Grand Slam: 3 Undervalued US Open Sponsors Serving Rising Profits

The US Open is more than a spectacle - we found three profitable stocks benefitting from the tennis tournament. 

Monday marked the beginning of the US Open, the fourth and final grand slam tennis event of the year. The tournament - which lasts until September 9th - is one of the world’s highest attended annual sporting events. Over 700,000 fans are expected this yea at the USTA Billie Jean King National Tennis Center in Flushing Meadows, NY. The Open will bring an estimated $720 million to New York City through next week.

The US Open is the only annual, internationally renowned sporting event in the New York City metropolitan area. For many businesses, the visibility and popularity of the US Open make the tournament a marketing opportunity unlike any other. ABC News writes that many companies sponsoring the event use it to access the sport’s more affluent audience members, and to entertain current and prospective clients. Others, like Xerox (XRX), use the tournament to advertise their services to other businesses.

Investing Ideas

This year, 24 companies and organizations have chosen to sponsor the US Open, including some of the world’s most recognizable brands such as Heineken, IBM (IBM), and Mercedes-Benz. The popularity of the tournament prompted us to look for investment opportunities among these names.

To begin, we created a universe of stocks comprised of companies that are US Open sponsors. We then screened for stocks with rising profits as indicated by rising diluted normalized earnings per share (EPS) for the past three consecutive years. EPS is the amount of company profit allocated to each outstanding share of common stock. The difference between diluted normalized EPS differs and normalized EPS is that the former takes convertible securities into consideration. These convertible securities, including options, warrens, and convertible preferred shares, can be exercised and lower net income. As a result, diluted normalized EPS tends to be both lower and more conservative than normalized EPS.

To further narrow down our list, we decided to screen for undervaluation as illustrated by a Price to Free Cash Flow (P/FCF) ratio below 15. P/FCF compares a company’s market price to its yearly free cash flow using the following formula:

Price / Free Cash Flow Ratio = Market Capitalization / Free Cash Flow

Free cash flow refers to the cash flow available to debt and stock investors. It's the cash a company generates in one year, minus expenses, taxes, and short-term and long-term investments in the firm. Free cash is considered a better assessment of a company’s value than its earnings and is more difficult to manipulate. Companies who invest aggressively in their business may see decreased earnings with increased depreciation. FCF adds back depreciation expenses (depending on accounting methods) - higher cash flows signal a greater return on investments.

We were left with three stocks on our list.

Click on the image below to see sales data over time. 

 

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Do you think sponsoring the US Open will help these companies continue their streak of rising profits? Use this list as a starting point for your own analysis.

1. Xerox Corp. (XRX, Earnings, Analysts, Financials): Engages in the development, manufacture, marketing, service, and finance of document equipment, software, solutions, and services worldwide.

Market cap at $12.21B, most recent closing price at $9.92.

Diluted normalized EPS increased from 0.64 to 0.84 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, diluted normalized EPS increased from 0.84 to 0.87 (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the last time interval, the EPS increased from 0.87 to 0.98 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

Price/Free Cash Flow ratio: 5.85.

Xerox and the US Open

In November 2010, Xerox entered a five-year agreement with the USTA to become the US Open’s exclusive office equipment and document technology and services provider, starting with the 2011 tournament. The company uses the event to promote its services segment, which the company is shifting its focus towards as its technology segment declines.

The US Open takes place during Xerox’s third quarter, which ends on September 30th. A look at the company's Q3 earnings statements from 2011 and 2012 shows that services revenue is rising in the quarter: in 2011, the segment generated $2.72 billion in revenue, up 6.3% from $2.56 billion in Q3 2010; and in 2012, the segment reported revenue of $2.85 billion, a year-over-year increase of 4.8%. Services revenue climbs even higher in the company’s fourth quarter: in Q4 2011, the segment’s revenue totaled $2.86 billion, up 5.5% from $2.71 billion in Q4 2010; and in Q4 2012, revenue was $3.05 billion, reflecting 6.6% growth from the year prior.

 

2. American Express Company (AXP, Earnings, Analysts, Financials): Provides charge and credit payment card products, and travel-related services worldwide.

Market cap at $78.49B, most recent closing price at $72.01.

Diluted normalized EPS increased from 1 to 2.87 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, diluted normalized EPS increased from 2.87 to 3.75 (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the last time interval, the EPS increased from 3.75 to 3.89 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

Price/Free Cash Flow ratio: 9.33.

American Express and the US Open

This year is American Express’s 20th year as a sponsor for the US Open. The credit card company offers tournament-enhancing experiences to cardmembers and fans, including professional swing analysis, a digital tennis gaming center, and the official US Open mobile app. Cardmembers also enjoy additional benefits unavailable to the general public.

American Express’s 2012 Annual Report shows that the company reported a record $888 billion in cardmember purchases due to offering more value and benefits for spending. During the company’s third quarter of 2012, which ended September 30th, average basic cardmember spending grew by 4%. In the earnings call, Chief Financial Officer Daniel Henry attributed the growth to “strong customer engagement.” He spoke further about the value of rewards and loyalty programs, saying they “drive billings, they have significant positive impacts on credit quality, and they result in closer, longer-lasting relationships with our cardmembers.”

 

3. JPMorgan Chase & Co. (JPM, Earnings, Analysts, Financials): Provides various financial services worldwide.

Market cap at $191.31B, most recent closing price at $50.58.

Diluted normalized EPS increased from 2.33 to 5.26 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, diluted normalized EPS increased from 5.26 to 5.37 (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the last time interval, the EPS increased from 5.37 to 5.95 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

Price/Free Cash Flow ratio: 3.09.

JPMorgan Chase and the US Open

J.P. Morgan is in its 31st year of supporting the US Open while Chase is in its 32nd. The latter provides tennis matches with “Chase Review”, the replay technology that allows players to challenge calls. Chase has also created a #ChaseReview sweepstakes where people who tweet photo reactions to a play with the #ChaseReview hashtag can win tickets to the US Open. The company, along with esurance and Xerox, is co-sponsoring a 50-foot social media wall at the USTA Billie Jean King National Tennis Center.

From 2006 to 2009, Chase offered tickets to customers via sweepstakes through its ATMs and texting. During the third quarter of 2009, the company’s Retail Banking Division reported $1 billion in net income, reflecting an increase of 44%, or $320 million, from the third quarter of 2008. Chase’s purchase of Washington Mutual Average helped average total deposits grow by 62% to $339.6 billion. Checking accounts also increased, rising 4% year-over-year to 25.5 million. Deposit margin fell from Q3 2013’s 3.06% to 2.99%.

In the third quarter of 2012, JPMorgan Chase reported $785 million in net income for its Consumer & Business Banking division (previously titled Retail Banking). This reflected a decline of 23%, or $238 million, from the previous year. Average total deposits rose by 8.7% from $362.2 billion in 2011 to $393.8 billion. Checking accounts grew by 4.5% from 2011’s 26.5 million to 27.7 million. However, deposit margin fell to 2.56% from 2.82% in the same period in the previous year.

 

 

 

(List compiled by Mary-Lynn Cesar. EPS data sourced from Yahoo! Finance. All other data sourced from Finviz.)

 

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