Challenges to 15 by 15 Alan Brochstein August 1, 2009.

Challenges to “15 by 15”

Alan Brochstein

August 1, 2009

AB Analytical Services 2

What Kind of Recovery?

W U

V L

J


Typically, a “U” or a “V”StockVal®

77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

GROSS DOMESTIC PRODUCT-REAL ($BIL) YTY % CHANGE-2

-1

0

1

2

3

4

5

6

7

8

HI 8.5 LO -2.7 ME 3.1 CU -2.5

09-30-197903-31-2009


GDP – The Long ViewStockVal®

45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

GROSS DOMESTIC PRODUCT ($BIL)200

500

1500

5000

14500 HI 14412.8 LO 244.6 ME 2275.6 CU 14097.2 GR 6.8%

09-30-194703-31-2009

GROSS DOMESTIC PRODUCT ($BIL) YTY % CHANGE-6

0

6

12

18HI 19.5 LO -3.6 ME 6.4 CU -0.4

03-31-194803-31-2009

GROSS DOMESTIC PRODUCT-REAL ($BIL)1000

20003000

6000

12000 HI 11727.4 LO 1568.0 ME 5021.0 CU 11360.5 GR 3.3%

09-30-194703-31-2009

GROSS DOMESTIC PRODUCT-REAL ($BIL) YTY % CHANGE-4

0

4

8

12HI 13.4 LO -3.0 ME 3.3 CU -2.5

03-31-194803-31-2009


The Case for “L”

• This time is different (careful!)

• Deleveraging will continue– Consumers– Banks/REITs/Corporations– Eventually Government (Taxes)

• Exports and deficit spending could offset


Unemployment: Here to StayStockVal®

45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

UNEMPLOYMENT RATE,SA (%)0

3

6

9

12HI 10.80 LO 2.50 ME 5.50 CU 9.50 GR 1.7%

01-31-194806-30-2009

UNEMPLOYMENT DURATION-WEEKS,SA6

8

12

18

26HI 24.50 LO 7.10 ME 13.45 CU 24.50 GR 1.7%

01-31-194806-30-2009

EARNINGS-AVERAGE HOURLY,SA ($) YTY % CHANGE0

3

6

9HI 9.4 LO 1.5 ME 3.9 CU 2.7

01-31-196506-30-2009

MFG WORKERS-AVG WEEKLY HOURS,SA36

38

40

42HI 42.00 LO 37.30 ME 40.60 CU 39.50 GR 0.0%

07-31-194706-30-2009


Consumer Spending: Rare DeclineStockVal®

58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

GROSS DOMESTIC PRODUCT ($BIL) YTY % CHANGE0

3

6

9

12

15

HI 14.6 LO -0.4 ME 6.5 CU -0.4

09-30-195903-31-2009

PERSONAL INCOME,SAAR ($BIL) YTY % CHANGE0

3

6

9

12

15

HI 14.3 LO 0.1 ME 6.9 CU 0.3

01-31-196005-31-2009

PERSONAL CONSUMPTION EXP,SAAR ($BIL) YTY % CHANGE0

3

6

9

12

15

HI 13.6 LO -1.8 ME 6.9 CU -1.8

01-31-196005-31-2009


Housing: Bust to Boom?StockVal®

58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

HOUSING STARTS,SAAR (TH)0

625

1250

1875

2500 HI 2494.0 LO 479.0 ME 1517.0 CU 582.0 GR -1.9%

07-31-195906-30-2009

HOUSING STARTS,SAAR (TH) YTY % CHANGE-60

-30

0

30

60HI 96.2 LO -54.9 ME 0.0 CU -46.0

07-31-195906-30-2009

NEW ONE FAMILY HOMES SOLD,SAAR (TH)300

400

600

1000

1400HI 1389.00 LO 329.00 ME 652.00 CU 384.00 GR -0.9%

01-31-196306-30-2009

NEW ONE FAMILY HOMES SOLD,SAAR (TH) YTY % CHANGE-60

-30

0

30

60HI 88.2 LO -50.5 ME 1.0 CU -21.3

01-31-196406-30-2009


New Cycle of Saving?StockVal®

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

PERSONAL SAVINGS RATE (%)-1

0

1

2

3

4

5

6

7

8

9

10

11

12

13

HI 12.50 LO -0.70 ME 8.00 CU 4.30 GR -0.3%

09-30-195103-31-2009


Money Supply: Liquidity AboundsStockVal®

77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

M2 MONEY SUPPLY,SA ($BIL)1500

1800

2200

2700

3200

3900

4700

5700

6900

8400

HI 8385.4 LO 1596.6 ME 3506.1 CU 8354.2 GR 6.0%

01-09-198107-17-2009

M2 MONEY SUPPLY,SA ($BIL) YTY % CHANGE0

2

4

6

8

10

12

HI 13.0 LO 0.1 ME 5.8 CU 8.7

01-08-198207-17-2009


Government Getting SqueezedStockVal®

45 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

FEDERAL GOVT EXPENDITURES ($BIL)30

100

300

1000

3300 HI 3205.8 LO 35.8 ME 442.6 CU 3205.8 GR 7.4%

09-30-194703-31-2009

FEDERAL GOVT RECEIPTS ($BIL)30

100

300

900

2700 HI 2679.2 LO 36.2 ME 417.1 CU 2377.6 GR 6.8%

09-30-194703-31-2009

FEDERAL GOVT EXPENDITURES ($BIL) YTY % CHANGE-8

0

8

16

24HI 44.9 LO -12.8 ME 6.8 CU 6.7

03-31-194803-31-2009

FEDERAL GOVT RECEIPTS ($BIL) YTY % CHANGE-20

0

20

40HI 56.1 LO -12.6 ME 7.3 CU -11.0

03-31-194803-31-2009


Will Interest Rates Stay Low?StockVal®

50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

FEDERAL GOVT BUDGET DEFICIT ($BIL)-834

-714

-595

-476

-357

-238

-119

0

119

238

HI 212.70 LO -828.20 ME -30.60 CU -828.20 GR NMN

09-30-195103-31-2009

US TREASURY BOND 10 YR (%)2

3

4

6

8

11

16

HI 15.68 LO 2.13 ME 6.52 CU 3.70 GR -0.2%

01-05-196207-24-2009


Exports: Recovery LikelyStockVal®

73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

EXPORTS-TOTAL ($BIL) YTY % CHANGE-16

-8

0

8

16

24

32

HI 34.0 LO -22.1 ME 9.2 CU -22.1

09-30-197403-31-2009

EXPORTS-GOODS ($BIL) YTY % CHANGE-16

-8

0

8

16

24

32

HI 36.1 LO -21.0 ME 7.9 CU -21.0

09-30-197403-31-2009

EXPORTS-SERVICES ($BIL) YTY % CHANGE-6

0

6

12

18

24

30

HI 26.2 LO -11.3 ME 10.6 CU -7.2

09-30-197403-31-2009


Stocks Rebound from Hell

• 666 intraday low represented 49% y-o-y decline

• 50% rally leaves stocks down 20% y-o-y

2006 2007 2008 2009

S&P 500 INDEX WITH REPORTED EPS (SP5)PRICE 982.18 DATE 07-27-2009PRICE 982.18 DATE 07-27-2009StockVal®

660660

720720760760

820820

880880

960960

10201020

11001100

12001200

12801280

13801380

14801480

1600

1720

1860

50

150

PRICE / SALES0.60.6

0.80.8

1.01.0

1.21.2

1.41.4

1.61.6


Stocks: The Long ViewStockVal®

26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22

S&P 500 INDEX4

8

16

28

56

112

216

424

824

1600

HI 1561.80 LO 4.41 ME 90.60 CU 979.26 GR 4.5%

07-19-192907-24-2009

S&P 500 INDEX YTY % CHANGE-44

-33

-22

-11

0

11

22

33

44

55

HI 100.0 +LO -70.0 ME 7.9 CU -22.1

07-19-192907-24-2009


Valuing Stocks

• Key elements – Interest Rates and Earnings

• Interest Rates: Corporate Bonds not Treasuries

• Earnings: Sales & Margins


Treasuries Low, Spreads HighStockVal®

58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

SPREAD-CORP BAA / US T-BOND 10 YR0

2

4

6

8

HI 6.19 LO 0.17 ME 1.82 CU 3.41 GR 2.4%

01-05-196207-24-2009

SPREAD-HI YIELD CORP / US T-BOND 10 YR0

4

8

12

16

20

HI 19.89 LO 2.32 ME 4.73 CU 8.63 GR 9.0%

01-03-199707-24-2009

US TREASURY BOND 10 YR (%)2

3

4

6

8

11

16

HI 15.68 LO 2.13 ME 6.52 CU 3.70 GR -0.2%

01-05-196207-24-2009


Margins Depressed, Valuations Fair

StockVal®S&P 500 INDEX WITH OPERATING EPS (SPX) Price 982.181993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

PRE-TAX MARGIN %3

6

9

12

15HI 13.0 LO 4.3 ME 10.3 CU 4.3

09-30-199412-31-2008

ENTERPRISE VALUE/SALES1.0

1.5

2.0

2.5

3.0HI 2.9 LO 1.2 ME 2.1 CU 1.4

07-22-199407-27-2009

ENTERPRISE VALUE/EBITDA6

9

12

15HI 14.6 LO 7.6 ME 11.1 CU 11.1

07-22-199407-27-2009

PRICE / YR-FORWARD EPS ESTS10

15

20

25

30HI 27.1 LO 10.4 ME 16.4 CU 15.7

12-03-199907-27-2009


Dow 15K in 2015

• 10% annual return

• Will require earnings growth– Revenues?– Margins?

• Headwinds:– Rates won’t help– Dilution from deleveraging


Stacking the Deck

• Go Conservative Financials– Avoid Dilution– Avoid Higher Interest Expense– Avoid Double-Dip Dunk

• Go Small– Nimble– Better Balance Sheets

• Go Overseas


Example

• National Instruments

• $2bln market cap

• $250mm cash/no debt

• Well managed• Growing International

• Downside Protection

SHOULD THE PE BE “HIGH” OR “LOW”?

StockVal®NATIONAL INSTRUMENTS CORP (NATI) Price 26.231999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20101999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

PRICE10

15

20

30

40HI 38LO 13ME 27CU 26GR 2.7%

07-23-199907-27-2009

NET PROFIT MARGIN ADJUSTED %6

9

12

15HI 14.1 LO 6.5 ME 10.5 CU 6.5

09-30-199906-30-2009

PRICE / SALES0

3

6

9HI 8.54 LO 1.59 ME 4.35 CU 2.83

07-23-199907-27-2009

PRICE / YR-FORWARD EPS ESTS10

20

30

40

50HI 50.0 LO 13.4 ME 31.6 CU 37.6

07-23-199907-27-2009


Conclusions

• Economy likely to remain challenging (L)

• Good things in small packages

• Financial leverage is ugly

• Focus on companies exposed to exports

• Bonds may offer more value than Stocks

• Buy and Hold won’t likely work

Challenges to 15 by 15 Alan Brochstein August 1, 2009.

Documents

ab analytical services20

ab analytical services5

ab analytical services12

ab analytical services3

y slide

high slide

deleveraging slide

squeezed slide