5 New Buys From Oaktree Capital's Howard Marks

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 |  Includes: CMCSA, CMLS, MPEL, SCCO, VSH
by: Stock Croc

Howard Marks is Chairman of Oaktree Capital, which he founded in 1995. Since then he has built his institutional investment firm into a $76 billion investment company in high-yield bonds, distressed debt, and private equity. Recently, he hasn’t taken a particular view on markets other than to say that:

...Whether bullish or bearish about the market in general, quite a few individual marketable securities do seem priced low compared to a conservative estimate of intrinsic value.

In this article I will analyze five recent stock purchases by Marks to determine whether they represent solid investment opportunities that will continue to accrue in value. Cumulus Media Inc. (NASDAQ:CMLS), Comcast Corp. (NASDAQ:CMCSA), Southern Copper Corp (NYSE:SCCO), and Melco Crown Entertainment Limited (NASDAQ:MPEL) are buys right now, while Vishay Intertechnology Inc. (VSH) is one to avoid.

Cumulus Media Inc has a market cap of $388.67 million and is trading at around $3, with a price to earnings ratio of 1.91. Its 52 week trading range has been between $2.18 and $5.78. It reported third quarter 2011 earnings of $132.30 million a substantial increase from second quarter earnings of $69.18 million and the third quarter net income was $59.54 million, a substantial increase from the second quarter net income of $1.34 million. It has quarterly revenue growth of 96.1% and a return on equity of 248.27%.

One of Cumulus’ closest competitors is Sirius XM Radio Inc (NASDAQ:SIRI), which has a market cap of $6.71 billion and last traded at around $2, with a price to earnings ratio of 44.75. It has quarterly revenue growth of 6.3% and a return on equity of 62.02%. This data indicates that Cumulus is outperforming Sirius. However, it is worthwhile noting that both companies have solid performance indicators.

Marks holds 3,985,983 shares of Cumulus. He purchased the entire holding in the third quarter 2011, at an average purchase price per share of $2.99. Based upon the last trading price of $2.83, he has made a return of -5.35%.

Cumulus’ cash position has improved in the last quarter. Its balance sheet showed $50.55 million in cash for the third quarter an increase from $30.15 million in cash in the second quarter. Cumulus’ quarterly revenue growth of 96.1%, versus an industry average of 6.9%, and a return on equity of 248.27%, versus an industry average of 28.1%, indicates that it is outperforming many of its peers.

Despite the negative economic outlook, the overall outlook for the broadcasting industry is quite positive, primarily due to increased advertising revenues and audience numbers. When this is considered in conjunction with Cumulus’ substantial increase in net income, increased cash holdings and strong performance indicators it is clear why Marks has chosen to invest in the company. On this basis I rate Cumulus as a buy.

Comcast Corporation (CMCSA) (CMCSK)

Comcast has a market cap of $58.28 billion and is currently trading at around $21, with a price to earnings ratio of 15.39. Its 52-week trading range is $16.30 to $27.16. It reported second quarter 2011 earnings of $14.33 billion, an increase from first quarter earnings of $12.13 billion. Second quarter net income was reported at $1.02 billion, an increase from first quarter net income of $943 million. It has quarterly revenue growth of 51.1%, a return on equity of 8.62% and pays a dividend with a yield of 2.1%.

One of Comcast’s competitors is DIRECTV Inc (DTV), which has a market cap of $31.93 billion and last traded at around $45, with a price to earnings ratio 14.11. It has quarterly revenue growth of 13.6%. Based on these indicators, it is underperforming Comcast.

Marks holds 1,889,500 shares in Comcast, with the entire holding bought in third quarter 2011 at an average price per share of $22.57. Based on the last trading price of $21.07, he has made a return of -6.65%.

Comcast’s cash position has improved in the last quarter. The balance sheet showed $1.99 billion in cash for the second quarter an increase from $1.82 billion in the first quarter. Comcast’s quarterly revenue growth of 51.1%, versus an industry average of 16.9%, and a return on equity of 8.62%, versus an industry average of 18.4%, indicates that it has stronger growth prospects than many of its competitors, but is not generating as strong return on shareholders’ equity.

The outlook for the CATV systems industry is positive, although these companies are facing increased competition from phone and satellite TV companies. Moody’s recently stated; “Any recovery in the housing market and growth in rental equipment income should help the cable business, but this will likely level off by 2012." The positive outlook could also be attributed to consumers seeking cheaper entertainment opportunities due to the negative economic outlook and high unemployment. Accordingly any uplift in the economy that sees an increasing in housing demand should bode well for cable TV companies such as Comcast.

Based on the positive industry outlook and Comcast’s increased net income and cash holdings, strong performance indicators and attractive dividend yield I can understand Marks’ decision to invest in the stock. On this basis, I rate Comcast as a buy.

Vishay Intertechnology Inc (NYSE:VSH)

Vishay has a market cap of $1.43 billion and currently trades at around $9, with a price to earnings ratio of 4.42. Its 52 week trading range is $7.94 to $19.36. Third quarter 2011 earnings of $637.65 million was reported, a decrease from second quarter earnings of $709.84 million. Third quarter net income was $50.49 million, a decrease from the second quarter net income of $82.1 million. It has quarterly revenue growth of -8.2%, and a return on equity of 22.23%.

One of Vishay’s competitors is Fairchild Semiconductor International Inc (NASDAQ:FCS), which has a market cap of $1.53 billion and last trading at around $12, with a price to earnings ratio of 8.93. It has quarterly revenue growth of -2.7% and a return on equity of 14.49%. Based on this data both companies are approximately performing on par.

Marks holds 2,750,000 shares in Vishay, with the entire holding bought in third quarter 2011 at an average price per share of $12.10. Based on the last trading price of $8.74 he has made a return of -27.77%.

Vishay’s cash position has improved, with the third quarter balance sheet showing $705.06 million in cash, an increase from $692.59 million in the second quarter. Vishay’s quarterly revenue growth of -8.2%, versus an industry average of 34.8%, and a return on equity of 22.23%, versus an industry average of 23.5%, indicates that it is underperforming many of its competitors.

The earnings outlook for the semiconductor industry is negative, as it is going to face a slow recovery due to the depressed global economic outlook and declining consumer demand resulting from high unemployment and low consumer sentiment.

When the industry outlook is considered in conjunction with Vishay’s declining earnings and net income, and poor performance indicators the stock is not a particularly attractive investment. With regard to Vishay I prefer to take a wait and see approach, especially as any recovery in the company’s earnings is dependent on an improvement in the economy. On this basis, I do not agree with Marks' investment decision, and rate the company as a hold.

Southern Copper Corporation (SCCO)

Southern Copper has a market cap of $23.39 billion and is currently trading at around $28, with a price to earnings ratio of 10.29. Its 52 week trading range is $22.58 to $50.35. It reported third quarter 2011 earnings of $1.75 billion, a decrease from second quarter earnings of $1.80 billion. Third quarter net income was $663.04 million, an increase from the second quarter net income of $658.04 million. It has quarterly revenue growth of 38.8% and a return on equity of 57.32%.

One of Southern Copper’s competitors is Freeport-McMoRan Copper and Gold (NYSE:FCX), which has a market cap of $32.59 billion and is trading at around $34, with a price to earnings ratio of 6.01. It has quarterly revenue growth of 0.8%, and a return on equity of 43.09%. Based on these indicators, it is being outperformed by Southern Copper.

Marks holds 225,713 shares in Southern Copper. He purchased the entire holding in the third quarter 2011, at an average price per share of $32. Based on the last trading price of $27.81 he has made a return of -13.09%.

Southern Copper’s cash position has decreased in the last quarter. The balance sheet showed $1.24 billion in cash for the third quarter a decrease from $1.45 billion in the second quarter. The net tangible assets have increased to $3.99 billion in the third quarter 2011, from $3.90 billion in the second quarter. Southern Copper’s quarterly revenue growth of 38.8%, versus an industry average of 192.5%, and a return on equity of 57.32%, versus an industry average of 28.2%, indicates that it is underperforming many of its competitors.

The boom in demand for resources driven by the growth of the Chinese economy indicates further opportunities for strong revenue growth. When combined with a weak dollar, that should make U.S. exports more competitive, it bodes well for commodities demand and producers like Southern Copper.

Based on the positive industry outlook in conjunction with Southern Copper’s increased net income and strong performance indicators, I agree with Marks’ investment decision and rate Southern Copper as a buy.

Melco Crown Entertainment Limited (MPEL)

Melco Crown has a market cap of $4.73 billion, and is currently trading at around $9, with a price to earnings ratio of 23.36. Its 52 week trading range is $5.55 to $16.15. It reported second quarter 2011 earnings of $979.58 million, an increase from first quarter earnings of $821.28 million. Second quarter net income was $68.02 million, a substantial increase from the first quarter net income of $7.28 million. It has quarterly revenue growth of 45.3% and a return on equity of 7.36%.

One of Melco’s competitors is Las Vegas Sands Corp (NYSE:LVS), which has a market cap of $31.36 billion and is currently trading at around $43, with a price to earnings ratio of 28.65. It has quarterly revenue growth of 26.2% and a return on equity of 19.94%. Based on these performance indicators, it has a better return on equity than Melco, but is not generating the same level of quarterly earnings growth.

Marks holds 1,155,941 shares in Melco, purchasing 486,541 shares in the third quarter 2011, adding to the existing holding of 669,400 shares purchased in the second quarter 2011. The average purchase price per share is $11.41. Based on the last trading price of $8.41 he has made a return of -26.29%.

Melco’s cash position improved in the last quarter. The balance sheet showed $1.04 billion in cash for the second quarter 2011, an increase from $704.35 million in the first quarter. Melco’s quarterly revenue growth of 26.2%, versus an industry average of 8.6%, and a return on equity of 19.94%, versus an industry average of 12.2%, indicates that it is outperforming many of its peers.

The earnings outlook for the Casino and Resorts Industry is subdued due to the current economic uncertainty, high unemployment and poor consumer sentiment, which has seen a decrease in demand. However, despite the gloomy economic outlook, Melco Crown Entertainment has strong performance indicators, an increasing net income and cash holdings, indicating it well positioned to capitalize on any growth opportunities. On this basis, I rate the company as a buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.