
Not to completely rip a line from Jack Nicholson, but is this really as good as it gets for impact-resistant door and window manufacturer PGT (NASDAQ: PGTI ) ?
A swift rebound in the housing market has boosted sales of PGT's doors and windows well above last year's levels. Combined with increased marketing and reduced scrap levels, PGT managed to boost its gross margin 10.3% from the previous year to 35.4%. Now, don't get me wrong: I'm not saying that a move higher in PGT isn't deserved after these significantly improved results. However, the magnitude of the move simply doesn't match the fact that PGT has lost money in five of the past seven years.
At nearly 30 times forward earnings and 18 times cash flow, PGT is going to have some very difficult comparisons to meet next year. Rising input costs and an increased marketing budget are likely to eat into its bottom line, especially with the company (in my opinion) still searching for long-term answers to drive product growth. From a sheer valuation perspective, this seems like an open-and-shut short-sell candidate.
This airline should be grounded
Merger-mania may be sweeping the airline sector and exciting investors, but I'm just as bearish on the sector as I've ever been. That's all the more reason for me to cast my discerning eye on Republic Airways (NASDAQOTH: RJETQ ) , which operates both its namesake airline and Frontier Airlines.
Trust me, I'm trying not to let my poor experiences on Frontier's planes get in the way of my better judgment here, but it's difficult. The February traffic report from Republic was abysmal, with a 13% decrease in revenue passenger miles and a 17% reduction in capacity. Frontier's February was even worse, with RPMs down 29% and capacity dropping 33%. Looking ahead, revenue growth is practically nonexistent based on analysts' estimates. The company is planning to minimize costs in order to boost profits and simply hope that fuel costs don't get too out of hand. That's a formula that's bankrupted the airline industry since the dawn of... well... the airline industry!
It'd be one thing if Republic were rife with cash, but it's sitting on nearly $1.9 billion in net debt. That debt gives the company little flexibility and makes it a potentially dangerous investment if jet fuel prices rise or consumer travel drops even slightly.
Been here, done that before
Enterprise printing is an extremely cyclical business, with demand for equipment ebbing and flowing every couple of years. As such, many print-based companies find that their share price is range-bound. Knowing that, I’m suggesting it's time to jump ship on analog-to-digital print solutions company Electronics for Imaging (NASDAQ: EFII ) .
EFI definitely got the message from corporate America that it needs to constantly improve its product line to complement an increasingly mobile world. Its mobile solutions have allowed the company to boost revenue by double digits in three straight years, but it's also not the only fish in the sea that's clinging to a transformation. Xerox (NYSE: XRX ) , probably the most globally known print company, has transformed from print services to getting about half of its revenue from information technology services like Medicaid processing and ticket booth collection software and services. EFI, on the other hand, is wholly reliant on enterprise print demand to drive growth.
My personal opinion is that enterprise print demand isn't terribly strong -- certainly not strong enough to support EFI at 16 times forward earnings. The other concern I have with EFI is its cash flow, which never seems to grow, stuck in perpetuity between $47 million and $62 million annually. The unwritten rule has been to run for the hills when EFI trades for more than 20 times cash flow. At its current level of 22.3 times cash flow, I’m heeding that warning.
This week’s theme is all about whether or not these three companies can top last year’s near-perfect results. With frothy valuations, difficult comparisons, and a history of cyclicality, all three companies seem poised for a sizable pullback.
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