This is our last article in the four part series of recent big trades by Donald Yacktman.
TJX Companies (TJX): This stock position has been reduced with only 10 100 shares remaining. The previous sale was in the first quarter- 40 900 shares sold, average price of $48.5.
The retailer is currently valued at $19.91 billion with rivals, Kohl’s Corp (KSS) at $12.1 billion and Macy’s (M) at $10.84 billion. TJX’s gross margin is lowest at almost 27%, whilst Kohl’s is the highest at 38.3%. Operating margins are almost identical – 10.1% TJX versus 10.6% KSS with Macy’s recording the lowest of 8.48%.
August sales advanced 4% with comparable store sales rising 1% over the same period last year. This came in at the lower end of management’s expectations with Hurricane Irene being blamed as the primary cause. At the same time, management noted that sales have picked up for the September period.
The company remains in an excellent position to take advantage of high quality merchandise at prices that would retain existing customers and attract new ones. Management recently raised fiscal second quarter and full year earnings guidance. The company has solid long term growth potential in the domestic and foreign markets.
CLOROX (CLX): After selling over 933 000 shares in the first quarter, Yacktman added 85,823 shares at an average price of $68.79, ending the second quarter with 2,794,965 shares.
Clorox is currently valued at $9.02 billion with price/earnings ratio of 17.04 (trailing twelve months). Cheaper than Colgate-Palmolive (CL) – 18.1 and more expensive than Proctor and Gamble (PG) – 15.9. Gross and operating margins are the lowest as well. Gross margin (%) is at 43.4 versus 58.5 CL and 50.6 PG. Operating margin (%) – 17.6 versus 23.8 CL and 19.1 PG.
The company has been in the headlines with Carl Icahn’s buyout offer. Management recently rejected the deal as being undervalued and not credible. As expected with buyout rumors, the stock rallied nearly to its 52 week high when the news came out, only to fall 12% or so once enthusiasm and common sense prevailed.
Fiscal 2011(ended June 30th) earnings came below analyst expectations. Earnings per share rose 7% to $3.93 on flat sales and volume. Price increases didn’t have the desired effect that management hoped for. Management earnings guidance for fiscal 2012 provides cold comfort – 1 to 3 % sales growth with gross margin remaining about flat.
The U.S. accounts for the majority of Clorox’s sales. A soft economy coupled with weak spending and fierce competition should dampen the company’s earnings in 2012.
Tyco International (TYC): This stock was sold out of the portfolio. Last sale was in the fourth quarter of 2010 - 99.125 shares, average price- $39.16.
Tyco is currently valued at $18.5 billion. Price to earnings ratio – 12.05 (trailing twelve months), cheaper than Honeywell International (HON) – 14.5 and about on par with General Electric (GE) – 12.4. Gross margins are nearly the same for Tyco and General Electric- 37.9% versus 36.3% with Honeywell the lowest at 24.2%. Tyco’s and General Electric’s operating margins are identical – 11.48%, as can be expected, Honeywell is the lowest at 10.2.
The security segment is the company’s best performer, recording double digit growth for the fiscal third quarter. Tyco has been on the acquisition trail, buying a security company and a leading provider of specialty chemicals in order to expand its fire protection offerings.
With the security segment the biggest earnings driver, Tyco is on track to post solid growth for fiscal 2011. The company’s Flow Control and Fire Protection divisions offer lucrative cross selling opportunities in the industries it serves, especially the energy industry. This bodes well for top and bottom line growth going forward.
Prestige Brands Holdings (PBH): This stock has been sold out of the portfolio. The last sale was in the fourth quarter of 2010 – 446,600 shares sold at an average price of $11.27, making roughly 88.5% on the initial purchase price of $5.98(bought in second quarter of 2009).
Prestige Brands current market value is $506.6 million, a minnow against rivals Johnson and Johnson (JNJ) – $175.57 billion, CLX – $9.02 billion and PG - $171.8 billion. Price to earnings ratio of 14.7 (trailing twelve months) is almost on par with JNJ – 15.3 and PG- 15.9, and cheaper than CLX- 17.04. Despite its small size, Prestige does enjoy higher margins on its competitors.
Fiscal first quarter 2012 earnings topped analyst estimates by a slight margin. Revenue has been growing for three consecutive quarters. The healthcare segment was the bright sport, posting 59.2% rise in revenues whilst the Household segment put a damper on results by recording a 9.1% decline, reflecting the highly competitive household care market.
Recent acquisitions complement the existing product portfolio and also strengthen its competitive position in the over-the-counter market. Management is now focused on building brand equity of the newly acquired products.
Consumers and retail customers have reacted positively to the company’s product innovation initiatives and marketing support. Management earnings guidance is erring on the side of caution considering the weak economic climate and the accompanying slump in spending.
Paychex (PAYX): The stock’s position in the portfolio has been trimmed. Last sale was in the third quarter of 2010 – 44,500 shares sold, average price - $25.94.
Paychex is currently valued at $9.4 billion, price to earnings multiple of 18.36 (trailing twelve months). Slightly cheaper than Automatic Data Processing (ADP) – 19.25 times and market value of $23.7 billion. Paychex enjoys higher gross and operating margins than ADP, though ADP recorded higher year over year quarterly growth in revenues.
Fiscal fourth quarter 2011 results were decent. Payroll service revenue rose 2% on increase in check per client and revenue per check. Including clients from business acquisitions, the client base grew 5.2%. Encouragingly, client retentions improved as fewer businesses went bust or having no employees.
Putting a slight damper on the positive report, the investment segment recorded double digit declines in interest on funds held for clients due to the current low interest environment. Management expects an 11% decrease for fiscal 2012.
Management’s earnings guidance for fiscal 2012 is realistic, taking the current economic environment into account. Total service revenue is anticipated to rise between 7 and 9 percent. The balance sheet is in good condition with has no long term debt. At the time of writing, the dividend yield stood at 4.8%, an attraction for income orientated investors.