This the third article in our four part series on Donald Yacktman’s recent trades. Following are stocks that have been sold off or reduced in the portfolio. Let’s dig a little deeper:
Loews Corporation (NYSE:LOW): The last sale was in the first quarter- 50 000 shares, average price of $38.9. The company is currently valued at $14.9 billion. Trailing twelve month price/earnings multiple of 13.53, which is more expensive than its rivals, American International Group (NYSE:AIG) - 8.17 and The Travelers Company (NYSE:TRV), 9.5.
Loews posted positive year over year growth in quarterly revenue, whilst its competitors recorded declines. The company has superior margins - gross margin- 44.35% versus 19.75% AIG and 26.52% TRV, operating margin – 20.9% versus 13.2 AIG and 12.75% TRV.
June period results were lackluster. Net income fell to $0.62 per share versus $0.87 a year ago. Management blamed higher natural catastrophe losses and weak contributions from CNA Financial, the company’s biggest operating unit for the weak results. Diamond Offshore was the bright spot, posting higher earnings on increased usage of its floaters.
The balance sheet is decent shape, with substantial free cash flow and total debt decreasing so far this year. The company has been buying back its stock, spending $465 million, almost 11 million shares for the year already. Further repurchases likely as Loews looks to deploy its substantial free cash flow. At the time of writing, the stock hovered around its 52 week low of $34.30
Abercrombie and Fitch (NYSE:ANF): This stock has been sold out of the portfolio with the last sale in the fourth quarter of 2010 - 200 000 shares, average price of $48.62.
The company is currently valued at $5.45 billion with the trailing twelve month price/earnings multiple of 28.44, more expensive than American Eagle Outfitters (NYSE:AEO) - 12.87 and Gap Inc (NYSE:GPS) - 8.74. Year over year, quarterly revenue growth outstripped that of its rivals- 23% versus 3.7% (AEO) and 2.71% (GPS). Gross margins are higher as well – 64% versus 38.5% AEO and 39% GPS.
Net sales for the second quarter grew 23% reflecting strong momentum in the U.S. and European markets. Comparable store sales increased 9%. International and online sales were highlights as well.
International expansion is the driving force behind the company’s current fortunes and future growth plans. It plans to open 5 more flagship stores, including the recent opening in Paris and up to 40 international Hollister stores, including the 6 that have already opened. Global appeal for its brands is strong amongst its target audience.
Management is confident in its growth and earnings prospects for the second half of the year, despite cost pressures and economic uncertainty. Analyst firm, Robert W Baird recently upgraded the stock from neutral to outperform.
WellPoint Inc (WLP): This stock was sold out in the fourth quarter of 2010 with 150 500 shares sold at an average price of $56.69. The company is currently valued at $22.7 billion with a trailing twelve month price/earnings multiple of 8.3, almost on par with Aetna (NYSE:AET) - 8.54 and cheaper than United Health (NYSE:UNH) - 10.3 Adjusted earnings for second quarter increased 9.6% to $1.83 versus same period last year, beating management’s forecasts. A decline in admin expenses contributed significantly to the earnings advance.
Management raised its full year earnings guidance to be in the range of $6.90 to $7.10 per share, on strong performance from its commercial segment and sound capital management, which is compensating for higher costs from its senior business.
The company’s competitive strengths lies in its leadership position in a highly fragmented managed care industry, coupled with its geographic and product diversity. Its healthy cash flow and the initiation of dividend payments this year, makes this stock attractive.
Dish Network (NASDAQ:DISH): The stock was sold out of the portfolio, last sale was in the first quarter- 420 000 shares, average price- $22.56. The company is valued at $10.8 billion. Trailing twelve month price/earnings multiple of 8.37, much cheaper Direct TV (DTV)-13.92 and Comcast Corp (NASDAQ:CMCSA)-15.32. Comcast enjoys the highest gross (55.4%) and operating margins (20.5%) of the three.
Dish delivered another round of strong quarterly results. Revenue advanced 13.3% to $3.6 billion with net income soaring 30.3% to $335 million. Diluted earnings per share increased 31.5% to $0.75.
Management cited price increases, settlement of the TiVo litigation and fewer gross new subscriber activations as reasons. Putting a damper on the solid results though, was a decrease in subscribers due to competition on the pricing front.
The pay-TV industry is at the mercy of the current economic weakness. With a depressed housing market and lower discretionary spending, results of pay-TV companies can (and will) be affected. The improvement in quality and speed of broadband networks is a factor that cannot be ignored.
Kraft Foods (KFT): The stock’s position in the portfolio was reduced in the second quarter with 5,505 shares being sold, average price of $33.92. Kraft is currently valued at $60.52 billion. Trailing twelve months price/earnings multiple of 19.6. Nestle (OTCPK:NSRGY) is cheaper, valued at 4.87 times.
June period results were solid. Revenues advanced 13.3%, to almost $14 billion with each geographic region recording gains. Earnings per share rose modestly 3.3% to $0.62. These results reflect the company’s progress in its productivity enhancements and pricing efforts.
The company recently announced its intention to split into two publicly traded companies; a North American grocery business and global snacks business.
Surging commodity costs are a concern, which should be partially offset by price increases. With 51% of its revenues from international operations, the Cadbury acquisition offers the opportunity to increase its emerging market presence. A solid balance sheet with a decent dividend yield, this stock is suited to income and defensive minded investors.
Bank of America (NYSE:BAC): This stock was sold out of the portfolio by the first quarter with 40 000 shares been sold at average price of $14.2.
The company is valued at $73.5 billion, stock hovers about 20% of its 52 week low of $6.01. On a price/book basis, the company sells at 0.36 time its book value. Citigroup (NYSE:C) sells at 0.47 and J P Morgan Chase (NYSE:JPM) sells at 0.77 times their book values.
Net interest income dropped almost 8% as pressure on the net interest margin weighed in due to low interest rates and weak economic activity. This scenario will play on for the rest of the year and probably in 2012 too. At best, prospects for the bank for the rest of this year and 2012 are hazy. New repurchase claims against mortgage securities sold by Countrywide continue to be filed. The extent of its mortgage problems is unknown.
The company’s main concern is its ability to raise enough capital to meet the upcoming Basel III capital requirements. Warren Buffett riding to the rescue to the tune of $5 billion helps in firming up the bank’s capital levels and restoring temporary confidence. If and when the economy eventually picks itself up, Bank of America is ideally positioned to benefit from its strong domestic presence and robust client base. A large company finding itself in a bad situation and out of favor is right up the alley for a value investor, though caution needs to exercised.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.