Alibaba, IBM, Capital One, American Express: Doug Kass' Views

NEW YORK (Real Money Pro) -- Doug Kass shares his views every day on RealMoneyPro. Click here for a real-time look at his insights and musings.

 


 

Why I'm Not Big on Big Blue

Originally published at 11:05 A.M. EDT on Wednesday, June 10, 2015

IBM (IBM) had a conference call yesterday that focused on its security business.

The company noted that the sector has a large target market -- in excess of $50 billion, with double-digit trendline growth -- but is fragmented and complex to penetrate. (IBM recorded less than $2 billion in security-business sales last year.)

My view: IBM's growth initiatives and tailwinds from markets such as security are fine, but measurably offset by Big Blue's weakening sales and margins in its legacy businesses.

 


 

From the Street of Dreams

Originally published at 10:56 A.M. EDT on Wednesday, June 10, 2015

RBC is lowering revenue and EPS estimates for Alibaba Group  (BABA) following management's conference presentation this week.

The company faces several headwinds, including suspension of its Online Lottery sales and a lowering of fees related to its group-buying platform.

RBC is cutting its BABA price target to $105 from $110.

Position: Long YHOO

 

Barron's Right on Card Companies

Originally published at 2:59 P.M. EDT on Wednesday, June 10, 2015:

Yesterday, Barron's Online published an article highlighting the investment merits of credit card companies Capital One  (COF) and MasterCard  (MA). We agree and would add American Express  (AXP) to the list. Matrix owns both COF and AXP for our clients.

As Barron's notes, the industry is attractive because it has good growth characteristics in the near term as the economy improves, and long-term growth potential as non-cash payments are growing globally as a percentage of transactions. Currently, 85% of transactions globally are in cash, leaving lots of runway growth for gains in credit card transaction market share. The increasing popularity of mobile transactions will be a further accelerant to credit card transaction growth. All credit card companies are benefiting from the improved consumer finances and near-record low default rates.

Capital One is an industry leader and trades at an unwarranted large discount to the group, in our opinion. After years of flat top-line growth due to its decision to let some older purchased credit card portfolios run off, the company's loan book is growing again and the stock is very attractive at less than 11x estimated earnings. As Barron's discusses, the company's strong financial position "paved the way for a 33% dividend increase" after passing the latest Federal Reserve stress test.

MasterCard has long been regarded as a premier business with a top management team. The company has an A+ balance sheet, and while not a bargain at 23x forward earnings, the business model requires low reinvestment and produces a lot of cash. Two potential catalysts for earnings growth and stock appreciation that Barron's highlighted are an improving European economy where MasterCard has been growing volume at a double-digit rate and China's opening its market to non-China based competition in the next few years.

Finally, American Express has been under a cloud with investors ever since announcing that it would not renew its relationship with Costco  (COST) when its deal expires in 2016. This is a significant relationship, but AXP is a fabulous, innovative business with exciting growth opportunities in the financial transactions business. The company has guided to flat earnings this year as it reinvests for future growth. The market weakness has created an opportunity to buy a great franchise business at a value price.

Position: Matrix is long COF and AXP and continues to buy.

At the time of publication, Kass and/or his funds were long YHOO, COF, and AXP and short IBM, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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