New York-based long-only hedge fund company Cantillon Capital Management, founded in 2003 by Munich-born William von Mueffling, manages over $5 billion in assets, including $1.9 billion in U.S. equity assets as per its latest Q4 (December 2011) quarter filing with the SEC on form 13-F. Before founding Cantillon, Mr. von Mueffling was a star at Lazard Asset Management where he made a name in tech and telecom and helped put the bank's hedge fund business on the map. He then left it in 2003 to launch Cantillon, in what was one of the biggest hedge fund launches of the time. The firm, with offices in New York and London managed $10 billion in assets at its peak, mostly in long / short strategies before reverting to a long-only shop and returning all but $1 billion back to investors.
Cantillon is probably one of the most well-respected but least known businesses in the hedge fund world. Thee fund basically acts as a value stock picker, and employs a fundamental approach in making investments. The fund holds a concentrated portfolio of just sixteen positions, with the top four positions accounting for half of the portfolio. It is focused mostly in technology (47%) and consumer non-cyclical (36%) sectors, with financials making up most of the remainder (13%). More than 80% of its portfolio is in large-caps and the rest in mid-cap equities.
The following are Cantillon's most bullish picks that are also trading at a discount compared to its peers (see Table):
Priceline.com Inc. (PCLN): PCLN, the pioneer of name-your-own price service, is a diversified online travel services company. It provides airline ticket, hotel room, car rental, vacation package, and cruise services through Priceline.com. At $79 million, this is Cantillon's largest move in Q4, adding a new position in the company in its portfolio.
PCLN has been one of the strongest performers of the last few years, up an astounding 20-fold plus in the last six years, including being up 15% in the past year. Earnings growth has kept pace with the rise in the stock price, up from $1.37 in 2005 to a projected $23.15 in 2011 and $29.95 in 2012. Thus, despite the huge run-up, the stock still trades at an attractive 16 forward P/E and 10.0 P/B compared to averages of 70.5 and 5.4 respectively for its peers in the Internet commerce group. Its shares have been weak recently after it reported soft guidance for Q4 in its Q3 report on November 7th, but the company is still in strong bull mode as revenue and margin growth continues to be outstanding. We would look at any pullback in this premium company as an opportunity to buy.
Google Inc. (GOOG): GOOG is the Internet's premier search engine. At $267 million, it is Cantillon's largest position, including $14 million added during Q4. Besides Cantillon, the company is also a favorite of the world's largest fund managers and also legendary or guru fund managers, both groups collectively adding to their positions in GOOG in the most recently reported quarter. Long-term, the stock is up a massive six-fold since its IPO in 2004, and is currently within striking distance of its all-time highs. Meanwhile, earnings growth has been even more fantastic, up from $2.50 in 2004 to a projected 36.87 in 2011 and $43.95 in 2012, still growing at a respectable 20% annual rate which is unbelievable for a company the size of GOOG. The stock trades at a discount 14-15 forward P/E and 3.9 P/B compared to its closest peer Yahoo! Inc. (YHOO), that trades at 17-18 forward P/E and 1.6 P/B with earnings growth at YHOO at a much slower 10% annual rate compared to the 20%+ rate at GOOG.
Oracle Corp. (ORCL): ORCL develops database and middleware software, and business application software and hardware systems for enterprises. At $215 million, including $13 million added in Q4, this is Cantillon's fourth largest position.
ORCL shares recently took a nose-dive after its November quarter came up short, missing on both analyst revenue and earnings estimates, prompting many analysts to downgrade the stock and slash their price targets. While the company blamed the weakness on an increase in last-minute approval for large deals, as well as a chip transition for its server business, the concern is that ORCL may be lagging in product strength and could head down to Microsoft Corp. (MSFT) like valuations in the high single digits. Currently, ORCL trades at 10-11 forward P/E and 3.2 P/B, compared to averages of 38.9 and 4.5 respectively for its peers in the computer software group, while earnings are projected to increase at a modest 7.6% annual rate from $2.22 in 2011 to $2.57 in 2013.
The following are additional companies that Cantillon is most bullish about, but that are not trading at a discount to their peer group (see Table):
Banco Bradesco SA (BBD): BBD is a Brazilian bank providing a range of banking and insurance products services to individuals as well as corporations. It operates a network of branches, ATMs, and special banking service stations and outlets in Brazil, and it also operates three branches and eight subsidiaries in New York, London, the Cayman Islands, Japan, Hong Kong, Argentina, Mexico, and Luxembourg. Cantillon added $5 million in Q4 to its $72 million prior quarter position in the company. BBD has been a huge long-term outperformer, up from sub-$2 range in 2004 to current prices in the $17 range. It trades at a premium 9-10 forward P/E and 2.2 P/B compared to averages of 8.1 and 1.1 respectively for its peer foreign banks, while earnings are projected to grow modestly from $1.54 in 2010 to $1.78 in 2012 at an annual rate of 7.5%.
Companhia De Bebidas Das Americas or AMBEV (ABV): ABV is a Brazil-based manufacturer of beer, soft drinks and other beverages in 14 countries in the Americas. Besides Cantillon, the company is also a favorite of the world's largest fund managers and also legendary or guru fund managers, both groups collectively adding to their positions in ABV in the most recently reported quarter. With a current market-cap of $107 billion, ABV arguably may be the best long-term performer in the mega-cap category (market-cap over $100 billion), as it is up from the $3-$4 range in 2004 to current prices ten-times higher appreciating up at an annual rate in the range of 35%. Earnings, however, have not quite kept pace, so that the stock trades at a premium 20 forward P/E and 7.9 P/B compared to averages of 13.9 and 2.4 respectively for its peers in the alcoholic beverages group.
Coca Cola Co. (KO): KO manufactures non-alcoholic beverage concentrates and syrups sold to bottlers and fountain wholesalers. At $247 million, including $15 million added during Q4, this is Cantillon's second largest position. KO shares are currently trading near their highs, up 8% in the past year. Its shares trade at a premium 16-17 forward P/E compared to the 16.0 average for the soft beverage group, but more importantly perhaps they also trade at a premium to arch-rival PepsiCo Inc. (PEP), whose shares trade at a more discounted 14 forward P/E, while earnings growth at KO is projected at an 8.9% annual rate over the next two years versus 5.4% at arch-rival PEP.
Philip Morris International Inc. (PM): PM manufactures cigarettes sold worldwide under the Marlboro, LM, Parliament, Virginia Slims and other brands. Cantillon added $12 million in Q4 to its $172 million prior quarter position in PM. PM has been a strong performer of late, up 150% from its lows in 2009, including over 30% in the last year. Its shares trade at a discount 14-15 forward P/E compared to the 12.6 average for the tobacco group, while earnings are projected to rise at an annual 16.3% rate to $5.23 in 2012.
Other companies in its portfolio that Cantillon is bullish on include chip-maker Analog Devices (ADI), in which it added $11 million in Q4; cosmetic and personal care company Colgate Palmolive Co. (CL), in which it added $8 million in Q4; and specialized semiconductor manufacturing company Altera Corp. (ALTR), in which it added $3 million in Q4.
Note to Table: The companies selected to be included in both the Top Buys and Sells and Top Holdings categories in the Table were picked on both an absolute basis, i.e. the highest dollar amounts of buys and/or sells, as well as those amounts relative to their market-cap. That way, the list is not biased towards the largest companies in the group.
Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
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