I discussed legendary hedge fund manager George Soros' Top Buys from the last quarter in a previous article. In addition it is also interesting to look at the top stocks where George Soros is reducing his holdings. The following is my analysis on some of the top sells of Soros Fund Management, according to its latest 13F filing.
AT&T Inc. (T): My Take - Sell
Soros Fund Management sold 378,642 shares of AT&T last quarter. AT&T is the largest telecommunications company in the U.S. The company provides local and long-distance calling over its wired and nationwide wireless networks; video under AT&T's U-verse brand to a portion of its U.S. wireline footprint; and voice and data services to businesses worldwide.
AT&T reported disappointing Q4 F2011 results with a 25% year-year decline in EPS. This decline was on the back of weakened margins from both wireless and wireline businesses. Wireless margins sequentially decreased by 1500 bps due to smartphone subsidies, especially with higher iPhone 4S sales.
The company's management guided for a margin expansion in 2012 with flat smartphone sales. However, it seems highly unlikely with the expected launch of iPhone 5 in July. Further, headwinds in the form of continued residential line and broadband subscriber losses, and slowing U-verse adds are expected to continue. Although the company's management has indicated restructuring (sale or potential spin-off) of its legacy wireline business, I don't see many strategic options for AT&T. CenturyLink (CTL) has categorically denied any interest in additional access lines and a spin-off to AT&T's own shareholders is also unlikely. With operational challenges in wireless and limited options with its wireline business there are no positive catalysts for near-term price appreciation. On the other hand, downward revision of guidance is likely, which may act as a negative catalyst.
Motorola Solutions, Inc. (MSI): My Take - Sell
Soros Fund Management sold 1,586,848 shares of Motorola Solutions last quarter. Motorola Solutions, Inc. provides mission-critical communication products and services for enterprise and government customers worldwide. The company's portfolio includes products such as two-way radios, barcode scanners, radio frequency identification readers, mobile computing devices, wireless broadband networks and wireless local area network products. I am not too bullish on Motorola Solutions, Inc. In the near term I am concerned about the potential impact of government spending cuts, as Motorola generates about 65% of its sales in its Government segment and the federal government represents 8% of revenue. Also, most of its enterprise sales are in the retail, transportation and logistics industries. Any downturn in retail sales due to macroeconomic concerns could lead to reduced purchases of Motorola barcode readers and mobile computing products.
Hewlett Packard Co. (HPQ): My Take - Sell
Soros Fund Management sold 377,616 shares of Hewlett Packard last quarter. Hewlett Packard is one of the old technology stocks that has taken quite a bit of hammering in the stock market in the recent past. After a dismal 2011 where we saw the leadership change with Meg Whitman becoming its new CEO, HP is trying to stage a turnaround. However, it looks like a long, tough path ahead for HP for its recovery as its CEO succinctly put it when HP announced its first-quarter results for this year.
There was nothing to cheer for when HP reported its first-quarter results as revenue declined by 7% year on year. No doubt the worldwide PC market is struggling. Hard disk drive shortages due to Thailand floods continue to affect sales, also adding to the cost pressures. Economic slowdown in Asia and a weak situation in Europe coupled with cannibalization by tablets is expected to limit end-market PC growth. But HP's problems seem to go beyond these and are secular in nature. Its PC volumes declined by 18% year-year trailing the broader PC market by a significant margin. It can only mean that it is losing market share to Lenovo (OTCPK:LNVGY). Lenovo incidentally reported strong sales growth across all major markets.
Further, its Enterprise Servers, Storage and Networking business; and Imaging and printing Group seem to be struggling with revenue declining by 10% year-year and 7% year-year respectively. Both these businesses are characterized by high margins. This decline is attributed to its cost structure, reduced corporate spending and overall economic environment. However, I have a reason to believe it's not just these macro factors; there are company specific issues also at work here. For example, HP's industrial standard servers revenue declined by 9% sequentially while DELL and IBM saw an increase of 6% and 16% respectively from the previous quarter. HP's continuous loss of market share in Itanium servers, most probably to IBM further proves my point.
HP's CEO broadly described her strategy for turnaround, which might take a few years as pointed out by her. However, unless there is some certainty/visibility on these changes, I see the stock continuing its downward journey.
Pfizer Inc. (PFE): My Take - Buy
Soros Fund Management sold 643,863 shares of Pfizer last quarter. Pfizer Inc. is a global pharmaceuticals company organized into two commercial segments, Biopharmaceutical and Diversified. The Biopharmaceutical segment is focused on discovering, developing and marketing drugs for cardiovascular, metabolic, central nervous system, immunology, pain, infectious diseases, respiratory, oncology and other indications. The Diversified segment includes animal health, consumer products and nutrition divisions.
Pfizer offers an attractive mix of inexpensive valuation, with forward P/E of just 9x; multiple catalysts in the form of Phase III data or FDA approval for many late-stage drugs; high FCF and dividend yield; and limited earnings risk.
Although the company's 2012 guidance disappointed some analysts, I believe it was lower mainly due to the FX headwinds, which are already baked into stock price now. Further, the management hinted that it was looking to manage its pharma business as two distinct entities, an innovative core pharma segment and value products division. As dynamics of these two groups will be made known, valuation could go up.
Cost synergies from the Wyeth acquisition is another positive as the company works through its Lipitor expiration. Drugs pipeline for 2012 seems solid with four new $1 billion plus products-- Eliquis, Xalkori, Prevnar and tofacitinib. The management is also committed to return cash to its shareholders with $ 5 billion expected share buybacks and a dividend yield of 4.2%. Clearly it is a quality company trading at an attractive 9x forward PE multiple and I will recommend buying the stock.
Comcast Corporation (CMCSA): My Take - Buy
Soros Fund Management sold 774,650 shares of Comcast last quarter. Comcast Corporation is the largest U.S. provider of cable services, with over 22 million basic subscribers. Comcast is also a majority owner of NBCU, which includes the NBC TV Network, MSNBC, USA, Sci Fi, Bravo, E!, CNBC, and several other cable networks, Universal Films and Universal Theme Parks.
Comcast recently reported better-than-expected Q4 2011 earnings and beat street consensus on all operating metrics. The strong earnings were primarily driven by modest video subscriber losses and higher High Speed Data net adds from product bundling. Comcast has also raised its dividend, with the yield now at a respectable 2.3%. Further, the management is keen to return cash to shareholders, with a $6.5 billion buyback authorization in 2012.
Going forward, the operating momentum seems sustainable, with improved video subscriber trends and solid growth potential in the high-margins HSD market. Management is expecting video subscriber growth for the first time in five years, which is a big positive. Also, smart initiatives by management in advertising and SME offer further growth potential. I believe Comcast is a good buy with increasing shareholder returns, continued evidence of superior execution, and attractive valuation.