Andreas Halvorsen is one of the partners that founded Viking Global Investors LP, where he currently acts as CIO. This hedge fund management firm that was set up in 1999 and is based in Greenwich, Connecticut invests in equities across the globe.
I always try to focus on businesses that obtain good returns on equity and incur little or no debt at all. I think that Andreas Halvorsen shares this concept. That is why I consider it is worth analyzing his main picks to get interesting investment ideas.
Trip Advisor Inc (TRIP): TRIP is an online travel research company that is headquartered in Newton, Massachusetts but operates in many countries across the world, such as China (through daodao.com). It focuses on showing reviews and providing advice on hotels, resorts, flights, vacation rentals and packages, travel guides, among other information.
Trip Advisor Inc. is one of the most visited sites in terms of trips. Travelers planning for trips search for helpful tips and reviews. In turn, they post comments and recommendations, thus extending the number of reviews. This site is permanently updating information thus generating an interesting circle of network effects. It provides information about hotels, recommendations for vacation rental, restaurants, travel guides, etc.
I think Mr. Halvorsen invested in TRIP because it is a leading company in terms of travel products that competitors cannot currently match. Furthermore, as it provides a wide variety of information for travelers, they do not have to move from one site to another in search for information. I also think that Mr. Halvorsen got attracted by the fact that TripAdvisor is not only used by travelers, but it is also a top advertising platform for travel vendors, online travel agencies and other tourism bureaus in the US and abroad that can capture consumers who plan their trips online. Last but not least, TRIP's growth in the last years has been outstanding, achieving revenues of $640 million in 2011 and converting 30% of it into cash flow.
In terms of Valuation Ratios, TRIP is trading at a Price/Book of 5.8x, Price/Sales of 6.7x and a Price/Cash Flow of 17.2 vis-à-vis its Industry Averages of 4.1x, 6.2x, and 16.5x respectively. It is essential to analyze the current valuation of Trip Advisor and check how is trading in relation to its peer group.
Financially speaking, TRIP looks healthy. The balance sheet displayed $165 million in cash and cash equivalents as against a five-year term loan of $380 million by the end of 2011. The loan requires that TripAdvisor pays back $20 million in four quarterly payments in 2012, $40 million in a three-year period, in four quarterly payments too and the balance in the fifth year upon maturity of the loan. TRIP is doing well. It is a profitable firm that is capable of generating cash. Indeed, in recent years, it has been able to turn 30% of revenue into cash flows. Furthermore, it is expected to generate almost $200 million in free cash flows on an annual basis in the next years. This cash generation should enable it to repay the loan and fund the business.
Qualcomm Inc (QCOM): Qualcomm Inc. is a company that uses Code Division Multiple Access (CDMA) technology to design, manufacture and market digital wireless telecom products and services. Among its products, it offers integrated circuits based on this CDMA technology, GPS products and system software for wireless voice and data communications. Qualcomm operates through the following segments: CDMA Technologies; Qualcomm Technology Licensing and Qualcomm Wireless & Internet. The total revenue reported by these three segments in 2011 has been 62.9%, 33.1% and 4%, respectively. Apart from the products it designs, manufactures and sells, QCOM also licenses many of its patents and intellectual property to manufacturers of wireless equipment.
There are two positive elements that Mr. Halvorsen might have considered when he invested in the firm. The first one is the leading position that Qualcomm has gained in the high-end smartphone segment thanks to the market share it has obtained from its rivals, STMicroelectronics and Intel. In the case of the latter, Infineon chipset was an important supplier for Apple's iPhone, but Qualcomm's Snapdragon platform has outperformed it. Moreover, the company is benefiting from the increasing popularity of Android-based 3G smartphones. Actually, Snapdragon processors are used with this operating system developed by Google. Today, Android operating system represents the highest market share at a worldwide level.
The second positive element that Mr. Halvorsen might had in mind when he invested in QCOM was the variable data pricing plans that large wireless operators are offering. It leads to a significant demand for data capable devices. Actually, at the beginning of 2012, Qualcomm was able to ship 156 million MSM chipsets. This represents a 32% increase y/y and 23% sequentially. In terms of figures, 340 devices use Snapdragon chipsets and another 400 are under development. Most importantly, the company expects to ship 146 million of MSN chipsets in Q2 2012.
Now, let's move to key ratios. QCOM's current net profit margin is 28.48%, currently lower than its 2010 margin of 29.54%. I do not like companies that have lowered their profit margins in relation to past margins. That could be a reason to analyze why that happened. Current return on equity for Qualcomm is 17.82%, lower than the +20% I look for in companies I invest but higher than its 2010 average ROE of 15.77%.
In terms of income and revenue growth, QCOM has a 3-year average revenue growth of 10.31% and a 3-year Net income average growth of 10.47%. Its current revenue year-over-year growth is 36.20, higher than its 2010 revenue growth of 5.43%. The fact that revenue increased from last year shows me that the business is performing well. Net income year over year is 31.20%, lower than its 2010 net income y/y growth of 103.96%. 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, Qualcomm is trading at a Price/Book of 3.8x, a Price/Sales of 6.7x and a Price/Cash Flow of 16.4x in comparison to its Industry Averages of 2.2x Book, 1.6x Sales and 11.6x Cash Flow. It is essential to analyze the current valuation of Qualcomm Inc. and check how it is trading in relation to its peer group.
Now, what about valuation? This element is a must when making an investment decision. Qualcomm is currently trading at 18.7x fiscal 2012 earnings estimate, exceeding S&P 500 average but far away from the industry average. With respect to the 2013 earnings estimate, stock is trading at 16.5x, which is also at a premium vis-à-vis S&P 500 average but a huge discount in relation to the industry average. It is apparent that the company is highly benefiting from the increasing demand of high-end smartphones and tablets and the use of 3G and even faster 4G networks. Last but not least, Apple's CDMA-based iPhone and iPad and Microsoft's Windows 8 operating system will serve as catalysts for Qualcomm.
In general, the company's current valuation does not clearly reflect its true potential for growth.
In terms of financial health, QCOM's position is extraordinary. As of September 2011, Qualcomm had $20.9 billion in cash and investments, with only $1 billion of outstanding bank loans. Most importantly, the company pays dividends that yield 1% to 2% and is allowed to make share buybacks.
Ebay Inc (EBAY): EBay Inc. is an important online retailer. It modestly started with the purpose of joining small buyers and sellers in an online auctioning platform. In 1998, it floated its IPO. Since then, the company has gone through several changes and the number of participants has significantly increased. Today, EBAY operates through two business segments: Marketplaces, which account for 57% of revenue and Payments, with 38%. It disposed of its communications business.
EBay has become a leading player in the online business. I think Mr. Halvorsen may invested in EBAY because, apart from the leading position the company holds, it is now pushing to become a leader in the mobile segment. Indeed, its strategy is to introduce useful mobile applications that can be easily installed on cell phones and tablets. Today, EBAY has 14 mobile apps available and is developing many others to double revenues this year.
An example of how hard eBay is working on this is the acquisition of RedLaser, a bar-code scanning application for iPhones that is currently offered for free at the iTunes store. The app allows users to read bar codes with the iPhone camera and compare the price and SKU with other points of availability, identifying the cheapest vendor. The idea of eBay is to add its lists so that the products it offers in its marketplace can be available. It is considered that the mobile market will strongly grow from $18.3 billion in 2009 to $119 billion by 2015 and users are willing to increase their expenditures.
Another reason why Mr. Halvorsen may have considered eBay an interesting pick is its strong balance sheet. The company reported almost $4.0 billion in cash and short-term investments and generates $700 million of cash a quarter. EBay permanently turns cash into investments, thus increasing them from $200 million to $1.01 billion in the last quarter. This is considered a wise move by eBay because interest rates remain soft and the cash balance earns less than it used to. Cash and short-term investments represent 16% of total assets. This means that the company has room for further expansion through acquisitions. As regards debts, the amount is relatively small and the debt cap ratio is over 18%.
Now, let's take a look at ratios. The current net profit margin is 27.72%, currently higher than its 2010 margin of 19.67%. I really like companies that increase profit margins in comparison to other years. It is essential to know the reason why that happened. Current return on equity for eBay is 19.44%, lower than the +20% standard I look for in companies I invest in, but higher than its 2010 average ROE of 12.38%.
In terms of income and revenue growth, EBAY has a 3-year average revenue growth of 10.91% and a 3-year Net Income average growth of 21.98%. Its current revenue year-over-year growth is 27.25%, higher than its 2010 revenue growth of 4.91%. 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 79.21%, higher than its 2010 net income y/y, which was -24.62%. I really like when net income growth is higher than the past.
In terms of Valuation Ratios, eBay is trading at a Price/Book of 2.6x, a Price/Sales of 4.0x and a Price/Cash Flow of 14.3x in comparison to its Industry Averages of 3.9 Book, 1.0x Sales and 11.8x Cash Flow. It is essential to analyze the current valuation of EBay Inc. and check how it is trading in relation to its peer group.
In terms of valuation, eBay P/E is 17.7x, lower than its peer group average of 61.4x and higher than the S&P 500 average of 13.9x. As regards shares, in the last five-year period, they have been trading between 7.3x and 35.4x, trailing 12 months earnings. This means that it is trading below the historical range average that was mentioned above.
Despite the discount at which stocks are trading vis-à-vis the peer group, the 53% discount based on forward earnings for 2011 is less than what it has been, historically speaking. This shows that the stock will improve.
What about the company´s financial health? EBAY is in an excellent shape. By December 2011, the company held $5.9 billion in cash and short-term investments and $2.1 billion in debt. Total debt/EBITDA was 0.63 and Cash Flow cushion is about 7 times. Fortunately, this means that the company will face no difficulty in meeting its debt obligations and has enough liquidity to repurchase stock. The company's cash position and free cash flow has enabled it to purchase GSI Commerce. Last but not least, EBAY is rated A+ with no default risk.
Prudential Financial Inc. (PRU): PRU is a firm that provides financial products and services such as life insurance annuities, retirement-related services, mutual funds, investment management and real estate services. PRU was founded in 1875 and is headquartered in Newark, New Jersey. Its products and services are targeted at individuals and institutions through large distribution networks in the financial services industry. The company operates through the Financial Services Businesses (81% of revenue) and the Closed Block Business (18%).
Why did Mr. Halvorsen become interested in PRU? Maybe because of two important reasons; First of all, Prudential is a company with a strong international presence that enables the company to enjoy growth opportunities vis-à-vis its peers and has helped the firm to increase its revenue. Its international business (primarily made up of Japan and Korea, actually, accounted for 40% of 2010 net income.
As regards Japan, PRU has been operating in the country for more than thirty years and 85% of the total sales for 2010 were reported there. Japan is a market that permanently grows and enables Prudential to succeed in its protection products and retirement needs. Furthermore, in 2011, PRU acquired Star Edison, thus expanding its distribution, increasing its operations and broadening its client base by 50%. According to management, this acquisition will be important for ROE and EPS.
In terms of ROE, management forecasts an increase above 12% in 2012 and above 15% in 2015. Prudential would become the largest foreign life insurance company in Japan. Secondly, PRU has announced a 50/50 joint venture with Fosun Group, a China-based company. The deal has been valued at $78 million and it will enable PRU to increase its position in the Chinese life insurance market, which has grown an average 30% over the last decades. The market is expected to grow at a 10-15% rate for the next five years.
Of course, this is not the first introduction of PRU in the Chinese market. It already has a presence in China through Beijing-based Representative Office of PICA, Everbright Pramerica Fund Management Co., Ltd., (headquartered in Shanghai), Pricoa Consulting (Shanghai) Co., Ltd. and Pricoa Relocation Hong Kong Limited.
Now, let´s move to key ratios. PRU´s current net profit margin is 7.47%, currently lower than its 2010 margin of 8.32%. I do not like companies that have lowered their profit margins in relation to past margins. That could be a reason to analyze why that happened. Current Return on Equity for Prudential is 10.53%, lower than the +20% I look for in companies I invest and lower than its 2010 average ROE of 11.09%.
In terms of income and revenue growth, PRU has a 3-year average revenue growth of 18.84% and no 3-year net income average growth has been reported. Its current revenue year over year growth is 28.39%, higher than its 2010 revenue growth 17.30%. 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 14.74%, higher than its 2010 net income y/y growth of 2.27%. I do like when the net income growth is higher than the past year. I look for Companies that increase both profits and revenues.
In terms of Valuation Ratios, Prudential is trading at a Price/Book of 0.8x, a Price/Sales of 0.6x and a Price/Cash Flow of 2.4x in comparison to its Industry Averages of 1.0x Book, 0.6x Sales and 3.2x Cash Flow. It is essential to analyze the current valuation of Prudential Financial Inc. and check how it is trading in relation to its peer group.
It is a must to analyze valuation at the time of investing in a company. In the case of Prudential, the company is showing a strong trend in new business. It is expected to show an improvement in ROE thanks to its significant brand name, wide array of products and strong balance sheet. Today, PRU´s shares trade at 8.7 earnings estimate for 2012. This represents a 19% discount to the industry average. The price to book valuation looks attractive with the trailing 12-month ROE above industry average.
There is no concern about Prudential´s ability to pay its debt obligations. However, the firm is leveraged to the equity and fixed-income markets and its equity cushion will probably become volatile. Should the market tremble again, the firm will have to look for new capital, which would be dilutive to shareholders.
Capital One Financial Corp (COF): COF is a banking company that is primarily focused on consumer and commercial lending and deposit origination. The company is located in McLean, Virginia and operates through its banking and non-banking subsidiaries. Its client database includes consumers, small businesses and commercial clients in the US. Its operations are carried out through the Credit Card segment, accounting for 63% of revenue; the Commercial Banking segment, accounting for 9% and the Consumer Banking segment, accounting for 28%.
I think that Mr. Halvorsen invested in COF because after a research he found out that Capital One remains strong with respect its banking and credit card businesses. Furthermore, even though the competitive deposit market is growing, total customer deposits increased 1.7% sequentially achieving $128.3 billion in the third quarter of 2011. This increase in the amount of deposits was boosted by a growth in branch and direct deposits. The credit card business still generates strong returns on a risk-adjusted basis, thus expanding revenue.
Most importantly, to encourage the segment, Capital One announced, in August 2011, an agreement to acquire HSBC Holdings Plc's US credit card business. Management considers that this deal will enable the company to focus on the segment. This deal will certainly bring a valuable banking franchise and will allow the company to profit from branch banking in high growth markets.
I also think that Mr. Halvorsen felt attracted by Capital One´s payment of dividends, which reflect a strong capital position and the fact that the company is well capitalized with its capital ratios Tier 1 capital ratio of 15.4%, Tier 1 common ratio of 10.0% and leverage ratio of 9.9% well above the regulatory requirements. The company will probably continue building capital, thus increasing its financial position that will help meet the Basel III requirements.
Capital On'´s current net profit margin is 19.17%, currently higher than its 2010 margin of 16.96%. 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 COF is 11.11%. It is lower than the +20% standard I look for in companies I invest in, but higher than its 2010 average ROE of 10.33%.
In terms of income and revenue growth, COF has a 3-year average revenue growth of 5.43%, but no 3-year net income average growth reported. Its current revenue year over year growth is 0.67%, lower than its 2010 revenue growth of 24.56%. I do not like when the current revenue growth is less than the past year. It generally shows that the business is decelerating for some reason. The current net income year over year growth is 14.73%, lower than its 2010 net income y/y growth of 210.29%. 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, COF is trading at a Price/Book of 0.8x, a Price/Sales of 1.4x and a Price/Cash Flow of 3.0x in comparison to its Industry Averages of 2.3x Book, 3.0x Sales and 7.5x Cash Flow. It is essential to analyze the current valuation of Capital One Financial Corp and check how it is trading in relation to its peer group.
In terms of valuation, Capital One is currently trading at 8.1x the earnings estimate for 2012. This represents a 4% discount vis-à-vis the industry average of 8.4x. As regards price-to-book valuation, shares trade at 0.7x, which is a 46% discount with respect to the industry average. Price-to-book valuation is attractive. ROE is positive in relation to a negative industry average.
Financially speaking, COF is well-reserved and well-capitalized. Today, the probability of financial distress is low.