Bill Gates (born October 28, 1955 in Seattle, Washington), is an American business magnate, investor, philanthropist and author. He is also the former CEO and current chairman of Microsoft, the software company he founded with Paul Allen. He is consistently ranked among the world's wealthiest people. Throughout his career at Microsoft, Gates held the positions of CEO and chief software architect, and he still is the largest individual shareholder, with 6.4 percent of the common stock. In addition, he has authored or co-authored many books.
Basically, all of that money is held within the firm Cascade Investment LLC, the successor to Dominion Income Management, Bill Gates' former private holding company.
Cascade Investment LLC is the secretive private holding company of the software executive. Almost every day the stock exchange has been open for 20+ years, Bill Gates has sold off as much Microsoft stock as he can without lowering its price, paid the taxes, and transferred the proceeds to this holding company. The well respected and successful value investor, Michael Larson, manages it on a full-time basis from the Kirkland, Washington headquarters.
I think it is interesting to analyze Bill Gate's holdings in order to generate seed investment ideas for further research. I consider that if a stock is a top holding from a prominent portfolio manager such as Gates, the company must have passed rigorous standards, so my confidence level to invest goes higher.
Canadian National Railway (CNI)
Canadian National Railway Company, based in Montreal, Canada, is engaged in the rail and related transportation business. The company operates the largest rail network in Canada and the only transcontinental network in North America. Canadian National Railway has the lowest operating ratio amid Class I railroads. It generates revenue from rail freight (accounted for 90% of 2011 revenues) and other sources (10%).
Canadian National Railway's rail freight actions are classified into seven business sections:
Petroleum and Chemicals (accounted for 16% of 2011 revenue)
Metals and Minerals (11%)
Forest Products (14%)
Grains and Fertilizers (17%)
Other Revenue (10%)
Canadian National predicts strong demand over all its businesses with growth in wholesale and retail market supporting high business volumes for the company. Management expects North American industrial production growth to be about 3%. Although the fluctuating economy and weather conditions that altered Canadian National's first half results, the company generated considerable business volumes for 2011 with 4% growth compared to the industry average of 3.2%.
We consider the improving operating efficiency along with growth in key markets like coal and intermodal will continue generating sound financial results, underpinning mid-single digit carload growth and about 10% earnings growth in 2012. Besides, pricing is expected to remain over 4%, with strong fuel surcharges aiding earnings going forward. Management continues to expect a sustainable operating ratio in the mid-60s during the next few years, producing stronger volume growth at low incremental cost with productivity initiatives, like improving system velocity and fuel efficiency.
The company's business sections are expected to induce growth all over the year. Coal will continue being one of the prime revenue contributors with higher carloads of coal and pet coke, especially from West Coast Port. The capacity expansion at the Ridley terminal is also supposed to bode well for the coal shipments followed by increased shipments from U.S. Gulf terminal. Last year, Canadian National also committed to a ten-year contract with Cline group for coal transportation. As regards Intermodal, the segment has remained paramount growth driver for the past two years and the company expects it to take advantage from continued growth in container traffic in domestic and international markets. In addition, the company is also launching new train service from Prince Rupert to Calgary and Edmonton this year to sponsor the Calgary log park project opening in 2013. Going forward wholesale and retail market are expected to remain solid supporting high business volumes for the company. Fertilizers are among other growth opportunities, particularly potash given the new 10 years contract with Canpotex Ltd. for transporting potash to North Vancouver export hubs from July this year. Besides, growth in automotive industry, petroleum and chemicals as well as improving construction market will also bode well in the near-term.
CNI's current net profit margin is 22.7%, currently higher that its 2010 margin of 25.36%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its current return on equity is 22.37%. Higher than the +20% standard I look for in Companies I invest and also higher than its 2010 average ROE of 18.69% (www.cn.ca/documents/Investor-Financial-Q...).
In terms of income and revenue growth, CNI has a 3-year average revenue growth of 2.1 and a 3-year net income average growth of 9.04. Its current revenue year over year growth is 8.81, lower than its 2010 revenue growth of 12.62. The revenue increase from last year shows that the business is now performing well. The current net income year-over-year growth is 6.89, lower than its 2010 average of 10.49. I do not like it when current net income growth is lower than the past year. It generally shows that business is decelerating for some reason. The current Net Income year over year growth is 16.78, higher than its 2010 net income y/y growth of 13.48. I like when Net Income growth is higher than the past.
In terms of Valuation Ratios, CNI is trading at a Price/Book of 3.2x, a Price/Sales of 3.9x and a Price/Cash Flow of 11.9x in comparison to its Industry Averages of 2.6x Book, 2.4x Sales and 9.2x Cas Flow. It is essential to analyze the current valuation of CNI and check how is trading in relation to its peer group.
In terms of Valuation, Canadian National's current trailing 12-month earnings multiple is 15.8x, compared with the 18.7x average for the peer group and 14.4x for the S&P 500. For the last five years, the company's shares have traded in a range of 9.3x to 18.7x. The stock is trading at a discount to the peer group and at a premium to the S&P 500 according to forward earnings estimates.
We estimate Canadian National is poised to profit from the improving demand and pricing trends. The Company's industry main operating ratio, service improvements and expected growth throughout all sections, especially in Coal and Intermodal, Metal and Minerals and Automotive bode well for the projected mid to double-digit gains growth at low costs in 2012. Nevertheless, many headwinds such as competitive threats, negative currency translation, rising fuel prices and low utility coal shipments restrict the upside potential to the stock.
As is typical for a railroad, CN carries a relatively high debt load (debt/equity around 0.61 and debt/capital of 0.38), but because EBIT/interest coverage remains at safely high levels (nearly 9.7 times during 2011), there is no concern about that.
Mcdonalds Corp (MCD)
Established in 1948, the Oak Brook, Illinois-based McDonald s Corp. is a major fast food chain operating more than 33,000 restaurants in 117 countries since December 31, 2011. It mainly operates and franchises quick-service restaurants (QSRs) under the McDonald s brand. In 2011, McDonald's derived 68% of sales from its company-owned restaurants and 32% through fees from both franchised and affiliated restaurants. The company's primary markets are Australia, Europe, Brazil, Canada, China, France, Germany, Japan (a 50%-owned affiliate), the U.K. and the U.S.
McDonald's continues to grow same-store sales, keep healthy traffic and exceed its peers.
Global comparable-store sales rose 7.5% in the fourth quarter, the highest quarterly comps in over seven years, with U.S. sales up 7.1%, Europe up 7.3%, and Asia/Pacific, Middle East and Africa (APMEA) up 6.9%. The group's better-than-expected total comparable sales came on the heels of the product innovation, apart from value menu offerings, McCafe premium beverages and a variety of basic items that perked up the comps. Beverages remain a sweet spot for McDonald's domestically as well as internationally. Beverages added more than the initially targeted $125,000 in sales per store annually.
Globally, McCafe is now focused on hot beverages. The company has identified certain markets to test or add Real Fruit Smoothies and Frappes over the next few years, starting with Australia. It still sees a lot of room in circulating breakfast products around the globe. In 2012, the group will leverage its success with line extensions and incorporation of new flavors as well as promotional food events to build sales. In spite of the addition of austerity measures in Europe due to the sovereign debt crisis, VAT increases in France, Portugal and Hungary apart from higher social charges and new taxes, McDonald's did not notice any slowdown in consumer behavior. The company's main European markets, France, the UK and Germany along with Russia, delivered solid results in the fourth quarter and the full year 2011.
The group's Plan to Win program, which is a revitalization initiative started in April 2003, continues to spur growth. Under this plan, McDonald's objective is to sustain growth by increasing restaurant visits, providing everyday value, innovating new menu items, and re-imaging restaurant along with market campaigns. In addition, management's re-franchising strategy involves a change to a greater percentage of franchised restaurants. At present, around 80% of total restaurants are franchised. We expect that re-franchising a large portion of its system will provide another engine for EPS growth and ROE expansion, as the company will reduce its capital requirements. Besides, free cash flow will keep growing, allowing reinvestment for increasing brand recognition and enhancing shareholders return. At last, since major portion of its business is refranchised, McDonald's will not be so affected by the inflation, compared to its rivals. The group remains on track to exceed its long-term financial targets of 3% to 5% sales growth and 6% to 7% operating income growth. In 2011, $6.0 billion were returned to shareholders through a combination of share repurchases and dividend payments.
MCD's current net profit margin is 20.38%, currently higher that its 2010 margin of 20.55%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its current return on equity is 37.92%. Higher than the +20% standard I look for in Companies I invest and also higher than its 2010 average ROE of 34.51% (www.sec.gov/Archives/edgar/data/63908/00...).
In terms of income and revenue growth, MCD has a 3-year average revenue growth of 4.71 and a 3-year net income average growth of 8.46. Its current revenue year over year growth is 12.18, higher than its 2010 revenue growth of 5.85. The revenue increase from last year shows that the business is now performing well. The current net income year-over-year growth is 11.26, higher than its 2010 average of 8.69. I like when Net Income growth is higher than the past.
In terms of Valuation Ratios, MCD is trading at a Price/Book of 6.8x, a Price/Sales of 3.9x and a Price/Cash Flow of 14.0x in comparison to its Industry Averages of 6.8x Book, 2.3x Sales and 14.8x Cash Flow. It is essential to analyze the current valuation of MCD and check how is trading in relation to its peer group.
One point found in the Valuation is that McDonald's present trades at 17.6x our fiscal 2012 gains estimate, a 25.1% discount to the industry average. Considering a price-to-book basis, the shares trade at 7.8x, which is trading at a 73.3% premium to the industry average.
McDonald's is in exceptional financial health. The debt/capital ratio is about 0.46, EBITDA covers interest 20 times, and its Cash Flow Cushion (cash on the balance sheet and future cash flow separated by debt and other debt like commitments) is over 2 times. We think McDonald's could support incremental debt, due to leverageable assets on its balance sheet and a sound free cash flow profile. We granted McDonald's an issuer credit rating of AA-, implying very low default risk.
Comcast Corp (CMCSA)
Comcast Corp. , incorporated in 2001 and based in Philadelphia, Pennsylvania, is the largest cable MSO (multi service operator) in the U.S in charge of more than 25% market share. Since June 30, 2011, the company's cable systems support approximately 22.525 million video customers, 17.550 million high-speed Internet customers, and 9.063 million phone customers. Comcast suggests various consumer entertainment, information, and communication products and services to the residential and commercial customers.
Comcast reports in two revenue generating sections:
Cable Communications Section: 66.7% of 2011 total revenues.
NBC Universal Segment: 33.3%.
Comcast is increasingly deploying its next-generation Xfinity TV, an on-demand, web-based service, for subscribers who will have access to video programming as well as Internet. The new Xfinity TV set-top box will have an avant-garde negation system that will enable subscribers to promptly navigate between live and on-demand programming. A new user interface will include content from Facebook, Pandora Internet Radio, news and weather applications. Previously, Comcast entered into an agreement with Microsoft to enable its subscribers to access Xfinity TVEquity online content from the Microsoft Xbox. The next-generation web-capable platform called Xcalibur presents a hybrid IP/QAM video gateway with an advanced user interface and the ability to port third-party apps that tie into a cloud-based infrastructure. In 2012, Comcast is ready to offer many innovative products, such as nationwide rollout of Xcalibur (rebranded as X1) services, various home security services like the remote control of heating and cooling pattern of the home, expansion of Wi-Fi network, and introduction of a plethora of new contents for multi-platform on-demand services. Presently, Comcast launched its top innovative product called Xfinity Streampix, a subscription based on-demand video streaming services. This is a significant augmentation of the group's pay-Tv offerings, which currently offers traditional TV shows and Xfinity on-demand shows for TV sets and broadband enabled devices. With Xfinity Streampix, a customer can instantly watch movies and TV shows whether he/she is in or out of the home on multiple platforms, e.g., TV sets, Computers, and mobile devices.
Comcast has turned into a media powerhouse armed with a unique control over content as well as distribution after completing the acquisition of a controlling stake in NBC Universal. At present, Comcast serves one-fourth of the U.S.'s pay-TV households seconded by a large content-creation empire. The group is trying to revamp NBC Universal's sports and movie theaters to collect hefty fees from cable operators. Comcast already invested in the remaining 50% stake of the Universal Theme. After acquiring majority share of NBC Universal, Comcast's advertising profits may shoot up to over $10 billion annually. NBC Universal acquired the U.S. telecast right for the 2014 and 2018 winter games and the 2016 and 2020 summer games. NBC Universal outbids its closest rivals ABC and ESPN networks, which are controlled by Walt Disney Co. and Fox Network, controlled by News Corp. NBC Universal will pay a total amount of $4.38 billion for these four Olympic Games. Comcast decided to distribute the coverage of these sport events throughout its cable and broadcast networks and its digital outlets. We expect that by acquiring Olympics TV rights, NBC Universal may soar Versus Cable sports network as a top national sports channel capable to take head on with ESPN.
CMCSA's current net profit margin is 7.45%, currently lower than its 2010 margin of 9.58%. I do not like when Companies have lower profit margins than the past. That could be a reason to analyze why that happened. Its current return on equity is 9.08%. Lower than the +20% standard I look for in Companies I invest, but higher than its 2010 average ROE of 8.35% (www.sec.gov/Archives/edgar/data/1166691/...).
In terms of income and revenue growth, CMCSA has a 3-year average revenue growth of 17.5 and a 3-year net income average growth of 17.77. Its current revenue year over year growth is 47.2, higher than its 2010 revenue growth of 6.1. The revenue increase from last year shows that the business is now performing well. The current net income year-over-year growth is 14.44, higher than its 2010 average of -0.08. I like when Net Income growth is higher than the past.
In terms of Valuation Ratios, CMCSA is trading at a Price/Book of 1.7x, a Price/Sales of 1.5x and a Price/Cash Flow of 5.8x in comparison to its Industry Averages of 3.7x Book, 1.3x Sales and 5.2x Cash Flow. It is essential to analyze the current valuation of CMCSA and check how is trading in relation to its peer group.
As regards Valuation, Comcast is now trading at 15.6x our fiscal 2012 earnings estimate. This is at a premium over the S&P 500 average, but at a deep discount to the industry average. With respect to our fiscal 2013 gains estimate, the stock is trading at 13.3x, again a deep discount to the industry average but way above the S&P 500 average. After achieving a majority stake in NBC Universal, Comcast became a media magnate controlling both rich contents and distribution networks. We think this will boost the stock price in the near future. We also remain fairly positive regarding the company's diversification, network upgrade and innovative product offering strategies. Considering the aforementioned positives, we believe Comcast deserves to trade at higher multiple.
Comcast had mainly used cash to repay debt from late 2008 through 2010, putting it in great shape heading into the NBCU deal. NBCU deepened the firm's debt load, but at about 2.3 times combined EBITDA, leverage remains very strong for a cable company.
Expeditors Intl (EXPD)
The leading third-party logistics (3PL) provider, Expeditors International of Washington Inc., is based in Seattle, Washington. The company takes part in the business of global logistics management, which includes international freight forwarding and consolidation, for air and ocean freight. The group acts as a customs broker in all domestic and many of its international offices. Services offered by Expeditors International include the consolidation or forwarding of air and ocean freight, distribution management, vendor consolidation, and cargo insurance as well as purchase order management.
Expeditors International reports its results in three sections:
Airfreight Services (38% of 2010 net revenue)
Ocean Freight and Ocean Services (23%)
Customs Brokerage and Other Services (39%)
We think Expeditors International is poised to take advantage from increasing global trade, market share profits, productivity improvement and growing presence in international trade. Over the long term, the group is investing in new opportunities and services, including those in the aerospace, pharmaceutical/healthcare, aviation, and energy verticals. This way, Expeditors is well positioned to grow its top line. We trust Expeditors to show continued improvement for the rest of this year and in the next. Besides, gross margin (yield) is expected to improve going forward owing to increases in air and ocean freight capacity. Operating margin expansion will moderately grow on increased hiring. Though hiring will maintain better service levels and support future growth, it will lead to higher employee bonuses. The ongoing operating efficiencies and Expeditors ability to pass on the higher rates to customers will help driving profitability.
We are encouraged by Expeditors solid balance sheet. The company's asset-light business model allows it to keep a debt-free balance sheet. In the first nine months of the year, Expeditors had a sound cash balance of $1.26 billion. We expect that to continue growing as the group focuses on organic growth and return a portion to shareholders in the form of increased dividends or share repurchases. The Company is consistently increasing shareholder returns every year; it paid an annual dividend of $0.40 per share in 2010, $0.38 in 2009 and $0.32 in 2008. In 2011, the group is paying an increased annual dividend of $0.50 per share.
EXPD's current net profit margin is 6.27%, currently higher than its 2010 margin of 5.77%. I like Companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its current return on equity is 20.6%. Higher than the +20% standard I look for in Companies I invest but lower than its 2010 average ROE of 20.9%.
In terms of income and revenue growth, EXPD has a 3-year average revenue growth of 2.97 and a 3-year net income average growth of 8.61. Its current revenue year over year growth is 3.07, lower than its 2010 revenue growth of 45.83. I do not like when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason. The current net income year-over-year growth is 12.06, lower than its 2010 average of 43.28. I do not like when current net income growth is less than the past year. I look for Companies that increases both profits and revenues.
In terms of Valuation Ratios, EXPD is trading at a Price/Book of 4.9x, a Price/Sales of 1.6x and a Price/Cash Flow of 21.7x in comparison to its Industry Averages of 4.6x Book, 1.1x Sales and 10.5x Cash Flow. It is essential to analyze the current valuation of EXPD and check how is trading in relation to its peer group (investor.expeditors.com/annual-reports/2...).
As for Valuation, Expeditors International's current trailing 12-month earnings multiple is 22.3, in comparison to the 17.6, average for the rival group and 16.8 for the S&P 500. During the last five years, the company's shares have traded in a range of 20.1-42.5x trailing 12-month earnings. The stock is trading at a discount to the rival group and premium to the S&P 500 benchmark, according to forward earnings estimates. We think Expeditors is focused on gaining market share, expanding gross profits, easing capacity constraints and increasing operational efficiency. Expeditors' debt-free balance sheet, superior execution, and ability to return cash to shareholders in the form of dividends make it appealing for investment. Nevertheless, competitive threats as well as dependence on asset-based transportation providers maintain us cautious on the stock for the long term.
Expeditors has no long-term debt and owns $1.3 billion in cash--a multiple of funds required for operations. In the year 2011, the group generated $618 million in operating income and $10 million in interest income.
Located in Bentonville, Arkansas and established in 1945, Wal-Mart Stores, Inc. operates retail stores in several formats across the world. The company conducts its businesses through three sections:
Walmart U.S., International and Sam's Club. The Walmart U.S. division accounted for 63.8% of the
Group's fiscal 2010 net sales of $405 billion. The International section consists of retail operations in 14 countries and Puerto Rico. This division generated 24.7% of the group's fiscal 2010 net sales. The Sam's Club consists of membership warehouse clubs. This segment achieved 11.5% to the company's net sales in fiscal 2010.
Walmart announced fourth quarter diluted earnings per share from continuing operations [EPS] of $1.51, which included net benefits of approximately $0.07 from certain tax matters and real estate transactions. The group's EPS guidance for the quarter of $1.42 to $1.48 did not include these net benefits. This EPS compared to $1.41 last year, which comprised net tax benefits of approximately $0.07. Consolidated net sales for the fourth quarter were $122.3 billion, increasing a 5.8 percent from the previous year. Walmart U.S. reported positive comparable traffic, and comparable store sales increased 1.5 percent in the 13-week period that ended on Jan. 27, 2012. Sam's Club comparable sales, without fuel, rose 5.4 percent for that period. Walmart International produced $35.5 billion in net sales for the quarter. Consolidated operating income for the quarter was $8.4 billion, which rose 5.0 percent from last year. Mike Duke, Wal-Mart Stores, Inc. president and chief executive officer said:
We are pleased with Walmart's earnings performance for the fourth quarter as well as the full year. At present, every segment of our business is stronger than it was a year ago, and we're in a great position for fiscal year 2013.
Walmart U.S. reported positive comps of 1.5 percent for the fourth quarter that included positive comp traffic.
This is now the second consecutive quarter of positive comp sales. Our price leadership is making a difference throughout the United States, as many families are settling into a new normal. Main customers remain cautious about their finances, and they rely on Walmart's EDLP promise to help them deal with today's economic challenges.
Walmart International delivered solid growth through both comp store sales and a record number of new units, including the acquisitions of Netto and Massmart. The leadership teams are focused on improving profitability, and our 'Powered by Walmart' efforts will strengthen productivity and reduce expenses in our markets.
Sam's Club comp sales have been consistently strong all year long, and we expect this momentum to continue in fiscal year 2013. Operational efficiencies contributed to expense leverage and improved member experience.
Our company leveraged expenses for the quarter as well as the full year. In fact, Walmart has now leveraged operating expenses for two years in a row. We have a relentless focus on the productivity loop to reduce costs and pass those savings on to customers.
WMT's current net profit margin is 3.89%, currently higher than its 2010 margin of 3.51%. I like Companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its current return on equity is 23.53%. Higher than the +20% standard I look for in Companies I invest and also higher than its 2010 average ROE of 21.08% (www.sec.gov/Archives/edgar/data/104169/0...).
In terms of income and revenue growth, WMT has a 3-year average revenue growth of 3.68 and a 3-year net income average growth of 8.78. Its current revenue year over year growth is 3.37, higher than its 2010 revenue growth of 0.92. The fact that revenue increased from last year show me that the business is performing well. The current net income year-over-year growth is 14.05, higher than its 2010 average of 7.24. I like it when Net Income growth is higher that the past.
In terms of Valuation Ratios, WMT is trading at a Price/Book of 3.1x, a Price/Sales of 0.5x and a Price/Cash Flow of 8.8x in comparison to its Industry Averages of 3.1x Book, 0.5x Sales and 9.2x Cash Flow. It is essential to analyze the current valuation of WMT and check how is trading in relation to its peer group.
One point found in the Valuation is that Walmart shares presently trade at 13.0x of earnings estimate for 2012, a 11.0% discount from the 14.6x industry average. On a price-to-book basis, the shares perform at 2.7x, a 3.8% premium from the industry average of 2.6x. The valuation on a price-to-book basis looks even, taking into account a trailing 12-month ROE of 21.8%, which is way over the industry average of 15.8%.
There are no liquidity issues at Wal-Mart. We project about $55 billion in free cash for the next five years against barely $20 billion in debt maturities due in the same time frame. The group has also more than $7 billion in cash on the balance sheet and maintains a $14 billion credit facility. The company's rent-adjusted fixed coverage ratio is currently at more than 17 times, well over any debt covenant requirements. Wal-Mart is the owner most of its stores. The group has more than enough liquidity going forward, even if a more altered operating context should materialize. We think the company is at a very low risk of default and we grant Wal-Mart an issuer rating of A+.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.