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Barron's Actually Nailed This One

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January 12, 2011 – Comments (11) | RELATED TICKERS: ITT

After digging out of the snow here in the Northeast this morning, I clicked on my CAPS portfolio to see that ITT's shares exploded to the upside. This is actually one that Barron's got right. Back in September it had an article about how ITT's stock is undervalued on the sum of its parts basis. Here's what I said about the company at the time:

With the wars, or at least the combat operations for the war in Iraq winding down (hopefully), and major budget deficits, defense stocks have been beaten up pretty badly lately.

One that's starting to look really attractive on a sum-of-the-parts basis is ITT Corp (ITT). This week's Barron's contains a positive write-up on the company.

ITT is not just a one-trick defense company. It derives nearly a third of its revenue from Fluid Technologies and another 12% from Motion and Flow Control operations.

Both of these divisions have been reporting solid growth. If one values them at 10 to 11 times EBIT their combined value comes in at $7.5 to $8 billion versus an enterprise value of $9.3 billion for all of ITT.

If one assumes that the above valuations are reasonable, ITT's defense business is only being valued at $1.8 billion. That's pretty cheap for a company that's expected to report $650 to $730 million in EBIT in 2010. If one was to apply a conservative multiple of 6 to 7 times EBIT for the defense business it would be worth $4 billion to $5 billion.

The Barron's article pegs ITT's fair value per share at $55 to $60.

There's a lot of assumptions about future earnings and what multiple people are going to be willing to pay for them going on here, but the bottom line is that ITT is still a quality company that pays a dividend that's trading for a fairly cheap price after its recent drop.


With today's huge pop, ITT is now sitting at the high end of where the author of that article pegged its value several months ago. I'm staying long the company in CAPS however because I think that there's more upside. This will be a really cool situation. Too bad I was only in thias one in CAPS and not real life before today's huge gain.

Deej

11 Comments – Post Your Own

#1) On January 12, 2011 at 8:52 PM, anchak (99.85) wrote:

Froget Barrons - the guy WHO GOT IT RIGHT FIRST - was Hans - ie porte - he recommended the stock to me in May 2009 - and then again in Dec 2009 - when they had a bump -to look at their balance sheet - which looked a hotch potch - but the revenue story was there - and then I concluded that ITT possibly was better as independent divisions - and looks like that's what will end up happening.

 

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#2) On January 12, 2011 at 9:08 PM, TMFAleph1 (94.93) wrote:

With the exception of Grant's Interest Rate Observer (which is much more expensive) and a couple of smaller, more specialized newsletters, Barron's is the finest financial publication in the U.S.

Alex Dumortier

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#3) On January 12, 2011 at 11:51 PM, JakilaTheHun (99.94) wrote:

I'd actually agree with MarathonMan.  Barron's has a fairly good track record on equity research.  Even with I disagree with them, I have respect for their very detailed viewpoints and analysis.

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#4) On January 13, 2011 at 1:42 AM, jgknot (30.99) wrote:

Mman & J the hun,

Are you kidding me..god they suck..

their performance suck for 2010, they got the 2010 totally wrong, they were more bearish in 2010, hence made conservative bull picks and all the monsters as bearish.. and they got their a** kicked.

ofcourse they have to give detailed viewpoints, what are they..jgknot.. to skip pitches. they are a financial publication for godsake..

timing was everything is this game and they blew it.. 

 

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#5) On January 13, 2011 at 8:05 PM, TMFAleph1 (94.93) wrote:

@jqknot,

Sounds to me like you're confusing process and results.

Alex Dumortier

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#6) On January 13, 2011 at 9:30 PM, TMFAleph1 (94.93) wrote:

@jqknot

I should have written that you're confusing process and outcome.

Alex Dumortier

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#7) On January 13, 2011 at 11:13 PM, jgknot (30.99) wrote:

@TMF MMan 

anybody can process anything anyway they want..sure..

well then pls explain why you have some exceptions,

what. they don't process in those exceptions of yours...

 

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#8) On January 13, 2011 at 11:53 PM, TMFAleph1 (94.93) wrote:

@jqknot,

Read this and meditate on it:

More Than You Know - Ch. 1, Michael Mauboussin

Alex Dumortier

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#9) On January 14, 2011 at 2:34 AM, jgknot (30.99) wrote:

@Marathonman 

Thanks for the link. Nice read.

ok lets take it slow this time.. 

Lets be clear, i never said process doesn't matter. was it good or bad was the question. As we see in the matrix, bad process producing bad outcome is poetic justice.

Either in the shortterm or long run or both, at some time outcome does matter, otherwise we don't know our process was good or bad..and we repeat our processes many times over to make sure the probability of the outcome is good or better.

Of course in this world or universe of ours, there are a great deal of things happening..and we study , we learn , and we process things and still we don't even know a lot outcomes yet, iam totally aware of that and lets not go there..

lets just stick to the stock picking for now, 

Despite the uncertain business of financials we are in , we still need to act.

And barrons being a leader in financial publication, and with their experts should have done the process iteration over and over by now.

With that i expect them to deliver  

i love to look at everyone with a positive prism, but the truth is you are judged by your results which is a direct outcome of how you processed your data.

that link/study is good for academics and may be to mega crisis like the depression, energy crisis, war & attacks. 

Please don't say we are in a crisis right now, then there is no time, there is something going on all the time. So lets consider the current events minor and Barrons know that and they said they will deliver it anyway for a fee, so better deliver is what iam saying, with a little precision. 

Ofcourse, Uncertainty is for Certain, as it never happened yet. But as analyst they say they can predict , iam i asking too much out of them to do their job.

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#10) On January 14, 2011 at 2:10 PM, jgknot (30.99) wrote:

am i asking too much

 

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#11) On January 14, 2011 at 3:21 PM, TMFAleph1 (94.93) wrote:

Over a 1-year timeframe, yes!

Alex Dumortier

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