The Crescent Fund invests on a fundamental value basis. It seeks to provide returns by buying the shares of companies that it considers are undervalued by the market. Here we look at 5 of its recent buys, and discuss if it could have invested differently:
Canadian Natural Resources Limited (CNQ): Shares are trading around $31.50 at the time of writing, as against their 52-week trading range of $25.69 to $52.04. At this share price the company’s market capitalization is $34.72 billion. Earnings per share last year were $1.14, and the shares trade on a price to earnings multiple of 27.79. The company paid a dividend to shareholders of $0.36 last year, a yield of 1.20%.
The price of natural gas has been held back over recent years as shale gas production has increased supply, and margins at the main exploration companies may be held back as economic malaise limits demand. With Canadian Natural Resources’ gross margin of 56.47% converting to an operating margin of 16.84%, the company holds up well against its main competitors. Encana (ECA) has a better gross margin (60.90%), but high overheads work this down rapidly to 10.25% at the operating level. Whilst Suncor Energy (SU) and Imperial Oil (IMO) both have operating margins of around 13.5%, Suncor benefits from gross margins of 47.26% versus Imperial’s more meagre 21.35%. With a better mix of oil, petroleum, and gas in its business structure than both Canadian Natural Resources and better gross margins than Imperial Oil, I think Suncor Energy is the better buy of the three.
The Travelers Companies Inc. (TRV): Shares are trading around $51.50 at the time of writing, as against their 52-week trading range of $45.97 to $64.17. At the current market price, the company is capitalized at $21.64 billion. Earnings per share for the last year were $5.29, placing the shares on a price to earnings ratio of 9.77. It paid a dividend of $1.64 (a yield of 3.20%).
Still in the memory is the financial crisis of 2008, and the mess that insurance companies like AIG managed to get themselves into. Travelers avoided that, but investors are fickle creatures and sometimes look at the short term rather than the long term. Travelers are well managed with good prospects going forward. Operating margins of nearly 13% hold well against rivals Hartford Financial Services Group (HIG) at around 10% and W.R. Berkley Corporation (WRB) at a shade under 14%. Good management should keep gross margins healthy (currently 26.5% versus Hartford’s 30% and W.R. Berkely’s 18%), and the company’s ongoing policy of share repurchases and dividend payout should continue to add value to shareholders. A good buy.
Microsoft Corp. (MSFT): Shares are trading at around $27 at the time of writing, as against their 52-week trading range of $23.65 to $29.46. The company is capitalized at $228.43 billion. Earnings per share for the last year were $2.69, placing the shares on a price to earnings ratio of 10.14. It paid a dividend last year of $0.80, a yield of 3.00%.
Microsoft has been the powerhouse behind the pc since its foundation by Bill Gates nearly 40 years ago. Its battles with Apple (AAPL) are well known and well documented. In recent years, Apple seems to have taken a lead in innovation against its rival, with its tablet based products bestsellers worldwide. But Microsoft may be hitting back. Last year it bought game company Twisted Pixel, and is likely to use its innovative workforce to capture a larger share of the on demand gaming market as it progresses. Gross margins at Microsoft beat Apple’s into a cocked hat (78% versus 40%). The dividend yield of 3% is attractive also (Apple pays none), as is the less demanding price to earnings ratio (10.14 versus 15.94). At this moment in time, I more bullish of Microsoft than Apple.
Wal-Mart Stores Inc. (WMT): Shares are trading around $56.00 at the time of writing, as against their 52-week trading range of $48.31 to $57.90. At the current market price, the company is capitalized at $191.8 billion. Earnings per share for the last fiscal year were $34.70, putting the shares on a price to earnings ratio of 11.85. It paid a dividend last year of $1.46 (yielding 2.70%). Food, and clothes. What everyone will always need, and what Wal-Mart does best. As far as the large discount retailers go, Wal-Mart is the daddy, but can it remain so? Comparing gross revenues against its rivals, Wal-Mart produces 25.27%, and Target (TGT) 29.87%. Costco (COST) lags behind at 12.6%. Operating margins at Wal-Mart are 6%, Target 7.75%, and Costco lags at 2.75%. With these numbers, it would seem that Wal-Mart and Target are the better buys. But when an investor digs a little deeper, he finds quarterly revenue growth at Costco at a whopping 16.8%, versus Wal-Mart’s 5.40% and Target’s 4.6%. Costco sells its produce at far lower prices, and lower margins. As the downturn in economic fortunes starts to bite, people are turning to Costco. Wal-Mart and Target will either have to drop prices, or continue to lose customers. Dropping prices will lower margins. Whilst discount retailers are likely to do well in the coming few years, at this moment in time Costco is the better buy, and merits its more demanding price to earnings multiple of 24.82.
Cisco Systems Inc. (CSCO): Shares are trading around $17.25 at the time of writing, as against their 52-week trading range of $13.30 to $24.60. At the current market price, the company is capitalized at $94.39 billion. Earnings per share for the last fiscal year were $1.17, putting the shares on a price to earnings ratio of 14.73. It paid a dividend last year of $0.24 (yielding 1.40%). Cisco is a market leader in the world of networks, but perhaps its far smaller rival Juniper Networks (JNPR) is catching up. Certainly, Cisco’s year on year quarterly revenue growth of 3.30% pales in comparison to Juniper’s 14.50%. Whilst Cisco’s management have announced a restructuring that should improve this performance, there will be costs of doing this and the benefits may not be seen for some time. With operating margins of 20% at Cisco only marginally higher than Juniper’s 18%, the aggressive growth rates of Juniper make it the better buy at this present time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.