Brian Rogers is a well known investor with more than 26 years of experience in industry finance and public accounting. He started in the public accounting sphere to then move to private industry. He served as controller and CFO, and in such roles he managed financial operations of retail and manufacturing entities and developed, implemented and maintained processes and procedures to efficiently carry out financial transactions.
In his job he leads management teams of all levels, works with a diversity of work forces and is accustomed to adapting himself to different business environments. Most importantly, he has wide experience organizing and prioritizing projects with efficiency across a range of responsibilities. He has a professional attitude and skills that enable him to successfully relate with staff, customers and vendors.
I think it is extremely interesting to analyze Brian Rogers´ top holdings. You can see his Portfolio and other information from his holdings in Edgar SEC fillings website. They provide seed investment ideas for further research. If a stock is a top holding from an important portfolio manager such as Rogers, the company must have been subject to rigorous research. This makes me feel highly confident at the time of investing.
General Electric Company (GE):
GE is one of the largest and most highly diversified technology and financial services corporation across the globe. It provides products and services including aircraft engines, power generation, water processing, security technology, medical imaging, business and consumer financing, media content and industrial products. It operates in more than 100 countries and employs almost 30,000 people. The company carries out its transactions through five business segments: GE Capital (29.1% of revenues), Technology Infrastructure (26.7%), Energy Infrastructure (26.8%), NBC Universal (11.6%) and Home & Business Solutions (5.7%).
One reason that I find GE attractive is the long-term growth perspective the company has. Although the company reported some challenges, there are also positive elements. According to management, the global demand for energy production and fossil fuel alternatives will grow in 2012 and in the years to come. This increasing demand is caused by concerns on global warming. Most importantly, the Energy Infrastructure segment holds the most efficient wind turbine fleet in the world and has an average utilization capacity of 99%. The segment grew 15% in the last quarter thanks to a 56% growth in energy equipment.
Another reason why the stock is attractive is GE´s capacity to generate free cash flow. Indeed, in the last quarter the company reported about $91 billion in free cash flow. This strong cash flow enables management to invest in product innovations, acquisitions and business development.
What about the company´s ratios? GE´s current net profit margin is 8.91%, currently higher than the 2010 margin of 7.55%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Current return on equity for General Electric is 11.15%, lower than the +20% standard I look for in companies I invest but higher than its 2010 average ROE of 9.60%.
In terms of income and revenue growth, GE has a 3 year average revenue growth of -6.90% and a 3 year net income average growth of -6.68%. Its current revenue year over year growth is -1.53%, higher than its 2010 revenue growth of -3.66%. The fact that revenue increased from last year shows me that the business is trying to improve performance. The current net income year over year growth is 21.53%, higher than its 2010 net income y/y growth of 5.61%. I like when net income growth is higher than in the past.
In terms of valuation ratios, GE is trading at a Price/Book of 1.8x, a Price/Sales of 1.4x and a Price/Cash Flow of 6.3x in comparison to its industry averages of 2.6x Book, 1.4x Sales and 10.2x Cash Flow. It is essential to analyze the current valuation of General Electric Company and check how it is trading in relation to its peer group.
It is a must to study GE´s valuation vis-à-vis its peer group. General Electric´s current trailing 12-month earnings multiple is 11.2x while the peer group´s average is 14.9x and S&P 500´s average stands at 15.8x. The company´s shares have been trading in a range of 4.7x and 19.x trailing 12-month earnings. This clearly shows that the company is placed in the middle of its historical range and represents a moderate upgrade.
Unfortunately, based on the forward estimate for 2011, GE has gone through a 37% discount to the peer group, which is lower than the historical average of 58%. This is another reason why the upside will be limited. Last but not least, GE´s expected earnings growth is 12.6% for the next five years. This percentage falls behind the 17.5% expected of the peer group. The company´s valuation is well justified.
Financially speaking, GE has reported a healthy cash flow of $14.7 billion or 14% of revenue in 2010. Furthermore, it had $19 billion in cash by the end of the year. There is no doubt GE will be capable of repaying debts and its upcoming obligations.
ExxonMobil Corporation (XOM):
ExxonMobil Corporation is an oil company that has its headquarters in Irving, Texas. This well known company is engaged in the exploration and production of oil and natural gas, refining and marketing of petroleum products, manufacturing of chemicals and other energy related businesses. The company carries out its operations through the following segments: Upstream, Downstream, and Chemicals. Most of its earnings, about 84%, are generated outside the United States. Lately, Exxon bought XTO Energy in an all-stock deal. The value of the transaction is $41 billion with $10 billion in XTO debt.
Why I think Rogers pick up XOM? There are two important elements he might have considered. The first one is the fact that Exxon is one of the best-run oil companies thanks to its superior return on the capital employed. As a publicly traded oil company, Exxon has become a core holding for investors as it is considered a company that fosters continued dividend growth.
Most importantly, with the acquisition of XTO, ExxonMobil now enjoys of a wide range of resources and holds North America´s newest energy discoveries with which it will be able to increase its share in the energy market. The company is also gaining presence in Canada, Argentina and Poland.
The second important element for picking up ExxonMobil is the number of operations the company holds in different projects across the world and that will certainly continue in the years to come. The company is expecting to expand its operations in the U.S., Canada, Kazakhstan, Nigeria, Australia, Russia, Angola and Iraq.
In terms of exploration, Exxon has presence in North America and offshore regions such as the Gulf of Mexico with unconventional natural gas. Today, the company is drilling in new deepwater plays in Romania (Black Sea) and Tanzania, as well as in Nigeria block PL 214. I found very interesting the "Growth Outlook" presentation made by William Colton, Exxon/Mobil's vice president of corporate strategic planning.
In terms of ratios, XOM ´s current net profit margin is 8.44%, currently higher than its 2010 margin of 7.95%. I like companies that increased profit margin in comparison to other years. It is essential to know the reason why that happened. The current return on equity for ExxonMobil is 27.26%, higher than the +20% standard I look for in companies I invest in and also higher than its 2010 average ROE of 23.67%.
In terms of income and revenue growth, XOM has a 3 year average revenue growth of 0.63% and a 3 year net income average growth of -3.17%. Its current revenue year over year growth is 26.93%, higher than its 2010 revenue growth of 23.39%. The fact that revenue increased from last year shows me that the business is performing well. The current net income year over year growth is 34.80%, lower than its 2010 net income y/y growth of 57.99%. I do not like when the current net income growth is less than the past year. I look for companies that increase both profits and revenues.
In terms of valuation ratios, XOM is trading at a Price/Book of 2.6x, a Price/Sales of 0.9x and a Price/Cash Flow of 7.6x in comparison to its industry averages of 1.8x Book, 0.7x Sales and 6.1x Cash Flow. It is essential to analyze the current valuation of ExxonMobil Corporation and check how it is trading in relation to its peer group.
Valuation is an interesting point to analyze. The acquisition of XTO Energy has been greatly beneficial for the company as its growth perspective is much clearer. ExxonMobil has now access to unconventional resources. Furthermore, the fact that it has gone public has turned it into a strong name with important dividend growth.
Nevertheless, there are certain headwinds that ExxonMobil is likely to face, particularly in relation to the access to new resources. Access to them will be more difficult for ExxonMobil as well as its peers. Unfortunately, there is skepticism as to the level of growth given the low volume it has experienced in the fourth quarter.
Financially speaking, ExxonMobil is in good shape. It is one of the few firms that are still rated AAA. XOM still has enough cash flow to finance capital expenditures and to increase dividends and buy back stock. More important, the large cash position and access to cheap debt give the company resources to make opportune acquisitions.
JP Morgan Chase & Co (JPM):
JPM is one of the most important financial holding companies across the globe. In fiscal year 2011, it reported $2.3 trillion in assets and $183.6 billion in stockholders´ equity. The company is present in more than 60 countries and is considered one of the largest financial service firms.
The company particularly renders services in investment banking, financing for consumers and business, financial transaction processing and asset management. To correctly deliver those services, it employs 260,157 employees all over the world. Its business segments are made up of: Investment Bank (26%), Retail Financial Service (27%), Card Services & Auto (19%), Commercial Banking (6%), Treasury & Securities Services (8%), Asset Management (10%) and Corporate/Private Equity (4%).
I like JPM because it has widely benefited from its leading businesses and large scale acquisitions. Indeed, most of its businesses are among the top four players in their respective industries. As regards acquisitions, in 2008 JPMorgan acquired Bear Stearns Companies and Washington Mutual Bank´s banking operations. In 2010 it acquired commodities from RBS Sempra Commodities LLP. The deal was valued at $1.6 billion. Management considers that these transactions will be profitable in the years to come. They will provide significant revenue opportunities, driven by strong client inflows and the growth in credit cards and investment products. I also think that JPM is a compelling opportunity because the company will be able to easily expand internationally. JPM wants to continue growing its business in Asia and other emerging markets. In fact, in 2010, JPMorgan acquired a majority stake in a Brazilian hedge fund and private equity firm Gavea Investimentos. This acquisition will certainly enable JPM to set its footprint in one of the fastest growing economies across the globe. Moreover, in 2011, the company's revenue from international operations stood at 26% of its total revenue, compared with 21% in 2010.
JPM´s current net profit margin is 18.07%, higher than its 2010 margin of 15.35%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. The current return on equity for JPMorgan is 10.21%, lower than the +20% standard I look for in companies I invest but higher than its 2010 average ROE of 9.69%. In terms of income and revenue growth, JPM has a 3 year average revenue growth of 13.08% and a 3 year net income average growth of 50.16%. Its current revenue year over year growth is -5.32%, lower than its 2010 revenue growth of 2.25%. I do not like when the current revenue growth is less than in the past. It generally shows that the business is decelerating for some reason. The current net income year over year growth is 9.25%, higher than its 2010 net income y/y growth of 2.25%. I like when the net income growth is higher than in the past.
In terms of valuation ratios, JPM is trading at a Price/Book of 0.9x, a Price/Sales of 1.8x and a Price/Cash Flow of 1.8x in comparison to its industry averages of 0.8x Book, 1.8x Sales and 2.3x Cash Flow.
It is essential to analyze the current valuation of JPMorgan Chase & Co and check how it is trading in relation to its peer group. Currently, JPMorgan´s shares trade at 8.5x the earnings estimate for 2012. This represents a 21% discount in comparison to the 10.7x average of the industry. Shares trade at 0.8x, if considered from a price-to-book perspective. This 0.8x involves a 20% discount to the industry average. Nevertheless, the valuation on a price-to-book basis is interesting thanks to a trailing 12-month ROE that exceeds the industry average by 22%.
Last but not least, JPMorgan is financially healthy. As of September 2011, the firm posted a Tier 1 common capital ratio of 9.9% and allowance for loan losses of 4.09% of retained loans. Fortunately, these two percentages provide an important cushion against losses. As regards capital generation, JPMorgan is moving at a reasonable pace. Actually, it has reported double-digit returns on equity in four of the last five quarters.
Royal Dutch Shell plc (RDS.A):
RDS.A is an oil and gas company involved in oil and natural gas, chemicals, power generation activities, renewable energy resources and other energy related businesses. The segments RDS.A is made up of include Upstream (83%), Downstream, and Corporate.
Last year, Royal Dutch Shell´s production of oil and gas amounted to 3.125 million of oil equivalent barrels per day. 52% thereof was oil.
I like Royal Dutch because the company is now focused on boosting more lucrative and well performing upstream exploration and production. Actually, the company has reported that it expects production to increase 25% worldwide on an annual basis by 2017-2018 (vis-à-vis 2011 levels). This increase in production should be encouraged by the new projects and startups. Furthermore, this advance by Shell is extremely ambition in the sector and will be achieved by the development of projects in Qatar, Australia and North America. Today, the company is assessing more than 60 projects and options, which will surely bring growth for the years to come.
The company also has a leading position in natural gas. Indeed, it is the second natural gas producer in the world. It has made its peers monetize its equity natural gas resource base, by investing in liquefied natural gas and gas-to-liquids technology. Shell has become a leader in these two technologies thanks to the research and development it has carried out, its experience in the area, the investments it has made and the relationships that it has set up with governments and partners.
RDS.A´s current net profit margin is 5.32%, higher than its 2010 margin of 4.39%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Current return on equity for RDS.A is 14.15%, lower than the +20% standard I look for in companies I invest but higher than its 2010 average ROE of 9.49%. In terms of income and revenue growth, RDS.A has a 3 year average revenue growth of 2.05% and a 3 year net income average growth of -13.72%. Its current revenue year over year growth is 32.62%, higher than its 2010 revenue growth of -39.46%. The fact that revenue increased from last year shows me that the business is performing well. The current net income year over year growth is 60.78%, higher than the 2010 net income y/y growth of -52.36%. I like when the net income growth is higher than in the past.
In terms of valuation ratios, RDS.A is trading at a Price/Book of 1.4x, a Price/Sales of 0.5x and a Price/Cash Flow of 6.2x in comparison to its industry averages of 1.8x Book, 0.7x Sales and 6.1x Cash Flow. It is essential to analyze the current valuation of Royal Dutch Shell p.l.c. and check how it is trading in relation to its peer group.
As regards valuation, it must be taken into consideration that Royal Dutch Shell is one of the largest energy companies across the globe. In the short term, the company will greatly benefit from its strategic programs, including cost reduction initiatives, leaving unprofitable markets and boosting the organization. Despite these advantages, the company may suffer a downside risk from the current slowdown of the economy. The high level of capital spending is worrying everyone as it may result in reduced returns going forward.
From a financial perspective, Shell is in good shape as it has reported a strong balance sheet and low debt/capital ratio. This strong balance sheet involving strong cash flow should enable Royal Dutch Shell to meet its debt obligations, fund investments and pay dividends. Unfortunately, if oil and gas prices retreat, the company will have to turn to more debt.
American Express Co (AXP):
AXP is a financial services company that operates through five segments: U.S. Card Services (50%), International Card Services (17%), Global Commercial Services (16%), Global Network & Merchant Services (17%) and Corporate & Other (this segment posted a loss in 2011). This well known financial services firm operates across the globe and has a strong brand name. It is a leader in credit payment card products and travel-related services. Its client database includes consumers, small businesses, middle-market companies, large corporations and banking and financial institutions. They interact through different channels such as direct mail, online apps, sales forces and direct response advertising.
Amex is a company that has shown that it could get out of recession more quickly than its competitors, thanks to its creditworthy customers. Furthermore, the company has gained competitive advantage and has improved its overall risk profile given the less confidence on revolving credit and back-end fees. Most importantly the company has developed a program called EGG program which focuses on diversifying revenue mix in eCommerce, mobile payments and fee-based businesses in emerging markets through business-to-business initiatives. Amex has also launched the prepaid debt card and the target prepaid; an initiative that enabled it to increase revenue by attracting customers of banking giants. Actually, consumers used funds worth $41 billion through prepaid cards in 2010, substantially up from $29 billion in 2009 and $19 billion in 2008.
The important growth that Amex is experiencing will certainly continue for the next 2 to 3 years. The company is also planning to start operations in the regulation-exempted category and to enhance its processing capabilities. In addition, Amex has created a fund with $100 million to meet digital commerce needs. All these new initiatives are expected to bring $3.0 billion in fees in the next 5-year period.
Amex is implementing a cost cutting strategy and an important re-engineering program aimed at increasing efficiency and closing unprofitable activities. In relation to this strategy, the company recorded post-tax re-engineering charges of $25 million in 2011 compared with $74 million in 2010, $185 million in 2009, $434 million in 2008, $49 million in 2007 and $100 million in 2006. The cost cutting initiative and the re-engineering program focus on restructuring operations and control cost structure.
The company had generated $300 million from employee plans in the second quarter of 2011. The re-engineering program is finishing by the end of 2012 but the company expects to incur $310 million this year as well. Despite this plan, management has previously estimated annual cost savings of $70 million from 2012 onwards.
Last but not least, Amex is trying to reduce loan loss provisions to improve credit quality. And the results of this initiative can already be seen. Provision for losses significantly reduced to about $1.1 billion in 2011, from $2.2 billion in 2010 and $5.3 billion in 2009. Finally, the company has separated almost $409 million for future loan losses reflecting liquidity. This amount involves 71% more than in 2010. These efforts are expected to help support the bottom line significantly.
American Express´s current net profit margin is 16.47%, currently higher than its 2010 margin of 14.585. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. The current return on equity for Amex is 28.18%, above the +20% standard I look for in companies that I invest and also higher than its 2010 average ROE of 26.49%.
In terms of income and revenue growth, American Express has a 3 year average revenue growth of 1.84%, and a 3 year net income average growth of 22.28%. Its current revenue year over year growth is 8.63%, lower that its 2010 revenue growth of 12.47%. I do not like when the current revenue growth is less than in the past year. It generally shows that the business is decelerating for some reason. The current net income year over year growth is 21.64%, lower than its 2020 net income y/y growth of 90.47%. I do not like when the current net income growth is less than in the past. I look for companies that increase both profits and revenues.
In terms of valuation ratios, Amex is trading at a Price/Book of 3.5x, a Price/Sales of 2.2x and a Price/Cash Flow of 6.3x in comparison to its industry averages of 2.4x Book, 3.1x Sales and 7.7x Cash Flow.
It is essential to analyze the current valuation of American Express Co and check how it is trading in relation to its peer group. What about Amex's valuation? In general Amex has experienced a strong recovery in credit trends with more card spending and strong billings. Furthermore, the company is planning to continue expanding internationally through acquisitions, alliances and technological services, which contribute to revenue. Unfortunately, the recovery will be affected by the global economic situation, higher expenses, the DoJ litigation and the new regulations that have been passed in the card industry. These elements will make Amex credit card more expensive thus bringing higher operating expenses, lower interest income and loan fee income.
As regards valuation per se, Amex shares currently trade at 11.8x the earnings estimate for 2012. This is a 30% discount to the industry average of 16.8x. As regards Price/Book valuation, shares trade at 3.2x, 68% above the 1.9x industry average. Price/Book valuation looks attractive. The 27.1% 12-month ROE supersedes the negative industry average. From a financial perspective, Amex is able to return capital to investors. There is no threat of a financial distress.
Disclosure: I am long AXP.