Saturday, November 24, 2012

Warren Buffett Loves This Stock The Most


People would be interested to know what the biggest holding of Berkshire Hathaway(NYSE: BRK-A) (NYSE: BRK-B) is. The answer is simple, it is the recession-proof stock that Warren Buffett would like to hold forever. The consistent and historical growth of this company has rewarded its shareholders, and Mr. Buffett. Buffett bought this stock in 1988 and has been holding it until now. It is Coca-Cola (NYSE: KO)
Coca-Cola is a very simple, and even boring business. It sells its own concentrates and syrups to bottling and canning partners. The formulas are the intellectual properties of the company. Coca-Cola has a long operating history dating back to 1886, and it has become the largest global beverage corporation with more than 500 beverage brands in more than 200 countries. Everybody drinks Coke, from the rich to the poor, from a farmer to a billionaire.  
Warren Buffett first bought Coca-Cola’s stock in 1988, with a $1 billion purchase. At that time, Wall Street thought buying Coca-Cola was crazy. The price he paid for was not a screaming bargain in terms of valuations, with 14.5x P/E and 4.8x P/B. Now, he owns 400 million shares, accounting for more than 20% of his total portfolio. Warren Buffett commented that Coca-Cola would be one of his permanent positions. The best action is just to sit on Coca-Cola’s and do nothing. The company is considered to have the extremely wide moat, he said: “If you gave me $100 Billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world,' I’d give it back to you and say it can’t be done.”  
Indeed, in 2011, Coca-Cola has a 41.9% market share globally, much more than its closest rival, PepsiCo's (NYSE: PEP), 29.9%. Previously, two companies competed directly in a so-called Cola war. PepsiMax was even designed in a TV commercial to show that it had a better taste than Coke Zero. However, when Ms. Indra Nooyi took over as PepsiCo’s chief, she redefined its strategy to focus more on higher margin and healthier beverages. Her ambitious goal was to grow PepsiCo’s revenue from those nutritional products to $30 billion by 2020. However, the refocus would move PepsiCo away from its core competitive advantage with carbonated soft drinks.  In the last 5 years, Coca-Cola returned nearly 45% to shareholders, much higher than the total return of 13.2% that PepsiCo has delivered. In the carbonated soft drink industry, the third position belongs to Dr. Pepper Snapple (NYSE: DPS), with the operation in the US, Canada, Mexico, and Caribbean, whereas Coca-Cola and PepsiCo are busy expanding internationally. DPS is the oldest soda brand in the US, with a 16.9% market share of carbonated soft drinks. It is interesting to note that in the past 5 years, the total return that Dr. Pepper has delivered to its shareholders was more than 85%, two times higher than Coca-Cola. Dr. Pepper is paying a similar dividend yield to PepsiCo, 3.1%, whereas Coke's dividend yield is 2.7%. However, Dr. Pepper is still at a far behind its two main competitors in market share. Coca-Cola is still the dominant player in this industry, with the largest global market share. It is worth $166.53 billion, with 19.5x P/E, whereas PepsiCo is worth $106 billion, with 18.2x P/E and Dr. Pepper Snapple is worth only around $9 billion, with 14.9x P/E.
The more it has been growing and expanding globally, the more social proof it has created. As Charlie Munger pointed out, social proof was the psychological factor that provides huge advantages to scale. Coca-Cola has it, as it’s available nearly everywhere on this planet. In addition, for more than a century of operation, Coca-Cola has been very successful in associating its products to happiness. Whenever people think of Coke, they think of happiness. That is why it has an “untapped pricing power.” It means the price of Coke could increase several pennies, and still users would be still very happy to buy it.
On the last note, Coca-Cola is trading at 19.5x trailing P/E, and a lot of investors might think it’s pricy. However, Roberto Goizueta, Coca-Cola’s CEO in the 1980s often quoted a 1938 Fortune article: “Several times every year a weighty and serious investor looks long and with a profound respect at Coca-Cola's record but comes regretfully to the conclusion that he is looking too late.”

Blackberry 10 Proves RIMM's Core Competence


Recently, Research In Motion (NASDAQ: RIMM) announced that it would introduce a Blackberry 10 version at the end of January 2013. Blackberry 10 will be the operating system for its own new smartphone. Actually Blackberry 10 was planned to be released in late 2012, but it was delayed because of a “large volume of incoming code,” and “not related to quality or functionality.” Could the new Blackberry 10 regain users’ preferences in the mobile market? And could RIMM regain investors’ confidence in the future?
According to Mark Hachman of pcmag.com, Blackberry 10 had 6 intriguing features including Blackberry Hub for improved messages, Blackberry flow for a better user experience, time shift application to choose the best picture among multiple shots, keyboard suggesting words for better typing, Blackberry balance to firewall data between work and personal uses, and Federal Information Processing Standard (FIPS) 140-2 certification for government agencies usages.
Among those 6 features, Blackberry balance and FIPS seem to be the most outstanding. Work data and personal data could be firewalled. Users could erase all of the work data without affecting personal data. In addition, it is glad to see that Blackberry sticks to its core competence with its unmatched security system. When the Blackberry Playbook was first released, it was the first one to be certified by the US and the Australian governments. Now the Blackberry 10 won FIPS the first time before the launch. This certification proved that the product could be used by US government agencies to transfer and share sensitive information. Personally, I think people choose Blackberry mainly because of its top security system, not because of its user friendliness. CEO Thorsten Heins is quite optimistic about the new platform: “In the last week, BlackBerry 10 achieved Lab Entry with more than 50 carriers - a key step in our preparedness for the launch of BlackBerry 10 in the first quarter of 2013… have spent the last several weeks on the road visiting with carrier partners around the world to show them the BlackBerry 10 platform and to share with them our plans for launch. Their response has been tremendous. They are excited about the prospect of launching BlackBerry 10 in their markets.” The CEO really hopes to turn RIMM around with this new platform and the new device running on it.
Users have waited for quite a long time for a breakthrough Blackberry product from RIMM. In contrast, its biggest competitor, Apple (NASDAQ: AAPL), with the newly launched iPhone 5, has kept refreshing itself with continuous releases of new products such as iPad 4, iPad mini. Additionally, the rumor of producing iPhone 5s is spreading widely. Another competitor, Nokia (NYSE: NOK) seems to make its way back strong in the US mobile market. Its Lumia device is partnering with three biggest mobile operators in the US including AT&T, Verizon and T-Mobile for exclusive Lumias sales.Sprint has not decided on Lumia but it said it had plans for Windows Phone 8 platform for the next year. Indeed, there is a tough competition out there in the market.
However, the Canadian Warren Buffett, Prem Watsa, showed his confidence in RIMM by loading up on more RIM shares in the third quarter 2012. He now owns more than 51.8 million shares, with a total value of more than $390 million. RIMM becomes his second biggest position, accounting for more than 21% of his total portfolio. Other value investor, Donald Yacktman, added more shares in the recent quarter as well. He owns nearly 23.5 million shares, with a total value of $176 million.
Currently, RIMM is trading at $9.97 per share; the total market capitalization is $5.22 billion. It is even less than 1% of what Apple is worth in the market right now. The market is valuing RIMM at only 0.5x book value. Apple is trading at nearly $550 per share, with the total market capitalization of more than $514 billion. It was more than 28% off from its high of $700 in September. Apple is still a value play with 12.3x P/E and 4.3x P/B. Nokia is trading at $3 per share, with the total market capitalization of $11.5 billion. The market is valuing Nokia at 1.1x P/B.
My Foolish Take
RIMM is an opportunistic play for me. If Blackberry 10 takes off, the company can fly high. Otherwise, I think its other bigger peers would buy RIMM for a good premium on the current market price. Apple is a pure value play, with a decent balance sheet, great earnings and free cash flow growth. It is valued cheaply in the stock market with only 12.3 P/E and 0.5x PEG. Investors might consider both stocks in the portfolio, however, for different reasons. For Nokia, even with the partnership with mobile carriers, I would rather stay out and watch to see how Lumia deliver for the company.

This Retailer is Too Cheap to Ignore


With the small cap series, I would like to talk about small cap opportunities the value investing way. Warren Buffett mentioned that he could make higher returns with a smaller amount of capital, such as 50% yearly on $1 million dollars.  I think with a small amount of capital, he would focus on undervalued stocks with little analyst coverage and competition from other investors. However, the small cap stock might be illiquid. That is why investors should be patient, have a long-term view, and do not panic with large price swings. Like the previous small cap series article, this one is about a small cap retailer stock. This retailer was listed around two years ago, and since April, the price dropped from $30.69 to $9.56. It has delivered double digit returns on invested capital for the previous 2 years with consistent increasing EPS and cash flow. It isBody Central (NASDAQ: BODY).
Business
Body is a specialty retailer with 263 apparel and accessories stores for young women from different cultural backgrounds, mainly in South, Mid-Atlantic, and Midwest at value prices. More than two thirds of revenue comes from apparel, the other 24% come from accessories sales. The business doesn’t manufacture itself, but rather buys merchandise from around 220 US vendors. More than 50% of its merchandise is from the top 10 vendors in 2011, with the two largest accounting for 27.3%.  The main revenue source is from store operations, with 88.3% of total net sales in 2011.
Historical operating figures
In the last three years, the retailer experienced quite favorable operating figures, with consistent comparable store sales growth and sales per gross square footage, along with the increase in its number of stores opened.

2011
2010
2009
Comp sales growth
11.30%
14.80%
4.90%
No of stores
241
209
185
Sales per gross square foot
$253
$233
$207
In addition, the EPS has grown more than 400% within just 3 years, from $0.23 in 2009 to $1.22 in 2011. In fiscal 2011, its return on invested capital was more than 27.5%. It is interesting to note that this retailer expanded without any leverage. As of September, it had $97 million in shareholders’ equity, $37 million in cash and short-term investment, and no debt.
Glitches
The recent quarter was not very good for the retailer. Its net revenue increased but its comparable sales experienced an 11.9% decrease. The income from operations fell significantly, including around $950,000 severance costs relating to its former CEO and CFO. The retailer kept expanding by opening 7 new stores in the quarter and closed 1 store to bring the total store count to 263, higher than 240 stores at the end of 2011. In the outlook for the fourth quarter, Body expected to have the full year net revenues to be in the range of $312-$314 million, with the EPS of $0.80 - $0.83. These financial glitches coincided with the management shakeup in the company. In August, its CEO, Allen Weinstein, resigned after three years managing the retailers’ operation. Since then, he has continued to sell his position. The board promoted CFO Thomas Stoltz to interim CEO while searching for a permanent replacement. The newly promoted interim CEO showed his confidence in the retailer by purchasing 10,000 shares at the price of $8.73 per share.
Comparable analysis
Compared to its peers including Rue21 (NASDAQ: RUE) and Aeropostale (NYSE:ARO), Body is obviously a better pick for growing retailers. It has the lowest PEG ratio of 0.4x, around half ARO’s PEG of 0.8x and Rue21’s PEG of 0.7x. In addition, it is the cheapest among the three with only 10.5x P/E, whereas the market is valuing Rue21 and ARO at 16.1x and 17.4x earnings respectively. Body is trading at $9.97 per share, with the total market capitalization of $162.22 million. Because it is holding a big chunk of cash and short-term investments, its enterprise value is just only nearly $119 million. The market is valuing Body quite cheaply at 3.85x EV/EBITDA, whereas RUE’s is 6.1x and ARO’s is 4.9x. The three retailers employ debt free operations. Being the smallest retailer with significant growth in the past, Body would keep expanding its operations. Rue21 is trading at $28.15 per share with nearly $670 million market cap, whereas ARO is trading at $13.08 per share with $1.06 billion market cap. Indeed, Oppenheimer thought alike, keeping the retailer in the Outperform category with a $19 intrinsic value tag, mentioning that Body is “too cheap to ignore.”
Foolish Bottom Line
Any businesses would have glitches during its expansion period. I think it is the case for Body. The small retailer has grown significantly in the past with outstanding comparable sales. It keeps growing by opening more stores each quarter. I might be wrong, but a cheap price and a low valuation give investors a decent margin of safety to bet on the stock. 

Tuesday, November 20, 2012

This Bakery is Getting Expensive


Beaten down companies can create investment opportunities. That is why I am interested in stocks approaching their 52 week lows, or stocks which have plunged recently. I have noticed a decent bakery that has consistently delivered a double-digit return on equity since 2005. It is Flowers Foods (NYSE: FLO). The stock has experienced quite a few ups and downs, but in a narrow range. That is why it is considered a less volatile stock, with the beta of only 0.16. This stock decreased in price gradually, from $23.80 in June to $18.87 in October, a market value loss of 20.7%. However, the stock just jumped more than 10% to $22.32 within just a day after the company was thought to be a most likely buyer of Twinkie maker Hostess' assets when it is liquidated. Is the price increased justified fundamentally? Let’s find out.
Flowers Foods has a history dating as far back as 1919, and has two main business segments: direct store and warehouse store delivery. The first segment operates 32 bakeries for customers in several regions in the US, whereas the warehouse delivery segment operates 10 bakeries sold to customers' warehouses. It is the business with customer concentration. The top 10 customers accounted for more than 45% of total sales in 2011, and Wal-Mart was the largest one with 21.6% of sales.
Over the last 10 years, Flowers Food has managed to grow its revenue and operating income consistently. In 2002, its revenue was $1.65 billion, with $27 million in operating income. Ten years later, the revenue was $2.77 billion, with $189 million in operating income. The annualized growth rate for revenue and operating is 5.3% and 21.5% respectively. Its EPS has grown from $0.09 in 2003 to $0.90 in 2011, marking a spectacular annualized growth of nearly 29.2%. Furthermore, Flowers Foods is a constant positive cash flow generator. For the trailing twelve months, it generated $222 million in operating cash flow and $159 million in free cash flow.
However, the balance sheet does not look quite exciting. As of September, it had $864 million in stockholders’ equity, $14 million in cash and nearly $400 million in long-term debt. Furthermore, it had $134 million in pensions and other benefits, and $667 million in goodwill and intangibles. So Flower Foods had only a $2.90 tangible book value per share. It also had more than $300 million in contractual cash obligations due in 2012, and $138 million due in 2013-2014.
In addition, investors might look at the history and see the consistently increasing dividends over the last 10 years, from $0.01 per share to $0.53 per share. However, the payout ratio has risen accordingly, from only 25% in 2002 to more than 59% in 2011. If we look closely at the cash flow statement, we might find that the consistently positive free cash flow is only if we don’t include acquisition cash flow. If we include that, the free cash flow of 2008 and 2011 would be negative $162 million and negative $114 million, respectively.
Currently, Flowers Foods is trading at $22.32 per share, with the total market capitalization of $3.08 billion. The market is valuing the company at 19.4x forward P/E and 3.6x P/E. The firm is paying a dividend yield of 2.8%. Flowers Foods is at richer valuations compared to its peers. The forward earnings of Campbell Soup (NYSE: CPB) andHillshire Brands (NYSE: HSH) were 12.9x and 17.4x respectively. Hillshire is paying the highest dividend yield with 4.8%, but in 2011, it paid out more than 84% of its earnings in dividends. Campbell Soup is the most conservative, paying a 3.2% dividend, with only a 48% payout ratio. Among the three, the free cash flow of Campbell Soup is the most stable with no big acquisition for the last 5 years. Campbell Soup is trading for $36.64 per share, with the total market capitalization of $11.49 billion, whereas Hillshire Brands is trading for $26.78 per share, with $3.27 billion in market cap.
Foolish Bottom Line
Flowers Foods own several great bakery brands, such as Bluebird and Tastykake with a 70% penetration in the US. However, it seems to grow the business via acquisitions. It would take time to figure whether the acquisition brings along synergies and profitability. With a not so strong balance sheet, high payout dividend ratio, fluctuating free cash flow after adjusting for acquisition costs, and high valuations, I would not purchase this company.

Follow George Soros and David Tepper Into This Insurer


It is interesting to see many famous hedge fund managers share the same long ideas. That is when investors should take notice. It might be a sole long idea, or just a hedge of a short. We do not know. Nevertheless, when many of them buy into one stock, it might indicate their bullish attitude toward that particular investment, especially when it accounts for a big chunk of their portfolios.
Recently, George Soros, one of the most successful hedge fund managers reported that he had bought more than 15.2 million shares of American International Group (NYSE:AIG) for a total value of nearly $500 million, at the price range of $30.17 - $35.00. AIG is now his largest holding, accounting for around 5.4% of his total US long portfolio. Following Soros, David Tepper, who is managing Appaloosa Management LP, bought 8.25 million shares to make it his fourth largest holding. AIG accounts for 6.7% of his portfolio. Other two hedge fund managers including Daniel Loeb and Leon Cooperman added more to their existing AIG position, owning 23.5 million and 8 million shares, respectively.
AIG is considered to be the global leading insurance corporation, operating in around 130 countries in various insurance fields such as life insurance, retirement services, and property-casualty. The majority of its revenue sources in 2011 came from commercial insurance (42%) and consumer insurance (22%). Both of these segments were run via Chartis. AIG was one of the corporations that received a $182 billion commitment from the government via the US Department of Treasury and the Federal Reserve. After the funding,  the Department of Treasury ended up owning 92% of AIG in Jan. 2011. Four months later, the department’s AIG ownership reduced to 77% due to the common stock offering by the department. In September this year, the department had another public offering of $18 billion. Now, the government funding of $182 billion has been repaid in full, and the government realized a profit of $15.9 billion to date.
In the third quarter, it reported a significant growth in revenue of $17.65 billion, from $12.7 billion in the same quarter last year. The growth was mainly due to the huge jump in its net investment income, from $658 million to $4.65 billion. With the increase in net income and decrease in the number of shares outstanding, its EPS improved from negative $1.99 in Q3 2011 to a positive $1.13. As of September, its total shareholders’ equity was $102.4 billion. The total policyholder contract deposits were nearly $127.5 billion. The majority of its $410 billion investment portfolio were in bonds, nearly $270 million. AIG is trading at $31.80 per share, with the total market capitalization of $46.95 billion. The market seems to value AIG cheaply, at 8.3x forward earnings and 0.5x P/B. 
For the last year, investors should be happy with a 45% return that AIG brought them. Actually AIG shot up to $37.21 in the middle of October, then slid down to the current price of $31.80. AIG’s peers are located in different places including AXA (NASDAQOTH: AXAHY) in France and Allianz SE (NASDAQOTH: AZSEY) in Germany. AXA has a similar valuation with AIG’s with 6.6x forward P/E and 0.6x P/B. However, it is better in terms of dividend as it is paying investors a 5.2% dividend yield. AXA is trading at $14.73 per share with the total market capitalization of nearly $34.5 billion. Allianz is a little more expensive with 9.9x forward earnings and 0.9x P/B. The dividend yield is 3.6%. Allianz and AIG are competing quite vigorously for a $50 billion auto insurance market in the biggest population in the world, China. Allianz made its move by selling voluntary coverage for 5 years, whereas AIG came in via 9.9% investment in the People’s Insurance Company of China, one of the largest Chinese insurers. Allianz is trading at $11.84 per share, with the total market capitalization of $53.58 billion.
My Foolish Take
With the strong footprint in the insurance markets globally, AIG will come back stronger. However, it will take some time. Along with the bullish attitude from other famous hedge fund managers who bought large stakes in AIG, investors might consider AIG to be a part of their long-term investment portfolios.  

A Leading Global Payment Service for Long Term Investors


Anyone remember March 2009? It was a time when the stock market reached a bottom; the Dow Jones Industrial Average was more than 6,600, the S&P 500 was around 680, and many great businesses were priced like peanuts. A great business that was priced at $10.43 per share in March 2009, is now trading at only 20% higher than that low, at $12.71 per share. It is Western Union (NYSE: WU).
Western Union the leading global business in money transfer and payment services. When people hear about Western Union, they think about reliability, trust, convenience, and speed. The global established brand brings consumers peace of mind when it comes to money transfer and payment. It has a condensed network of more than 485,000 agents in more than 200 territories. In fiscal 2011, there have been money transfer activities in around 70% of its locations. How does Western Union make money? From fees charged customers when they make payments or send money. The majority of its revenue has been in consumer-to-consumer, accounting around 84%-85% of total revenue, whereas global business payments accounted for 14%.
Since 2008, Western Union has managed to deliver double-digit return to shareholders. Its TTM ROIC is 27.37%, and the net margin has been increasing to 21.87%. At the same time, the business has grown its book value quickly while reducing financial leverage level, from 20.8x in 2009 to only 8.16x over the past twelve months. Its operating cash flow and free cash flow have been quite consistent since 2005, and they are now $1.15 billion and $930 million, respectively.
On Oct. 26, Western Union was trading at $17.93 per share. By Oct. 31, it dropped to $13.43 per share, after the company lowered its FY12 guidance. Previously, the company expected that its GAAP EPS would be $1.68 - $1.72, but it has lowered it to $1.60 - $1.63. It was also lower than analysts’ expectation of $1.76 EPS. Along with the announcement, the company declared its quarterly dividend of $0.125 per common share, a 25% growth compared to the previous quarterly dividend. It also planned a new share repurchase of $550 million, expiring at the end of 2013. As of September 2012, it has nearly $1.15 billion in stockholders’ equity, $1.8 billion in cash, and $8.2 billion in total liabilities. The two main items in the liabilities were payables and accrued expenses at $4.14 billion, and long-term debt at $3.43 billion.
Western Union's share are trading at $12.71 per share, with a total market capitalization of $7.58 billion. The high level of debt has made its enterprise value reach nearly $9.6 billion. However, the debt level is acceptable as its interest coverage stays at 7.62x. The EV/EBIDTA is only at 5.72x. Its forward P/E is only 7x, half of its 5-year average level of 14.5x.
Business-wise, Western Union owns 20% of the market share in international remittances. The second position is held by MoneyGram International (NYSE: MGI), which is much smaller with a $685 million market cap and around 267,000 agents globally. Since 2007, MoneyGram has kept generating losses due to its investment portfolio.  Its other peers include Paypal, a subsidiary of eBay, and American Express (NYSE: AXP). The business of American Express is much broader than Western Union's. It is a much larger corporation with a $60.77 billion market capitalization. Over the past 10 years, it has kept generating profits and paying consistent and increasing dividends. It is paying 1.4% dividend yield on the share price of $54.30, half of what Western Union is paying to its shareholders. The market is valuing American Express at 11.6x forward earnings.
Foolish Bottom Line
Western Union is a market leader with a huge economy of scale. The business has a wide moat focusing on global remittances and payments. In the short-term, it might have some glitch of underperforming analysts’ expectations. But with a low valuation, decent dividend yield, and constant cash flow generation, I think Western Union could be a safe bet for long-term value investors. 

A Large Global Asset Manager with Huge Insider Buys


I am often very excited about insiders’ buys, especially those with huge value. It is not about some hundred thousand, or some million dollars, but approaching nearly $100 million in value. In addition, this can be considered one of the biggest insiders buys in the overall market in nearly a decade. Ready to hear the name of the company? It is actually a big investment management firm with the increasing and consistent dividend payment for nearly 10 years. It is BlackRock (NYSE: BLK). Since October, James Grosfeld, the company’s independent director, has bought nearly 496,000 shares at the price range of $186.93 - $192, with the total value of more than $94 million. With a huge amount of one personal insider buy, should we follow?
James Grosfeld, 74 years old, is a private investor. He seems to have a lot of experiences in the real estate industry. He had been the chairman and CEO of Pulte Homes for around 14 years. Previously, he had been on the board of Copart for the period of 1993 - 2007, and as its chairman in 1993-1994. He was also on the board of Lexington Realty Trust and Ramco Gershenson Properties Trust. After the recent buy on November 1, he owns more than 700,500 shares of BlackRock.
BlackRock is a financial services firm, providing investment management services for a variety of customers. As of September 2012, it had more than $3.6 trillion of assets under management globally. The majority of its investments were in fixed income and equity. For fixed income, it had more than $650 billion in active fixed income and more than $393 billion in institutional index. The institutional index was much higher in equity investment, with around $993 billion and nearly $289 billion in active equity.  They are all considered long-term products of BlackRock, accounting for 92% of the total AUM.
In the third quarter 2012, its AUM has increased $113 billion from $3.56 trillion in the previous quarter to $3.67 trillion. Net market appreciation was reported to be $133.5 billion in all long-term products, including $97.2 billion appreciation in equity products and $21.5 billion appreciation in fixed income products. The weakened US dollar against other strong currency such as the Euro, Pound Sterling, and Japanese Yen has brought BlackRock nearly $29 billion growth in AUM.
Currently BlackRock has around $25.2 billion in stockholders’ equity. The stock is trading at nearly $187 per share, and the total market capitalization is $32.62 billion. The market is valuing BlackRock at 14.5x earnings and 1.3x its book value. It is interesting to see that BlackRock is paying constant and increasing dividends over years. In 2003, it paid out $0.34 per share in dividend. In 2011, the dividend has increased to $5.50 per share. However, the payout ratio has increased as well, from 17% in 2003 to 44.5% in 2011. BlackRock has outperformed its smaller peers such as Legg Mason (NYSE: LM) andState Street Corporation (NYSE: STT) in the last 5 years, with nearly 9.7% gain, whereas both State Street and Legg Mason generated losses of 38% and 61.8%, respectively.
Legg Mason is managing around $643 billion. It is trading at $25.08 per share, with a total market cap of $3.3 billion. The market is valuing Legg Mason at 19.8x P/E and 0.6x P/B. It is paying a 1.5% dividend yield to investors. State Street is trading at $44.21 per share, with the total market capitalization of $20.55 billion. It is currently valued at 11.2x P/E and one time its book value. The dividend yield is a decent 2% 
Foolish Bottom Line
Personally, I think BlackRock has a wide moat with a position as the largest global asset manager. The assets under its management could be considered quite sticky, as the majority are from institutional clients in more than 100 countries. With the huge insider buys, as well as consistent and increasing dividends, BlackRock should be in the portfolios of the long-term investors. 

Three Great F&B Stocks for Income Investors


Food & beverage have been always an exciting sector to bet on. The majority of depressions didn’t seem to slow the industry down; after all, people still have to eat and drink on a daily basis. That is why I am quite interested in this sector. However, investors need to dig in deeper to find the decent F&B businesses, which are priced reasonably in the stock market. A great business should deliver a double-digit return, and it should have a history of paying consistent dividends over time.
In order to search for those opportunities, I have set four main criteria to select the stocks: (1) Food & Beverage Industry with operating history of more than a century, (2) Return on invested capital must greater than 15%, (3) Paying dividend continuously for the last 10 years, and (4) Its EV/EBIDTA should be lower than 15x.
Here are the only 3 results:
Hershey (NYSE: HSY) has a long operating history, as it was founded in 1894 by Milton Hershey. It is considered to be the leading chocolate and sugar confectionery producer in the world. The business is divided into three regional segments covering all continents in the world, with more than 80 brand names. Hershey sells its products to wholesalers, retailers, merchandisers, and convenience and department stores so that those customers can resell its products to the end users. The biggest customer is McLane, accounting for 22.3% of its total net sales in 2011. Interestingly, McLane is a primary distributor of Hershey into Wal-Mart Stores.
Trailing twelve months, its ROIC was 23.65%. In the last 10 years, Hershey has paid consistently increasing dividends to shareholders, from $0.63 per share in 2002 to $1.38 in 2011. The current dividend yield is 2.1%. Hershey is trading at $71.74 per share, with the total market capitalization of $16 billion. Its EV/EBITDA stays at 12.71x.
Campbell (NYSE: CPB) is famous for being a producer of high quality convenience food products. It also has a long history dated back to 1869. The business has around 11 operating segments based on geography and product types, including US Simple Meals, Global Baking and Snacking, International Simple Meals and Beverage, US Beverages, and North America Foodservice. Campbell has five main customers accounting for around 34% of the total revenue. The largest customer is Wal-Mart Stores, accounting for 17%-18% of total sales. The company has around 4,200 trademarks in 165 countries.
Campbell Soup has a history of delivering double-digit return to shareholders. Over the past 12 months, its ROIC was nearly 19.7%. It has also paid consistent dividends in the past 10 years. The dividend yield is 3.2%. It is trading at $36.64 per share, with the total market capitalization of $11.5 billion. The market is valuing CPB at 9.44x EV/EBITDA.
Hormel Foods (NYSE: HRL), which was founded in 1891, is involved in manufacturing meat and food products with five main segments: Grocery products, Refrigerated foods, Jennie-O Turkey Store, Special Foods and Others. In fiscal 2011, more than 55% of total revenue came from perishable meat, 19% was from poultry and 16.8% was from shelf-stable. Wal-Mart is the biggest customer, accounting for 12.5% - 13% of its revenue.
Trailing twelve months, Hormel Foods delivered a 16% return on invested capital. The firm has paid consistent and increasing dividends as well. It has increased its dividend from $0.20 per share to $0.51 per share in the period of 2002-2011. The current dividend yield is 1.9%. Hormel Foods is trading at $30.87 per share, with the total market capitalization of $8.12 billion. The market is valuing it at 9.31x EV/EBITDA.
Foolish Bottom Line
With a strong legacy of operating for more than a century, a consistently high return on invested capital, a growing dividend and a reasonable EV/EBITDA, all three food & beverage companies should be considered to be in the portfolios of income long-term investors.

An Opportunistic Play with Large Insiders Buys


What is better than a company’s insiders, including the CEO, accumulate a big chunk of stocks for their personal portfolio? This happened recently with Halcon Resources(NYSE: HK). It just reported its third quarter earnings results and provided a decent outlook for 2013. After that, eight insiders bought more than 354,000 shares for more than $2 million. Out of that, Floyd Wilson, its chairman and CEO, bought 175,000 shares at the average price of $5.71 per share, for the total value of nearly $1 million. It seems that insiders are bullish. Should we share the same attitude to buy shares of Halcon along with the insiders? Let’s find out.
Halcon is in the business of exploring and producing onshore oil and natural gas properties in the US. Since its establishment in 1987, the company has been quite active in three states, including Louisiana, Texas, and Oklahoma. As of December 2011, the company’s estimated proved reserves were 21.1 MMBOE, with 59% were crude oil, 32% were natural gas, and 9% were NGLs. In fiscal 2011, Halcon produced more than 1,500 MBOE, with an average rate of 4,100 BOE per day.
In the third quarter 2012, Halcon had operating revenue of $73.1 million, nearly three times higher than the same quarter last year. It was due to the significant increase in sales of oil, from $18.96 million to nearly $65.7 million this quarter. The increase in oil revenue was mainly due to the rise in production volumes in GeoResources and East TexasAssets acquisitions.
However, it produced $20 million in losses in net income for the third quarter, or a loss per share of $0.11. The loss was due to significant increases in the general and administrative costs and the cost of depletion, depreciation, and accretion. Its chairman and CEO has commented that the company was switching to the exploitation phase after a multi-year drilling:
“We have achieved our goal of building an oil company with a multi-year drilling inventory in several liquids-rich basins. Now we turn to exploitation. The drill bit is spinning to the right in all three of our core plays, plus a few others. We have the knowledge, people and capital necessary to execute on our growth initiatives.”
Halcon has a decent balance sheet, with no long-term debt and $1.11 billion in stockholders’ equity. The biggest item in its balance sheet is the oil and natural gas properties with the net value of $2.37 billion. Currently, it is trading at $5.70 per share; the total market capitalization is $1.23 billion. With the proved reserves of 21.1 MMBOE, the market is currently valuing Halcon at $53.22 BOE, with the P/B of 1.1x. 
As mentioned above, it is worth noting that since Nov. 9, eight insiders have accumulated shares of Halcon in the price range of $5.35 - $5.74. The two most aggressive insiders are the chairman and CEO Floyd Wilson, with 175,000 shares for the total value of nearly $1 million, and James Christmas, a director with 100,000 shares for the total value of more than $570,000.
Wilson has an admirable record in the oil / gas industry. He founded Petrohawk Energy, a shale development company, which was bought out by BHP Billiton (NYSE: BHP) in 2011 for total consideration of $15 billion. The transaction provided BHP Billiton with Petrohawk assets of around 1 million acres in Texas and Louisiana with the proved reserves of 3.4 Tcfe. With the acquisition, BHP Billion recognized the goodwill of more than $3.5 billion. Thanks to the rising US gas prices, otherwise BHP Billion would have to write PetroHawk’s acquisition down. In addition, the shale addition to BHP’s assets might have a higher value than the purchase price.
Before that, Wilson founded Hugoton Energy, which was acquired by Chesapeake Energy (NYSE: CHK) in 1998. With that acquisition, Chesapeake owned 300 Bcfe of proved serves, more than 50% of total Chesapeake’s proved reserves of 580 Bcfe at that time. In 2011, the total proved reserves were nearly 18.9 trillion cubic feet of natural gas equivalent onshore in the US. Chesapeake is trading at $16.39 per share, with the total market capitalization of $10.9 billion.
My Foolish Take
With the successful record of its Chairman and CEO Floyd Wilson, I think the probability of Halcon Resources success would be very high. The confidence comes stronger with his $1 million insider purchase in the company. Like Hugoton and Petrohawnk, Halcon Resources might be up for sale to bigger energy corporation in the near future.

A Closer Look at Four Warren Buffett Sells


Along with Warren Buffett’s new buys of Deere & CompanyWabco Holdings andPrecision Castparts, it was worth noticing that Berkshire Hathaway (NYSE: BRK-B)sold some of its holdings. The corporation sold out its shares of CVS Caremark (NYSE:CVS) and Dollar General (NYSE: DG). In addition, it reduced some of its stakes in two long-term holdings, Johnson & Johnson (NYSE: JNJ) by 95% and Procter and Gamble(NYSE: PG) by 11%. It seems that his two talented investment managers, Todd Combs and Ted Weschler, made those decisions. Industry-wise, more industrial stocks are added and consumer and retailer stocks were sold out or reduced. Should investors follow? Let’s go through each stock to find out.
CVS Caremark
The elimination of CVS seems to have created bearish momentum for its shares. It was just a one-year holding for Berkshire Hathaway. Buffett bought CVS in Q3 at the average price of $35.73. He has begun to sell CVS since last quarter when the average price was $44.87, and the total stake in CVS was eliminated for an average price of $46.20. He picked the right time to enter CVS. Right after he bought it, CVS soared. For the trailing twelve months, CVS delivered a 8% return on invested capital, with 3.18% net margin and 1.76x financial leverage. CVS is now trading at $44.70 per share; the total market cap is $55.73 billion. The market is valuing CVS at 15.3x P/E and 1.5x P/B. It is paying its shareholders a dividend yield of 1.4%.
Dollar General
Warren Buffett added discount retailer Dollar General to Berkshire Hathaway’s portfolio in the middle of last year. As of June 2011, Berkshire Hathaway owned around 1.5 million shares in the company. Buffett began to buy Dollar General at an average price of $32.81, and he added more positions in the following quarter at a slightly higher price. It was reported that Berkshire Hathaway sold out its position in the company completely in the price range of $48.54 - $55.58.
The dollar store concept has been performing quite well during the recession, with the high unemployment rate and low wage growth bringing more customers to the discount stores. Over the past 10 years, Dollar General has managed to grow its revenue continuously, from $6.1 billion in 2002 to $14.8 billion in 2011.  For the trailing twelve months, its return on invested capital was 12%, net margin was 5.7%, and financial leverage was 2.1x. Dollar General is trading at $47.96 per share with a total market capitalization is $16 billion. The market is valuing the company at 18.3x P/E and 3.3x P/B.
Johnson & Johnson
Warren Buffett bought JNJ in 2002 and 2005 when the stock price was trading at 15.2x P/E. He has been buying and selling JNJ stocks for the last several years. In the last quarter, he reduced Berkshire Hathaway’s stake in JNJ significantly, down more than 95%, at an average price of $68.34. After the trade, Berkshire Hathaway currently owns only 492,028 shares.
In the last 10 years, JNJ has kept delivered a double-digit return on invested capital. However, the return has been trending down. For the trailing twelve months, its ROIC was 10.6%. JNJ has a history of paying increasing dividends over time. Its annual dividend was $0.80 per share in 2002, and it increased to $2.25 per share in 2011. Nevertheless, its payout ratio has increased, from 36.8% in 2002 to as high as 64.5% in 2011. JNJ is trading at $69.07 per share, with the total market capitalization of $191.41 billion. The market is valuing the company at 22.7x P/E and 3x P/B, with a dividend yield of 3.4%.
Procter & Gamble (P&G)
Warren Buffett ended up owning P&G because he had previously owned Gillette since 1989. Berkshire Hathaway was Gillette’s largest shareholder, with around 9% ownership of the company. In 2005, P&G bought Gillette for $57 billion, giving Buffett a whopping $4.4 billion in profit. After the deal, Berkshire owned 100 million shares in P&G. As of Q1 2012, ownership was reduced to 75 million shares, and as of Q3, it was just more than 52.7 million shares. Compared to other positions, P&G takes a good chunk of total Berkshire Hathaway’s US investment portfolio, at nearly 4.9%.
P&G is receiving a lot of attention these days due to Bill Ackman, the activist investor who owns around 1% of the company. His fund, Pershing Square, bought P&G for $62 per share, at 16x P/E. He said that the valuation is historically low on depressed earnings. He was trying to put pressure on the current chairman and CEO, Robert McDonald, to perform better and deliver better return for shareholders. Trailing twelve months, P&G’s ROIC was nearly 10.95%. It is trading at $66.32 per share, with the total market capitalization of $181.33 billion. The market is valuing P&G at 21.6x P/E and 2.9x P/B. The current dividend yield is 3.3%.
My Foolish Take
Investors should look deeper in the business fundamentals to determine the course of actions suitable for themselves. Personally, I think over the long-run, the great businesses with long operating histories such as JNJ and P&G will deliver decent returns for its shareholders.  

This Specialty Retailer Looks Good After the Rise


Investors should notice the large price swings in the market. However, they should not be dictated emotionally with those swings. They should take advantage of them to buy or sell certain positions in their portfolios. Recently, Abercrombie & Fitch (NYSE: ANF) has experienced nearly 35% daily gain, from $31.18 to $41.92 per share. The significant gain was fueled by its impressive third quarter results. Do the strong results justify the rise, or did the market just overreact? Let’s dig deeper into its reported numbers.
Abercrombie & Fitch is a specialty retailer, which sells a variety of products ranging from sportswear, jeans, and outerwear to personal care and accessories, under Abercrombie & Fitch, Hollister, Abercrombie kids, and Gilly Hicks brands. As of fiscal 2011, it operated around 946 stores domestically in the US and 99 stores outside of the US. In addition, the retailer offers its products via direct-to-consumer channel including its website. In 2011, this channel brought in more than $550 million in revenue, accounting for 13.3% of net sales for the company.
It is good to see that the company sourced its merchandise through 170 vendors globally, with no single factory taking more than 10% of total merchandise. As a specialty retailer, the business is quite seasonal with the majority of revenue occurring in August (Back to School season) and November and December (Holiday).
The third quarter 2012 results came very strong. The revenue was nearly $1.17 billion, 8.8% higher than the same period last year. The net income grew as high as 40.5% to $71.5 million. The EPS was $0.87, a 53% growth compared to Q3 2011. Mike Jefferies, the Chairman and CEO commented
These significantly improved financial results reflect progress on several fronts over the past quarter. Our US chain store business posted healthy growth on top of a strong quarter a year ago, and we saw sequential trend improvement in our international business. Our principal focus remains to execute against our key strategic initiatives to leverage our iconic brands and to continue to be judicious in our use of our shareholders' capital to drive long-term shareholder value.”
However, the overall comparable sales declined 3% year over year, along with the decrease in comp sales across all the brands. For the FY 2012 outlook, it is expected to have the EPS of $2.85 to $3, with mid-single digit percentage decrease in comp sales.
The retailer has quite a strong balance sheet. As of October 2012, it had nearly $2.85 billion in stockholders’ equity, with only $60 million in short-term borrowings and $174.7 million in deferred lease credits. In addition, it had a good chuck of cash, with nearly $350 million readily available. With the incredible 35% advance in the share price, it is trading at $41.92 per share; the total market capitalization is $3.46 billion. Its enterprise value is $3.27 billion.
Based on the management’s expectation, its P/E is in the range of 14x – 14.7x.  Since 2010, the retailer has experienced a significant decrease in operating performance, from an average 29% (2003-2009) to only 4.8% (2010-2012). The decrease was mainly due to the sluggish net margin.
Both of its peers, including Gap (NYSE: GPS) and American Eagle Outfitters (NYSE:AEO), had a triple and double than ANF’s net margin and ROIC, respectively. GAP seems to be the most performing retailers among three, with a 6% net margin and 15.9% ROIC. However, it is paying the least dividend yield of 1.5%, whereas AEO and ANF had a 2.3% dividend yield. All three have quite similar forward earnings valuation of 13x – 14x. GAP is trading at $33.46 per share with the total market capitalization of $16.09 billion. AEO is trading 19.12 per share, with the total market capitalization of $3.76 billion.
Foolish Bottom Line
All three retailers seem to be decent for shareholders to buy for their portfolio. Among the three, I would personally pick GAP as it has the most outperforming business performance. Investors might consider the other two retailers for their income portfolios as have been paying consistent dividends for the last 5 years.

Three of Warren Buffett's New Buys


All investors would like to achieve a great investment record like Warren Buffett. That is why we love to follow his speeches, his teachings, and his ideas. It would be quite useful for us to closely follow the movement of Berkshire Hathaway (NYSE: BRK-A) (NYSE:BRK-B) in the stock market. Recently, Berkshire Hathaway revealed its three newest investments: Deere & Company (NYSE: DE)Wabco Holdings (NYSE: WBC), andPrecision Castparts (NYSE: PCP). Currently, Berkshire Hathaway holds nearly 4 million shares in Deere, 1.6 million shares in Wabco, and 1.25 million shares in Precision Castparts. Should investors join Berkshire Hathaway into those three new buys? Let’s look at their fundamentals to find out.
1. Deere & Company
Deere is involved in three main business categories: agriculture and turf to provide farm and turf equipment; construction and forestry to provide machines for construction, material handing and earth moving; and financial services for leasing its equipment. The first business segment delivered the majority of sales, with $24 billion out of $32 billion in total sales, whereas construction and forestry segment only brought in a combined $5.3 billion in fiscal 2011. In the last several years, the agriculture and turf segment has surfed quite well on the rising demand for agricultural commodities. The demand was expected to be strong, mainly for high horsepower equipment of the company.
Over the last 9 years, Deere has managed to continuously deliver double-digit returns on equity to shareholders. Trailing twelve months, the ROE was nearly 41%. The high return on equity was due to a decent net margin of 8.7% and a high leverage level of 7.19x. As of July 2012, Deere had $7.4 billion in stockholders’ equity, more than $21 billion in long-term debt, $10 billion in short-term debt, and nearly $5 billion in cash. The low equity portion was mainly due to the increasingly high share buybacks, with nearly $8.5 billion value in its balance sheet. Even with the high debt level, Deere could comfortably pay for the interest expense, as its interest coverage is 6.2x. Deere is trading at $84.74 per share; the total market capitalization is $33.19 billion. The market is valuing Deere at 11.4%, with a 2.1% dividend yield.
2. Wabco Holdings
Wabco Holdings, established in 1869, is in the business of providing electronic and mechanical products, especially anti-lock braking systems (ABS) and electronic braking systems (EBS) for bus, truck, and passenger car producers. Its customers are divided into four main groups: OEMs for trucks and bus, OEMs for trailers, commercial vehicle aftermarket distributors, and car manufacturers. Daimler and Volvo are its largest customers, with around 12% and 11% of total sales, respectively, in fiscal 2011. The top 10 customers took 52% of its total sales. It is interesting to see that around 62% of revenue came from Europe; Asia ranked the second with 19% of sales. So the bet on Wabco by Berkshire Hathaway is a bet on European trucks and bus OEMs.
Wabco has delivered solid returns over the past 10 years, with consistent double-digit return on invested capital in the majority of the years. Over the past twelve months, its ROIC was 47.9%, the net margin was 12.3% and financial leverage was ample at 2.3x. As of September 2012, Wabco had $710 million in stockholders’ equity and $225 million in cash. The business employed $123 million in short-term debt, but it does not have long term debt. Like Deere, Wabco has been buying back shares, with the current value of $606 million treasury stocks in the book. Currently, Wabco is trading at $57.64 per share; the total market capitalization is $3.64 billion. The market is valuing Wabco at 12.2x P/E and 5.1x P/B.
3. Precision Castparts
This is a manufacturer of metal components in three segments: Investment Cast, as well as Forged and Fastener products, which are provided to diverse industries ranging from aerospace, medical, oil/gas, to pollution control. The majority of sales were from the aerospace market, which accounted for 62% of total sales in fiscal 2012. The second position belonged to the power market, with 21% of sales. The biggest customer wasGeneral Electric, accounting for 15.4% of sales in 2012. In addition, the firm considered United Technologies, Boeing, Airbus, and Rolls-Royce as key customers, although they didn’t account for more than 10% of total sales.
The business performance has been quite consistent, with double-digit return on invested capital and net margin for the last 5 years, while employing ample financial leverage of only 1.3x. Over the past 12 months, its ROIC was 15%, the net margin was 17.2%. As of September 2012, it had $9 billion in stockholders’ equity, $193 million in cash and only $670 million in debt. Currently, the stock is trading at $173.30 per share; the total market capitalization is $25.22 billion. The market is valuing the business at 19.1x P/E, 2.8x P/B, with the dividend yield of only 0.1%.
My Foolish Take
All three businesses mentioned above have delivered good business performances in the past, with high return on capital and reasonable debt level. They all have kept enhancing shareholders’ value by repurchasing its own stocks in the market. Personally, I think they are worth investors’ consideration to buy and hold for the long run.