Richard Blum is one of the founders of Blum Capital Partners, which was founded in 1975 as an investment firm, making strategic block and control investments in public and private transactions. He is a value investor who looks to take advantage of out of favor or neglected companies that offer compelling entry prices and he seeks to take advantage of price dislocations and market over reactions. He also takes an active role in the companies in which he has invested by implementing financial, operational and governance changes. Blum is currently quite bullish on US equities as he believes that many companies are trading at a significant discount to their true value. In this article I will analyze five stocks in which Blum has recently invested to determine whether any are buys right now.
Noah Holdings Limited (NOAH)
Noah has a market cap of $378.58 million and is trading at around $7, with a price to earnings ratio of 16.87. Its 52 week trading range is $6.56 and $20.58. It reported second quarter 2011 earnings of $23.78 million, an increase from first quarter earnings of $15.42 million and the second quarter net income was $9.12 million, an increase from first quarter net income of $5.87 million. It has quarterly revenue growth of 88.9% and a return on equity of 27.87%.
One of Noah’s competitors is BlackRock Inc (BLK), which has a market cap of $27.09 billion and is trading at around $151, with a price to earnings ratio of 11.95. It has quarterly revenue growth of 6.4% and a return on equity of 9.5%. It pays a dividend with a yield of 3.5%. This data indicates that both companies are performing on par.
Blum holds 10,000 shares of Noah, purchasing the entire holding in the third quarter 2011. The average purchase price per share was $12.32. Based upon the last trading price of $6.71, he has made a return of -45.54%.
Noah’s cash position has marginally improved. Its balance sheet showed $138.32 million in cash for the second quarter an increase from $135.30 million cash in the first quarter. Noah’s quarterly revenue growth of 88.9%, versus an industry average of 22.7%, and a return on equity of 27.87%, versus an industry average of 10.3%, indicates that it is outperforming many of its competitors.
The earnings outlook for the Asset Management industry is currently quite positive, with Moodys' revising their overall outlook from negative to stable. This has occurred on the basis that asset managers have improved their earnings capability, as well as obtaining clarity on the terms of regulatory reforms. This according to Moodys’ shows they are less exposed to reform than other sectors of the financial services industry. However, the current market volatility triggered by the Euro-zone crisis and weak US economy is affecting portfolio valuations and creating negative investor sentiment which is having some impact on the asset management value chain and affecting future profitability.
When the positive industry outlook is considered in conjunction with the increase in net income and balance sheet cash as well as Noah’s solid performance indicators it is a compelling investment. In addition, Noah is currently trading at close to the bottom of its 52 week trading range and this represents a buying opportunity. On this basis I agree with Blum’s investment decisions and rate the company as a buy.
Dolby Laboratories (DLB)
Dolby has a market cap of $3.30 billion and is currently trading at around $30, with a price to earnings ratio of 10.91. Its 52 week trading range is $25.70 to $68.88. It reported third quarter 2011 earnings of $243.77 million, an increase from second quarter earnings of $219 million. Third quarter net income was reported at $79.07 million, an increase from second quarter net income of $61.75 million. It has quarterly revenue growth of 7%, and a return on equity of 19.53%.
One of Dolby’s competitors is DTS Inc (DTSI), which has a market cap of $441.16 million and is trading at around $26, with a price to earnings ratio of 26.90. It has quarterly revenue growth of -2.4% and a return on equity of 12.47%. Based on these indicators it is being outperformed by Dolby.
Blum holds 150,000 shares in Dolby, with the entire holding purchased in third quarter 2011 at an average price per share of $35.71. Based on the last trading price of $30, he has made a return of -15.99%.
Dolby’s cash position has significantly improved in the last quarter. The balance sheet showed $942.79 million in cash for the third quarter an increase from 903.67 million in the second quarter. Dolby’s quarterly revenue growth of 7%, versus an industry average of 7.7%, and a return on equity of 19.53%, versus an industry average of 9%, indicates that it is performing on par with many of its competitors, but is delivering a better return on shareholders’ equity than many.
The earnings outlook for the diversified electronics industry is relatively positive as global demand has increased for components, with many companies seeing better demand coming out of emerging markets. However, inventory and supply issues are threatening the margins of some companies as uneven consumer spending has partially led to inventory problems for a few companies. In addition, the weak US dollar, which makes US exports more attractive, bodes well for US based manufacturers such as Dolby.
Dolby is a compelling investment opportunity as it has reported an increase in third quarter net income and balance sheet cash as well as currently trading well below its 52 week price peak. Accordingly, I agree with Blum’s investment decision and rate Dolby as a buy.
Thomas and Betts Corporation (TNB)
Thomas and Betts has a market cap of $2.52 billion and currently trades at around $48, with a price to earnings ratio of 14.76. Its 52 week trading range is $37.51 to $61.88. Third quarter 2011 earnings of $604.43 million was reported, an increase from second quarter earnings of $566.34 million. Third quarter net income was $54.33 million, an increase from second quarter net income of $43.46 million. It has quarterly revenue growth of 16.6%, and a return on equity of 11.14%.
One of Thomas and Betts’ competitors is Hubbell Inc (HUB.A), which has a market cap of $3.16 billion and currently trades at around $54, with a price to earnings ratio of 13.18. It has a quarterly revenue growth of 11.6% and a return on equity of 17.14%. Based on this data both companies are roughly performing on par.
Blum holds 225,000 shares in Thomas and Betts, with the entire holding bought in third quarter 2011 at an average price per share of $45.81. Based on the last trading price of $48.33 he has made a return of 5.5%.
Thomas and Betts’ cash position has improved, with the third quarter balance sheet showing $465.45 million in cash, an increase from $460.82 million in the second quarter. Thomas and Betts quarterly revenue growth of 11.6%, versus an industry average of 19.8%, and a return on equity of 17.14%, versus an industry average of 13.6%, indicates that it is performing on par with many of its competitors.
The outlook for the industrial electrical equipment industry is cautiously positive as there has been an increase in the demand for equipment and components from key customers such as utility companies. This is a direct reflection of the positive outlook for the electric utilities industry. In addition, the weak US dollar makes US exports more attractive and when combined with a better than expected US manufacturing outlook, it bodes well for US based manufacturers such as Thomas and Betts.
When the positive industry outlook is considered in conjunction with Thomas and Betts increased net income and cash holdings, and solid performance indicators I consider the company to be a god investment opportunity. In addition, it is currently trading at well below its 52 week trading range peak and at its current trading price represents a buying opportunity. Accordingly I rate the company as a buy.
Newell Rubbermaid Inc (NWL)
Newell has a market cap of $4.13 billion and is currently trading at around $14, with a price to earnings ratio of 35.10. Its 52 week trading range is $10.87 to $20.38. It reported third quarter 2011 earnings of $1.49 billion, a decrease from second quarter earnings of $1.57 billion. Third quarter net income was -$177.60 million, a decrease from second quarter net income of $146.70 million. It has quarterly revenue growth of 5.8% and a return on equity of 6.94%.
One of Newell’s competitors is Avery Dennison Corporation (AVY), which has a market cap of $2.58 billion and currently trades at around $24, with a price to earnings ratio of 9.19. It has quarterly revenue growth of 3.6% and a return on equity of 17.2%. Based on these indicators both companies have similar earnings growth but Avery Dennison is delivering a better return on equity.
Blum holds 1,100,000 shares in Newell, purchasing the entire holding in the third quarter 2011, at an average price per share of $13.76. Based on the last trading price of $14.25 he has made a return of 3.56%.
Newell’s cash position declined in the last quarter. The balance sheet showed $138.90 million in cash for the third quarter a decrease from $143.60 million in the second quarter. The net tangible assets have increased to -$1.13 billion in the third quarter 2011, from -$1.29 billion in the second quarter. Newell’s quarterly revenue growth of 5.8%, versus an industry average of 7.7%, and a return on equity of 6.94%, versus an industry average of 26.4%, indicates that it is underperforming many of its competitors.
The earnings outlook for the house wares and accessories industry is cautiously positive primarily due to the improving economic outlook and as demand for the industries products is relatively inelastic.
Despite the positive industry outlook I do not believe that Newell represents a good investment opportunity as the company has reported a substantial third quarter loss, which represents a substantial drop in net income. In addition, it reported a drop in balance sheet cash. Accordingly, I rate the company as a sell.
Mohawk Industries Inc (MHK)
Mohawk has a market cap of $3.42 billion, and is currently trading at around $50. Its 52 week trading range is $39.93 to $68.86. It reported third quarter 2011 earnings of $1.44 billion, a decrease from second quarter earnings of $1.48 million. Third quarter net income was $46.65 million, a substantial decrease from second quarter net income of $60.90 million. It has quarterly revenue growth of 10.2% and a return on equity of 5.37%.
One of Mohawk’s main competitors is Interface Inc (IFSIA), which has a market cap of $639.08 million and is trading at around $10, with a price to earnings ratio of 30.12. It has quarterly revenue growth of 8.1% and a return on equity of 8.08%. Based on these performance indicators, both companies are roughly performing on par.
Blum holds 250,000 shares in Mohawk, purchasing the entire holding in the third quarter 2011 at an average price per share of $49.14. Based on the last trading price of $49.77 he has made a return of 1.28%.
Mohawk’s cash position has declined in the last quarter. The balance sheet showed $276.16 million in cash for the third quarter 2011, a decrease from $285.42 million in the second quarter. Mohawk’s quarterly revenue growth of 8.1%, versus an industry average of 0%, and a return on equity of 8%, versus an industry average of 5.7%, indicates that it has better growth prospects than many of its competitors but it is not generating as strong return on shareholder’s equity.
The earnings outlook for the textile industry is negative predominantly because the poor economic outlook combined with high unemployment and the subsequent negative consumer sentiment has seen a drop in demand for textile products. However, if there is an uplift in the economy then the outlook should improve as historically consumer consumption of textiles follows GDP.
When the negative industry outlook is considered in conjunction with Mohawk’s decreased net income and cash holdings it is not a particularly appealing investment and I believe there are better investment opportunities in the market. Accordingly, I do not agree with Blum’s investment decision and rate the company as a sell.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
