The Federal Reserve's Open Market Committee yesterday deemed quantitative easing an ongoing necessity to prop up a U.S. economy that it feels can't stand on its own two feet, yet the broad-based S&P 500 continues to notch new all-time highs at a regular clip. 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. Take Aon (NYSE:AON), which has seen its name brought up in good light due to a massive corporate shift in the way employers are handling health insurance for current employees and retirees. Aon subsidiary Aon Hewitt manages a private corporate health exchange that has landed at least 18 clients with 5,000 or more employees, including Walgreen and its 120,000 eligible employees. As employers look to save on expenses and distance themselves from health costs as much possible, Aon's privatized platform could see incredible membership gains.
Still, other companies might deserve a kick in the pants. Here's a look at three that could be worth selling.
You can't fool me!
Financial information and investment advisory firms have actually had a very good go of things since the recession. The need for investment advice, financial figures, and reports is nearly higher than it's ever been, which has propelled publication giant Thomson Reuters (NYSE:TRI) to a new 52-week high and a gargantuan $31 billion valuation. However, I would contend that this run could be about done, as its growth engine appears to be running on fumes.
Following Tuesday's third-quarter earnings release, Thomson Reuters noted that it would be cutting an additional 3,000 jobs on top of the 2,500 employees it let go earlier this year. In total, Thomson Reuters has announced layoffs totaling nearly 10% of its workforce in 2013. While these moves are done to save costs, it's also important to remember that it's difficult to grow a business that relies on financial reporting when there are fewer bodies available to report.
Thomson Reuters' management also announced a plan to repurchase $1 billion worth of stock (a tad more than 3% of its outstanding shares) by the end of 2014, which it plans to fund through lower capital expenditures and possibly by taking on more debt. This is like choosing between a bad idea and a worse idea! Capex drives innovation, so Thomson Reuters reducing its budget is only going to result in very weak top-line growth. Similarly, taking on debt to repurchase shares is rarely a smart move as interest on that debt may outweigh any temporary gains in the stocks' share price.
Ultimately, Thomson Reuters' third-quarter results demonstrated exactly how directionless its earnings momentum is at present -- revenue was down 3% to $3.09 billion, which was well below estimates, while earnings per share was relatively unchanged from the previous year. The company can attempt to impress shareholders with a smoke-and-mirror campaign to repurchase shares and cut costs to boost EPS, but I can see right through its lack of organic growth. Its forward P/E of 19 is beginning to look awfully pricey, and when it's coupled with $6.3 billion in net debt, I'd suggest passing at these levels.
Here today, gone tomorrow
Somehow I seem to find myself in this position about every two years, but once again, let's welcome weight-loss specialist Nutrisystem (NASDAQ:NTRI) to the list of companies you may be better off selling.
Following Nutrisystem's third-quarter results a lot of you might be wondering why I'd suggest putting this weight-loss meal planning stock back on grocery shelves. For the quarter, Nutrisystem delivered 5% year-over-year revenue growth to $85.4 million while producing $0.15 in EPS which was 50% ahead of its adjusted EPS last year. Both figures were nicely ahead of Wall Street's forecast and could signal that the company's turnaround is occurring quicker than anyone expected. In addition, Nutrisystem has been testing out new partnerships with Target and Wal-Mart in an attempt to improve ongoing sales.
However, there's one issue with Nutrisystem that has always made it a short-sale candidate in my book -- and it's a concern that I'm not sure how it will ever solve. This involves Nutrisystem's lack of customer loyalty. Most people who try to lose weight on Nutrisystem's plan only stick around for three months or less and are generally out to lose a few pounds. In other words, Nutrisystem's model is rarely going to breed lifetime members, which can lead to erratic cash flow and profits, as we've seen in the past.
Another factor that needs to work perfectly in Nutrisystem's favor is consumer confidence. Weight-control companies like gyms and weight-loss health planners often see sales dive when consumer confidence is falling because users view them as easily expendable. Although consumer confidence peaked earlier this year, it fell dramatically in October and that could be a sign that consumers are getting ready to tighten their wallets once again.
Time and again I've heard that this could be the moment when Nutrisystem gets its act together, but a long history of ups and downs suggests otherwise.
Buy this, not that
Not every company featured in this weekly series should be considered a bad business. In fact, sometimes the reason to sell is simply that a better opportunity pops up within the same sector. That's exactly the way I see it between the recently public Era Group (NYSE:ERA) and Bristow Group (NYSE:BRS) in what I would refer to as the perfect "buy this, not that" moment.
Era Group and Bristow both primarily operate as transporters of people and resources between the mainland and offshore oil and gas rigs via helicopter. The business model itself is pretty much genius. The demand for offshore oil and gas drilling is only expected to increase with the Obama administration pushing for less reliance on foreign sources of fuel, which means steadily increasing demand for Era and Bristow's transport services. However, from a valuation and liquidity basis I see Era Group being the stock you dump and Bristow being the stock you flock to.
Era Group, with a bit of post-IPO euphoria in its sails, is valued at 48 times its trailing earnings, while Bristow is staring down a forward P/E of just 12. Because of its smaller size, Era will need to spend heavily to build up its helicopter fleet, but it may find that challenging with just $27 million in cash on its balance sheet. Bristow, though, has plenty of cash on hand and has been able to match Era's revenue growth rate almost punch for punch.
Like I said, we're not talking as if Era is a bad company. In a few years, I may be discussing Era as a solid buy. However, with the company in rapid expansion mode and Bristow growing at an equally impressive rate with cheaper metrics and a 1%-plus dividend yield, I feel it could be time to trade out Era for Bristow moving forward.
This week's theme is all about paying attention to the trends. Thomson Reuters' job cuts and share buybacks aren't enough to mask its lack of organic growth, while Nutrisystem has a hard road ahead to prove to investors that consumer loyalty for its products is improving. As for Era Group, the sector trend shows increasing optimism in oil and gas personnel transportation services, but Bristow Group looks like a far cheaper option.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Aon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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