Analyzing Top Picks of Citadel LLC

by: Rash Menaria

Citadel L.L.C. is one of the world's largest hedge fund managers, managing over $20 bn in equity investments. The following is a list of its top 15 buys in the last quarter, as released in its 13F filing with the SEC.



Shares Held - 12/31/2010

Shares Held - 03/31/2011

Google Inc




PNC Financial Services Group Inc




MetLife Inc




The Chubb Corporation




Lowe's Companies Inc




Fifth Third Bancorp




The Goldman Sachs Group Inc




Ensco Plc




The Home Depot Inc




Nielsen Holdings NV




Noble Energy Inc




Ross Stores Inc




Maxim Integrated Products Inc




Microsoft Corporation




American Express Company




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Here is my take on Citadel’s top five buys by market value:

Google is a global technology leader focused on improving the ways people connect with information. The company's innovations in web search and advertising have made its web site a top internet property and its brand one of the most recognized in the world. Its mission is to organize the world‘s information and make it universally accessible and useful. The company is headquartered in Mountain View, California.

My Take: Buy

The company remains focused on creating long term value. Strategically, Google’s approach is to identify and penetrate large, global markets by creating platforms and marrying them with significant owned & operated web properties. With searches increasingly coming from mobile devices such as smartphones, Google developed Android, a mobile operating system that allows open interoperation across carriers and manufacturers. Android’s success is increasingly well-recognized. Android is poised to account for over 50% of smartphone subscribers by 2014, while the number of apps has grown to ~150k, narrowing the gap with Apple (NASDAQ:AAPL). Google now accounts for 75-80% of search spend in the United States versus approximately 70-75% a year ago as Google represents the vast majority of mobile spend today. On average, the SEMs (search engine marketers) continue to expect healthy growth in 2011, with mid-to-high teens growth for the United States on average.

To enable faster searches, Google launched a new web browser called Google Chrome with 160 million users. This browser makes it easier for folks to use their favorite Google products like Google Maps, Gmail, Google Calendar, Google Docs and Google Translate, which allows users to instantly translate web pages and videos between any of 58 languages.

The company is constantly trying to increase user experience through innovation. It recently announced three new search products, Instant Pages, PC voice search, and Goggles for the PC. Search is at the core of Google’s business. Google is monetizing its search products through user experience and innovation. The majority of the company’s $29 billion in revenue last year came from advertising as Google’s proprietary technology automatically matches ads to the content of the pages on which they appear. Advertisers pay the company either when a user clicks on one of its ads or based on the number of times their ads appear on the Google Network. Due to the growth of the digital economy and the shift of consumers and advertisers from offline to online, Google has generated outstanding growth.

Stock Price of Google has corrected 20% YTD. I do understand the threat from Facebook and the not so successful attempts by Google in Web2.0 space. But a PE valuation of just 12x next year EPS is cheap for a company like Google.

PNC is the nation’s fifth largest bank ranked by deposits of $182 billion and the sixth largest bank ranked by assets of $259 billion. Founded in 1852, and with its headquarters in Pittsburgh, Pennsylvania, PNC operates 2,470 branches throughout the Mid-Atlantic, Midwest, and Florida, a footprint that covers nearly one third of the U.S. population.

My Take: Buy

PNC Financial Services Group has recently agreed to acquire RBC US Bank for $3.45b. The purchase price is however, subject to adjustment at close for actual net tangible asset value delivered, according to the terms of the agreement. PNC has the option to pay up to $1.0 billion of the consideration in common stock. Merger and integration costs of PNC are projected to be about $322 million and the company plans to reduce RBC Bank’s noninterest expense by approximately $230 million through operational and administrative efficiency improvements. PNC is taking into account bad loans with a fair value mark on RBC's loan book of 12.5% ($2.2b). PNC has a track record of successful assimilation, notably the National City acquisition.

By acquiring the well-placed branches of RBC Bank, PNC moves out southeast, primarily North Carolina, also Virgina, Washington D.C., South Carolina, Georgia, Alabama, and Florida (where PNC already has assets from the National City transaction). The deal between PNC and RBC gives PNC a great entry point into the Southeast, and includes $19b in deposits and $16b of loans. With the 424 branches located in the Southeast, PNC gains a strong foothold in the Southeast region, while increasing its branch network by about 15%. When combined with PNC's existing network, the company will have 2,870 branches, ranking it 5th among U.S. banks. PNC expects the transaction to be accretive to earnings by the end of 2013 or sooner depending on the amount, if any, of the $3.45 billion purchase price paid in the form of PNC common stock.

MetLife is the leading provider in the U.S. of individual and group life insurance, retirement savings products, dental, disability and group auto & home insurance.

My take: Buy.

The company possesses the strongest long-term growth potential of any U.S. life insurer owing to its leading market positions, household brand-name awareness and solid financial strength. With the announced acquisition of ALICO (AIG's foreign life subsidiary), international markets will become the company's biggest business.

The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals. It is the 11th largest property and casualty insurer in the United States and has a worldwide network of some 120 offices in 27 countries staffed by 10,100 employees. The Chubb Corporation reported $50 billion in assets and $13 billion in revenues in 2010.

My Take: Hold

On June 20th, CB announced that it estimated aggregate losses from catastrophes for the months of April and May 2011 were approximately $250 million to $310 million before tax (approximately $0.55 to $0.68 per share after tax). Losses during the two month period were primarily related to tornadoes and severe storms in the United States. Chubb had previously disclosed in its Form 10-Q for the quarter ended March 31, 2011, that its estimated catastrophe losses for the month of April 2011, were between $175 million to $225 million before tax.

Chubb’s geographic concentration exposes it to catastrophe losses. Experts predict that the April-May catastrophe losses would cost about $7.7–$12.5 billion to the industry. According to them, the insurers overall have already incurred heavy catastrophe loss, which is almost twice the figure earlier predicted for full-year 2011. On the other hand a weak housing market and "jobless" economic recovery have kept material growth from returning to homeowners thus affecting CBs’ personal insurance products. Also, price competition in commercial insurance and reinsurance could affect profitability.

The fact that CB’s losses amount to only about 2% of Q1 ending equity is a testament to the benefits of diversification and solid risk management. CB is a very recognizable and prestigious brand name in the insurance industry. The company has been able to benefit from positive selection, as the best clients and the most profitable agents prefer to do business with Chubb.

Lowe's Companies, Inc is the second-largest home improvement retailer in the world with about 1,700 stores in the U.S. and Canada.

My take: Underperform.

In its first quarter results, Lowe’s reported net earnings of $461 million for the quarter ended April 29, a 5.7 percent decrease from the same period a year ago. Sales for the quarter decreased 1.6 percent to $12.2 billion from $12.4 billion in the first quarter of 2010. Comparable store sales for the first quarter decreased 3.3 percent. The company expects second quarter results to be better on the back of better weather conditions. Given the high probability of significant headwinds in the second quarter, owing to a soft housing market recovery, high gas prices, and stronger competition from Home Depot (HD), it will be tough for Lowe’s to meet its target.

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