price to sales ratio

TORONTO-DOMINION BANK $46 (Toronto symbol TD; Conservative Growth Portfolio, Finance sector; Shares outstanding: 850 million; Market cap: $39.1 billion; Price-to-sales ratio: 2.6; SI Rating: Above Average) will probably report lower 2009 earnings. The recession has increased the bank’s loan losses, particularly at its U.S. operations. In 2008, TD earned $3.8 billion, or $4.88 a share, before unusual items. Despite the likelihood of lower earnings, TD feels it can keep paying quarterly dividends of $0.61 a share, for an annualized yield of 5.3%. The current payout rate is equal to 45% of TD’s earnings, which is at the top of its target range of 35% to 45%. Still, TD has enough capital to maintain the dividend even if its earnings fall more than it expects. TD Bank is a buy.

We continue to recommend that all investors own at least two of Canada’s big-five banks. But these should not be the extent of your financial holdings. Other types of financial investments, such as high-quality insurance companies, should play a role in your portfolio, as well. Here are four non-bank financial companies we like. All offer an attractive combination of growth and value. However, only three are buys right now. GREAT-WEST LIFECO INC. $16 (Toronto symbol GWO; Conservative Growth Portfolio, Finance sector; Shares outstanding: 943.9 million; Market cap: $15.1 billion; Price-to-sales ratio: 0.6; SI Rating: Above Average) is Canada’s largest insurance company. Great-West administers $339 billion worth of assets. The company also offers wealth-management services. It operates in Canada (55% of its earnings), Europe (35%) and the U.S. (10%). Power Corp. (Toronto symbol POW) owns 72.7% of Great-West’s shares....

YUM! BRANDS INC. $28 (New York symbol YUM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 459.9 million; Market cap: $12.9 billion; Price-to-sales ratio: 1.2; WSSF Rating: Above Average) is the world’s largest fast-food operator, with over 36,000 outlets in more than 110 countries. (McDonald’s Corp. has fewer restaurants than Yum, but higher annual sales.) Its major chains include KFC (fried chicken), Pizza Hut, Taco Bell (Mexican food), Long John Silver’s (seafood) and A&W (root beer and hamburgers). Yum continues to aggressively expand in China, particularly its KFC fried-chicken restaurants. Yum’s China division, which includes Taiwan and Thailand, accounts for 30% of its sales and earnings. Yum’s U.S. operations provide 45% of its sales and 40% of its profit. Its international division (excluding China) supplies 25% of its revenue, and 30% of earnings. Thanks mainly to strong growth at the China division, Yum’s revenue rose 25.2%, from $9 billion in 2004 to $11.3 billion in 2008. Earnings rose 30.2%, from $721 million in 2004 to $939 million in 2008. Yum has bought back over $5.6 billion worth of its shares since 2004. As a result, per-share earnings rose 61.9%, from $1.18 in 2004 to $1.91 in 2008. Cash flow per share rose 61.4%, from $2.02 in 2004 to $3.26 in 2008....

We generally advise against investing directly in China and other emerging markets. These markets are highly volatile, and growth can be swift. But gains can quickly evaporate in a recession like today’s. More important, investors enjoy far less legal protection in emerging markets. That’s why we prefer to buy U.S. companies with profitable Chinese interests. A long-time favorite of ours, Yum Brands, was the first fast-food company to enter China (in 1987). It is now the largest in China, with nearly 3,600 restaurants. Its established brands and size give it a big advantage over its rivals. Yum is building on its success by launching a chain of Chinese restaurants in China. Yum’s stock has dropped by a third over the past year, mainly due to weakness in the U.S. But at around 13 times its likely 2009 earnings, the stock is a particularly attractive buy....

PEPSICO INC. $52 (New York symbol PEP; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.6 billion; Market cap: $83.2 billion; Price-to-sales ratio: 1.9; WSSF Rating: Above Average) is one of the world’s largest food companies. PepsiCo’s main products include soft drinks (Pepsi-Cola), snack foods (Frito-Lay), sport drinks (Gatorade), fruit juices (Tropicana) and cereals (Quaker Oats). PepsiCo owns 18 brands that each generate annual sales of over $1 billion. PepsiCo continues to do a good job of increasing its sales and earnings in a highly competitive industry. Moreover, it’s cutting its costs with a new restructuring plan, that includes closing plants and laying off 2% of its employees. The plan should save PepsiCo a total of $1.2 billion over the next three years, including between $350 million and $400 million this year. PepsiCo may use the cash that these savings free up to expand advertising this year, which should lift the company’s sales. In 2008, PepsiCo’s sales rose 9.6%, to $43.3 billion from $39.5 billion in 2007. Earnings rose 5.4%, to $5.9 billion from $5.4 billion. PepsiCo is an aggressive buyer of its own shares, so earnings per share rose 9.2%, to $3.68 from $3.37 on fewer shares outstanding. These figures exclude unusual items, mainly severance payments....

GENERAL ELECTRIC CO. $10 (New York symbol GE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.6 billion; Market cap: $106 billion; Price-to-sales ratio: 0.6; WSSF Rating: Above Average) has lost its AAA credit rating due to concerns over the quality of assets held by GE Capital, GE’s finance division. GE Capital profits from the difference between the rate it charges borrowers and the rate it pays to its bondholders. The lower rating will force it to pay higher interest on new bonds. Still, GE expects GE Capital to be profitable in the first quarter of 2009. GE aims to shrink GE Capital’s contribution to its overal profit, to 30% from 50%. This cuts GE’s risk. As well, GE’s industrial businesses, such as locomotives and power-plant turbines, should benefit from new government spending on infrastructure. GE is a buy.

AGILENT TECHNOLOGIES INC. $16 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 345.3 million; Market cap: $5.5 billion; Price-to-sales ratio: 0.2; WSSF Rating: Average) makes testing systems that help electronics manufacturers improve the quality of their products. Agilent also makes measurement equipment for medical research labs and drug companies. Demand for Agilent’s medical-related products remains steady, but the recession has hurt sales of cellphones and other electronic devices. As a result, manufacturers are spending less on the company’s testing equipment. In response, Agilent plans to drop some of its businesses and shrink its workforce by 3%. The company expects to pay $100 million in severance and other expenses. But these moves should lower Agilent’s costs by $150 million a year, and let it keep spending 14% of its sales on research. To put these amounts in context, Agilent’s earnings in its first fiscal quarter, which ended January 31, 2009, dropped 47.1%, to $72 million, or $0.20 a share. It earned $136 million, or $0.36 a share a year earlier (these figures exclude restructuring and other charges). Sales fell 16.3%, to $1.2 billion from $1.4 billion....

VERIGY LTD. $7.61 (Nasdaq symbol VRGY; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 58.2 million; Market cap: $442.9 million; Price-to-sales ratio: 0.8; WSSF Rating: Extra Risk) designs and makes test systems that are used in computer-chip production. Because of slowing computer sales brought on by the recession, Verigy lost $41 million, or $0.70 a share, in its first fiscal quarter, which ended January 31, 2009. It earned $33 million, or $0.53 a share, a year earlier. These figures exclude unusual charges, including severance costs related to an 18% cut in Verigy’s workforce. The plan should reduce Verigy’s costs by around $100 million a year, and help it break even on $110 million in quarterly revenue. Sales during the quarter fell 66%, to $68 million from $200 million. Verigy holds cash of $300 million, or $5.16 a share, and has no debt. Verigy’s research costs were unchanged at $25 million, but were a high 36.8% of sales. This was mainly because of a sharp drop in new orders. The company’s restructuring should help it maintain its high research spending. This will let it develop new products that will fuel future sales....

Agilent and Verigy are leaders in two tech niches. The recession has hurt both companies, but their strong balance sheets and tightly controlled costs should help them survive. Meanwhile, their high research spending will let them keep developing new products. This will pay off in sales and earnings gains when the economy improves. AGILENT TECHNOLOGIES INC. $16 (New York symbol A; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 345.3 million; Market cap: $5.5 billion; Price-to-sales ratio: 0.2; WSSF Rating: Average) makes testing systems that help electronics manufacturers improve the quality of their products. Agilent also makes measurement equipment for medical research labs and drug companies. Demand for Agilent’s medical-related products remains steady, but the recession has hurt sales of cellphones and other electronic devices. As a result, manufacturers are spending less on the company’s testing equipment. In response, Agilent plans to drop some of its businesses and shrink its workforce by 3%. The company expects to pay $100 million in severance and other expenses. But these moves should lower Agilent’s costs by $150 million a year, and let it keep spending 14% of its sales on research....

ADOBE SYSTEMS INC. $22 (Nasdaq symbol ADBE; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 524.2 million; Market cap: $11.5 billion; Price-to-sales ratio: 3.4; WSSF Rating: Average) is down from its August 2008 level of $46. This is partly because the recession has prompted users to postpone upgrading their Adobe software. Adobe plans to take advantage of the slump by acquiring other software companies, probably at bargain prices. It’s particularly interested in smaller companies that specialize in software for cellphones. This would let Adobe take advantage of growing consumer demand for downloadable video and music files. Adobe holds cash of $2.4 billion, or $4.47 a share. Its long-term debt is just $350 million, so it can easily afford to expand. Adobe is a buy.