David Tepper, the founder of Appaloosa Management, has approximately $3 billion under management. His reputation is as one of the best performing fund managers on Wall Street today. Here we look at five of his latest buys:
Mosaic Co. (MOS): Shares are trading at $72.47 at the time of writing, in the middle of its 52-week trading range of $55.70 to $89.24. At the current market price, the company is capitalized at $32.36 billion. Earnings per share for the last fiscal year were $5.62, It paid a dividend of $0.20 (a yield of 0.30%). Tepper bought 2,390,027 shares in the second quarter of 2011.
Mosaic’s position as the world’s largest producer of animal nutrients puts it in a great competitive position when measured against its two biggest rivals, Potash Corp (POT) and Agrium Inc (AGU). Its operating margin of 26.80% outweighs that of Agrium (11.47%), though is some way below that of Potash (42.57%). Its price to earnings ratio is on a par with Agrium (12.92 versus 12.41), and far less demanding than Potash’s 21.39.
On the face of it, it might seem that Potash’s better operating margin warrants such a higher rating. However, in a market that is set to grow - with rising population and need for food pushing that growth - investors should take note of Mosaic’s far larger cash pile of $3.91 billion as against Potash’s $408 million and its lower debt of $832.90 million versus $4.82 billion. It is placed in a far stronger position to take advantage of opportunities that arise.
Google Inc (GOOG): Shares are trading at $537.83 at the time of writing, in the middle of its 52-week trading range of $447.65 to $642.96. At the current market price, the company is capitalized at $173.66 billion. Earnings per share for the last year were $27.72, placing the shares on a price to earnings ratio of 19.40. It pays no dividend. David Tepper holds 90,000 shares.
Google is a company where direct comparison with its competitors’ numbers reveals its strength. It monetizes its internet proposition far better: gross margins of 65.18% produce an operating margin of 33.62% (as against AOL’s (AOL) 8.69%, and Yahoo’s (YHOO) 15.16%). Revenue outstrips its rivals too. At $33.33 billion it is over ten times as much as AOL’s $2.25 billion, and six times that of Yahoo’s $5.57 billion. Its position as market leader in its field fully merits its higher price to earnings ratio (Yahoo 15.31, AOL 6.90).
Marathon Oil Corporation (MRO): Shares are trading at $26.50 at the time of writing, as against its 52-week trading range of $23.32 to $54.33. Earnings per share for the last year were $4.76, placing the shares on a price to earnings ratio of 5.57. It paid a dividend last year of $0.60, a yield of 2.30%.
With oil prices generally firm, despite a weakening economy, a buy in the exploration and production sector of the market would appear good. But is holding Marathon shares a better proposition than holding the shares of bellweather Exxon Mobil (XOM)? Gross margins at Marathon are 15.63%, at Exxon 31.45%. Operating margins at Exxon are similarly around double that of its smaller rival, at 12.74% versus 6.52%. Exxon’s dividend yield of 2.60% shades Marathon’s, and Exxon has increased its dividend for 28 years running.
These are the figures that justify Exxon’s price to earnings ratio of 9.73 against Marathon’s 4.76. Having said this, however, at the current level Marathon’s book value of $23.40 per share could underpin the share price. A shame that Tepper paid an average of $51.69 per share for his holding of 704,000 shares.
Western Refining Inc (WNR): Shares are trading at $17.64 at the time of writing, as against its 52-week trading range of $4.06 to $21.75. At the current market price, the company is capitalized at $1.57 billion. Earnings per share for the last fiscal year were $1.21, putting the shares on a price to earnings ratio of 14.60.
In some markets, size matters. Oil refining and sales is one of those markets. Western Refining shares have performed well this year, and currently trade near its 12 month high. But with a gross margin of 6.73% on revenue of $8.30 billion producing meager operating margin of 3.95%, any downturn in the economy could prove more costly than at the giant ConocoPhillips (COP), where gross margins of 23.43% translate into operating margins of 9.46%.
With a book value per share of $8.92, I find it hard to justify Western Refining premium price to earnings ratio of 14.63 against ConocoPhillip’s 8.53. The shares look fully valued at this level for the time being. Tepper paid an average of $16.66 per share for his holding of 2,798,374 shares.
CVR Energy Inc (CVR): Shares are trading at $28.19 at the time of writing, at the very top of its 52-week trading range of $7.00 to $28.68. At the current market price, the company is capitalized at $2.44 billion. Earnings per share for the last year were $2.23, placing the shares on a price to earnings ratio of 12.62. Tepper’s fund holds 7,334,534 shares.
When reviewed on the same basis as that of Marathon (MRO) and Exxon Mobil as above, it is far easier to see why CVR’s shares trade at its high of the year. Gross margins are 12.69%, and operating margin is 8.04%, good management is leading to a good ratio of operating to gross.
However, the price to earnings ratio is a little more exacting at the current level than Exxon’s, and the book value of $11.26 may hold further progress in the share price back. Better value than Marathon, but Exxon is still my pick in this sector.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.