Abrams Capital Management Is Bullish On Consumer Finance And More

Includes: AIZ, SLM, TEVA, WAIR, WU
by: Insider Monkey

By Andrei Braghis

David Abrams, the founder and manager of Abrams Capital Management, has made little changes to the fund's equity portfolio in the past quarter, with an approximate total 13F value of $1.03 billion. Most of the top positions are unchanged, with the exception of two new comers, Western Union (NYSE:WU) and Assurant Inc. (NYSE:AIZ). Let us take a look at the reason behind these trades, and how the other top picks have fared in 2013. See the original 13F here.

It's important to track hedge fund sentiment because it has been found that for investors who know where to look, it's possible to beat the market by 18 percentage points a year. (Learn more here).

Top dog

There was no change in the fund's leader, SLM Corporation (NYSE:SLM), also known as Sallie Mae, the widely known behemoth that offers student loan financing. Abrams Capital owns a little over 15 million shares, worth a reported $308 million. The value of the shares have increased by 20% since the end of 2012, with a current share price of approximately $20, and the stock is traded at a trailing Price to Earnings (P/E) ratio of 9.06, significantly lower than the industry average of 19.60.

A dividend yield of 2.4% is another selling point for Sallie Mae, as analysts' price target range rests between $21 and $25, but it's clear that this is a macro play first and foremost. S&P holds a positive outlook for the consumer finance sub-industry, citing "stable" credit quality trends heading for the remainder of 2013, supported by "a dramatic improvement in credit quality in 2011 and 2012." Needless to say, it's easy to see why Abrams is bullish.

The best of the rest

Western Union represents a new investment by Abrams and his team. They have added a little less than 15 million shares, with a reported value of $225 million. Shares of the payment services provider have appreciated by 20% year-to-date, with a current value of approximately $16.50. They sport a trailing P/E ratio of 9.93, lower than the industry average of 19.60, and a dividend yield of 2.8% is sixth best in the credit services industry. During the first quarter of 2013, the company registered revenues of $1.3 billion and EPS of $0.37; Western Union has beaten Wall Street's earnings expectations in four straight quarters.

Unlike Sallie Mae, Western Union is a bet on the broader consumer payment services space, more particularly mobile payments. In the past year, Western Union has made significant headway in this arena, with the crown jewel of its efforts being its deal with MTN Group, one of Africa's largest mobile operators. The duo have launched a cross-border money transfer service in more than 50 nations, building off of Western Union's pre-existing partnership with Safaricom M-PESA.

Abrams has not made any changes to the fund's stake in Teva Pharmaceutical (NYSE:TEVA). During the first quarter of 2013, the 2.5 million shares owned by Abrams Capital Management appreciated by 6% and are now reportedly worth $101 million. The stock is traded at a trailing P/E ratio of 19.99 and has a forward P/E of 7.33. Teva's beta of 0.75 makes it a relatively safe investment, with the company also paying a dividend yield of 2.7%.

Recent financial results have pleased investors, with Teva beating the market's expectations in its latest quarter, and Abrams' faith in this stock indicates his faith in continued prosperity in the generic drug marketplace. In addition to broader consumer trends toward generics after the most recent recession, several major drugs are losing patent protection over the next few years, which will provide opportunity for even more augmentation. Though the value isn't mind-blowing, Teva's positioning as the world's largest generics manufacturer is enough to warrant any investor's consideration.

Abrams kept his fund's investment in Wesco Aircraft Holdings Inc. (NYSE:WAIR) intact, with the value of the 5 million shares increasing by 11% last quarter. The stock is traded at a trailing P/E ratio of 16.25, significantly lower than the industry average of 26.50. Trading around $17 per share, the stock has a beta of 1.14 and does not pay a dividend. The sell-side expects Wesco's bottom line to grow by 14-15% a year over the next half-decade, third highest in the wholesale industrial equipment industry. A PEG ratio of 1.2 indicates that this growth isn't overly expensive, and is actually on the borderline of being rather cheap. Wall Street's high price target estimates predict another 9% appreciation from present levels.

This top five is closed by a new addition: Assurant , a company that offers specialized insurance products. Abrams and his team bought 1.5 million shares with a quarter-end value of $67 million in Q1, and Assurant's stock price has been in a steep uptrend of late, advancing 40% year-to-date. Shares currently trade at a price slightly above the $49 mark, and have a trailing P/E ratio of 9.36. Assurant also sports a sub-1.0 PEG, in addition to sales and book multiples below parity.

A dividend yield of 1.7% is solid, but this is a growth play, first and foremost. Analysts who cover this stock expect EPS growth of 9-10% a year through 2017, much higher than its annual average over the past five years (1.1%). An ongoing share buyback program in excess of $900 million has brought in its fair share of bulls, and regulatory issues aside, there's significant value here.

Final thoughts

Abrams is one of the 500 most prominent fund managers we track at Insider Monkey, and his top five equity positions prove intriguing yet again this past quarter. Sallie Mae and Western Union are two big bets on consumer financing, while Teva is the most dominant player in one of the most bullish themes out there right now. Wesco is a borderline GARP (growth at a reasonable price) play, and a mammoth share buyback has made undervalued insurer Assurant very attractive.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article is written by Insider Monkey's writer, Andrei Braghis, and edited by Jake Mann. They don't have any business relationships with any of the companies mentioned in this article and they didn't receive compensation (other than from Insider Monkey and Seeking Alpha) to write this article.