John Paulson is the President as well as the Portfolio Manager of Paulson & Co. Inc. He became a billionaire by deciding to short-sell subprime mortgages during 2007, thus making $3.5 billion during that year alone. By 2009, Paulson had increased most of his investments in the gold industry. Paulson also established the Paulson Gold Fund in April of 2009. Now, five gold mining stocks make up 14% of Paulson's firm's portfolio. In the first quarter in 2009, Paulson bought 31,500,000 shares of the SPDR Gold Trust (GLD) at a value of $89.56 per share.
As of April of 2011, GLD's stock has increased 63% to about $133 per share. Moreover, gold prices have increased over 131% in these last five years. In 2010, the price jumped almost 30%, and Paulson's investments paid off even more than Paulson's subprime bet during 2007, since he earned $5 billion. Nonetheless, during the first quarter of 2011, his gold funds have gone down by 1.26%.
When taking an investor's perspective, I believe it is interesting to concentrate on stocks that are large holdings in Paulson's portfolio. By examining them, I have found a number of reasons why Paulson could have been attracted to invest. I search for companies that I can understand, particularly companies with good long-term prospects, operated by competent individuals and, above all, available at attractive prices.
Delphi
Delphi Auto Plc's (DLPH) sales are to grow at a pace exceeding the normal average rate of growth in the global vehicle demand. Delphi offers products that are normally in high demand by most consumers, but that also public legislation requires to be installed. Due to their growth potential, Delphi's key products that I believe are interesting include electronic devices, power train, electrical architecture and safety. Sales growth and return on investment, in my view, will also be improved by the firm's ability to innovate process and product technologies. Manufacturing discipline as well as labor in low-cost countries will allow for a considerable operating leverage as volume rises. A global manufacturing presence allows the firm to follow its customers worldwide and capitalize on the automakers' use of most global vehicle platforms.
Vehicles are becoming ever more electrified through transmissions controls, connectivity, engine controls, active suspension systems, drive-by-wire, entertainment systems, brake-by-wire, and several other electronic devices as well as mechatronics. Thus, the complex electrical architecture is increasing and requires a better control of power and electrical signal distribution. Such a phenomenon will benefit Delphi, since the firm offers products such as connectors, wire harnesses as well as smart distribution boxes. This positive fact can be found in the company's 10K filling.
In terms of valuation ratios, DLPH is trading at a Price/Book of 6.2x, a Price/Sales of 0.8x and a Price/Cash Flow of 9.8x in comparison to its industry averages of 2.6x Book, 0.6x Sales and 11.8x Cash Flow.
I consider Delphi's financial health as significantly enhanced in comparison to before the bankruptcy. By the end of 2004, the last full year when the firm was publicly traded, the total capital was negative due to the mounting retained losses. The previous year, the total debt/total capital amounted to 67.3%. Total adjusted debt/EBITDAR, which does contemplate the effect of operating leases as well as rent expense, stood at 2.9 times.
But by the end of the third quarter of 2011 (Sept. 30), and on a pro forma basis as regards its IPO in November, the firm's total debt/total capital stood at 51%, and its net debt/total capital stood at a very respectable 19% on a considerably cushy cash balance of $1.3 billion. The firm's total adjusted debt/EBITDAR (adjusted for off-balance-sheet debt as well as rent expense) stood in a position as good as many investment-grade-rated companies' at 1.4 times.
Furthermore, at least on a pro forma basis, Delphi enjoys a healthy liquidity of over $1.3 billion in cash and cash equivalents as well as $500 million of non-drawn revolver availability, excepting $11 million in letters of credit. As such, the firm employs accounts receivable securitization facilities that are uncommitted, which are usually included in the balance sheet as short-term debt.
The capacity of such facilities was not stated in the S-1 filing of November, yet the outstanding balance stood at $70 million by the end of the third quarter. There remain no long-term debt maturities until the year 2016, then in each successive year until 2021, the largest maturity will be $950 million in the year 2017. I think the company shall enjoy the financial flexibility to roll such maturity to a rather later date and, should management decide to do so, it could employ cash to repay part of the outstanding amount.
Currently, the firm does not pay common stock dividend. For the moment, I expect that Delphi will reinvest in the business. However, I believe that a small dividend may in fact be possible within the next two to three upcoming years.
Anadarko
Anadarko Petroleum Corporation (APC), which is headquartered in The Woodlands, Texas, is a considerably large independent oil and natural gas exploration and production (E&P) company. The firm is mainly engaged in exploring, developing, producing, gathering, processing as well as marketing crude oil, natural gas, condensate and natural gas liquids (NGLS). By the end of 2010, the firm had total proven reserves of 2.4 billion barrels of oil equivalent (BOE), of which about 69% were proven developed reserves. By the end of 2010, the firm's product mix of proven reserves consisted of nearly 56% in natural gas and 44% in liquids. The company's major assets have been located in the United States and contain 89% of the company's total proved reserves. Moreover, the firm has E&P facilities in Brazil, China, Indonesia, Algeria, Ghana and Mozambique.
The firm's deep as well as well diversified asset base (consisting mainly of unconventional resources) offers the Anadarko a considerable growth potential during the medium-to-long run. The firm's low-risk as well as its predictable production profile both reflect an important upside potential.
The company has demonstrated an excellent financial discipline by managing with prudence its balance sheet. Its financial discipline allows it to capitalize on the flexibility shown by its global portfolio, while simultaneously enabling it to pursue new tactical and strategic growth avenues. Anadarko finalized its third quarter of 2011 with approximately $3.48 billion in cash on hand and kept access to its $5 billion non-drawn credit facility.
As of September 30 of 2011, the firm had a total debt of $12.94 billion as well as long-term debt of $12.8 billion. The firm's discretionary cash flow was quite healthy at $1.87 billion, which generated $576 million of free cash flow. Anadarko has managed to leverage its healthy financial position to end its settlement with BP plc as regards all current and future claims related to the Deepwater Horizon accident. I found several key pieces of information in the last quarterly filling.
The current net profit margin of APC is -18.97, which is lower than its 2010 margin of 6.93. I do not like it when companies see lower profit margins than past ones, yet it could be a reason to examine why that occurred. Its current return on equity is -13.66. It is lower than the 20% standard I look for in companies I invest in. It is also lower than its 2010 average return on equity of 3.75.
In terms of income and revenue growth, APC has a 3-year average revenue growth of -2.70. There is no information on its 3-year net income average growth. Its current revenue year over year growth is 27.16, higher than its 2010 revenue growth of 22.04. That revenue rose from last year demonstrates that the business is now performing well. There is currently no information on the current net income year over year growth.
In terms of valuation ratios, APC is trading at a Price/Book of 2.3x, a Price/Sales of 3.0x and a Price/Cash Flow of 16.8x in comparison to its industry averages of 1.9x Book, 3.0x Sales and 6.5x Cash Flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
In terms of valuation, the firm has managed to master its financial overhang after reaching a full final settlement for all current and future claims related to the Deepwater Horizon incident. The firm's future potential is still strong on account of its new discovery made at offshore Brazil and its fresh project startup in the offshore GOM. Furthermore, an investment-grade rating, a healthy balance sheet and an open access to liquidity should allow the firm to seek more tactical and strategic growth opportunities. Nonetheless, in my view, the firm's upside potential could be restricted by the constrained commodity environment that is currently going forward. In addition, the fluctuating prices, the regulatory overhang and the risks related to drilling keep me on the sidelines. Anadarko's stock is presently trading at a 8.5x trailing 12-month cash flow in comparison to the peer group's 23.1x average.
Currently, the firm is in an admirable financial shape, having minimal upcoming debt maturities, $3.5 billion of cash on hand as well as $5 billion of unused revolver capacity at the time of this report's publication. As of the end of 2010, the company's net debt/EBITDAX as well as EBITDAX/interest ratios were quite solid, at 1.2 and 8 times, respectively. I expect continued strong credit metrics, with net debt/EBITDAX increasing to 0.5 times during 2013 as well as net debt/proved reserves to be trending from $0.64 per thousand cubic feet equivalent in 2010 to $0.30 per mcfe during 2013. I believe that the firm will further pursue its strategy of funding investment activity mainly by means of operating cash flow, which in turn will a provide balance sheet flexibility that will be useful in absorbing potential legal liabilities.
Hartford
Hartford Financial Services Group (HIG), established in 1810 and based in Connecticut, is one of the largest multi-line insurance and investment firms in the United States. It offers investment products, individual life, group disability and group life insurance products as well as property and casualty insurance products in the United States. The firm offers numerous innovative products by means of several distribution channels to consumers and businesses.
Moreover, it constantly endeavors to develop and increase its distribution channels by seeking cost efficiencies in economies of scale and enhanced technology. The company, in addition, also capitalizes on its brand name as well as The Hartford Stag Logo, which is one of the most well-known symbols in the financial services industry. The firm reports broadly in four customer-focused divisions, namely Consumer Markets, Wealth Management, Commercial Markets and Runoff Operations. The firm conducts business in nine main segments.
With a view to concentrating on its American operations and improving its operating leverage, the company has been selling its non-core businesses: it sold its mutual funds business (Hartford Investments Canada Corp) to CI Financial Corp. during December of 2010. Also, during 2011, the firm sold Trumbull Services LLC to ExlService Holdings Inc., SRS to Sedgwick Claims Management Services Inc. and Federal Trust Corporation to CenterState Banks Inc.
In addition, during December of 2011, the company stated that it would enter an agreement to sell Hartford Life Private Placement (HLPP) to the Philadelphia Financial Group Inc. All these divestitures will allow the company to focus the totality of its financial and manpower resources on the firm's core businesses and thus improve its operating performance in the long run.
The firm's capital raise, repayment of government funds as well measures to un-risk the company's balance sheet, have raised confidence in its financial strength. This will enable the company to multiply its dividend by two, a first during the fourth quarter of the year 2010 since the most serious period of the recession. During August of 2011, the firm also stated that it would conduct a share repurchase program amounting to $500 million, which is believed to be used completely in the first half of the year 2012. Furthermore, the firm's investment portfolio has been reinforced with an enhanced investment method as well as active risk management performed by the firm.
Moreover, during 2011, the company executed a hedge program as regards its Japanese operations, which are one of the most important components of the firm's international business and have been under significant competitive pressure from both internal and external insurers. The Japanese earthquake and tsunami affected heavily the firm's financials. Thus, its hedge program is believed to seek to decrease the risk and ease up the pressure on the firm's deposits within the Japanese market. The company explained this positive fact in a recent conference that I found in the company's Investor Relations site.
The current net profit margin of HIG is 2.84, which is lower than its 2010 margin of 5.20. I do not like it when companies achieve lower profit margins than the past. Among others, it could prove to be a reason to analyze why that took place. Its current return on equity is 2.94. It is lower than the 20% standard I look for in companies I invest in. It is also lower than its 2010 average return on equity of 6.72.
In terms of income and revenue growth, HIG has a 3-year average revenue growth of -3.78. There is no information on its 3-year net income average growth. Its current revenue year over year growth is -0.86, higher than its 2010 revenue growth of -10.74. The reality that revenue rose from last year evidences that the firm is performing well. The current net income year over year growth is -60.60. There is no information on its 2010 average.
In terms of valuation ratios, HIG is trading at a Price/Book of 0.4x, a Price/Sales of 0.5x and a Price/Cash Flow of 4.6x in comparison to its industry averages of 0.8x Book, 1.0x Sales and 10.20x Cash Flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
With regard to valuation, currently, the company's shares trade at 6.2x, the average analyst estimate for 2012, a 46% discount to the 11.4x industry average. On a price-to-book basis, the shares are trading at 0.4x, a 50% discount to the 0.8x industry average. In fact, the firm's valuation on a price-to-book basis seems a bit stretched due to a trailing 12-month ROE of 4.5%, which in reality is below of the industry average of 5.5%. The six-month target price of $22.00 per share equals to about 6.5x the earnings estimate for the year 2012. In combination with the $0.40 per share annual dividend, such target price does imply an expected total return of 6.7% over such named period.
The market rally following the finance crisis enabled the firm to return to a large portion of its lost equity cushion. The firm has paid back the Treasury for the TARP investment, although its capital position remains leveraged to equity market returns and investment results by means of its variable annuity business.
Mylan
Mylan Inc. (MYL), which is headquartered in Canonsburg, Pennsylvania, is specialized in developing, manufacturing, marketing and distributing generic, branded and branded-generic pharmaceuticals as well as active pharmaceutical ingredients. The firm, operating in nearly 150 countries and territories, leads the field in worldwide generic and specialty pharmaceutical firms. The firm's product portfolio consists of several therapeutic areas like central nervous system, anti-infective, gastrointestinal, cardiovascular, metabolic and endocrine as well as respiratory agents.
Furthermore, the company also conducts a specialties business, focused on medicines for allergy, respiratory and psychiatric diseases. By means of its controlling interest in the firm's Indian subsidiary, the company (known formerly as Matrix Laboratories Limited) enjoys open access to one of the largest active pharmaceutical ingredients manufacturers in the whole world.
The firm, in addition, also engages in supplying APIs for manufacturing antiretroviral drugs against HIV. In the meantime, the acquisition of Merck KGaA's generic business, Merck Generics, during October 2007 has enabled the firm to further increase its worldwide scope.
The firm is one of the world's leading players in the generics market. Mylan is the second player in the American generics market, which is the largest in the world, as it has $47.5 billion in revenues for the twelve months finalizing in November of 2011. In addition, the firm has a strong foothold within the European market.
Of the top ten European generic retail pharmaceutical markets, Mylan enjoys the leading position in France, the number two position in Italy as well as the number three position in the UK, Portugal, Belgium and Netherlands. The firm will soon be better prepared to take over the market, since more medicines are slated to lose patent within the upcoming period.
Furthermore, on the long term, the most important opportunities for growth in the generics industry will be expanding in emerging markets. The firm has taken a giant leap in such direction by acquiring the Merck KGaA generics business as well as Matrix (which is now known as Mylan Laboratories Limited) in addition to its collaboration with the firm Biocon.
The acquisition of the Merck KGaA Generics company has enlarged the firm's distribution and marketing strength in over 150 countries and territories and given Matrix it an important presence in India. Furthermore, it also proved to be a low-cost source for the manufacture of active ingredients for drugs. The company has usually been the main driver of growth in the APAC region for the last few quarters, as it has been driven by a strong ARV finished dose as well as sales of API to third parties.
Management believes that the ARV business, currently at $300 million worldwide, will record a CAGR of 13% between the years 2011 and 2016, as it will be driven by the firm's geographic expansion and its new product launches. In addition, the company deems that it will establish a commercial presence in India within the second half of the year 2012. In India, the company seeks to focus on women's health, ARV, nutrition and respiratory products. Lastly, the firm is also searching for acquisition opportunities within Latin America, China as well as Eastern and Central Europe. You can find this and other positive factors in MYL's last 10-K.
The current net profit margin of MYL is 8.76, which is higher than its 2010 margin of 4.10. I am positive about firms that have amplified their profit margins when compared to previous years. As such, I deem it relevant to understand the cause behind such result. Its current return on equity is 15.13. It is lower than the 20% standard I look for in companies I invest in. It is also higher than its 2010 average return on equity of 6.64.
In terms of income and revenue growth, MYL has a 3-year average revenue growth of 6.06. There is no information on its 3-year net income average growth. Its current revenue year over year growth is 12.46, higher than its 2010 revenue growth of 7.02. Revenue rose from last year, so the business is most likely performing well. The current net income year over year growth is 55.55, higher than its 2010 average of 48.39. I like it when net income growth is higher than the past.
In terms of valuation ratios, MYL is trading at a Price/Book of 2.8x, a Price/Sales of 1.6x and a Price/Cash Flow of 13.9x in comparison to its industry averages of 2.6x Book, 2.5x Sales and 12.7x Cash Flow. It is essential to analyze the company's current valuation and check how it is trading in relation to its peer group.
As far as valuation is concerned, as it has been said, the firm is now one of the leading players in the American generics market. The firm has enormous potential, since numerous blockbuster drugs are beginning to lose patent and several more will lose patent exclusivity within the upcoming years. In addition, it is encouraging to see the firm's geographic scope and product depth, together with its strong generic product pipeline.
It is my belief that the generic segment will publish strong sales during 2012, which will benefit from a slew of product launches that have already been lined up. The firm's current trailing 12-month earnings multiple stands at 11.6, in comparison to the industry average of 17.1 and 14.4 for the S&P 500. During the last five years, the firm's shares have been trading in the range of 8.3x to 19.4x trailing 12-month earnings.
The firm has much more financial leverage than its generic manufacturing peer, but thanks its stable cash flows, I expect that the firm's management will successfully fulfill its commitment to repay debt and enhance the firm's credit ratings during the upcoming years. The firm's EBITDA does cover its interest expense a bit more than 3 times. This, which is admittedly still low, has risen over the last few years. The firm's total debt/EBITDA stood at nearly 4.8 by the end of the year 2010.
Motorola Mobility
Motorola Mobility Holdings Inc. (MMI), which is headquartered in Libertyville, Illinois, is one of the leading mobile phone and smart-phone manufacturers. The company also engages in the design, manufacture and installation of IP video, digital video and broadcast network interactive set-top boxes, not to mention voice as well as data-related customer premises equipment mainly for cable TV industry purposes. The firm's converged mobile devices, such as smart-phones and tablets, are usually based on the operating system Android. In addition, the firm also develops accessories for Bluetooth.
Motorola Mobility was created following the spinoff from its parent company Motorola Inc. on January 4 in 2011. After such breakup, the firm is now mainly targeting retail customers for the future growth of this segment. The firm offers advanced mobile media solutions as well as multi-screen technologies, which are based on a converged platform of admirable mobility, capabilities for end-to-end video content delivery as well as the Internet.
The company is bound to benefit from the considerable market acceptance of Android as the next generation's 3G as well as 4G smart-phone operating system. The company's handsets also feature an intuitive user interface as well as an effective combination of messaging, Internet access and multimedia programs based on the Android operating system.
The firm's major innovation has been its customized software interface, which is known as MOTOBLUR, a social-networking interface with which the firm is trying to distinguish its products from other smart-phones. The firm is now endeavoring to enlarge this platform by employing its proprietary MOTODEV program.
In addition, the company was recently awarded an important contract by VimpelCom Ltd., a Russian telecom giant, to supply its integrated series of VIP22n2E set-top boxes. VimpelCom is set now to provide said set-top boxes to IPTV subscribers, while Motorola Mobility's VIP2202 and VIP2262 set-top boxes, belonging to the VIP22n2E series, offer considerably interactive television services, including multi-room functionality, HD-video recording, on-demand movies as well as Internet browsing by TV to customers. Furthermore, the firm's home division is also showing signs of improvement, which are based on a higher number of DVR set-top box shipments. In addition, I believe the rising popularity of IPTV will further deepen the demand of set-top boxes in the future.
In terms of valuation ratios, MMI is trading at a Price/Book of 2.3x, a Price/Sales of 0.9x and a Price/Cash Flow of 32.7x in comparison to its industry averages of 1.6x Book, 1.1x Sales and 4.2x Cash Flow.
Concerning valuation, currently, the firm is incurring losses. Therefore it is impossible to value the stock on the usual P/E multiple basis. Due to the structure of the spinoff originating Motorola Mobility, the company holds $3 billion in cash and zero debt.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
