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Published: November 19, 2009
The most valued company in the United
States? If you guess Coca-Cola (NYSE: KO) or
ExxonMobil (NYSE: XOM) or Berkshire Hathaway (NYSE:
BRK-A), you're way off. Hint: This company been around since
1851 and does business in nearly every town in the world.
Another hint: A band called The Five Americans made it the
subject of a hit song in 1967.
The biggest company in the United States by revenue, earnings
and market cap is ExxonMobil. But even Exxon's No. 1 position in
the petroleum world doesn't make it the most valued business in
the United States.
That honor belongs, believe it or not, to Western Union Co.
(NYSE: WU). Though the company's market cap is only equal to
about two weeks of Exxon's revenue, its underlying
financial-services business -- the one that helps people send
cash around the world -- is valued more richly than Exxon's oil
exploration and production activities, lucrative though they
are.
In this case, "richly" is determined by calculating net asset
value and comparing it with market capitalization. That might
sound complicated, but it's not. Here's how it works out in
three easy steps.
1) Add up the company's assets -- anything that has value.
2) Subtract every debt. The resulting net asset value is known
as "shareholder equity." You'll find shareholder equity on every
balance sheet in the world. It's the part of the company that
belongs to the owners free and clear, just like the equity in
your house.
3) Divide market cap by shareholder equity. If the number is 1.0
or less, investors can buy the company for less than the value
of the company's net assets. Anything above 1.0 is the value of
the company's underlying business. It’s the premium investors
pay to own the future of a retail store, the oil business, or
the soft-drink industry -- whatever the sector.
In most cases, companies trade at a multiple of book value.
That makes sense, of course, as a company certainly should be
worth far more than merely the value of its headquarters, desks
and inventories. The S&P 500 index, in fact, trades at an
aggregate 2.21 times book value. In other words, if you take the
average company in the S&P and multiply its book value by 2.21,
you'll get its market cap.
Western Union trades at 41 times the value of its net assets.
Which brings us to an important point: There are lies, damned
lies, and statistics. The only reason Western Union trades at
such a steep premium is that it has almost no shareholder
equity. Its balance sheet shows $6.2 billion in assets but only
$327 million in equity. As things stand, Western Union's market
cap is currently about $13 billion.
The question, of course, is why Western Union's market value
hasn't fallen. If it were an "average" S&P company, after all,
it would be trading at 2.21 times its equity, or $722 million,
not even enough to merit it a spot on the benchmark index.
The answer is that investors are humans, not computers, and the
market is not an efficient or accurate processor of information.
Western Union's price didn't fall because investors really do
place a high value on its business, which it will use to boost
its balance sheet by either growing its assets or reducing its
debt, or both. When that happens, its price-to-book ratio will
happily regress to the mean.
Here is the list of the most valuable U.S. businesses. This
screen omits companies worth less than $10 billion. Except for
Amazon (Nasdaq: AMZN), UPS (NYSE: UPS),
Southern Copper (NYSE: PCU) and perhaps IBM (NYSE: IBM),
these are all defensive, countercyclical companies that will
have customers in nearly any economic climate.
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Are these stocks good investments? I'd be a proud owner of
any of these shares except Lockheed Martin (NYSE: LMT).
All but Lockheed have seen a positive return year-to-date, and
65% of these companies have beaten the S&P so far this year.
The biggest winners have been Amazon, +156%, and Southern
Copper, +124%. Amazon and Southern Copper trade at not only a
rich premium to book but also at a steep P/E ratio: AMZN sells
for 76 times earnings, Southern Copper for 65. That strikes me
as far too rich, given tepid demand for both copper and the
prospects for the upcoming holiday shopping season, which is
expected to underwhelm.
Of the companies with a positive return for the year, the best
values, that is, the lowest earnings multiples, are Altria
(NYSE: MO) (11), IBM (13) and Lorillard (NYSE: LO)
(13).
Western Union -- whose price/book is likely to fall -- is
attractively valued at only 14.4 times earnings. Western Union's
assets may be worth a pricey 18.4 times the S&P's net asset
value, but WU's earnings can be had at a -34.5% discount to the
index.
Companies with good businesses command a high book value. When
those companies can be purchased at a fair price, it's a good
profit opportunity for long-term investors.
So with that in mind, can you guess which of the companies
mentioned in the introduction have the highest price-to-book
ratio?
Times are never too tough for a Coke. So if you said Coca-Cola,
you're right.
(Coca-Cola, 5.5, Berkshire, 1.3, Exxon, 3.3)
So have a Coke and a smile and enjoy
this oldie.
Andy Obermueller
Chief Investment Strategist
Government-Driven Investing
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