Thursday, November 29, 2012

The 3 Biggest Positions in Warren Buffett's Portfolio


Warren Buffett and Charlie Munger have made their fortune by their top buy-and-hold ideas. They are not new, fancy, or sexy ideas, but very simple. Charlie Munger even mentioned that both of them had a habit, whenever a new investment idea come, they would do the comparison to see whether that new idea was much better than existing positions in the portfolio. If not, they would pass and stick to their existing positions. Here are their top three positions:
Coca-Cola (NYSE: KO) takes the lead with 20.1% of Berkshire Hathaway’s (NYSE:BRK-A) (NYSE: BRK-B) portfolio. Berkshire Hathaway owns 8.9% of the world’s largest beverage company, with a value of $14.9 billion. Warren Buffett loves it because of its global market leader position, predictability, and excellent historical growth. Coca-Cola currently owns 49.9% of the global market share, more than its closet rival Pepsi’s 29.9%, and the third global player’s 16.9%. In the last 10 years, Coca-Cola has experienced annualized growth in both revenue (9%) and EPS (11.55%). Although Coca-Cola is large, with the total market capitalization of $167 billion; it still has a lot of room for growth. Currently the majority of unit cases sold were in the US, accounting for 21%, whereas China was only 8%. India and Russia each had 2%. As in “2020 vision,” in the next 5 years, the company committed to investing $30 billion in emerging markets around the world and to double its $100 billion revenue by 2020. Currently Coca-Cola is trading at 19.5x P/E and 5x P/B. In addition, it is paying 2.7% dividend yield.
Wells Fargo (NYSE: WFC) is the second largest holding in Warren Buffett’s portfolio. It seems to be the bank that he loves the most. Buffett first invested into the bank during the banking crisis relating to real estate loans. At that time, the majority of the Wells Fargo’s loans were exposed to real estate. Everybody was panicked, and continued to sell off all bank shares. In 1989, he jumped in and initiated the position in the bank. At that time, Wells Fargo delivered a return on equity of 20% and sold in the market at only 5x earnings. In the recent quarter, he added more Wells Fargo to Berkshire Hathaway’s portfolio. Buffett's stake in Wells-Fargo is worth $13.9 billion, accounting for around 19.4% of his total portfolio. Currently, most of Wells Fargo’s loans are in real estate 1-4 first mortgages, accounting for 21% of its total assets. The large residential mortgage loan would benefit the bank because of the current gradual improvement in the residential mortgage environment. In addition, Wells-Fargo has the highest net interest margin in the industry, 3.66%. Citigroup ranks the second with 2.8%, whereas BAC's and JP Morgan's are at 2.21% and 2.43% respectively. The market is valuing Wells-Fargo at 10.2x P/E and 1.2x P/B.
International Business Machines (NYSE: IBM) is the first biggest bet of Berkshire Hathaway in the technology field. Warren Buffett just recently bought IBM at the reasonable earnings valuation of 13.5x and 9x P/B. At that time, IBM delivered nearly a 70% return on equity and paid 1.6% dividend yield. Berkshire Hathaway currently owns more than 67.5 million IBM’s shares, with the total value of nearly $12.8 billion, accounting for 18.6% of his total portfolio. Buffett said he bought the stock after reading recent IBM’s annual report. He was amazed with IBM’s moat in supplying technology solutions to businesses. In his analysis, he cared about what the companies were doing and what they planed to be doing in the future, how tied they were with suppliers and the level of stickiness. Warren Buffett said he likes IBM because it laid out where wanted to go, and it went there. Buffett commented: “They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they've laid out another road map for 2015. They've done an incredible job." Currently, IBM is trading at $189.20 per share with the total market capitalization of $213.78 billion. The market is valuing the company at 13.7x P/E and 10x P/E. It is paying investors a 1.7% dividend yield.
My Foolish Take
Indeed, all of those three businesses above are recession-proof. They have long traditions and strong legacies with global recognition. In addition, they are paying investors sustainable and decent dividend yields. Investors would be better off holding those three stocks for their lifetime portfolios. These are true buy and holds.

Which Hospital Operators Will Thrive Under ObamaCare?


At the end of 2011, when I was looking for investment opportunities in the US, I stumbled onto one decent hospital operator that had continued to increase operating cash flow. However, I did not initiate a position because of its high leverage level. That company is Community Health Systems (NYSE: CYH). When I first looked at it, CYH was trading for only $16 - $17 per share. Now, I feel I may have missed out, as it has already advanced to more than $30 per share, a gain of 76% - 87% in less than a year. So, with a $30 price tag, is CYH still a good investment? 
CYH, founded in 1986, is in the business of providing healthcare services via 131 operated hospitals with nearly 19,700 beds in 29 states in the US. The occupancy rate in terms of beds in service has fluctuated in the last 3 years. The revenue from inpatient and outpatient services has been relatively evenly divided during this period. In 2011, the inpatient revenue was 46% of total revenue, whereas the outpatient revenue accounted for 52%. Over the years, CYH has generated increased revenue, operating income, and operating cash flow
USD million
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Revenue
2,200
2,835
3,333
3,738
4,366
7,127
10,840
12,108
12,987
13,626
Opt. Income
242
291
339
406
380
486
984
1,069
1,115
1,134
Opt. CF
285
244
326
411
350
688
1,057
1,076
1,189
1,262
The 10-year annualized growth of its revenue, operating income, and operating cash flow was 20%, 16.7% and 16%, respectively. That’s quite a record of growth.
What worried me, was the high debt level that CYH is carrying and its high level of goodwill. As of September, CYH’s total stockholders’ equity was $2.65 billion; the cash on hand was only $241 million. The long-term debt increased to nearly $9.5 billion, along with nearly $4.4 billion in goodwill. That leads to a negative tangible book value of nearly -$20 per share, whereas the shares are currently trading at $30, with a total market capitalization of $2.74 billion. However, with 1.94x interest coverage, CYH is in decent position to pay back its interest expense on its debt. 
President Barack Obama’s Affordable Care Act will have positive effects on hospital operators, as one of their main revenue sources have been from the reimbursement of Medicare and Medicaid.  The effort of this law is to provide health insurance for all US people and to reduce healthcare spending growth. It would expand Medicaid coverage for around 17 million people in the US, provide 47 million women access to preventative health services, and it also gives the seniors free preventative care and cheaper drugs. This law would improve the bottom lines of hospital operators including CYH, HCA Holdings (NYSE: HCA)Health Management Associates(NYSE: HMA) and LifePoint Hospitals (NASDAQ: LPNT). In 2011, the majority of CYH’s revenue source was from Managed Care and other third party payers, 51.5%, whereas Medicare and Medicaid accounted for 26.8% and 9.7% of the total operating revenue respectively. For HMA, Medicare accounted for 31% and Medicaid accounted for 9%. For HCA, the Medicare and Medicaid took around 34% and 10.5% of the total revenue respectively. LifePoint had a little higher percentage, 35%, from Medicare and 14.3% from Medicaid.

CYH
HCA
HMA
LPNT
D/E
3.6
Negative equity
3.7
0.8
Forward earnings
6.4
7.7
8.8
9.7
Tangible book per share
-19.7
-27.3
-0.8
6.3
It seems that all hospital operators employ high levels of debt. HCA even has negative equity due to high level of negative retained earnings. As of September, it had  negative equity of $7.86 billion, whereas the total long-term debt was more than $25 billion. LifePoint is the least leveraged, with only 0.8x D/E. It is also the only company that has a positive tangible book value.
Just two weeks ago, Glenview Capital, managed by Larry Robbins, reported to increase its holdings in CYH to nearly 7.65 million shares, or 8.39% of total company. Glenview Capital now effectively invested 30.5% of its funds into Health Care industry, out of 45 stocks it owns. The current biggest position is Life Technologies(NASDAQ: LIFE) with nearly 11.5 million shares. LIFE’s position is worth nearly $560 million, accounting for 9.2% of the total portfolio. LIFE is trading at $50.08 per share, with the total market capitalization of $8.62 billion. The market is valuing Larry Robbins’ biggest position at 12.3x forward earnings. In addition, he also owns 8.43 million shares of HCA, accounting for 4.6% of his portfolio.
My Foolish Take
The future seems to be bright for hospital operators with the Obama administration. However, I think investors need to dig deeper to find the suitable opportunities and some diversification. Personally, I prefer LifePoint for its most conservative capital structure. 

3 Cheap Stocks Paying Consistent and Growing Dividends


Investments give investors two sources of income: dividends and capital appreciation. Income investors would prefer big companies, which pay consistent growing dividends over time, so that they can have constant income for their living expenses, and feel safe with those companies. Of course, investors should be worried about companies that keep paying consistent growing dividends, but the amount of dividends are more than what they earn on that particular year. I’m looking for investment opportunities for income investors into cheap large cap companies, which has decent histories of paying consistent and growing dividends. The screen is based on four main criteria: (1) at least 5 years of historical dividend payment, (2) payout ratio is less than 15%, (3) dividend growth rate is greater than 5% per annum, and (4), the EV/EBITDA is less than 5x. Here are the top 3 companies: 
Apache Corporation (NYSE: APA) is an exploration and development company for crude oil, natural gas and natural gas liquids in six geographic areas: the US, Canada, Australia, the North Sea, the UK, Australia, Argentina and Egypt.  As of December 2011, the estimated proved reserves were nearly 3 billion BOE, and 43% of that was in the US. In 2011, it produced 273.1 MMBOE, and 38% of that was produced in the US. Apache has the history of paying consistent and growing dividends. In 2002, it paid out $0.19 dividend per share, and in 2011, the annual dividend was $0.60 per share. So over the last 10 years, the annual dividend growth is more than 12%.
The current payout ratio is only 10.3%. Trailing twelve months, it delivered a 13.6% return on invested capital, along with the net margin of 26.7%. Currently, it is trading at $77.14 per share, with the total market capitalization of $30.18 billion. The market is valuing Apache at only 7.6x forward earnings and only 3.34x EV/EBITDA.
Aaron’s (NYSE: AAN) is the specialty retailer of household appliances, electronic products, furniture and accessories in 1,232 company-owned stores and 713 franchised stores in the US and Canada. The business has combined traditional retailing with rent-to-own model, allowing customers to either purchase products outright or lease it with the opportunity to own it. Aarons' model allows customers to obtain ownership of around 46% in the beginning of the lease, higher than that of rent-to-own model of around 25%.  The majority of revenue derived from lease operations, of $1.5 billion out of $2 billion in total revenue. The second highest revenue was from non-retail sales, of $388 million in 2011. The retail and franchise fees were only around $100 million in revenue combined.
Aaron's began to pay a dividend in 2006, of $0.03 per share. In 2011, the dividend was $0.05 per share, thus the annual dividend growth for the last 6 years was 5.2%. It has a quite low payout ratio, fluctuating in the range of 2.9% - 4.1%, and currently at 2.9%. Trailing twelve months, its ROIC was 14.35%. Aaron's is trading at $29.26 per share, with the total market capitalization of $2.55 billion. The market is valuing the company at 11.4x forward earnings and only 2.3x EV/EBITDA.
HollyFrontier Corp (NYSE: HFC) is the result of the merger between Holly Energy Partners and Frontier Oil Corporation in July 2011. It is involved in refining high value light products including gasoline, diesel fuel, jet fuel, etc, which is divided into two segments: refining and Holly Energy Partners. The majority of revenue were from gasoline and diesel fuels sales, accounting for 48% and 32% of total 2011 sales, respectively. The business has a customer concentration; in 2011, 13% of revenue was from Sinclair and 10% of revenue was from Shell Oil.
HollyFrontier has a history of paying consistent and growing dividends as well, from $0.05 per share in 2002 to $0.34 per share in 2011, an annualized growth of 21.13%. Currently, the payout ratio is only 6.7%. The company is trading at $45.48 per share, with the total market capitalization of $9.24 billion. The market is valuing HollyFrontier at 7.8x forward earnings and only 2.89x EV/EBITDA.
Foolish Bottom Line
With a strong history of paying consistent and growing dividends at the decent rates, low payout ratio and low EV/EBITDA, those three companies mentioned above should be considered by long-term investors for their income investment portfolios.

What Credit Companies Are Buys?


Many people are now living on credit.  It seems to be quite easy and convenient for users to purchase now, and think about the payment later. The credit card industry is the direct beneficiary of this trend. Indeed, Visa (NYSE: V)MasterCard (NYSE: MA), and American Express (NYSE: AXP) have delivered good returns for their shareholders over the years. The 5-year total return chart shows it all.
Visa leads the group with more than a 170% return, whereas in the last 5 years MasterCard and American Express delivered a 134% and 48% return, respectively. So, in the rear view mirror, Visa was a winner for investors. How about the future? Should investors bet on Visa as well, or on the other two? Let’s find out. 
In terms of brand identity,  big spenders may be most familiar with American Express. It is the brand known for ease of use, customer loyalty, and trust. It has a “spend-centric” business model, concentrating on delivering revenue by driving spending, whereas finance charges and fees are only secondary. In 2011, around 70% of its $30 billion of revenue were generated from activities inside the US. Visa and MasterCard have more international users. Visa is considered to be a global payment technology company with its presence in more than 200 countries and territories. Its revenue was derived from fees paid by clients based on volumes of payment and from other financial services. The operating revenue derived from US market in 2011 was $5.7 billion, accounting for nearly 54.9% of its total revenue. Similarly, MasterCard is reported to have its presence in more than 210 countries and territories with more than 150 currencies. In 2011, the net revenue generated in the US accounted for 39.6% of its $6.7 billion total revenue. The US was the only country, which accounted for more than 10% of MasterCard’s revenue in any period. Furthermore, Visa and MasterCard are quite similar that both of them partnered with banking institutions to be their middleman, whereas American Express could directly lend money to consumers. 
In terms of global market share, in 2011, Visa was still the market leader with more than $3.7 trillion dollars in payment volume, with 77.6 billion transactions and more than 2 billion cards. MasterCard took the second place with $2.43 trillion in payment volume; with 39.8 billion transactions and more than 1 billion cards. The third place belonged to American Express with 808 billion in payment volume, with 5.3 billion transactions and 97 million cards.
In terms of financial figures, it seems that MasterCard is the best bet for now.

V
MA
AXP
Net margin (%)
20.57
30
16.15
ROIC (%)
7.93
33.73
5.83
D/E
N/A
N/A
2.9
Forward earnings
18
18.6
12.2
Dividend yield (%)
0.7
0.3
1.4
Among the three, MasterCard has the highest net margin and an extremely high return on invested capital over the previous 12 months. Its 33.7% return on invested capital is four and five times higher than those of Visa and American Express. That might be the reason why MasterCard has a slightly higher forward earnings valuation of 18.6x. Visa has a very high trailing P/E of 46x, but only 18x forward P/E. Both Visa and MasterCard employs no debt whereas the D/E of American Express is 2.9x due to a different business model, which was discussed above.
My Foolish Take
Investors would feel safe by betting on all three companies. Visa seems to be a good bet with its market leader position and its economies of scale. However, I would personally choose MasterCard because of its highest margin and the highest return on invested capital compared to the other two companies.

Tuesday, November 27, 2012

Following Huge Insider Buys of This Agricultural Equipment Maker


$105 million insider buys for the last 2 months! Does it sound like a screaming opportunity? More interestingly, it was from one single director. It happened with agriculture equipment maker AGCO Corporation (NYSE: AGCO), and the director is Mallika Srinivasan, the current chairman and CEO of Tractors and Farm Equipment Limited. Since Oct. 10, she kept buying AGCO’s shares at the price range of $43.61 - $46 per share, with the total value of more than $105 million. After the most recent purchase in Nov. 23, she effectively owns more than 2.7 million shares in the company.
AGCO is the global leading agricultural equipment maker of a variety of products such as tractors, hay tools, sprayers, etc in 140 countries via 3,100 independent dealers and distributors. The majority of its sales occurred in Europe, accounting for 52% of total sales in fiscal 2011. North and South America ranks the second with around 20%-21% of total sales for each region. Recently, the company reported its third quarter earnings results and its guidance for FY 2012. The revenue experienced 9.3% year-over-year growth to $2.3 billion, but it missed the revenue estimate of $2.4 billion. In the revenue result, it already included the currency translation of negative 11%. Excluding the currency translation impact, the sales growth would've been 20.3%.  The operating income was nearly $140 million, 22% higher than the same period last year. Its net income for the quarter was $92.1 million, or $0.96 diluted EPS, a 10.3% growth compared to Q3 2011 EPS of $0.87.
AGCO seems to have a comfortable balance sheet. As of September, AGCO recorded $3.38 billion in total stockholders’ equity, $1.35 billion in long-term debt, nearly $290 million in pension benefits and $322 in cash. Trailing twelve months, it delivered more than 17.5% return on invested capital, along with 7.2% net margin.
The company competes globally with Deere & Company (NYSE: DE) and CNH Global NV(NYSE: CNH). Deere was the stock that Warren Buffett chose to buy for the third quarter 2012. Berkshire Hathaway bought nearly 4 million shares for around $78 per share on average. Deere has been delivering good returns for shareholders in the last 9 years, with consistent double-digit return on equity. However, its high return on equity was largely contributed by high leverage level.

AGCO
DE
CNH
Net margin (%)
7.21
8.71
5.62
ROIC (%)
17.55
8.42
4.51
D/E
0.4
2.9
1.4
Forward P/E
7.3
8.7
9.3
Dividend yield (%)
N/A
2.1
N/A 
Indeed, Deere is the most leveraged company among the three, with 2.9x D/E, whereas AGCO employs the least, with only 0.4x D/E. Deere is the only company which pays dividends. The current dividend yield of Deere is 2.1%. Trailing twelve months, we can see that AGCO is the most efficient in deploying its invested capital, with more than 17.5% ROIC. It is more than two times higher than Deere’s return on and four times higher than CNH’s return. In addition, AGCO is the cheapest compared to the other two companies with only 7.3x forward earnings, whereas the forward P/E of Deere and CNH are 8.7x and 9.3x respectively. AGCO is the market leader in other countries rather than in the US. It was reported that Fendt and Massey Ferguson took around 25%-30% of the European market share, whereas the latter brand was a market leader in South America, with 60% share. It is currently the third largest player in the US market. 
Foolish Bottom Line
The purchase of Deere signals Berkshire Hathaway’s bullish attitude towards agriculture equipment products. AGCO might be small for Berkshire Hathaway, with only $4.4 billion in market capitalization, whereas Deere’s market cap is nearly $32.9 billion, 8 times higher. Among the three, I would prefer AGCO because of the huge insider buys, highest return on invested capital, and cheapest valuation. 

A Short-Term Bet with Insider Buying


"Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise." – Peter Lynch
That is why I often follow insider buys quite closely. I expect most of the time, insiders will buy if they think the company is either undervalued, or will experience a certain catalyst in the near future which can drive the company’s share price higher. Currently, the children's educational entertainment company, LeapFrog Enterprises (NYSE: LF), has been bought by several insiders, including the CEO, the CFO, and other directors since November 8. The total purchase value was around $795,500. John Barbour, the CEO, bought 15,000 shares at $7.23 per share, whereas its CFO, Raymond Arthur, bought 12,607 shares at an average price of $7.68 per share. Should investors follow those purchases? Let’s find out. 
LeapFrog makes learning toys and develops several learning platforms for children including LeapPad Explorer and Tag and Tag Junior reading systems. The majority of sales were in the US market, accounting for around 75% of total sales in fiscal 2011. The business had customer concentration on three big retailers including Wal-Mart Stores, Toys “R” Us, and Target. Those three retailers combined for around 64%-65% of the total revenue. LeapFrog is operating in a quite seasonal business. The busiest seasons are normally the third and the fourth quarter, which accounted for around 33% and 46% of total sales, respectively. In terms of operating cash flow, it seems to be highest in the first quarter, as the firm collects receivables from fourth quarter sales. The cash flow from operation is the lowest in the third quarter when receivables have been collected and inventory is stocked for the holiday season in the fourth quarter. 
In the last 5 years, LeapFrog and its peers including Mattel (NASDAQ: MAT) and Hasbro(NASDAQ: HAS) have been performing quite well.
 
Mattel seems to be performing the best with more than 76% capital appreciation for its shareholders. LeapFrog and Hasbro are quite similar with around 40%-42%. 
During the same period, the return on equity has been quite consistent with Mattel and Hasbro, whereas LeapFrog has experienced growth of  nearly 25%. Mattel still ranks the first with nearly 31.9%.
For the trailing twelve months, LeapFrog has delivered a decent return on invested capital, nearly 24.6%, along with the net margin of 10.42%. LeapFrog has a quite strong balance sheet. As of September, it had $266 million in the stockholders' equity, no debt, and $49 million in cash. Currently, the company is trading at $8.44 per share, with the total market capitalization of $570.87 million. The total enterprise value is around $521.44 million. Among the three companies, LeapFrog is the only one, which is debt-free, whereas the D/E of Mattel and Hasbro are 0.4x and 0.9x respectively.
Among the three, LeapFrog doesn’t pay any dividends, whereas Mattel pays to investors a 3.2% dividend yield. Hasbro has the highest dividend yield for investors, of 3.6%. The payout ratio of both Hasbro and Mattel is quite similar, 50.5% and 47.6% respectively.  At the current price, LeapFrog is the cheapest, valued at 11.7x forward P/E and 0.6x PEG by the market. Hasbro is valued at 12.3x forward earnings and 2.4x PEG. Mattel has the highest forward P/E, of 13.1x but a reasonable PEG of 1.5x, lower than that of Hasbro.
My Foolish Take
As the fourth quarter of holiday season is coming, it is when LeapFrog can bring the majority of revenue for the year, along with the strong balance sheet and improving financial performance, I think LeapFrog would be a decent bet for the near future. 

Icahn Keeps Buying This Expensive Organic Food Manufacturer


Are you interested in a company that has just recently experienced a pullback of nearly 13% and famous activist investor Carl Icahn is accumulating shares? That company is The Hain Celestial Group (NASDAQ: HAIN), the natural and organic product manufacturer. Hain has delivered to its shareholders significant gains, nearly 500% from $12.56 in March 2009 to $71.47 in September 2012. Carl Icahn first initiated his purchase of Hain in the middle of 2010 at around $22.60 - $24.50 per share, and has continued to buy since then. Recently, he bought nearly 110,000 shares at around $58 - $59 per share, with the total purchase value of $6.45 million. Effectively, Icahn owns nearly 7.4 million shares to-date, accounting for 16% of the company.
Hain is in the business of manufacturing and selling natural and organic products under different brand names in different market categories including Earth’s Best, Celestial Seasonings, Rice Dream, Imagine, etc. The products of Hain could be divided into five categories such as grocery, tea, snacks, personal care, and fresh. The majority of Hain’s revenue came from grocery category, 68% in 2012, whereas snacks, tea, and personal care accounted for 15%, 8% and 8% of the total 2012 revenue respectively. The sales occurred mainly in the US, with 72% of sales, then the UK with 14% of sales.
As we might expect from the company with the majority of grocery sales, the company would have a thin net margin. That is true with Hain. In the last 10 years, its net margin fluctuated in the range of 3.53% - 5.89%, except in 2009 when Hain experienced a loss and a decline in its revenue. The return on invested capital has always been a single digit number. In fiscal 2012, the net margin was 5.75% and Hain delivered only 6.46% return on invested capital. The operating figures were much lower than those of its peers including General Mills (NYSE:GIS) and Nestle (NASDAQOTH: NSRGY). Over the past 10 years, Nestle has been consistently generating double-digit returns on invested capital, except 2003 of 9.51%. Trailing twelve months, its ROIC was 12.85% with the net margin of 11.42%. General Mills had TTM ROIC of 11.5% with the net margin of 10.15%.
Hain seems to have a good balance between its stockholders’ equity and debt. As of September, it had more than $1 billion in stockholders’ equity, $36 million in cash, and only $360 million in long-term debt. What worries me though, is the high level of goodwill and intangible assets in its balance sheet. The amount of goodwill and intangible assets were $1.02 billion, a little higher than its total equity.  Its level of goodwill and intangible assets were the highest among the three, around 60% of the total assets. General Mills’ were 57.13% and NestlĂ©’ had the lowest of goodwill and intangible equity, with only 33% of the total assets.
Hain seems to behave differently from other Icahn’s bets such as Netflix and Oshkosh. In 2010, the company already reached an agreement with Icahn to have two Icahn’s nominees on the board including his son Brett Icahn and Icahn Capital LP’s Managing Partner David Schechter. Icahn appraised Hain: “Hain has a strong portfolio of brands that position it well for a continuing secular shift towards organic and all natural foods and consumer packaged goods. We look forward to working with the current board and management toward enhancing stockholder value."
Currently, Hain is trading at $62.20 per share, with the total market capitalization of $2.87 billion. The market is valuing the company at 20x its forward earnings and 2.8x its book value. General Mills seems to be much cheaper, at 13x forward P/E and 4x P/B. In addition, the company is paying shareholders a 3.2% dividend yield. Nestle is priced in the middle, with 16.3x forward earnings and 3.4x P/B. The dividend yield of Nestle is 2.8%.
My Foolish Take
Even with the bullish momentum that Icahn put on Hain, personally I do not consider Hain to be a good investment opportunity. With the low business return, no dividend, and high valuation, investors should be better off looking for other investment opportunities. Investors might purchase Hain to speculate on Icahn’s talent to drive the company’s shareholders’ value in the near future.

Monday, November 26, 2012

3 Large-Cap Buys


When investors think of large-cap companies, we normally think about stability. Most large-cap companies have strong legacies with long operating histories. Those large-cap businesses offer investors peace of mind with stable business and consistent dividends. Retirees consider those companies for both value and income reasons. I decided to search for cheap, large-cap businesses that are paying decent dividend yields to shareholders. Five criteria were selected: (1) market cap is greater than $10 billion; (2) return on invested capital is greater than 20%; (3) P/E ratio is maximum 10x, (4) Dividend yield must be at least 3%, and (5) payout ratio is less than 40%. Here are the only 3 results:
Seagate Technology (NASDAQ: STX) is the global leading supplier of electronic data storage. The majority of sales came from OEMs (original equipment manufacturers) with master purchase agreements in 12 – 24 months. In fiscal 2012, 72% of its total revenue were from OEM, whereas 21% was from distributors. Asia Pacific is the region contributing most sales, with 55%. The Americas rank the second with 26% of total sales. According to iSupply, as of Q4 2011, after the food in Thailand, Seagate shipped 46.9 million units. It suddenly had the largest market share, with 38% of the market. Western Digital (NASDAQ: WDC) shipped only 28.5 million units, accounting for 23% of the total market. Seagate is trading for $26.75 per share, with a total market capitalization of more than $9 billion. Western Digital is worth an equivalent amount, nearly $8.4 billion, with shares trading at $34.38 per share.  Over the last 12 months, its ROIC was quite high, nearly 54%, two times higher than 23.4% of Western Digital. Currently, Seagate is valued at 3.5x P/E, with its 4.3% dividend yield. The payout ratio was quite low, 13.2%.
Intel (NASDAQ: INTC) has been mentioned as a potential undervalued investment opportunity. The company was considered to be the market leader in the semiconductor industry. Its PC Client Group brought in the majority of its revenue, around 66% of $54 billion total sales.  Intel has lost its momentum, along with the weak overall environment in the PC industry. Its stock was $26.88 in August this year, and now it is trading for only $19.36 per share. During its business turmoil, the President and CEO, Paul Otellini, said that he would retire in May after 40 years working for Intel. For the trailing twelve months, the ROIC was nearly 21.7%. During the past 10 years, the company has been paying increasing and consistent dividends. The dividend yield is rich at 4.5% with only 37.4% payout ratio. Currently, Intel is trading at $19.36 per share, with the total market capitalization of $96.34 billion. The market is valuing Intel at 8.5x P/E  and 1.4x PEG.
Statoil (NYSE: STO) is a Norwegian oil/gas corporation with operations in more than 41 countries. It was controlled by the Norwegian state with 67% ownership. As of December 2011, Statoil had proved reserves of more than 5.4 billion BOE. This company is the second-largest natural gas provider for European markets. Trailing twelve months, it delivered a 20.5% return on invested capital. Shareholders are getting a quite decent dividend yield, 3.8% annually. Even with that decent yield, the payout ratio is only 21.7%. Currently, it is trading at $24.23 per share, with the total market capitalization of $77.26 billion. The market is valuing Statoil at only 5.4x P/E and 0.4x PEG.
My Foolish Take
With high returns on invested capital, decent dividend yields, low payout ratios, and single digit valuations, all three companies should be considered to be long-term positions in diversified income portfolios of investors. 

An Opportunistic Play on This Agriculture Business


Corporate governance is always an interesting issue, with conflicting ideas between directors, gaining board seats, related transactions, etc. Big investors, especially activist ones, would love proxy battles to gain board seats to push for changes so that more shareholder value could be created. Recently, hedge fund Jana Partners has put more pressure on Agrium (NYSE: AGU), the producer of fertilizer and farm products, by naming five nominees for spots on its board of directors.
The fund initiated its stake in Agrium with around 6.5 million shares earlier this year, and it has increased the position to more than 9.22 million shares, accounting for 6.19% of the company’s total shares outstanding. With this move, Jana Partners is the largest shareholder of Agrium. The fund has been pushing to cut costs and spin off the retail business.
Jana has pointed out two main important points of why Agrium has not reached its full potential. First, it was because Agrium’s intrinsic value was hidden in a conglomerate structure, with two different businesses: a stable farm product distribution and volatile fertilizer business. Second, the board did not have a retail experience to efficiently manage its costs, its retail working capital, and to have sufficient public reporting disclosure for the retail business.
In 2011, two thirds of Agrium's revenue came from the retail segment, with the majority from crop nutrients and crop protection products, of $4.53 billion and nearly $3.5 billion, respectively. The biggest selling item in its wholesale business was nitrogen, with sales of $2 billion. However, out of total $2.23 billion in EBIT, nearly $1.85 billion was from wholesale, and only $600 million was from retail.
Source: Jana’s presentation
The hedge fund has pointed out that the wholesale and retail segments should have two different capitalization structures and capital usage. Jana concluded that Agrium should have employed more leverage and the business has failed to return capital both “regularly and opportunistically.”  Currently, Agrium is trading at $100.14 per share, with the total market capitalization of $14.92 billion.
Compared to its peers, including Potash Corporation of Saskatchewan (NYSE: POT) andCF Industries Holding (NYSE: CF), the total return that Agrium delivered to its shareholders was right down the middle.
In the past 5 years, Potash delivered only a 9.3% return; CF was the best performing, with a nearly 160% return. Agrium is in the middle, with nearly 91%. Even though Agrium’s stock has performed pretty well in the past, Jana said it was not really enough compared to its full potential. The market is valuing Agrium at 10.8x P/E and nearly 6.1x EV/EBITDA, along with a 0.7% dividend yield. CF is even much cheaper, with 7.4x P/E and nearly 3.5x EV/EBITDA, along with a 0.8% dividend yield. Potash seems to be the most expensive in terms of valuation, with 14.3x P/E and 9.51x EV/EBITDA, but with the highest dividend yield of 1.5%. 
My Foolish Take
The breakup of a conglomerate would definitely benefit investors as the market would recognize the true value of each business segment in the corporation. Personally, I would be quite interested in CF because of its cheap valuation, and Agrium could be an opportunistic play for corporate actions. 

3 Biggest Positions in Chase Coleman's Portfolio


Chase Coleman, a young and successful hedge fund manager, has been quite successful in technology/start-up investing. He founded Tiger Global Management, with the seed money from Julian Robertson. He has a strong track record of investing in internet and technology companies before they go public. Since its establishment in 2001, it has managed to delivered annualized return of more than 21% and now it has more than $7 billion AUM.
Recently, the fund reported an increase in ownership of Groupon (NASDAQ: GRPN) now owning 65 million shares, accounting for 9.9% of the total company. Coleman first bought Groupon in the third quarter with 1.3 million shares purchased at around $6.25 per share. Investors seem to be pessimistic about Groupon’s future due to the increasing competitionfrom AmazonLocal, Travelzoo, and LivingSocial in this “low barrier to entry” business. At the current price of $3.88 per share, his 65 million shares would be worth $252 million. However, Groupon is not the top holding among his 43 positions. His top three holdings as of September are Apple (NASDAQ: AAPL)Yandex NV (NASDAQ: YNDX) and Google(NASDAQ: GOOG).
Coleman owns 1.3 million shares of Apple, with the total reported value of more than $867 million. Coleman sold some of his Apple position in the last quarter, but it is still his largest holding, accounting for more than 12% of the total portfolio. Apple seems to be the popular bet for hedge fund managers including George Soros, Ken Fisher, and David Einhorn. Einhorn owns more than 1 million Apple shares, with the total value of nearly $730 million, accounting for more than 12% of his total portfolio. Einhorn expressed his belief that Apple could hit a $1 trillion market cap because of Apple was a software company with its own operating system with its own high-margin device. It was all interconnected between iOS, App store, iTunes, and iPhone, iPad, Mac. Apple’s shares have been beaten down from its $700 mark in September and now trades at $561.70 per share, with a total market capitalization of nearly $528.4 billion. The market is valuing at 9.1x forward earnings and only 0.5x PEG.
Yandex ranks the second biggest position in Coleman’s portfolio with 23.5 million shares. His total Yandex position value was around $568 million, accounting for 8% of his portfolio.  Coleman has invested in Yandex before its IPO, with 62.3 million shares, or a 71% stake in the company. Yandex is a quite popular search website for Eastern European and Russian people. According to Comscore.com, Yandex had around 150 million searches per day and more than 25.5 million daily visitors. It currently has a 60% market share in the search engine industry in Russia. Currently, it is trading at $22.46 per share, with a total market capitalization of $7.35 billion. The market is valuing Yandex at 23.1x forward P/E and 0.7x PEG.
Google made the third largest position in Coleman’s portfolio with 698,000 shares. With the total value of around $527 million, it accounted for 7.4% of his total portfolio. Google is the largest and the most widespread global search engine. Despite its non-existence in China, the biggest population in the world, it still owns 88.8% of the global search engine market share, according to Karmasnack. Baidu (NASDAQ: BIDU), Google’s small competitor, which serves the Chinese market, only accounts for 3.5% of the total global search engine industry. Both Google and Baidu have experienced a significant decline recently. Google moved down from $768 per share in October to $665.87 currently, with $218.8 billion in market capitalization. Baidu had been a worse performer by falling from $134 in August to only $93.24 per share, with the total market capitalization of $32.6 billion. It seems to be pricier in terms of valuations compared to Groupon and Yandex with 15.1x forward earnings and 1x P/B.
My Foolish Take
Groupon, with around 54% market share in a discounted market place industry, is still a market leader. However, investors’ pessimisms make sense because the growing competition from AmazonLocal with Amazon’s huge and reputable database would pose a huge threat to Groupon. Groupon could be an opportunistic play on the market pessimism itself with the low market price. Apple and Google are still both value and growth stories in the businesses themselves. With the market leading positions in the tablet market for Apple and search engine market for Google, those two stocks would be worth to be in the long-term investors’ portfolios.

Misfortunes Abound for This PC Manufacturer


Misfortunes never come alone, but many of them happened because of what we have done in the past. That is the case for Hewlett-Packard (NYSE: HPQ). The business has been facing an overall decline in the PC industry that affects several other businesses, such as Dell(NASDAQ: DELL) and Intel (NASDAQ: INTC). In addition, Jim Chanos, a famous short seller,pointed out that HP had been hiding its R&D expenses via acquisitions, and reality has proved him right. Several days ago, the company had to write down one of its big acquisitions, Autonomy, with around $8.8 billion in charges.
Geez, an $8.8 billion impairment charge would be equivalent to nearly 37.5% of its $23.5 billion market cap, and it was more than 80% of the $11 billion price tag that HP had to pay for Autonomy. That was not a small amount at all. Dated back in October last year, we could see how “bullish” HP was. It paid 25.50 pounds per share, a 79% premium compared to what it was trading before the acquisition. HP’s shareholders considered the purchase price to be excessive. Oracle’s CEO, Larry Ellison, agreed on this point, saying that he did not want to buy Autonomy because of “absurdly high” price. At that time, by buying Autonomy, HP had re-transitioned itself to move away from the hardware PC manufacturing business. Autonomy focused on “unstructured” search for big companies to find out the contents in their email, phone calls, etc.
The ugly side of the story was that, the majority of this write-down, $5 billion, was due to “serious accounting improprieties, disclosure failures and outright misrepresentation”, which were discovered internally by HP. The company said that Autonomy had inflated its top line and gross margin by categorizing its low margin hardware sales as high margin software sales and booking bogus licensing revenue. Even though Autonomy branded itself as a software company HP found that the low-end, negative margin software accounted for around 10-15% of its total revenue. Mike Lynch, the founder and previous chief of Autonomy was “shocked” when hearing the claims and rejected it. He said: “Look at the size of the write-down. If you have done meticulous due diligence with 300 people you can't get it that wrong."
Looking back to Autonomy’s historical financial statements, in a period of 2007 – 2010, the revenue and net income growth were magnificent. In 2010, it was reported to have $870 million in revenue and $217.3 million in profits. As of June 2011, it booked $2.23 billion in stockholders' equity, $716 million in long-term debt and $736 million in cash. Interestingly, even as it booked consistent growing operating cash flow and low capital expenditures, but other investments in cash flow had been quite high and volatile. Notably, in 2008 and 2009, the cash flow from investing activities netted nearly negative $400 million and $700 million, respectively. The only factor, which made its cash balance positive, was the issuance of stocks and debt. By paying $11 billion for Autonomy, HP had valued this company as high as nearly 5 times its book value. In a blog post of Bronte Capital, John Hempton, has spotted suspicious accounting before. He commented that in a software business, normally the provider will sell it upfront and for cash, so there would be little receivables. However, in 2010, Autonomy's sales were $870 million, whereas receivables were $330 million, or 4.5 months receivables. So, along with large receivables, Autonomy could book more revenue even though cash was not coming in. In addition, software provider would have to book large unearned income as it needs to service that software, but Autonomy did not book any large unearned income item to service the software. 
Full year 2012, HP recorded a net loss of $12.65 billion, or $6.41 per share. The book value was reduced from $39 billion in October last year to only $22.83 billion this year. The current book value was somehow equivalent to its long-term debt of $21.8 billion. The goodwill and intangible items were significantly reduced from $55.5 billion to $35.5 billion, but I think it was still a unusually high figure, as it still accounts for nearly 33% of the total assets. While Dell’s goodwill and intangibles were only around $10.2 billion, or 23% of the total assets. It was equivalent to those of Intel, with $15.85 billion, accounting for more than 21% of the total assets. Microsoft (NASDAQ: MSFT), even with a series of overpriced acquisitions, has reduced its goodwill and intangibles percentage gradually year-over-year, from 19% in 2008 to 14.7% currently, of nearly $17.9 billion. HP had a negative book value of $6.43 per share, whereas Dell’s tangible book is $0.70 per share, Intel’s is $6, and Microsoft’s is $5.90. In terms of valuation, HP is priced at around book value. Intel is worth at two times its book. Dell is cheaper at 1.6x P/B. The most relatively expensive company is Microsoft, with 3.3x P/B.
Foolish Bottom Line
With a high level of goodwill and intangibles and the questionable M&A capability, I think there would be more bumps on the road for HP in the near future. Investors might still consider HP as an opportunity play; however, the short-term future might be quite volatile and extremely unpredictable.