S&P 500 Stock Picks
The stocks listed below are in the best position to generate the most shareholder value.
The General Electric Company.
Current C.E.O: H. Lawrence Culp Jr
General Electric's logo (GE) shown on the company's machinery.
Explanation:
General Electric Co:
Originally Posted: April 28, 2020.
Updated: June 30, 2022.
Established in 1892, in a merger between Thomas Edison's Edison Electric Company and the Thomson-Houston Electric Company, The General Electric Company (G.E.) was established. The 130-year-old company invented essential items such as the x-ray machine, the washing machine, the air conditioner, and the light bulb. Today, the company operates through several divisions, including G.E. Healthcare, G.E. Aviation, G.E. Digital, G.E. Power, G.E. Capital, and G.E. additive. Once the largest corporation on earth, General Electric stood unbreakable. However, more recently, the company was forced to sell major profit-generating businesses such as NBC Universal, G.E. Plastics, and G.E. Capital and announced plans to split the business into three independent units. G.E. 's ill-time acquisitions and over-leveraged balance sheet contributed to G.E.'s fate. Currently, G.E. 's market capitalization stands at a smaller, $70 billion, with revenues of about $80 billion. These numbers are a far cry from 2000 when G.E.'s market cap was $600 billion. Despite G.E.'s troubled history, G.E. will be able to lift itself and power forward into the 21st century through good management, cost cutting, a strong portfolio of businesses, and well-timed business sales.
First, I'll start with the ugly and how the company's past leadership affected G.E. After Jack Welch's extraordinary 20-year tenure, the company had become one of the largest corporations ever. During Welch's time at General Electric, all of G.E.'s segments were either 1st or 2nd in their industry, and in 2000, the company had actual revenue of nearly $210 billion. However, Welch's handpicked successor, Jeffrey Immelt, brought the company to its knees almost ten years later. One of G.E.'s most substantial problems going into the 2008-2009 global financial crisis was its banking division: G.E. Capital. When times were good, Immelt and Welch made G.E.'s banking division into the 6th largest U.S. bank, and while it made up nearly 35% of G.E.'s annual net income at one point, the segment almost entirely collapsed. As the 6th largest bank in the U.S. going into the financial crisis, G.E. capital was exposed to consumers as it operated as a consumer bank rather than a commercial one. When Americans found themselves without jobs in '08, G.E. could not recover the loans they gave, making G.E.'s insurance rates skyrocket. Importantly, G.E.'s WMC Mortgage business exposed G.E. to the subprime mortgage crisis. As G.E.'s banking division suffered, G.E.'s net income fell. The company's other divisions also suffered. After having revenues of nearly $222 billion in 2008, G.E.'s net income fell to $190 billion in 2009, representing a $32 billion fall. Additionally, as G.E.'s cash dried up, the company was forced to make an emergency stock offering in 3 days, worth up to $15 billion. Eventually, the company couldn't operate without a cash infusion. In November of 2008, congress bailed G.E. out for nearly $140 billion, making it runner-up to the biggest bailout in history: AIG. G.E. revived itself in 2009 as its share price rose almost 70% from its lows. But over the next ten years, G.E. would miss out on the largest bull market in history due to poor management. G.E.'s main weakness was generating organic revenues. Before '08, G.E.'s significant cash pile allowed for constant acquisitions, falsifying G.E.'s actual growth. After G.E. starved for cash, revenues fell to $125 billion by 2017. But this wasn't the worst for G.E.
While failing to grow organically was a major structural problem at G.E., the company suffered from Immelt's ill-timed acquisitions. In 2014, Immelt ignorantly made a $17.1 billion bid for Alstom, an ailing French power company. There were a set of problems associated with the acquisitions:
Alstom's power generators ran on coal (currently being phased out).
The power generation market stood at a peak at the time of G.E.'s acquisition.
G.E. grossly overpaid for the failing company.
In 2017, G.E. bought a controlling stake in Baker Hughes, one of the world's largest oil field service companies. G.E. made a bet thinking that oil prices could climb back to $100 a barrel. While oil prices currently trade above $100 per barrel, G.E. needed cash and sold most of its shares before 2022, when oil changed from $-37 to $70 per barrel. Originally, G.E. bought 62.5% of Baker for close to $70 per share. As of June 2022, Baker Hughes's (BKR) share price stands at about $29 per share. Not to mention, G.E. has $26.18 in goodwill charges. Notably, the SEC and DOJ investigated G.E. for a $6.2 billion insurance loss in 2018, and in 2020, the company paid $200 million to settle the charges.
Lastly, G.E. had a tremendous amount of debt. As of 2017, G.E. had a deficit of $134.59 billion, ultimately making its total liabilities larger than its market capitalization. As a result, investors became worried, causing its shares to fall 80% from 2017 to 2018. G.E.'s share price fell while the Dow and S&P reached new highs. Additionally, G.E.'s share price performance was so bad that on June 26, 2018, the Dow Jones Industrial average booted G.E. from the Dow even though it was an original component of the index. Fortunately, under new CEO Larry Culp, I believe General Electric's fortunes have changed for the better.​​
Industry veteran Larry Culp seems like the man who can get the job done. Before taking his position at GE, Culp worked as the CEO of The Danaher Corporation, a globally diversified conglomerate that designs, manufactures, and markets medical, industrial, and commercial products and services. As a conglomerate in a similar position as GE, Culp saved Danaher and grew the company to become the model for all industrial conglomerates today. From when Culp took the job as the boss of Danaher to when he left, shareholder returns were an eye-popping 465%, substantially beating the S&P during that same period. I believe Culp can do the same at G.E., as proven by his history and what he has already accomplished at G.E.
First, Culp has vowed to fix the company's balance sheet. So far, Culp has reduced G.E.'s debt by selling its Bio-Pharma business and a large portion of its stake in Baker Hughes. G.E. raised $20 billion from the sale of its bio-pharma business and nearly $10 billion from the sale of its shares in Baker Hughes. Investors and the analyst community applauded these timely and strategic sales. Additionally, Culp cut the company's dividend to just a penny a share, saving the company $16 billion. In March of 2021, Culp announced that G.E. would merge GECAS (General Electric Capital Aviation Services) with Irelands's, Aercap. This deal will further help pay down debt as G.E. receives $24 billion in cash, 1.1 billion Aercap shares, and an additional $1 billion. With the deal, G.E. announced it would wind down G.E. Capital, merging it with the industrial businesses. G.E.'s moves are beneficial in the short and long term: One, G.E. lowered total debt to $33.63 billion as of Q1 2022, and two, with a strong balance sheet and newly provided cash from the deal, G.E. can take part in important M&A deals. Also, by ridding G.E. of its capital division, the company is much less complicated and makes G.E. more like its industrial peers. However, G.E.'s moves came at the cost of credit agency downgrades and a $3 billion non-cash charge. But, through G.E. becoming a more transparent company, investors would applaud that over a temporary credit rating downgrade. Overall, people viewed the deal positively as G.E. will reach its debt target by 2024.
Notably, during former CEO John Flannery's year-long tenure, Flannery sold businesses to raise cash. Flannery sold G.E.'s locomotive business and other units such as its lightbulb, motor, and other groups totaling $10 billion. In addition, while Immelt financially destroyed the company's balance sheet, he also began to de-leverage G.E. 's debt before his resignation. In 2016, Immelt led the sale of G.E. appliances and raised $5.5 billion after selling the unit to a Chinese corporation, Haier. In about six years, G.E. has raised nearly $75 billion.
Lastly, in November 2021, G.E. announced that it would divide into three companies: G.E. Aviation, G.E. Healthcare, and G.E. Power. I believe G.E.'s breakup is good for the company. Investors will see G.E. Aviation and Healthcares' operational excellence and strength as the power division will no longer weigh on unit earnings. In addition, G.E. 's power division will have less debt than Healthcare and Aviation, allowing it to improve its business and expand further into renewable energy. While G.E. Aviation and Healthcare may have more obligations than G.E. Power, that debt is manageable due to high free-cash-flow generation.
Additionally, G.E.'s business units will help the company recover and thrive. Before the Coronavirus epidemic, G.E. Aviation was the 'crown jewel' of G.E., making up 2/3 of the airplane engine market. The segment produced $32 billion in revenue for G.E. in 2019 and supplied Boeing and Airbus with engines. Boeing (B.A.) and Airbus (EADSY) struggled with the effects of the Coronavirus, and the epidemic had a short-term but significant material impact on G.E. Aviation's profit. However, today G.E. Aviation is back up and running. Aviation orders grew 31% from Q1 2021 to $7.206 billion in Q1 2022. Revenues also increased to $5.603 billion (12% higher from a year prior). Also, segment profit grew to $908 million, up another 42% from Q1 2022. Lastly, margins stand at 16.2%, although margins could be better. In addition, G.E. Aviation has many backlog orders totaling $259 billion.
Looking at G.E. Healthcare, the unit is run very efficiently and boasted orders of $4.9 billion, up 8% YoY. Revenues stood at a healthy $4.36 billion on margins of 12.3%. While margins fell 390 basis points from the previous year, inflation and the Russia-Ukraine War contributed to lower margins. As these issues resolve, margins should grow, generating increased net profit. Ultimately, G.E. Healthcare should continue strengthening its class-leading medical machinery in the coming years.
G.E.'s power business is a different story. G.E. Power was unprofitable for years and dragged down the rest of G.E.'s businesses. For instance, in 2018, G.E. had -$3 billion in free cash flow due to troubles in its power division. Today, G.E. has turned cash flow positive. G.E. Power generated $63 million on margins of 1.8% (400 points higher than last year) for Q1 2022. Orders grew 14% to $4.15 billion, while revenues fell 11% to $3.501 billion. G.E. Power's improvement proves that Culp is the right man to fix General Electric. However, Renewable energy is in a temporary rut. Due to inflationary pressures, supply chain issues, and the Russia-Ukraine War, G.E. Renewable Energy reported $2.87 billion in sales, down 12% from Q1 2021. Unfortunately, segment loss came to -$434 million on margins of -15.1%, down 85% YoY. However, I believe G.E. Renewable Energy problems are temporary and should resolve quickly as the world works to return to low inflation, peace, and no supply chain issues. Also, the power generation market looks forward to several years of sustained secular growth. According to the EIA, by 2050, 38% of power will come from renewable energy sources, 36% from natural gas, 13% from coal, and 12% from nuclear energy. With GE having most of its power generation sales from natural gas and renewable energy turbines, G.E. will benefit from growing and changing electricity demand. Additionally, G.E. is currently switching its coal power generators into those that run on natural gas, helping the company take market share in the power generation market. In the next three years, expect General Electric to earn upwards of $7 billion in total free cash flow annually. Additionally, the company should revive its dividend.
​CNBC commentator Jim Cramer once said, "G.E. was once a great American company," and I agree with him. However, former G.E. CEOs Jack Welch and Jeff Immelt lead G.E. away from its industrial roots, over-expanding in several different industries. After 2008, G.E. could not grow organically, and with significantly less cash, the company could not look to M&A for growth. Welch and Immelt's poor decision-making almost cost the company its life. However, with General Electric's new management and determination to fix the company, G.E. will prosper again.
Currently, G.E. shares trade for about $70 per share, but I believe their fair value is $140 per share. Buying stock in G.E. today is an all-out bet on management and CEO Larry Culp's ability to fix the once 'great' American company.
The DuPont De Nemours, Inc.
Current C.E.O: Edward D. Breen
The DuPont De Nemours logo.
Explanation:
DuPont De Nemours:
Originally Posted: June 24, 2020.
Updated: July 2, 2022.
Founded in 1897 by Éleuthère Irénée du Pont, DuPont De Nemours, Inc (DD) is one of the oldest and largest specialty chemical companies in the world. The company has a market capitalization of $25 billion and amasses revenues of $16 billion. Significantly, DuPont has gone through much change over the past five years. First, in 2015, DuPont spun off the Chemours Company (CC), a chemical company worth around $2 billion. The company was for a long time part of DuPont and inherited most of the lawsuits and fines that came with DuPont's former production of Teflon and PF08. In 2017, Dow Chemical (DOW) and DuPont merged to form the chemical behemoth, DowDuPont. The combined company was worth nearly $140 billion. Subsequently, the Dow Jones component traded for two years until, in 2019, DuPont spun off Dow Chemical and Corteva Inc (CTVA), DuPont's agricultural division. DuPont is headquartered in Wilmington, Delaware, and headed by CEO Edward D. Breen.
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In early 2020, DuPont shareholders ousted former CEO and CFO Marc Doyle and Nick Fanandakis from their positions at DuPont, and former DuPont CEO Ed Breen took back the reins of the company. I view the executive shuffle as positive for the company, as Marc Doyle and his CFO proved ineffective during their tenures. With Ed Breen back on the job, the company can re-focus on its restructuring plan, swiftly shuffling its portfolio. Ed Breen was behind Dow Chemical's and DuPont's intelligent merger to create the world's largest chemical company. I believe DuPont made a mistake in spinning off Dow, which would have produced meaningful profits for the company in the long run. But for now, with Ed Breen back, the company is in good hands.
As of 2022, Breen has structurally changed DuPont's portfolio. Divesting from DuPont's generations-old legacy businesses such as DuPont Nutrition & Biosciences (N&B) and DuPont Mobility and Materials (M&M) has given the cash to invest in newer and more lucrative markets. For example, Dupont acquired Laird Performance Materials in July of 2021 for $2.3 billion to increase its market share in the developing electronics and semiconductor markets. Additionally, DuPont sold its N&B business to IFF the same year for $7.3 billion. Then, in November of 2021, DuPont announced the sale of most of its M&M business to Celanese Corp for some $11 billion while acquiring Rogers Corp for $5.2 billion. After the dust settles, DuPont will have gained a strategic hand in the automotive, general industrial, electronics, and communications industries. Specifically, Dupont is betting on the continued development of electronics and the electrification of automobiles as it becomes a significant player in printed circuit boards, device protection, sealants, battery components, and several other products.
Besides DuPont's recent acquisitions, DuPont is a highly diverse company and has set itself up to grasp profits from the residential real estate market. With DuPont's remarkably successful Tyvek, I expect homebuilders to continue to use the product as there is virtually no competition. As my analysis of Home Depot shares mentioned, while interest rates will rise, I do not expect homebuilding to crash. While there may be a period of slower growth, the homebuilder's market should continue to grow as long as Federal Fund rates stay below 6%. Importantly, DuPont has a decent record of innovation. For example, DuPont pioneered Kevlar (a polymer with many uses in the textiles industry) and Nomex. Continued innovation will replace the earnings of phased-out products.
Also deeply dependent on housing starts is DuPont's water and protection segment. Water and protection makeup roughly 40% of the company's sales and should benefit as the real estate market grows. Also, as climate change takes hold and water consumption continues to rise, consumers will consider efficient recycling technologies and water filtration.
Additionally, DuPont's electronics and industrial segment sell several products. DuPont's products include industrial finishes, display materials, LED materials, semiconductor fabrication, electronic components, printed circuit boards, thermal management, and insulation materials. As electronic devices continue to develop, cars electrify, and new appliance products emerge, utilization of semiconductors will grow. Heightened use in semiconductors means increased revenues for DuPont. Also, with the ever-growing 'smart tech' market and auto electrification, large electronic devices and manufacturers such as Apple and General Motors will utilize DuPont's thermal management, electrical insulation, and semiconductor fabrication materials.
DuPont's Q1 2022 earnings reflect the success of Breen's restructuring efforts. In the company's Electronics & Industrial segment, DuPont's net sales reached $1.53 billion on operating margins of 31%. Sales were 18% higher YoY with 9% organic growth. In DuPont's Water and Protection business, sales grew 8% to $1.43 billion on margins of 23.9%. The segment incurred 10% organic growth. For FY 2022E, DuPont expects to net up to $13.7 billion in sales with EBITDA of $3.25 billion to $3.45 billion. DuPont also deleverages, using the proceeds from its recent asset sales. Currently, the total debt stands at roughly 22% of assets ($11.04 billion), down from 33% of assets in 2021. With an improved balance sheet, the company has announced a $1 billion stock buyback program, expiring March 31, 2023.
​DuPont's share price trades in the mid $50 range, remaining significantly undervalued. DuPont's current P/E ratio stands at 18 on a dividend yield of 2.5%. DuPont's strategic deal-making and strong growth prospects lead me to believe that DuPont should prosper in the future. I assign the company a fair value of $90 per share.
The Citigroup Inc.
Current C.E.O: Jane Fraser
The Citigroup Inc logo.
Explanation:
CitiGroup:
Originally Posted: May 23, 2020.
Updated: July 5, 2022.
Citigroup Inc (C) is one of the world's most significant investment and retail banks. In 1998, the company formed through a merger between Citigroup and financial titan Travelers Group. Subsequently, in 2002, Citi spun off Travelers Inc (TRV). Currently, the company has a presence in several regions worldwide, including the Americas, Europe, Africa, Asia, and parts of the Middle East. Citigroup has a market capitalization of $100 billion on revenues of $71 billion annually. In recent years, former CEO Michael Corbat has worked to make a smaller and more efficient Citigroup through divestitures and cost-cutting. Corbat led Citigroup on a path to recovery after the Great Recession by taking sweeping action. While Citigroup shrunk in size, its global business connections stayed intact. Citigroup's globality diversifies the company from its American peers as few can duplicate its strong international presence. While Citigroup's global presence may give the company an advantage over its competitors, the company is still hard to understand and has some inconsistent revenues in some divisions. As of now, Jane Fraser has taken the top executive position. While Fraser enters into a much less complicated Citigroup, the story has many moving parts. However, while Citigroup may face some issues today, I believe the company is a long-term value player.
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Like all U.S. banks, Citigroup and its peers must pass the Federal Reserve's Dodd-Frank Act Stress Test (stress test) and the Comprehensive Capital Analysis Review (CCAR). On June 27, 2022, Citigroup announced that it had passed the stress test and CCAR but would raise its capital buffer requirement from 3% to 4% from Q4 2022 to Q3 2023. Even with the increase in Citi's capital buffer requirement, the company is in solid shape and can withstand a range of economic severity without cutting its dividend of $0.51 per share. Since 2015, Citigroup has passed the 'fed stress test,' helping investors sleep soundly without worrying about possible liquidity issues. Additionally, companies are thriving because economic growth has surged in the last year. Citigroup and other banks need not worry about loan defaults as, most importantly, the most leveraged sector, the oil industry, is generating excess cash. As oil prices hover near $100 per barrel, even the most leveraged oil companies can pay off debt. In comparison, the Coronavirus's effect on oil markets only two years ago forced companies to default on loans affecting earnings for big banks like Citigroup.
​Since 2008, Citigroup has taken extreme measures to maximize efficiency. Even in a zero interest rate environment, Citigroup can stay profitable. Today, the interest rate environment is drastically changing and will work to benefit Citigroup. Rising interest rates will boost earnings as net income from loan growth and higher yielding credit card balances become apparent. While Citigroup may not benefit from higher interest rates in the U.S. as much as its peers, the company has exposure to global interest rate hikes. As the E.U. and Great Britain raise interest rates, Citigroup will profit.
Recently, Citi has reshuffled its businesses. I believe that asset sales such as Citi's sale of Citibanamex (Citi's Mexican bank) for $10 billion and the sale of its Indian retail bank for $1.6 billion give the company financial flexibility. Capital from asset sales totaling around $22 billion allows the company to repurchase a significant number of shares, possibly bolstering its stock price. While Citi has sold assets in parts of Asia and the Americas, Citi's global footprint is still intact. Citigroup works to streamline and grow its Institutional Clients Group (ICG), its most profitable division focused on investment and corporate banking services for high-net-worth people and companies. Citi's turnaround should gain steam. As a tailwind, Citi is the most preferred investment bank globally, and as long as it keeps its global footing, the company will continue to reign large institutions into its client list. Also, as long-term economic growth continues and large corporations reap the benefits, companies and wealthy individuals will immerse themselves in increased investments and M&A. I project Citigroup to increase fees by 2.5% annually, passing down advertising costs and up-holding its global footprint to its clients.
Additionally, while consumer spending will undoubtedly fall from its all-time highs over the decade, it will continue to rise, benefitting Citi. Although slimmed down by Fraser's sale of Citibanamex and its Indian banking division's consumer bank, Citi's consumer bank should offer Citi stability. While the consumer banking division is prone to decline during an economic recession, as Citi grows its investment banking division, it will cover possible losses from its consumer banking division.
Also, like other large U.S. banks, Citigroup is transforming itself with its push toward electronic banking. The bank already has one of the most consumer-friendly platforms, quickly attracting millennials.
I expect Citi to perform well with Citigroup's significant global footprint, portfolio reshuffle, and long-term macroeconomic tailwinds. While Citigroup's Q1 2022 demonstrated underperformance, issues such as the Russia-Ukraine war contributed to Citi's 46% drop in net income YOY. However, while a maximum loss of $3 billion will hurt Citi's 2022 earnings, it represents no structural problems. Subtracting the Russia-Ukraine impact from Citi's earnings would show a thriving company. Citi's 2021 EPS is higher than in 2006, demonstrating Citi's epic recovery from 2008 and its ability to continue and grow its businesses.
Additionally, Citi has a lower P/E ratio than most banks other than Goldman Sachs, suggesting Citi's stock is undervalued. Today, Citigroup's P/E stands at 5.4. Also, Citi's dividend of 4.5% should comfort investors as Citigroup transforms into a highly efficient and more focused bank. While Citigroup's transformation is in the early innings, the stock will bear fruit if one waits. I believe Citigroup's fair value stands at $68 per share with significant upside as the bank transforms.
The Bank of America Corporation.
Current C.E.O: Brian Moynihan
Bank of America's logo displayed on its website.
Explanation:
Bank of America:
Originally Posted: May 12, 2020.
Updated: July 10, 2022.
Bank of America (BAC) is one of the largest banks in the United States. With a market capitalization of about $270 billion and annual revenues of $71 billion, the bank has a significant market share among its operating peers. The company operates through three main segments: Merrill Edge, BofA Securities, and BofA Private Bank. Following the 2008-2009 financial crisis, the company had difficulty dealing with its poorly-timed acquisitions of Countrywide Financial, Merrill Lynch, and MBNA, as it had to pay hefty regulatory fines and shrink the bank through a time-consuming restructuring process. The 2008 Financial Crisis put BofA's existence at risk as the company involved itself in risky subprime Mortgage Backed Securities (MBS). BofA and other financial institutions, including Bear Stearns and Lehman Brothers, paid little attention to debtor's credit history; when the economy began to wobble, debtors could not pay their mortgages. As debtor's defaulted and banks foreclosed homes, real-estate prices fell dramatically. Then, as debt holders demanded their principal investment and interest paid on matured bonds, banks could not secure these payments causing banks to borrow more. As real-estate values decreased and corporate debt increased, some financial institutions defaulted, declaring bankruptcy. Fortunately, with a bailout from the U.S. government and several loans, Bank of America survived the Financial Crisis with a pen stroke. A decade later, CEO Brian Moynihan has reduced the bank in size, markedly deleveraging BofA, allowing it to focus on its profitable core assets.
I must mention the impact of a 'looming' recession on Bank of America. After the global financial crisis, BofA worked on exiting risky markets such as the subprime mortgage industry and shrunk itself so it could focus on its most profitable assets. Such moves allowed the bank to lower its costs and current and long-term liabilities while upping its free cash flow and revenue. Additionally, BofA pursues secure lending as its customer's minimum credit score must be 750. Due to its strengthened balance sheet and proper management, Bank of America is prepared to weather any economic downturn. Also, as of Q2 2022, BofA has already begun infusing its loan loss reserves with cash, giving the company a cushion if the current economic state worsens. Not to mention, BofA has passed the Dodd-Frank Act Stress Test (stress test) and the Comprehensive Capital Analysis Review (CCAR) for several years. As of June 27, 2022, BofA announced its stress capital buffer (SCB) would be roughly 100 bps higher than the current level. As of March 31, BofA had $170 billion in SCB funds, giving the company generous room to operate smoothly in an economic downturn.
Moving forward from the 2008 Financial Crisis, BofA's business lines are strong. The bank is a top-tier investment bank due to its unique platform at Merrill Edge and BofA Securities. These platforms have the top technological bases, which should attract the younger population while forcing older clients to adapt. Also, BofA has a $10 billion per year tech budget, which is easily the largest in the industry. Notably, the bank has a wide economic moat that should help it in the foreseeable future. With Moynihan putting several advanced cost advantages into place, BofA is a more attractive bank. The bank has excellent operating efficiency, as proven by its efficiency ratio, which has dropped to about 60% in 2021. The company also contains a small-cost deposit base, which has helped it in recent years. However, the bank is subject to substantial regulatory fines due to its size, as the U.S. government would look to seek out any misdemeanors that the bank committed in the past.
Fortunately, I believe that since BofA has already been subject to paying billions of dollars worth of fines due to its past illicit banking practices, most of the skeletons are out of the closet. With the end of the regulatory fees for BofA, having riddled the company's balance sheet and potential throughout the past decade, the bank should display earnings potential in the future.
​In the coming years, loan growth should stay at a stellar 3% which will conservatively help the bank's profits. With increasing interest rates, BofA should benefit due to its nature as a large retail bank. In BofA's most recent quarter, BofA's net interest grew 22% to $12.1 billion on higher interest and loan growth rates. Additionally, the performance of global economies will impact the bank's earnings. While the next 6-10 months may bring a mild recession, BofA will benefit as the global economy enters its next phase of expansion. Notably, the bank has 10.7% of the market share in domestic deposits, giving it the largest retail-banking market share out of all the U.S. banks. Also, multinational corporations widely prefer Bank of America. As these corporations grow in the coming years, they will need to do more lending, and at higher interest rates, BofA will provide capital, taking cash from higher rates.
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Lastly, I would like to review BofA's financial performance. Ten years ago, when the global financial crisis ended, BofA's EPS stood at a painful $-0.29 per share. However, since the depths of the financial crisis, the company's EPS has grown profoundly and stood at $3.50 per share in Q2 2022 (TTM). Even more noteworthy, its share price has skyrocketed since 2009. Over the past ten years, BofA's share price rose approximately 1000%, vastly outperforming the S&P's performance. With growing EPS and revenues over the next ten years, I see the company's share price continuing to outperform the general market. Additionally, the bank offers its investors a stable dividend yield of 3.5%, which should keep its long-term investors happy while they await returns.
Currently, BofA's total debt stands at $300 billion, or 9.2% of its assets representing BofA's strong balance sheet. Due to BofA's very profitable new and reformed business and high-interest rates, I assigned BofA a target share price of $47.
The Exxon Mobil Corporation.
Current C.E.O: Darren Woods
Exxon's corporate logo to the right.
Explanation:
Exxon Mobil:
Originally Posted: April 29, 2020.
Updated: July 21, 2022.
As the oldest operating descendent of John D. Rockefeller's Standard Oil, ExxonMobil (XOM), incorporated in New Jersey, was formed from the merger between Exxon and Mobil in November of 1999. Today, Exxon is one of the highest-rated integrated oil companies in the world. The company operates through three segments: upstream, downstream, and chemicals. Exxon's performance since its founding has allowed it to become the benchmark for all oil and gas companies. Exxon generates revenues TTM of $306.8 billion and has a market capitalization of $375 billion.
In today's political environment, ExxonMobil may not seem like the right investment choice. Recently, the governments and activist investment groups such as Jeffrey Ubben's Engine No1 have pressured oil and gas companies to take further steps to curb climate change by halting fracking and spending money on carbon capture. However, while Ubben won two seats on Exxon's board of directors, the group could not change Exxon's plan to continue heavily investing in oil and natural gas production. Today, with oil prices sitting at roughly $100 per barrel, Exxon's bets are working in the company's favor and building market share within the sector. Specifically, Exxon's market share of revenues from the oil and gas industry stood at 10.01%.
I should mention that the notion that demand for gas will decline in future years does not add any upside sentiment for the sector. However, these assumptions are outright false. According to the International Energy Agency (IEA), global oil demand will continue to rise. The IEA forecasts oil demand to rise to 104.1 million barrels per day by 2026, representing an increase of 4.4 million barrels per day consumed. The Energy Information Agency (EIA) expects oil consumption to rise to 122 million barrels per day by 2040. As some oil corporations and governments aim to curb their company's and countries' oil production, oil prices will rise in tandem with demand. Due to Exxon-Mobil's commitment to long-term investments within the oil industry, Exxon's market share of world oil production, and therefore revenues, will rise as other companies look toward renewable energies.
Also, the EIA stated that as oil reserves dry up in the next 30 years, supply shortages will follow, pushing up the price of oil. The EIA predicted oil prices to rise to $90 per barrel by 2030 and a whopping $103 a barrel by 2040.
Moving to Exxon's most recent earnings, its upstream segment, the most prominent business segment, reported earnings of $4.5 billion (US GAAP), or a 76% increase from Q1 2021. Increased profits in Exxon's upstream segment are attributed to higher commodity prices and decreased operational costs. Recently, Exxon has invested in off-shore oil reserves in Guyana and completed Liza Phase 2 development, which added roughly 345,000 BPD in oil production. Additionally, Exxon will invest in its Yellowtail, the company's fourth-largest investment in Guyana. Exxon's investment in Yellowtail will yield an extra 250,000 BPD in oil production. Exxon's total oil production for Q1 2022 stood at 3.7 million barrels of oil. With increased oil and gas E&P, Exxon's upstream segment will continue to thrive, raking in profits. I should also note that 90% of Exxon's capital investments generate more than a 10% return on investment at $35 per barrel. Exxon's low breakeven price represents Exxon's low cost and efficient operations, and with oil at $100, Exxon's ROIC will stay within the 20% range.
Exxon's chemical segment, its second-largest business segment, also reported good earnings. Specifically, chemicals brought in $1.35 billion. While Q1 2022's $1.35 billion may be slightly less than Q1 2021 earning's of $1.4 billion, project planning and increased maintenance volumes were to blame. However, Exxon is recycling wasted polymers and plastics, reducing operating costs. Not to mention, due to Exxon's strategic placement within the oil industry, Exxon's chemical business has leverage over other chemical companies. Rather than having to buy and transport oil, costing chemical companies millions of dollars and forcing them to pass higher costs to consumers, Exxon has and transports its oil. Exxon's familiarity with the oil industry allows it to beat the prices of other chemical companies' products, making Exxon's chemical products the preferred product choice.
Lastly, Exxon's downstream business, its smallest, reported earnings of $332 million for Q1 2022. This number represents a substantial increase from downstream’s -$390 million loss in Q1 2021. Improved industry fuel refining margins and lower expenses were partially offset by lower base stock margins and volumes driven by higher turnaround activity. Unfavorable mark-to-market impacts and price timing effects expected to reverse or unwind over time impacted results. Global refining margins improved from the fourth quarter despite softening seasonal demand, higher natural gas prices in Europe, and lagging jet demand recovery. By the end of the first quarter, industry margins improved to levels above the 10-year range, with the tight supply/demand balance expected to persist. While average base stock margins declined from the prior quarter, pricing in April is catching up to rising feedstock costs.
Shifting focus, I will examine Exxon's corporate structure and what CEO Darren Woods has done for the company thus far. Woods, who became CEO in 2017, has released an aggressive spending strategy that differentiates Exxon from its peers. Exxon aims to keep capital expenditures (CAPEX) between $21-$24 billion for 2022 and $20-$25 billion through 2027. Also, Woods has promised to be more 'transparent' with the company by including critical financial data in quarterly reports while making executives available during presentations. Not to mention, Woods and the executive board have given investors a high dividend yield of 4% on average, which has been increasingly growing for over 20 years. Even though Exxon did not raise its dividend for 2020, the firm's current plan and commitment to cash flow will ensure its dividend is stable and growing. I expect Exxon to continue and raise its dividend, rewarding shareholders annually for the long term.
While Exxon remains somewhat leveraged, high oil prices and operating efficiency should help the company pay down debt. For Q1 2022, Exxon's debt stood at $47.25 billion, or 14.8% of the company's assets. While Exxon's debt is manageable, with higher oil prices and improved operating efficiency, Exxon can continue to pay down debt. Just for a noteworthy mention, at the height of the Coronavirus Pandemic in 2020, Exxon's debt stood at roughly 30% of its assets.
Lastly, Exxon has a credit rating of AA- from S&P Global Ratings. Furthermore, even in a rising interest rate environment, Exxon's credit rates should stay down, giving the company financial flexibility.
Due to a combination of operating efficiency, high-quality businesses, high oil prices, global solid oil and gas demand, and Exxon's commitment to heavily investing in the oil and gas industry, Exxon's fair value comes to $106 per share.
ASML Holding NV.
Current C.E.O: Peter Wennink
ASML's logo shown to the left.
Explanation:
ASML Holding NV:
Originally Posted: July 27, 2022.
Updated: July 27, 2022.
Founded in 1984, The Advanced Semiconductor Materials Lithography Company (ASML) is the world's largest photolithography and the only extreme ultraviolet lithography systems producer. Headquartered in Veldhoven, Netherlands, ASML is a multinational corporation with clients including Intel Inc, Taiwan Semiconductor Company (TSMC), and Micron Inc. ASML's market cap stands at $225 billion on revenues of $19.19 billion, TTM. Photolithography, dating back to the early 1820s, is a microfabrication skill used to pattern surfaces. ASML's photolithography machines enable installing nano-wires bigger than 8 nanometers (nm) required to create a semiconductor chip. Photolithography is a complicated process and occurs when light pierces through a light-sensitive silicon film coating on a wafer. As the light hits the silicon film, the film has tiny grooves that print onto a wafer. More recently, ASML has developed its extreme ultraviolet wavelength lithography (EUV) and deep ultraviolet lithography (DUV) process. ASML's EUV and DUV systems work similarly to photolithography, except these machines create tighter and wider wavelengths and are used for the 5-7 nanometer (nm) semiconductor market. While some believe ASML's growth prospects are not as strong as the company suggests, I believe ASML shares trade at a significant discount to their fair value.
As the world becomes electrified, the demand for semiconductors will rise. According to Fortune's Business Insights, while the semiconductor market is worth roughly $570, analysts expect the semiconductor industry to grow at a compounded annual growth rate (CAGR) of 12.2% until 2029. A 12.2% CAGR suggests the semiconductor industry will be worth roughly $1.4 trillion in 2029. Specifically, analysts expect the semiconductor industry to multiply due to several key factors: growth in the electric vehicle, smartphone, computer, and wireless technology, virtual reality, and the artificial intelligence markets. While competitors like Nikon and Canon exist in the semiconductor machinery market, as of 2021, ASML held 100%, 88%, and 62% shares in EUV, DUV, and photolithography semiconductor machinery processes. Such large market share percentages make ASML almost monopolistic in semiconductor machinery.
Additionally, ASML's monopoly on its EUV system machinery will command the upward direction of ASML's revenues. Production of the world's most advanced semiconductors ranging in size from 5-7nm requires EUV lithography. Apple and Samsung's technological devices use the 5-7 nm semiconductor. As the 5-7nm semiconductor market grows, ASML's clients will look to produce these chips. As of 2022, some of the biggest semiconductor production companies, including Samsung and TSMC, have begun the 5nm process. Specifically, Samsung's 5LPE and 4LPE and TSMC's N5, N5P, N4, and N4P chips use the 5 nm process. However, America's largest semiconductor company, Intel, has yet to begin production of 5nm chips. As of late 2021, Intel expects to start production of its 5nm Meteor Lake CPU by the end of 2022. As reported by Reuters, a chip plant needs 9 to 18 semiconductor fabrication machines to be "cutting edge." Since Intel is one of the largest semiconductor companies in the world, its plants need to be "cutting edge," making it very likely that Intel will purchase several of ASML's EUV machines. Currently, ASML sells each device at roughly $200 million, making potential revenue from Intel's purchase of EUV machines range from $1.8 billion to $3.6 billion.
Also, ASML is a leader in technological innovation. As of 2021, ASML spent roughly $2.6 billion on R&D investments, or an approximately 140% increase from R&D investment in 2016. As R&D spending continues to grow at ASML, I believe the company will continue to lead the world in the semiconductor machinery market. Currently, ASML's newly developed product, the high-NA EUV, uses a broader aperture or the space where light passes through the silicone covering to increase resolution. ASML's high-NA machine will cost roughly $300 million.
I should also note the global semiconductor shortage. After the Coronavirus pandemic, demand for products using semiconductors rose incrementally, leaving chip foundries in short supply. Additionally, pandemic-related supply constraints have left chip manufacturers dumbfounded. As chip makers look to meet world demand for semiconductors, they will look towards ASML for semiconductor machinery. ASML's Q2 2022 earnings report supported the notion of increased demand for machinery due to semiconductor shortages. ASML reported net sales of $5.5 billion on gross margins of 49%. These numbers add up to a 34% increase in net sales in Q2 2021. Also, ASML had record net bookings of $8.6 billion and a net income of $1.5 billion. Not to mention, ASML is very profitable, earning a 38% return on invested capital in the trailing twelve months. ASML provided strong guidance of 10% revenue growth in 2022 and net sales ranging from $5.2-$5.5 billion. As one can see, the fear of recession has not slowed ASML's revenue growth. As we move to the back half of 2022, I believe ASML will prove to be a "recession-proof" company.
ASML's balance sheet is strong. As of Q2 2022, ASML reported $32.02 billion in assets with $4.5 in long-term debt. ASML's debt to asset ratio stands at a meager 0.15. While ASML's long-term liabilities totaled $4.15 billion, continued strength in revenues and operating efficiency makes this debt acceptable. ASML had roughly $5.8 billion in property, plant, and equipment. As ASML's machine production capacity rises, I expect this number to rise. Also, ASML has roughly $5.7 billion in net intangible property. As ASML's licenses and patents become more valuable due to the world's reliance on semiconductors, I expect ASML's net intangible property value to rise incrementally. Lastly, ASML's P/E ratio stands at 37 and pays a 1.4% dividend. While ASML's P/E balance seems relatively high, it is justified. In a September 2021 earnings call, ASML expects to generate annual revenues ranging from $28-$35 billion. Annual revenues of $28-$35 billion would represent a 49% increase from the 2021 annual revenue.
Due to strong current and future growth prospects, a significant market share, and the world's never-ending necessity for semiconductors, ASML's fair value comes to $810 per share.