Yesterday, both Versace and Hawkins discussed Google (GOOG) on air with Fox Business, Versace on Money with Melissa Francis and Hawkins with Neil Cavuto. We're both wondering just what the company is thinking these days with its spending spree, which you might find surprising given our frustration over the lack of capital investing by corporates these days.
According to Bloomberg, S&P 500 companies are expected to spend about 95% of their earnings in 2014 on share buybacks and dividends while the Commerce Department estimates that the average age of fixed assets, such as plants and factories, is about 22 years old, the oldest average going back to 1956.
Aging capital reduces labor productivity, which eventually cuts into the bottom line, but so far companies seem to prefer financial engineering to investing in the future growth of their businesses. While it probably means we will one day be in for a major capital spending and business investment cycle, we'd argue that such a boom is not likely until we see the corporate tax code overhauled and more tax-friendly repatriation of offshore cash.
That said, perhaps returning cash to shareholders is a better choice than Google's investment in robotics, a 60-year lease on NASA's massive Moffett Airfield and an enormous accumulation of corporate real estate, through acquisitions and leases, including 1.9 million square feet in Sunnyvale and 934,000 square feet in Redwood City, Calif., often picking up new digs before it even gets to occupy the last footage.
We aren't exactly clear how spending on robots or owning/leasing an empire of empty buildings is going to help the company's core search and advertising business or otherwise generate shareholder value. Perhaps Google is looking to emulate Amazon's (AMZN) increasingly controversial venture capitalist-style research and development. Our collective antennae are up when we see companies straying from their core businesses in ways that are not obvious value generators. This is in contrast to Apple (AAPL), which we believe has done an excellent job of staying focused on the type of innovation that will deliver long-term shareholder value.
Maybe the rather heady performance of many tech sector stocks is reigniting some of Google's hubris from the past and has executives drinking a tad too much of their own Kool-Aid. However, if these wild adventures don't generate incremental return on investment, it's the shareholder's that will be left holding the bag.
Meanwhile, companies in the S&P 500 aren't the only ones making due with what they've got. Consumer spending is still well below its historical norms, as the chart below illustrates. Growth in personal consumption expenditures is still far below historical norms, having peaked in the late 1990s. This is intuitive given that, according to the Census Bureau's September 2014 release of its annual report on "Income and Poverty in the United States," median household income in 2013 was just $51,939, still 8% below the 2007 levels, and 8.7% below the peak level in 1999 at $56,895.
With that in mind we'll be looking closely this Friday at the Advance Monthly Sales for Retail and Food Services from the U.S. Census Bureau to see if falling prices at the pump translated into an increase in spending, or if instead consumers added to their rather skinny piggy banks. If the money saved at the pump does translate into additional spending, and you think that the higher-end has taken a sufficient beating, companies such as Coach (COH), Michael Kors (KORS) or Blue Nile (NILE) may benefit. But given that Macy's (M) reported a worse-than-expected same-store sales comp and cut guidance, we're not holding our breath that "Joe Consumer" is getting ready to spend like a drunken sailor.
Most stocks are priced rather rich these days, particularly given the melt up over the last few weeks, so our tack has been to look for ones that have been struggling, but have solid fundamentals.
Coach is currently trading below its 50-day and 200-day moving averages. It has an attractive dividend yield of about 4%, and is currently trading at a discount relative to both its five-year average price-to-earnings ratio and three-year price-to-sales ratio. Its P/E ratio is also well below the industry average.
Michael Kors is now trading over 30% below its highs, but has strong fundamentals with a very healthy balance sheet, an impressive gross margin of 61%, and over 40% revenue and EPS growth in the most recently reported quarter. The company has also announced a share repurchase plan, (nice to see a fashion company keeping up with the fashion), which will enhance EPS.
If you'd rather stick with the cash-strapped-consumer-discount-retailer theme, falling oil prices combined with an appreciating dollar may make Wal-Mart (WMT), which is set to report tomorrow, an interesting play beyond the holiday season. Wal-Mart sources much of its goods either directly or indirectly from international suppliers, while over two-thirds of its sales are domestic. All else being equal, an appreciating dollar would improve margins. Falling oil prices will also help reduce transportation costs, again, improving margins.
Costco (COST), TJX Companies (TJX), which owns T.J. Maxx, Marshalls and HomeGoods, as well as Ross Stores (ROST) are also stocks to look at this holiday season.