Reuters Insider - Facebook Stock Is Still Undervalued
22/08/2016 22:50
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Description: Barron's Bounce: Yes, Facebook shares have been on
tear, up 600% from their 2012 low. But earnings
have accelerated faster. Plus: why Mattel and the
Atlanta Braves are buys.
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Transcript (May be auto-generated)
Facebook has been leading the market higher and we think it can keep on going.
I'm Jack Otter, Editor of Barrons.com. I'm here with Jack Hough, Senior Editor
with the magazine. Let's get the bad news out of the way first, okay? We got to
say this: Barron's made a bad call on Facebook early on and we admit it. But
you've been positive on the stock and the numbers in your story this week were
really interesting. You think it's going to be a crazy valuation but it's not.
Right, it's not so crazy. We did write something that was a skeptical and put on
the cover and now it's about four years ago and it has not gone our way. When
you look at the stock, it's had a tremendous run since then. But really, the
earnings have quickly multiplies. The cash flow has quickly multiplied. This
company is very prosperous. And like a lot of dotcom companies, it's very
scalable. So from here you increased the revenues quickly without much added
cost. I mean, the price-to-earnings ratio, if you like, it's not really that far
above what investors are paying right now for some of these consumer staples
companies- the companies that make breakfast cereal or sell cigarettes that have
big dividend yields. So it's much more- So this number- this 25 times 2017
estimates- now that is not gap estimates.
Right, it doesn't include the stock compensation we pointed out in our original
story that you have you factor that in. But, look, you don't increase the stock
compensation at the same pace that you're growing the revenues at this point. So
when you look ahead four, five years down the road, you're still paying about
the same level of stock compensation but you really blown out revenue, blown out
profits. I think you reach a point by the end of this decade where Facebook
generates as much free cash as Microsoft, which is about $25 billion, $26
billion. Wow.
And so I think the stock price is not crazy, in fact, I think it can move higher
from here. I made the case for more than a 20% gain over the next year and I
think that's what analysts are looking for and I think it's entirely feasible.
And the stock is up about 0.75 percentage point on your story, and we're not
saying this just because we'll all be working for Facebook someday, because
they'll own media. Right. Let's move onto Barbie. Yes. You have been really good
on this stock. You said that Mattel was overpriced, and it went down. Right.
And then when it hit about, what, $20, you got positive on the stock. And put it
like maybe $35-ish- I forget exactly. I think it went down about, I mean, the
low $20s. Then we turned favorable on them because we really like the price. We
really like that they were sticking with the dividend and they brought in new
leadership, and we really like what they were hearing. I always like when you
get a company that's made some missteps and the company is very frank about
them- they have a clear plan on what to do. And, look, Mattel had a number of
toy lines that weren't working well, and the new brass said: "We haven't been
innovative enough lately. We haven't kept it fresh. And we're going to do that.
We've got a plan to do that." They brought back a guy who had a lot of increase
in Barbie sales in years past, and he's back on the team now. So, look, they
tried this Hello Barbie- it's like a talking Barbie that talks back. It didn't
really work, but they're trying new things. Then they came out with this line
called Fashionistas. Now, here you've got diverse skin tones, hair types, body
types- Wow, that's a big move for Barbie. It addresses a lot of the challenges-
a lot of the complaints that basically parents had made. Parents are saying:
"Look, I don't want to buy this outdated toy for my child that has this image of
just we're shopaholic- whatever." Suddenly, now there's new Barbie movie out.
They're moving the direction that parents want. Barbie has a personality and she
does new things- she's into space adventures and- suddenly she's doing things
that are important, she looks different.
It's all fresh. They've done better things with a number of the other toy lines
too- the children toy: Fisher-Price and so on. So sales were up big. I see no
reason to sell the stock here, especially because there's a bad cycle happens in
the way down where you lose sales then you begin to lose shelf space. That cycle
begins to go in reverse. Now, it's just sales start surging- suddenly the toy
stores want more of your toys on their shelves. I think it can continue for a
while longer. It could be a good holiday season for Mattel. And finally, this is
a really interesting story. Andrew Barry writes that people ought to consider
buying the tracking stock for the Atlanta Braves. Yeah. As a Mets fan, I have
not been crying very hard about the Braves' miserable performance, but of course
as value investor, that's when you buy the stock. Yeah, I mean, he thinks that
you can get a higher stock price. There's an
atrocious record here with the- Oh, it's bad. And I can say that with a smile,
yeah. Worst of baseball- but they're getting a new stadium, right? Tell me if
I've got this right. You get the new stadium, you pack it full of more VIP seats
which bring in more money, and you sell more concessions- I presume that you're
selling these people posh stuff with higher margins. They're not just going in
there and eating Cracker Jacks- Waitress, service- the whole thing. Right. So
you boost your sales, you get some naming rights on the new stadium from
SunTrust I think here. And so all this brings in more cash, and maybe the team
is worth more money before you've even improved the record. That's the argument
here. And of course, if they start playing better baseball, you could have even
more upside. These things tend to be more cyclical. So when the Braves win the
World Series, you sell the stock. Okay, we'll see. Thanks, Jack. Thank you