And so, after several months on a leave of absence to write a book, I'm back, and now the Drip Port has some purchasing to do. I periodically saw how stocks were performing over the last several months, and at certain prices I was interested in buying more shares for the portfolio. However, I stuck to my leave and let things go by. In a way, this made our real-money portfolio more true to life.
You won't always have money to invest; you can't always buy stocks at the prices you'd like, even when you believe you're seeing a good price; and sometimes your portfolio just takes a backseat. Or sits on autopilot. If you're comfortable with what you own, that's fine.
PepsiCo (NYSE: PEP)
Rick Munarriz (TMF Edible) pointed out some value when it rolled by here, including Pepsi in September at $37. The stock has rebounded 17% to $43. In October, Rex Moore (TMF Orangeblood) wrote about the company's value as well, covering its earnings. Two days ago, Pepsi reiterated fourth-quarter earnings guidance by projecting 13% to 14% growth. In 2003, it is expected to grow earnings another 12%.
Is the stock still a good deal? In a stock market where few companies have strong near- or intermediate-term prospects, I believe so. At $43 per share, Pepsi trades at 20 times its simple free cash flow (FCF, which is operating cash flow minus capital expenditures); it trades at 22 times consensus earnings-per-share (EPS) estimates for the year (estimates that were just confirmed); and at 19 times 2003 estimates.
These are not bargain multiples, nor are they much below the average multiple given to the S&P 500, but they're decent valuation multiples for a company of Pepsi's stature achieving double-digit earnings growth. In fact, these multiples are attractive enough for us (given our 15-year objective) to buy more of it this month.
Additionally, Pepsi's stock has an FCF yield of about 4%. A company's FCF yield is obtained by dividing the company's FCF for the last twelve months by its enterprise value (market cap minus cash and equivalents plus long-term debt).
Pepsi's 4% FCF yield means that for every $43 you pay for a share of Pepsi, that share currently earns about 4% of its value back in FCF each year. You don't get all this money (you get the 1.4% dividend yield), but it's useful to know how much of your stock's value is supported by new cash inflow each year -- cash in the form of FCF.
Pepsi's FCF yield is 3.5% if you remove from the cash flow calculation all items not directly tied to the business; its FCF yield is 4.8% if you figure the yield on a basic definition of free cash flow (again, operating cash flow minus capital expenditures). Either yield is strong in today's environment.
Johnson & Johnson (NYSE: JNJ)
The company sports an FCF yield of 4.04%. It achieved FCF of $6.7 billion the last 12 months, and has an enterprise value of $168 billion. The $56 stock trades at 25 times trailing FCF, and 24 times this year's EPS estimate. It's at 21 times the fast-approaching 2003 estimate. That year's earnings are expected to grow an aggressive 16%.
We'll send a check to buy more J&J this month as well.
Paychex (Nasdaq: PAYX)
Paychex, meanwhile, has a 2.5% FCF yield. That's not great when compared to the yields at these other giants. Its $29 stock is much more expensive, too, valued at 39 times FCF. I was starting to like the price of Paychex at around $22 this summer, but, well.... it's easy for me to write that after the fact, isn't it? I'm not eager to buy more of the stock at this price. I'm more content to wait than I would be to buy.
Intel (Nasdaq: INTC)
Intel, believe it or not, has generated $4 billion in FCF the last 12 months. Its value sits at 30 times its FCF, while the stock has a 3.3% FCF yield. We'll continue to wait to purchase more Intel, too; the stock trades at 40 times this year's earnings estimate and 32 times next year's EPS guess, and lately estimates have declined.
Mellon Financial (NYSE: MEL)
The investment firm's estimates have also ticked down. The stock is at 18 times this year's expected EPS, and 15 times next year's. These multiples are near the stock's five-year average multiple. We bought more Mellon in the low- and mid-$20s, and we would again, but for now, at $29, we'll wait.
Businesses remaining equal, the following are the prices (and the resulting values) at which the Drip Port would really get interested in buying more of its stocks:
Stock and price Desired price Approx. value Pepsi ($43) Around $37 17x FCF J&J ($56) Around $47 20x FCF Paychex ($29) Low $20s about 26x FCF Intel ($19) Around $14 21x FCF Mellon ($29) Back around $24 12x '03 EPS est.We've taken advantage of such prices in the past. We may not see such prices again soon, however, so we'll continue to buy our stocks at reasonably higher prices as well, averaging in over time. Exciting? You bet not! But does it work? Yes. Averaging in will achieve our goal of saving, investing, and growing our money over time. We'll send money to J&J and Pepsi by the end of the month.
