The Motley Fool: Market cap matters

A: Not at all. You must factor in the number of existing shares to get an idea of a company's size. If Drive-Thru Dentistry Inc. (ticker: DRILZ) has a stock price of $10, for example, and 1 billion shares outstanding, its market price ("market capitalization," or "market cap," to use Wall Street lingo) is $10 billion. If it has just 200 million shares outstanding, its market cap is $2 billion.

For some real-life examples, look at JPMorgan Chase, Best Buy and Hershey. All were trading recently for around $50 per share, but their market caps were, respectively, $175 billion, $25 billion and $12 billion.

Q Is it ever bad for a company to buy back its own stock? — H.D., Florence, S.C.

A Generally it's a good thing. Stock buybacks, when companies buy back and essentially retire some of their own stock, generally benefit shareholders. That's because fewer shares remain, and each is therefore worth more. (An extreme example: If you own 10 of a company's 100 shares, you own 10 percent. But if it buys back 50 shares, your 10 now make up 20 percent of the company.)

Remember that valuable dollars are spent buying back shares, so companies should be doing so only when the shares are deemed undervalued. If they're buying at bargain prices and retiring shares, they're creating good value for shareholders. If they're buying at inflated prices, that money could be better spent paying out a dividend or reinvesting in the business, or in a number of more profitable ways.

Bonds demystified

Bonds are essentially long-term loans. If a company issues bonds, it's borrowing cash and promising to pay it back at a certain rate of interest.

Bonds sold by the U.S. government's Treasury Department are called Treasurys. State and local governments issue municipal bonds, while businesses issue corporate bonds (sometimes called corporate "paper"). Companies that may be perceived as low-quality are forced to offer high-interest-rate "junk" bonds to attract buyers. The rates are high because there is a higher risk that someday the companies won't have the cash to cover interest payments, and the bonds will default.

Bond investors receive regular interest payments from the issuer at what is called the coupon rate. For example, if you buy a $1,000 bond with a coupon rate of 10 percent, you'll receive payments of $100 per year. When the bond matures — after perhaps five, 10 or 30 years — you'll get back your initial loan, called par value. Most corporate bonds have a par value of $1,000, while government bonds can run much higher.

Sometimes a company will "call" its bond, paying back the principal early. All bonds specify whether and how soon they can be called. Federal government bonds are never called.

Bond investors don't necessarily buy a bond at issue and hang on through maturity. Once issued, bonds can be traded among investors, with their prices rising and falling in reaction to changing interest rates. For example, when rates fall, people bid up bond prices. If banks are offering 5 percent, an 8 percent bond starts looking good.

Over the long run, though, bonds rarely trump stocks. According to Jeremy Siegel's "Stocks for the Long Run" (McGraw-Hill, $30), from 1926 through 2001 (notice that includes the Great Depression years), long-term government bonds returned a nominal average of 5.3 percent per year, compared with 10.2 percent for the stock market. If you had invested $5,000 in bonds for 50 years, it would have grown to $66,000. In stocks, it would have become $643,000 — quite a difference.

Whirlpool cools

The nationwide housing slump has softened Whirlpool's (NYSE: WHR) domestic sales, but it's seeing strong growth in regions such as Brazil and India. Meanwhile, Whirlpool is counting on cost-cutting from last year's acquisition of archrival Maytag. The firm's management expects to wring out hundreds of millions in "significant efficiencies" over the next few years, saving perhaps $400 million in 2008.

Whirlpool is using excess capital to pay off debt taken on to acquire Maytag. Its pension and health-care plans were underfunded by more than $1 billion before it bought Maytag, and these drains on funds that could be used to benefit shareholders are worth watching.

Other concerns include the capital-intensive nature of the appliance business and increasing competition from General Electric and international firms such as Samsung and LG Electronics. Whirl- pool is very dependent on a few major domestic retailers, and its largest customer (Sears) is focused on cost-cutting rather than store growth. Fortunately, Whirlpool has proved adept at introducing appealing new products, and it controls some well-respected brands, namely Whirlpool, Kenmore, KitchenAid, Maytag, Jenn-Air and Amana (acquired from Maytag).

Based on projections for this year, the stock looks promising, even after a recent run-up. Overall, its seasoned operating model, reasonable valuation, cost-cutting opportunities and international growth prospects outweigh concerns about slow U.S. growth and housing woes.

Up and down in the air

In 2001, I had just started investing and had been hurt, but not hammered, by the tech bubble collapse. In the wake of the Sept. 11 attacks, I realized that companies were being hammered by the market irrationally, and I saw a buying opportunity. My first pick was Boeing, at $33. It was obvious to me that no matter what happened in commercial aviation, Boeing would be well-positioned to benefit from military responses to terrorist attacks. Then I bought United Airlines and soon watched it self-destruct. As of today, I'm still ahead, thanks to Boeing (recently at $90). And since this was in my early investing days, the dollar amounts involved were small. I learned several valuable lessons: Don't invest if you don't understand the company and its financials. Don't be afraid to get out when you realize your own stupidity. And a good idea does not make a good investment. — Nathan, by e-mail

The Fool responds: Even in good times, airline stocks have been troublesome, as they typically struggle with fare wars, volatile fuel costs, bad weather, aging fleets, costly empty seats and more.

Name that company

I was created in 1996 when two Swiss chemical and life sciences giants, Ciba-Geigy and Sandoz, agreed to merge. (The companies traced their origins back to the 1700s and 1800s.) I employ roughly 100,000 people and spend more than $5 billion annually on research and development. I develop drugs (such as Diovan, Lotrel and Lamisil), vaccines and animal-health products. My consumer brands include Gerber baby food and other products, Ex-Lax, Maalox, Gas X, Theraflu, Triaminic, Bufferin, Excedrin and No-Doz. My Ciba Vision unit offers more contact lens options than any other manufacturer in the world. Who am I?

Last week's trivia answer

Founded 30 years ago and based in South San Francisco, Calif., I'm a top biotechnology firm working on biotherapeutics for significant unmet medical needs. Due to products such as Rituxan, Avastin and Herceptin, I rake in more than $9 billion annually. My market cap is more than $90 billion, making me bigger than Apple, Home Depot, UPS, Boeing and American Express. I employ 10,500 people, and Fortune has named me one of the "Top 100 Places to Work" in the United States for nine years in a row. My ticker symbol evokes the double helix. Who am I? (Answer: Genentech)