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Thursday, 8 February 2007
Alcon (ACL)

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisors prior to making any investment decisions based on information on this website.

I was looking through the list of top % gainers on the NYSE this evening and came across Alcon, ACL, which closed at $129.77, up $9.02 or 7.47% on the day.  I do not own any shares of Alcon, but my son does own 5 shares in an account that I monitor.  I believe this company deserves a spot on my blog so let me go over a few of the points that I think justifies its inclusion here.

What exactly does this company do?

According to the Yahoo "Profile" on Alcon, the company

"...engages in the development, manufacture, and marketing of pharmaceuticals, surgical equipment and devices, and consumer eye care products to treat diseases and disorders of the eye. Its pharmaceutical products include a line of products to treat glaucoma; anti-infectives, anti-inflammatories, and combination therapies to treat bacterial, viral, and fungal infections of the eye, as well as to control ocular inflammation; products for the treatment of ocular allergies; and generic ophthalmic products and otic pharmaceuticals."

How did they do in the latest quarter?

Yesterday, after the close of trading, the company announced 4th quarter 2006 results.  It was this announcement of strong earnings that drove the stock higher today.  Sales for the quarter ended December 31, 2006, climbed 16.1% to $1.22 billion, from $1.05 billion in the same quarter in 2005.  Even accounting for the positive effects of currency exchange rates, sales grew a strong 13.5%.  Net earnings for the quarter came in at $354.7 million or $1.16/diluted share up from $60.7 million or $.19/diluted share last year.  (Adjusting for one time items, net earnings in the 4th quarter 2005 would have been $257.9 million or $.83/diluted share, with a resultant 39.8% increase in earnings/share with the adjusted figure!)

The company beat expectations of $1.03/share according to Thomson Financial, on revenue of $1.2 billion. The company also raised guidance for the upcoming year with 2007 per-share earnings of $5.10 to $5.20 on revenue of $5.45 billion expected.  Analysts had been expecting earnings of $4.93/share on revenue of $5.34 billion.  This was a very strong quarterly report for Alcon!

What about longer-term financial results?

Reviewing the Morningstar.com "5-Yr Restated" financials,  we can see the steady increase in revenue from $2.7 billion in 2001 to $4.37 billion in 2005.  With the latest quarter, 2006 revenues came in at $4.90 billion.

Earnings were reported at $1.92/share in 2003 with $2.98/share reported in 2005.   With the latest quarter, earnings for 2006 totaled $4.37/share.

The company paid $.36/share in dividends in 2004, increased it to $.99/share in 2005, and $1.36/share in 2006.

The number of shares outstanding has been very stable with 309 million in 2003 decreasing to 306 million by 2005.  The company is reducing this number further with 302.29 million shares reported on Yahoo.  

Free cash flow increased from $758 million in 2003 to $1.07 billion in 2005. 

The balance sheet on Morningstar.com shows $1.8 billion in cash, $1.4 billion in other current assets, easily covering the $2.3 billion in current liabilities as well as the $394 million in long-term liabilities combined.  The current ratio works out to a 'healthy' 1.43.

How about some valuation numbers on Alcon?

Reviewing Yahoo "Key Statistics" on ACL, we find that this is a large cap stock with a market capitalization of $39.23 billion.  The trailing p/e is a bit rich at 38.20 with a forward p/e of 26.32.  Yahoo doesn't list a PEG ratio.

According to the Fidelity.com eresearch website, the 5 Year PEG is estimated at 1.57, below the industry average of 1.94.  IMHO, PEG's between 1.0 and 1.5 are reasonably valued, and a PEG of 1.57 is acceptable.

Fidelity also shows Alcon with a Price/Sales (TTM) of 7.50, well below the industry average of 21.26, again suggesting reasonable valuation.  The company is also quite profitable with a Return on Equity (ROE) (TTM) of 47.94 per Fidelity, compared to an 'industry average' of 34.10%.  Again suggesting that the company is more profitable than average as well as being relatively 'cheaper' than average compared to similar companies.

Finishing up with Yahoo, we can see that while there are 302.29 million shares outstanding only 75.18 million float.  Of these, 1.89 million are out short as of 1/9/07, representing 4 trading days of volume (the short ratio).  With today's sharp rise on an otherwise down day in the market, this bit of a significant short interest may well have been 'squeezed' as short-sellers were likely scrambling to cover their bets by buying shares to close out their positions.  Now that is just speculation on my part, but a sharp rise after posting good news may well be evidence of a squeeze.  

As noted, the company is paying a forward dividend of $1.36 yielding 1.10%.  No stock splits are reported on Yahoo.

What does the chart look like?

Looking at the "Point & Figure" chart on Alcon from StockCharts.com,  we can see how the stock which was trading between $63 and $85 during much of 2004, broke out strongly higher in 2005 to a high of $146 in October, 2005.  The stock traded lower throughout much of 2006, hitting a low of $91 in July, 2006, only to turn higher once more, breaking through resistance at $116, and now pushing towards the $130 level.  Overall, the stock looks strong to me without being overextended.

Summary: What do I think about this stock?

Taking into consideration my son's small investment in this stock, I have a small bias towards the stock.  However, seriously, the stock traded nicely today in an otherwise weak market.  The latest quarterly report did everything an investor could wish in a report: they reported increased revenue and earnings, beat expectations on both, and raised guidance on both!  Longer-term, they have been reporting strong results for the past 3-4 years, pay a dividend and have been increasing the dividend, reporting increasing free cash flow, and they are even retiring shares enhancing shareholder equity.  Finally the balance sheet is strong.

Value-wise, the p/e is a bit rich but with a PEG just over 1.5, it isn't really that bad.  The Price/Sales is lower than the average for the industry, while their profitability as measured by ROE is higher.  In conclusion, even the chart looks promising as the stock moves towards historic highs.

I like this stock!  Only wish it was a bit cheaper.  But then again, it isn't the price/share that counts, it is the quality underlying that stock certificate and Alcon fits the bill!

Thanks so much for stopping by and visiting!  If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Stock Picks Podcast Website where you can download mp3's of me discussing many of the same stocks I write about here on the blog!

Bob

 


Posted by bobsadviceforstocks at 9:10 PM CST | Post Comment | Permalink
Updated: Thursday, 8 February 2007 9:11 PM CST

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