When companies fall on hard times, investors often look for any reason for optimism they can find. Management teams, hoping to buoy investors’ spirits, often resort to share buybacks to boost morale and to build a floor underneath the stock price.
That’s exactly the tactic being employed by these three companies, whose businesses have stagnated in recent months and taken their stock prices down in tandem.
Are new, generous share repurchase programs enough to lift these stocks out of the doldrums?
Big buybacks in the news
The global economy continues its gradual recovery from the worst financial crisis in decades. At the same time, there are always a few companies that can’t seem to get their acts together.
Healthcare company Intuitive Surgical, Inc. (NASDAQ:ISRG) used to be a darling of the growth investor community for the rapid growth in sales and profits it exhibited seemingly every quarter. In fact, Intuitive Surgical had a four-year streak of double digit growth in both revenue and earnings per share, but that streak was broken when the company released its recent quarterly results.
The company’s latest quarterly results were not received well due to ongoing fears surrounding the safety of the company’s revolutionary da Vinci surgical robots. In all, quarterly revenue came in at $578 million, with EPS coming in at $3.90 per share. Earnings per share missed expectations badly, a major reason why Intuitive Surgical, Inc. (NASDAQ:ISRG) shares trade for $390 per share, a level not seen since 2011.
In reaction, Intuitive Surgical, Inc. (NASDAQ:ISRG) doubled its existing share repurchase authorization to $1.5 billion worth of shares.
Global machinery juggernaut Caterpillar Inc. (NYSE:CAT) has seen its business suffer in recent months due to declining mining activity across the globe and the widely-rumored Chinese slowdown.
In all, Caterpillar Inc. (NYSE:CAT) reported second-quarter profit of $1.45 per share, down from $2.54 the year prior. That represents a whopping 43% decline in profits. Not surprisingly, Caterpillar’s EPS badly missed analysts’ estimates.
Revenue wasn’t anything to brag about, either: Caterpillar Inc. (NYSE:CAT)’s sales dropped 16% year over year, which also missed expectations.
At the same time, investors received news that Caterpillar Inc. (NYSE:CAT) accelerated its share buyback program. Caterpillar has agreed to purchase $1 billion worth of its shares from Societe General, to be completed in September.
Following the trend, Potash Corp./Saskatchewan (USA) (NYSE:POT) reiterated its intent to purchase up to $2 billion of its own shares over the next year. This was important for shareholders, who have seen its stock price lose more than a quarter of its value in just two weeks.
This was because of recent news that a global potash partnership is about to be broken up, which will likely send potash prices plummeting in the near future.
Analysts were quick to slash prices on potash producers, including Potash Corp./Saskatchewan (USA) (NYSE:POT), and researchers at Goldman Sachs now expect potash fertilizer to fall by nearly half over the next year.
At the same time, Potash Corp./Saskatchewan (USA) (NYSE:POT) racked up nearly $2 billion in operating cash flow last quarter. PotashCorp is a leader in its industry, but it remains to be seen how drastic the effects will be from the breakup of the potash partnership.
The Foolish takeaway
It’s no secret that these stocks are in distress. Their industries and operations are in the midst of pronounced downturns, taking their stock prices and investor confidence down with them.
To combat market pessimism and in an attempt to build a floor under the stock price, management teams of these companies have turned to share buybacks.
To their credit, these companies believe their stocks to be undervalued at current prices, and could be making shrewd capital allocation decisions by buying their own stock when it’s low.
As a result, these buybacks are providing investors with a healthy dose of further downside protection to weather the storm until business conditions improve. And, due to their declining stock prices, these stocks can be purchased for low valuations.
Each of these stocks represent a strong underlying business that’s currently facing hard times. But, it seems to me that the challenges each of these stocks face are temporary in nature. Sooner or later, the storm clouds will pass. These compelling buybacks, along with a return of more normal business conditions, means that these stocks should see increasing earnings per share again in the near future. Buy these stocks with confidence.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical. The Motley Fool owns shares of Intuitive Surgical.
The article Are Huge Share Buybacks Enough to Lift These Struggling Stocks? originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.