Question:
I wanted to get your two cents on LinkedIn. Are there any Internet networks you like?
Answer:
LinkedIn Corp.(NYSE: LNKD) operates a social networking website used for professional networking. It differs from Facebook Inc. (NASDAQ: FB) in that it is a professional site and specifically targets both those looking to hire and those looking to be hired. The site allows members to post a profile of their professional expertise and accomplishments, and is a great tool for job hunting and just general networking within an industry.
It is free to join with the base membership, but they also offer other levels of membership for a fee that come with different premium features. This is one way that LinkedIn generates revenue. They also generate revenue from their hiring solutions business. Since LinkedIn manages a database of resumes, companies and recruiters will pay a lot of money for the ability search the database for potential hires. Lastly, they generate revenue from advertising on the site.
LinkedIn does not meet our strict criteria for investment, but that does not necessarily mean it is a bad investment. Of the social networking sites available out there, LinkedIn seems to have one of the more stable revenue streams, as they do not rely as heavily on advertising revenue. The company has reported decent results as of late, but there are a lot of questions surrounding the ability of social networking companies as a whole to monetize on mobile advertising as users shift from the traditional website access to mobile versions.
As far as Internet or social networks that we like, we aren’t currently recommending any, and we have a similar stance across the board. Looking at valuations of Facebook and LinkedIn in particular, social networking companies are in the growth phase, being in a fairly new industry. Because of this, these trade at extremely high P/E ratios—51 times earnings for Facebook and 689 times earnings for LinkedIn. It gets difficult to put a value on a company like LinkedIn or Facebook, as there is the question of whether they will continue to grow at the rapid pace that they have experienced over recent years. There is also a lot of hype surrounding their IPOs which can often lead to excessive valuation as we saw with the Facebook IPO.
The biggest concern that we have, and this is one that has driven Facebook shares considerably lower, is how these companies are going to be able to monetize on the shift to mobile. More and more users are accessing Facebook and LinkedIn strictly from their smart phone, which has posed a problem as the companies rely on advertising and clicks. If advertising isn’t effectively worked into these mobile platforms, social networks will likely see their revenues fall.
Question:
Now that Obama won the presidency, I’m watching certain health care and hospital stocks rise. What is your take on long-term care facilities or hospice facilities? I think with an aging population this will be a big market. What other short-term plays could there be?
Answer:
Tenet Healthcare Corporation (NYSE: THC) and Universal Health Services, Inc. (NYSE: UHS) come to mind as they are both in the business of operating acute care hospitals, behavioral health centers, surgical hospitals, diagnostic imaging centers and related health care facilities. However, many hospitals come with a lot of debt, so these certainly fall under “investor beware.”
As for short-term plays that may benefit from the new administration, you could speculate in the alternative energy field, or perhaps, temporary help. We are concerned that some small businesses will opt for part-time, temporary help rather than hire full-time employees who would qualify for health care benefits.
However, why speculate on short-term plays when you can buy a solid long-term play like Apple Inc. (NASDAQ: AAPL), which is trading cheap at 10 times earnings, pays a 2% dividend and has a 21% growth rate projected for next year?
Question:
I’m considering either STJ or MDT. They seem pretty even in price and dividend. What other insight can you give me?
Answer:
First of all, both of those companies are high quality and financially strong, but you’re right: St. Jude Medical Inc. (NYSE STJ) and Medtronic, Inc. (NYSE MDT) both have nearly identical dividend yields, and they are valued very similarly. Both pay a dividend yield of about 2.5%, and their price-to-earnings ratio are both just above 11 and they trade about 2.5 times book value.
The reason for the similarities is because St. Jude and Medtronic’s businesses are so similar in that they are both leading medical device companies. As populations around the world continue to age, demand for defibrillators, pacemakers, and other medical devices should remain robust for the foreseeable future.
With a market cap of more than $40 billion, Medtronic is the largest player in the industry, with leading positions in cardiac rhythm management, spinal, vascular, neurology, and cardiac surgery.
In September 2010, we sold our shares of Medtronic for a couple of reasons. The company had some negative product issues for a couple of years, and it resulted in weak earnings. At the time, management consistently issued weak guidance.
Medtronic has continued to struggle to meaningfully grow sales and earnings, possibly because of its size and the law of large numbers. Sales are expected to grow a paltry 0.3% this year, and longer-term, earnings are only expected to grow 6.4%.
St. Jude, on the other hand, is not nearly as big as Medtronic with a market cap that is less than a third of Medtronic’s. While heart-related devices account for about 50% of Medtronic’s sales, they account for more than 90% of St. Jude’s.
Basically, in terms of end-markets, St. Jude is a lot more concentrated, or put in other words, they’re less diversified. However, St. Jude is looking to grow sales by 4% this year, but earnings are expected to climb 10.2% over the longer term.
Since it appears St. Jude has better growth prospects and the two companies’ valuations are so similar, we vote for St. Jude in this instance. St. Jude appears to be the better value at the moment.
What concerns us is the coming 2% tax coming off of gross revenue, which is part of Obamacare. This is a considerable amount of money for an industry that cannot raise their prices. The expected increase in client base has yet to be proven. Overall, we feel health care is a dangerous place to tread right now for investments.
Question:
I know you’re fans of VF Corp. How does PVH stand up?
Answer:
We have liked and owned VF Corp. (NYSE: VFC) for about three and a half years. The Company has the following brands under its umbrella: North Face, Timberland, Nautica, Jansport, and with Wrangler and Lee jeans, it has the largest market share in jeans. Other brands include Majestic, Eastpak, Vans, 7 For All Mankind, and Smartwool.
Where VF focuses largely on apparel for the great outdoors and for both sexes, PVH Corp. (NYSE: PVH) brands are generally geared toward men and would be considered more in the dress-wear category. PVH could be helped by a recovery in the jobs market more so than VF Corp. because of their focus toward dress wear and dress shirts. PVH owns Tommy Hilfiger, Van Heusen, Arrow, IZOD, and after its acquisition of Warnaco this week, now fully owns Calvin Klein.
The company’s Tommy Hilfiger and Calvin Klein brands have benefited from robust demand, and it looks like they’ve picked up market share. Even in Europe, Tommy Hilfiger comparable sales jumped 15% in the most recent quarter from last year.
Comparing the companies side-by-side, VF has better margins, a higher dividend yield, and is slightly cheaper by a few valuation measures. On the other hand, PVH probably has better growth opportunities because of the previously mentioned recovery in the jobs market. PVH is expected to grow earnings by more than 14% whereas VF is expected to grow earning by about 12%. PVH may be a stock to consider.
At Henssler Financial we believe you should Live Ready, which includes understanding the stocks you are investing in. If you have questions regarding your family’s holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
