Julian Robertson's Undervalued Picks: Will You Invest With A Pro Manager?

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Includes: BAM, DGI, GS, PNC, WFC
by: FAF Research

Julian Robertson is considered the father of hedge funds. He launched his firm, Tiger Management, in 1980 with $8 million, and turned it into over $22 billion in the late 1990s. Robertson had the best hedge fund record throughout the 1980s and 1990s. It is reported that the compound rate of return to his investors was 32%.

During his active years, Mr. Robertson was considered to be the "Wizard of Wall Street." His hedge fund, Tiger Management, became the world's largest fund, which peaked at over $23 billion invested. He, however, lost 4% in 1998 and then 19% in 1999, as rival investors rode the dot-com bubble to spectacular returns. He shut down his fund. Today, Tiger Management only manages funds from internal investment, mainly Mr. Robertson's own money.

His investment record aside, Mr. Robertson also mentored a group of young hedge fund managers, known as the "Tiger Cubs". A number of them became extremely successful hedge fund managers in their own right, including John Griffin of Blue Ridge Capital, Lee Ainslie of Maverick Capital, Andreas Halvorsen of Viking Global, and Steve Mandel of Lone Pine Capital.

I find very interesting to analyze some of Julian Robertson's holdings and see the current positives, ratios and valuation of some of his picks. I use WhaleWisdom to research Julian Robertson picks. The site gives me a good overview of funds holdings.

PNC Financial Services Group (NYSE:PNC)

PNC Financial Services Group Inc. provides consumer and business banking services and is one of the biggest financial services organizations providers in the country. PNC deals with retail banking, corporate and institutional banking, asset management and residential mortgage banking. PNC's markets are mainly located at Delaware, D.C., Florida, Illinois, Indiana, Kentucky, Maryland, Michigan, Missouri, New Jersey, Ohio, Pennsylvania, Virginia, Washington, and Wisconsin.

PNC Bank is the group principal subsidiary with its base in Pittsburgh, Pennsylvania. PNC Financial reports through six business areas: Retail Banking (35.4%), Corporate and Institutional Banking (32.3%), Asset Management Group (5.9%), Residential Mortgage Banking (6.6%), Distressed Assets Portfolio (7.4%), and Other, including BlackRock (12.4%).

I like PNC Financial because it is one of the leading banks in the country. The acquisition of National City in December 2008 has clearly improved that position and created important growth potential in new high-net-worth and institutional markets. Not only has the acquisition led to an increase in the deposit base, but it has also provided a wider distribution platform for cross-selling the company's products and services.

In continuation with its acquisition spree, PNC recently acquired the 27-branch retail bank franchise in Georgia from Flagstar Bank, a subsidiary of Flagstar Bancorp Inc. This possession will spread operations in Atlanta and add to its competitive edge.

Another thing to take into account is the company's share in BlackRock. BlackRock' s global reach, specialized and well regarded financial expertise and commitment to client service would keep on benefiting PNC Financial due to cross-selling opportunities.

PNC Current Net Profit Margin is 20.93%, currently higher than its 2010 margin of 19.84%. I like companies that increased profit margins in comparison to other years. The current return on equity for PNC is 9.33%, lower than the +20% standard I look for in companies I invest in, but also lower than its average ROE of 10.01%.

In terms of income and revenue growth, PNC has a 3-year average revenue growth of 31.53% and a 3-year net income average growth of 51.32%. Its current revenue year-over-year growth is -5.60%, higher than its 2010 revenue growth of -6.48%.

The current net income year-over-year growth is -10.43%, lower than its 2010 net income y/y growth of 39.44%. I do not like when 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, PNC is trading at a Price/Book of 1.0 x, a Price/Sales of 2.3 x and a Price/Cash Flow of 5.5 x in comparison to its industry averages of 1.0x Book, 2.0 x Sales and 4.5 x Cash Flow. It is essential to analyze the current valuation of PNC and check how is trading in relation to its peer group.

In terms of valuation, PNC Financial shares now trade at 9.5x our 2012 earnings estimate, which is at an 8% discount to the industry average. On a price-to-book basis, the shares trade at 0.9x, in line with the industry average. The valuation on a price-to-book basis looks interesting, given a trailing 12-month ROE of 10.1% that is 12% above the industry average.

I can also say that PNC is in good financial condition. At the end of 2011, its Tier 1 common ratio was 10.3%, a hike of more than 400 basis points since the end of 2009. The bank's allowance for loan losses remains at over 100% of non-performing loans, and the percentage of non-performing loans/total loans has steadily declined over the past few years. The firm funds nearly 70% of its assets with deposits. I do not see it having any problems rolling this debt.

Wells Fargo & Company (NYSE:WFC)

Wells Fargo & Company is one of the biggest financial services firm in the U.S. (when talking about assets) with $1.3 trillion in assets and over $920 million in deposits. The company grants banking, insurance, trust and investments, mortgage banking, investment banking, retail banking, brokerage services and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, the internet and other distribution channels to individuals, businesses and institutions across North America and internationally. Wells Fargo purchased Wachovia Bank in December 2008, becoming a premier coast-to-coast financial services franchise.

The firm offers its services through three broad areas: Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement. Wells Fargo's growth plans have included plenty of acquisitions over the years, with Wachovia being the biggest purchased in December 2008. The firm also acquired substantially all of the US-based operating assets of Foreign Currency Exchange Corporation (FCE), a wholly-owned branch of the Bank of Ireland Group, intending to expand its international banking capabilities.

The deal substantially strengthened Wells Fargo's foreign currency exchange capabilities for domestic correspondent banks. The company has shown its capacity to assimilate local franchises, offering a broader range of products than the acquired company could have had, thus increasing the number of options for customers to choose from. This has been the driving force behind its growth in the recent years.

Wells Fargo has implemented company-wide expense management initiative, with the main aim of removing non-necessary complexity and eliminating duplication, as an alternative to improve the client experience and the work process of the members of the team. Having those initiatives and the completion of merger integration activities, the firm plans to bring down the quarterly non-interest expenses to $11 billion by the fourth quarter of 2012. Furthermore, once the integration process and the continuance of the economic recovery finish, expenses are forecast to decrease, thereby giving opportunities for future growth in earnings.

WFC's current net profit margin is 18.56%, currently higher than its 2010 margin of 13.65%. I like companies that increased profit margins in comparison to other years. The current return on equity for WFC is 12.19%, lower than the +20% standard I look for in companies I invest in, and also higher than its average ROE of 10.53%.

In terms of income and revenue growth, WFC has a 3-year average revenue growth of 24.57%, and a 3-year net income average growth of 81.48% Year. Its current revenue year-over-year growth is -5.00%, lower than its 2010 revenue growth of -3.92%. I do not like when current revenue growth is less than the past year.

In terms of valuation ratios, WFC is trading at a Price/Book of 1.4 x, a Price/Sales of 2.2 x and a Price/Cash Flow of 13.2 x in comparison to its industry averages of 1.0x Book, 2.0 x Sales and 4.5 x Cash Flow. It is essential to analyze the current valuation of WFC and check how is trading in relation to its peer group. I think WFC trades with a premium over its peers because its proven management and conservative business practices.

It is fair to say that Wells Fargo is in good financial health, with an estimated Tier 1 common ratio of 7.5% as of December 31, 2011. Together with its capital levels, the firm's impressive core earnings power (as evidenced by a 2.5% pre-tax, pre-provision return on average assets in the final quarter of 2011) grants an important cushion against losses.

Goldman Sachs Group (NYSE:GS)

Goldman Sachs Group Inc. is a firm leader in financial holding worldwide. Together with its consolidated subsidiaries, the firm offers investment banking, securities and investment management services to a substantial and several client base that includes corporations, financial institutions, governments and high-net-worth individuals. The company is headquartered in New York, with offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

The firm reports its results in the following four business areas: Investment Banking (15%), Institutional Client Services (61%), Investing and Lending (7%), and Investment Management (17%). I like the fact that Goldman continues to balance near-term uncertainties with longer-term strategic goals in the ongoing challenging environment,. It aims to have more capital to protect itself against the present macro economic uncertainties with the commitment of giving strong relative return to shareholders. The firm plans to invest for growth in attractive places and businesses and reduce businesses experiencing lower customer demand.

Goldman keeps on investing in client franchise and foresees new market extension even in a volatile macro economic environment,. In 2011, the asset-management unit of Goldman agreed to purchase India's Benchmark Asset Management Co. (NYSE:BAM), a big provider of exchange-traded funds (ETFs). The purchase is meant for extension in Asia's third-largest economy. This commitment will enable the firm to maintain its legacy of granting superior services to customers and attracting and retaining competitive position in the global marketplace as well.

GS's current net profit margin is 8.71%, currently lower than its 2010 margin of 19.70%. I like companies that increased profit margins in comparison to other years. The current return on equity for GS is 3.65%, lower than the +20% standard I look for in companies I invest in, and also also lower than its average ROE of 11.50%.

In terms of income and revenue growth, GS has a 3-year average revenue growth of -26.43% and a 3-year net income average growth of 23.40%. Its current revenue year-over-year growth is -26.43%, lower than its 2010 revenue growth of -13.31%.

In terms of Valuation Ratios, GS is trading at a Price/Book of 0.9 x, a Price/Sales of 2.5 x and a Price/Cash Flow of 3.3 x in comparison to its Industry Averages of 1.0x Book, 1.0 x Sales and 5.2 x Cash Flow. It is essential to analyze the current valuation of C and check how is trading in relation to its peer group.

Goldman shares now trade at 10.1x consensus analyst earnings estimate for 2012, which is at a 34% discount to the industry average of 15.3x.

Goldman restructuring as a bank holding company and its access to government borrowing facilities decrease its short-term funding concerns even though it is still highly leveraged,. The company's balance sheet is also much clearer now than before the recession and has a high amount of excess liquid securities.

Digital Globe (NYSE:DGI)

DigitalGlobe, Inc. is worldwide provider of commercial high-resolution earth imagery products and services. The firm's products include DigitalGlobe System, QuickBird satellite, ImageAtlas; and GlobeXplorer. DigitalGlobe System grants collection and archival of geospatial information data and QuickBird satellite, which offers commercial resolution imaging systems. DigitalGlobe operates a constellation of high resolution earth imaging satellites, possesses a growing aerial imagery network and offers a comprehensive geoinformation product store - DigitalGlobe.com - that allows quick access and order a wide variety of imagery and derivative information products. DigitalGlobe conducts its business through two segments: defense and intelligence, and commercial.

The presence of satellite use for commercial and military applications has increased in last years, benefiting surveillance satellite operators like DigitalGlobe. As one of only two domestic nongovernmental operators of commercial surveillance satellites, DigitalGlobe enjoys a narrow economic moat, in our opinion, which should help it earn outsize economic profits for some time to come.

DGI can benefit from a diversification in its client base. DigitalGlobe has been very connected to the public sector since its inception in 1993. The U.S. Government has not only cooperated fund the construction of various of the firm's satellites, but also remains the firm's biggest client. The National Geospatial-Intelligence Agency, which is the primary procurer for the U.S. Government, maintains an agreement with DigitalGlobe to access imagery captured by the company's satellites. While this close relationship with the government has certainly benefited DigitalGlobe, the firm has made a concerted effort to diversify away from government clients, as the U.S. Government alone generated more than 60% of total company sales in 2010.

DGI Current Net Profit Margin is -8.28%, currently lower than its 2010 margin of 1.27%. In terms of income and revenue growth, DGI has a 3-year average revenue growth of 7.25% and a zero 3-year net income average growth. Its current revenue year-over-year growth is 5.27%, lower than its 2010 revenue growth of 14.40%. I do not like when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason.

I can say that DigitalGlobe's balance sheet is relatively healthy, with a net debt/capital ratio of roughly 13% at the end of 2011. The firm covered its interest expenses with operating income roughly 1.3 times in 2011. Nonetheless, constructing a satellite is very expensive, and I think capital requirements to extend the company's fleet will probably be substantial. Overall, I believe the company is in fair financial standing.

Disclosure: I am long WFC.