Integrating television, video and music streaming, and web browsing has revolutionized how people receive and view their favorite TV shows, movies, music, video clips, photos, and more. And as people become more used to the convenience of accessing both television and the Internet on one device, the more they will demand it in the future. As a result, telecom companies like Windstream (WIN), Verizon (VZ), Comcast (CMCSA), AT&T (T), and Charter Communications (CHTR)have all had to adapt to meet customers’ changing needs.

Windstream’s Merge

In this article, I argue that Windstream’s new Merge service is a killer deal for frugal investors like me! In March 2012, Windstream introduced Merge, a high-speed Internet entertainment service that provides high speed Internet with access to free and paid Internet content. Customers can access paid movie and television streaming services like Netflix, Huluplus, and free services like music streaming from Pandora with a click of a button instead of having to visit the websites to sign in. This also allows people to view or listen to media from their television instead of crowding around a small computer or smartphone screen.

With Merge, customers can download movies, television shows, and other content found online directly to their television or computer. The company has also started producing its own web-only series, ‘On the Mark,’ which customers can download from both Facebook (FB) and Youtube. The show, an introspective look at pop culture and television, hosted by journalist Mark Steines, will air every other week for the next six months. To continue reading, click here.

Pfizer (PFE) is the world’s largest research based pharmaceutical company by sales. In addition to its core human healthcare business, it has leading positions in animal health care and infant health, as well.

I was looking forward to its first quarter 2012 earnings as the company’s top selling drug, Lipitor, lost patent protection in the fourth quarter of 2011.

Pfizer’s issue with losing top selling drugs to patent expiration is hardly unique. Since late in the last decade, many top selling drugs have fallen to generic competition among all large drug makers. A curious thing is pharmaceutical patents. Copyrights for books or movies don’t expire. Patents for widgets last forever. But drug companies aren’t selling widgets or entertainment. They are peddling, and profiting mightily, by selling health care. Patent rights are provided for 20 years from the time the medication is first identified in the research phase. Never mind that it can take eight years or more for the FDA to approve a drug. There are mechanisms to extend the 20 years for a few more, and the industry is rife with litigation between generic makers and research drug manufacturers.

Due largely to an anticipated steep fall in Lipitor based revenues, Pfizer’s revenue in the first quarter of 2012 fell 7% to $15.4 billion. GAP profits were $1.79 billion, or $0.24 per share. The year ago GAP profit was about $2.2 billion, or $0.28 per share. Excluding special items, earnings in the 2012 first quarter were $0.58, per share, or two percent above analysts expectations for the quarter. All in all, a solid performance given the conditions. To continue reading, click here.

PepsiCo (NYSE: PEP) has a strong presence in the world beverage market, but unbeknownst to many is the fact that PepsiCo produces roughly half of its revenue each year through its foods division that owns popular brands such as Doritos, Quaker, Frito-Lay and Tostitos. While PepsiCo competes directly with the beverage behemoth Coca-Cola (NYSE: KO) and the smaller beverage giant of the Dr. Pepper Snapple Group, it also competes with Kraft Foods (NYSE: KFT) and Nestlé in the foods market. The company’s versatility and presence in multiple markets provides it with an economic moat that reduces the risk of investing in the company and secures long term returns for its shareholders.

PepsiCo maintains solid footing in the carbonated beverage industry and has performed well against its main rival, Coca-Cola with its seasonal Mountain Dew offerings that vary each season and its Pepsi Cola product. As consumers have begun to become more health conscious and move away from heavily sugared and carbonated soft drinks, PepsiCo has shifted its focus into its Lipton Tea and Tropicana brands, which provide an assortment of teas and juices. The Dr. Pepper Snapple Group competes with PepsiCo in the tea segment with Coca-Cola pushing back against the Tropicana line with its Minute Maid brand.

A recent probe by the Food and Drug Administration into both Minute Maid and Tropicana may end up hurting both PepsiCo and Coca-Cola, however, after traces of fungicide were found in each brand’s orange juice products. While the initial reports state that the fungicide is nontoxic, the reports themselves will continue to push health conscious consumers away due to the growing trend toward natural foods and beverages with minimal additives. The Dr. Pepper Snapple Group has been taking advantage of this shift by advertising its All Natural line of products.

Where PepsiCo has strength is in its food brands, which compete with Nestlé and Kraft Foods in grocery stores across the globe. Its snack brands also have exposure in convenience stores and gas stations as impulse buys for travelers to snack on over a long drive. PepsiCo plans to make more moves toward providing healthier food as well and already has a footing in the market with its Quaker brand of foods and snacks.

PepsiCo has excelled against its competitors in both the food and beverage markets, showing revenue growth of 13% over the last year which was slightly higher than Kraft Foods’ 11% and well above the 5.2% and 4.9% growth shown by Coca-Cola and the Dr. Pepper Snapple Group, respectively. Its acquisition of the Russian dairy and juice company, Wimm-Bill-Dann has allowed PepsiCo to make a play in Russia and Asia in both the food and beverage markets, widening its economic moat.

The acquisition added $12.6 billion to PepsiCo’s debt load, but its increase in assets has justified its liability. PepsiCo now has $75.3 billion in assets and carries $58.1 billion in liabilities. Its profits have risen over the last three years from $5.1 billion in 2008 to $5.9 billion in 2009 and $6.3 billion in 2010. In the first three quarters of 2011, PepsiCo reported net revenue of $4.9 billion, on track to continue its steady incline.

PepsiCo provides a quarterly dividend of $0.51 per share, for a total of $2.06 per share over the last four quarters. Its quarterly payout provides more opportunity to compound returns for income investors and it is currently paying out at a ratio of 0.52 with a projected yearly yield of 3.2%. I believe that despite its declining carbonated beverage sales, PepsiCo has established enough of a safety net here to protect its dividend and continue to provide returns to its shareholders.

Kraft Foods is the largest threat to PepsiCo in the food market, but I believe that PepsiCo has a broad range of products that allow it to compete and its expansion into the Russian and Asian markets will protect it against any pressure that it receives from Kraft. Nestlé has an extremely strong presence in the Chinese coffee market, which it plans to solidify even further in 2012, but I don’t believe that Nestlé poses a great threat to PepsiCo’s expansion into the Asian market due to PepsiCo’s ability to offer a variety of food products in addition to its beverages.

Over the last three years, PepsiCo stock has grown in value from $47 per share to $63 and I believe that its wide economic moat will protect it against the incursions it will undoubtedly face from the Dr. Pepper Snapple Group in the natural tea and juice market and the opposition it will meet against Nestlé when it expands into China. PepsiCo shows itself to me as a lower risk buy with long term growth potential and consistent dividend gains that can be reinvested for a stronger position in the company.

Automatic Data Processing (NASDAQ: ADP), with a market capitalization of about $26.6 billion, is the largest global provider of payroll, human resources, tax filing, data processing, and benefits outsourcing services. The company has a commanding position in the large company segment of the payroll processing industry but also counts small and medium sized business among its more than 570,000 clients.  The company’s principal competition comes from Paychex (NASDAQ: PAYX), with a market capitalization of about $11.4 billion, which operates in the small and medium-sized business payroll processing space.  Ultimate Software (NASDAQ: ULTI), and Insperity (NYSE: NSP) are much smaller players focused on human resources outsourcing and software with relatively less exposure to direct payroll processing services. Ultimate Software has a market capitalization of about $1.8 billion while Insperity’s market capitalization is about $800 million.

By capturing the large company part of the payroll processing market, ADP has created competitive advantages that have led to robust cash flow growth of around 10%, solid operating margins north of 31%, and strong returns on invested capital just under 22% since 2007.  The company’s primary competitive advantages are high barriers to entry because a large infrastructure is needed to process a large number of employees; economies of scale once the infrastructure is in place because of its ability to add incremental recurring revenue without material capital expenditures and which leverages fixed infrastructure costs over an ever increasing customer base; high customer switching costs due to the company’s long-term contracts and the difficulty in switching human resources processes to another outsourced provider- average client retention is estimated to be longer than 10 years and revenue is highly recurring in nature; pricing power with customers due to the high switching costs; and a brand image that gives ADP an advantage as it competes for new customers and retains existing ones because clients must trust the entity that conducts its critical payroll and human resource functions.

ADP is fundamentally a play on the U.S. economy and with recent signs of a turnaround in the job market, revenue and earnings growth are poised to improve, taking the share price beyond the estimated current intrinsic value of about $70 per share on a discounted cash flow basis. This estimated value is about 30% above the recent share price of about $54 and reflects assumed growth in free cash flow of about 6% annually which is a sizeable reduction from the approximately 10% annual growth rate in free cash flow since 2007.  However, free cash flow has grown by only about 2% since 2002 so a 6% growth assumption is aggressive but warranted given the expected economic recovery and concurrent job growth that ADP can exploit with its competitive advantages.

ADP trades at a multiple to future growth above its smallest peers but well below that of its largest peer.  Analysts estimate that ADP’s earnings growth will be about 9.8% which is better than Paychex at about 7.2%, and with a forward price to earnings ratio of about 18x compared to about 19x for Paychex, ADP has a more attractive price to earnings to growth multiple of about 1.8x compared to about 2.6x for Paychex.  Insperity has the lowest price to earnings to growth multiple at about 0.81x while Ultimate Software’s price to earnings to growth multiple is about 1.2x.  Both of these companies have much higher growth rates as they are growing off much smaller revenue and earnings bases than either ADP or Paychex.  I believe that the projected earnings growth rate for ADP at about 9.8% is reasonable given that earnings grew by about 5% for the year ended June 2011 even with the significant drag of weak employment all throughout the year.  Furthermore, the company’s competitive advantages will be more fully exploited as the jobs market recovers thus growing the customer base, expanding operating margins, and growing cash flow.  Operating margin was only about 31.7% last year compared to a five year average of about 38.5%, leaving significant room for improvement as customers and services offered are added.  Operating cash flow, which was only about 17.3% of revenue last compared to an average of about 18.1% since 2007, grew by only about 1.7% last year.  This rate of growth is much less than the approximately 7.1% annual rate for the past five years which I anticipate will be closer to the rate going forward.  The $70 per share intrinsic value estimate pegs cash flow growth at 6%.

Although the economic outlook and the job market in particular are forecast to be improved in the next two years, their impact will be moderated by low interest rates through 2013 which hurts ADP’s interest income from holding client funds, which has declined to about 6.9% of revenue last year from about 10.4% of revenue in 2007.  Declining income from interest on client funds will be a headwind for the company for the foreseeable future but investors should gladly accept this drag on earnings because I firmly believe the company will not be tempted to reach for yield by placing customers’ funds in high risk investments.  Such a move might be advantageous to income in the short term but would expose the company to real and permanent value destruction if losses in risky accounts caused harm to a client(s) operations or financial position.  The company has never shown an inclination toward such behavior and I doubt it ever would.

ADP has a high current payout ratio of about 55%, which is well above its long term average of about 40%.  Paychex’s current payout ratio of about 84% is much higher than its historic average of about 65% but I believe that in both cases it is temporary until earnings growth moves back toward the historical averages for a sustained period of time.  ADP should increase dividends annually going forward as it has in the past, but at a slower rate than earnings growth to allow the payout ratio to revert to its mean.

ADP ‘s focus on the large business market allows the company to dominate the niche and enjoy its many competitive advantages, but this strategy does limit ADP’s exposure to the higher growth rates and greater volatility of small and medium sized businesses.  Overall, ADP is well positioned to take advantage of the recovery in the jobs market and at its current price of about $54, the shares are a strong buy.  Even if cash flow projections do not materialize to the assumed 6% growth rate going forward or are delayed by a downturn in the economy, the shares are fairly valued at the current price and investors can collect a sustainable 2.9% dividend.

Kraft Foods (NYSE: KFT) is one of the most dominant players in the global processed and packaged food market and owns an extensive range of brands that include Countrytime, Handi-Snacks, Oscar Mayer, Planters, Cadbury and Nabisco. It is second only to Nestlé, which is the largest processed food company in the world, but Kraft Foods is poised to expand its market share against Nestlé’s recent drop in profitability. It also competes with PepsiCo (NYSE: PEP) in the snack food and beverage markets, but its range of brands and global distribution network insulate Kraft Foods in a highly competitive market.

Kraft Foods is in possession of over $95 billion in assets, with a significant portion of its assets having been acquired in its deal to acquire Cadbury in 2010. The purchase of the candy maker has allowed Kraft Foods to become more competitive against the privately owned Mars, Inc. and Nestlé’s confectionery division. Kraft Foods currently has a market cap of $67.6 billion, which is less than a third of Nestlé’s cap of over $190.6 billion. Its acquisition of Cadbury positioned Kraft Foods to protect itself more effectively against the global packaged food giant.

Kraft Foods must also contend with PepsiCo, which derives half of its business in the foods market with brands such as Tostitos, Doritos, Frito-Lay and Tropicana. Kraft Foods’ Countrytime brand allows it to put some pressure on PepsiCo’s juice division, but PepsiCo’s recent acquisition of Wimm-Bill-Dann has positioned it to pressure Kraft Foods in the Russian and Asian markets. PepsiCo experienced a growth in revenue of 13% over the last year, which was slightly higher than Kraft Foods’ revenue growth of 11% over the same period.

Despite Nestlé’s dominance in the global food market, it showed a 5% decline in sales over the last year, but it has recently announced its commitment to expand its presence in the Chinese coffee market this year. Kraft Foods is the leading food company in North America and its presence in the North American market provides it with a hedge against the competition it is receiving in other markets across the globe. This will minimize the direct impact that its competitors’ moves into other markets will have on Kraft Foods, but it could hurt the company later on as it attempts its own expansion in the Russian and Chinese markets.

Kraft Foods stock has shown steady growth over the last three years, rising steadily from $22 per share to $38. It is maintaining its bullish course into 2012, and I don’t foresee any immediate threats to its stock value over the next year. The possession of a diverse range of products in several high demand markets gives the company an economic moat despite any incursions that it may experience from its competition.

I believe that Kraft Foods is an ideal and safe choice for income investors due to its quarterly dividend of $0.29 per share. Quarterly dividends give investors the opportunity to reinvest their dividend returns more often and results in compounded gains over time. Its total of $1.16 per share in dividend payouts over the last year provided a yield of roughly 3% and its consistent upward trend on the market provides additional gains through stock value. Kraft Foods currently pays out at a ratio of 0.63, which shows the company’s commitment to its shareholders’ interests and the potential for higher dividends over time as Kraft Foods continues to grow.

Kraft Foods has averaged just under $4 billion in net revenue per year over the last four years, showing an ability to sustain its dividend and establishing consistent profitability. The company is in a favorable position in the market and has the opportunity to make gains that may not have been realized yet since its acquisition of Cadbury only two years ago. The transaction added $12.8 billion to Kraft Foods’ long term debt load, but I believe that once it begins to pay down its debt, it will possess the ability to make a sharp move against its competition in Asia.

I see Kraft Foods as a low risk investment that is perfect for longer term gains. It is up 50% over the last three years and provides a lucrative dividend that will allow investors to glean increasing returns over time. Kraft Foods has survived against pressure from tough competition in an extremely competitive market and has not failed to show its shareholders a return over the last four years. 2012 will be no different.

Oil is surging right now, driven wild by fear and inflation.

The first issue is Iran. The country, which is the world’s third largest exporter, cut off exports to Great Britain and France. These two countries may not account for much of Iran’s revenue in and of themselves, but European countries do account for roughly 18% of the country’s oil exports and there is talk that Iran halt shipment to other countries in the Eurozone going forward. In fairness, half of Iran’s revenues come from oil; if it continues to shut countries out it will have to bear the burden on its bottom line.

An embargo planned for July 1 would like have increased oil prices anyway, but what we are dealing with here is a matter of perception – and perception, especially fearful perception, has been known to have a disastrous effect on stock prices, leading companies to be priced higher or lower on trading momentum rather than anything to do with the stock itself. The second issue is the US dollar. When the dollar goes lower, like it is now, oil prices start to swell. There is also the issue of the economy. Despite all the doom and gloom in the media (like George Soros saying in January, “The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”), the economy has been showing pockets of strength. In any case, these are the facts and oil prices reflect them.

Billionaire oilman turned hedge fund manager T. Boone Pickens is saying that oil will end up trading at an average of $110 to $120 this year. He’s probably right. Benchmark oil prices are over $109 a barrel, while Benchmark crude has increased by 9 percent year-to-date in 2012. This will drive up the price of gas at the pump, obviously, but it will also push oil company stock prices higher.

The question is, where will your money earn the most profit?

ExxonMobil (NYSE: XOM) is one option. The company is one of the leaders in the major oil and gas industry and it has plenty of upside. Exxon recently traded for $87.34 a share on a mean one-year target estimate of $93. If analysts are right, the stock will return roughly 6.5% in the next year, plus another 2.20% for its $1.88 dividend – that’s an upside of roughly 8.7%. Exxon is also priced low at 9.72 times its forward earnings, and it is one of the best run companies in the world, which is saying something given its size. Management runs the company well but they also look after shareholders – in terms of dividends, stock repurchases, etc. One of Exxon’s biggest advantages is that it takes a long-term view of everything it does – that is part of the reason it has been able to grow as large as it has.

But, the company isn’t coming up all roses. Analysts predict that Exxon’s earnings will fall -2% this year, with most of the loss coming in the current quarter. They estimate that its earnings will increase by 9.0% next year, all in all producing an earnings increase of 7.36% on average per annum over the next five years. That’s less than its industry, which is expected to grow 51.20% this quarter, 26.20% this year and 16.19% over the next five years. That’s even less than the S&P, which is predicting to grow by 10.49% a year on average over the next five years.

So, why the long face? One reason is that Exxon has a comparatively large exposure to natural gas and, right now, natural gas prices are at the lowest they have been in years. However, that may play out okay if the company wasn’t so bullish about natural gas. Right now, most companies in the oil and gas industry are going in the opposite direction, pushing their extra cash flows into the activities that would earn them the most – namely crude. They are cutting back on natural gas activities while Exxon has increased its focus and actually ramped up plans to increase production. In its annual report, Exxon announced that it would continue investing $37 billion annually for the next several years. Even if Exxon is right in the long term, until then its focus on natural gas is going to be like a headwind, preventing it from achieving maximum shareholder value.

In addition, for as low as Exxon is priced, its rivals are priced even lower. ConocoPhillips  (NYSE: COP) is priced at 8.68 times its forward earnings and pays a higher dividend ($2.64 or 3.60% yield at its recent price of $75.95), but there is a trade off. ConocoPhillips also has an earnings growth estimate of just 4.41% a year on average over the next five years and it doesn’t have the upside – it has a mean one-year target estimate of $78.98.

Competitor Chevron (NYSE: CVX) has the greatest predicted upside of the three – it recently traded at $109.08 a share on a mean one-year target estimate of $124.43 – and it pays a decent, $3.24 dividend (3.00% yield). It also has the lowest forward P/E of the three; it is priced at just 8.26 times its future earnings. However, Chevron also has the lowest predicted earnings growth. Analysts anticipate the company’s earnings will grow by an average of just 4.35% a year for the next five years.

So, the question is whether Exxon is worth the premium pricing. I don’t think so, at least not for the shorter term investor. It may be a good play in the long term, as in over five years, but I prefer to put my money in stocks that have plenty of upside and stable growth, like Chevron. Exxon could be the big winner once natural gas goes up, but I say that investors would do better to bet on Chevron, realize the short-term gain, then sell and invest in Exxon – there is time for both plays. Alternatively, conservative investors could hedge one against the other. As natural gas prices go up, so will Exxon; as oil prices go up, Chevron will be the winner. It’s a win-win.