5 More Undervalued Stocks Getting Bought Back

Stock buybacks are generally considered a bullish signal on Wall Street. They often announce management's belief that its stock is cheap, and that its own shares will provide its best return on investment. Like dividends, buybacks also let companies return capital to shareholders.

How buybacks work
Done right, share repurchases will increase earnings per share, so long as profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have EPS of $1. Now, if it buys back 250,000 shares, leaving only 750,000 shares outstanding -- and total profits remain $1 million -- its new EPS would be $1.33, or $1 million divided by 750,000.

We're seeking companies that have announced stock-buyback programs. Then we'll head over to Motley Fool CAPS to get some insight into the investing community's preferred picks. If companies announce stock buybacks, and CAPS' top investors endorse their future prospects, Fools should take notice.

Here are some of the latest companies to announce share-repurchase programs.

Sources: Company press releases; Motley Fool CAPS.

The CAPS advantage
Investors at CAPS seemingly have mixed feelings about this group of companies announcing buyback programs, with only two of the five earning four stars. All of them are buying back sizeable chunks of stock -- even KLA-Tencor's 10 million-share program represents more than 5% of its outstanding shares at current prices.

Marsh & McLennan's program reflects how far down this stock has sunk. A victim of scandals of its own making, coupled with a soft pricing environment where premiums in its commercial insurance market continued to decline, Marsh & McLennan has seen its shares fall 13% year-to-date.

The insurance broker was recommended to subscribers of Motley Fool Inside Value as a bad-boy turnaround candidate with a new squeaky-clean CEO running the show. Back-to-back scandals in 2003 and 2004 led to a housecleaning by former prosecutor Michael Cherkasky. Yet it hasn't had an easy time with competitors such as Aon (NYSE:AOC) and Willis Group (NYSE:WSH) elbowing their way to grab market share. The just-released quarterly earnings report came in below analyst expectations, with its Kroll division seeing revenues decline for the second straight quarter under competitive pressures.

More than 150 investors have weighed in on Marsh & McLennan, with 92% giving it the thumbs-up. Earlier this year, CAPS member weiwentg thought that the broker's remaining moving parts seem to work well together:

Marsh is a brand name. All its units have high switching costs for customers, and are relationship-type businesses. And there are synergies between most of their businesses. The new management team seems good. I think that the shares were beaten down by the regulatory issues, but that they've turned the corner.

And, they're finally getting rid of Putnam (agreed to sell "in principle"). Putnam's synergies with the rest of MMC's business are limited, and we all know about Putnam's problems.

Now that Putnam has been sold for $3.9 billion to Canada's Power Financial, the $2.5 billion in cash Marsh & McLennan gets will be used to make new acquisitions to bolster its remaining businesses, while also paying down debt and financing the buyback.

Although not everyone thinks Marsh & McLennan is a good investment, there are hints at potential outperformance in even the negative critiques. While industry analyst and research firm Netscribes cites high debt levels as a possible problem, it also says the Putnam sale should ultimately prove beneficial:

Marsh and McLennan Companies' revenues for the year 2006 had a modest growth of 3% at $11.9 billion, but its income from continuing operations more than doubled to $818 million. The restructuring plan seems to be going right on track and is expected to have annualized savings of $350M, while incurring approximately $225M of restructuring related costs and might help in improving the operating efficiency. The huge debt of around $2.9 billion it carries in the balance is really a cause of concern, as it does not enjoy good credit ratings. However the deal to sell off Putnam Investments to Great West Lifeco seems sensible as it would help it concentrate more on [its] core operations, improve financial flexibility and use the proceeds to repay debt, share buybacks and other ventures.

CEO Cherkasky says he wants to support the Kroll division and will make acquisitions to do so. With the cash on hand now to achieve that objective, look for Marsh & McLennan to be on the move.

Foolish fallout
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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.