Mario Joseph Gabelli (born June 19, 1942) is an American stock capitalist, investment consultant and financial analyst who founded Asset Management Company Investors (GAMCO Investors), a $30 billion dollar global investment firm based in Rye, New York, in which he serves as chairman and CEO. In 2006, he was listed as #346 on the list of wealthiest Americans by Forbes magazine´s 2006 Forbes 400 rankings, estimating his net worth at $1 billion as of 2011.
Gabelli bases investment analysis on a research-driven and value-oriented point of view. For the analysis of stocks, he applied the theory of value investing, which he had learned at Columbia University. He created a metric of his own known as "private market value" [PMV], which is, along with a catalyst methodology, a widely used analytical tool for value investors. This valuation metric highly emphasizes analyzing a company's cash flows and gives less importance to accounting profits. In other words, PMV means the price to be paid by potential buyers if they were to acquire the entire company, incorporating any synergies and premium for control. This analytical tool was widely used in the analysis of LBO transactions (leveraged buyouts), whereby an entire company is taken private by using borrowed funds. When calculating PMV, the method is not always the same as the one used when measuring the value of public companies.
I think it is essential to buy companies that sell products or services needed or desired, have no close substitutes and are not regulated. I studied Mario Gabelli´s portfolio from WhaleWisdom.com and found that he also shares those business tenets. I will point his holdings and the reason that I think the stock could be attractive.
Genuine Parts (GPC)
Headquartered in Atlanta, Georgia, Genuine Parts Company distributes automotive and industrial replacement parts, office products and electrical/electronic materials in the U.S., Canada and Mexico. It operates under four sections: Automotive Parts, Industrial Parts, Office Products and Electrical/Electronic Materials. In 2010, Automotive Parts contributed 49% of the total sales, whereas the Industrial Parts, Office Products and Electrical/Electronic Materials constituted 33%, 14% and 4% of total sales, respectively.
I like Genuine Parts, because it is a company that has undertaken various initiatives to boost sales and earnings, such as product line expansion, penetration into new markets and cost-saving activities. The company also relies on a diverse product portfolio for top-line and bottom-line growth.
I also got attracted by the fact that in the Automotive Parts segment, Genuine Parts, expects growth of 2% 5% per year in the future, with NAPA representing about 10% of the market. Demand should remain solid as the average age of vehicles on the road has risen to almost 10 years.
Genuine Parts has an excellent balance sheet. The company had a low debt/capital ratio of 14.8% as of March 31, 2012. The company's cash and cash equivalents increased to $465.9 million as of March 31, 2012 from $333.5 million in the corresponding period a year ago.
Genuine Parts has developed a wide distribution network and strong customer relationships. It is the company´s ability to maintain wide-ranging inventories and deliver cost-effective products in the shortest amount of time what has allowed it to carve a narrow economic moat.
Genuine Parts' largest segment, automotive, leads in the distribution of automotive parts. It supplies parts mainly to mechanics at independent repair shops through its highly regarded NAPA brand. These customers, which require a wide range of products, and delivered in a timely manner, rely on NAPA's middleman services to transport vehicles in and out of shops as quickly as possible. I think that Mario Gabelli found that the company's immense store and distribution network, combined with its large delivery truck fleet, creates a scale advantage unmatched by smaller competitors, and this might have encouraged him to invest in the company. Switching costs among customers by implementing inventory-monitoring systems in repair shops that notify local NAPA stores when a shop is running low on a certain part has also been created. The recent revamp of dealer service centers (a way of trying to capitalize on the profitability of vehicle maintenance) has reduced sales for many independent repair shops. However, General Motors' and Chrysler's dealership reduction eliminated numerous dealer-owned service centers, mitigating this concern.
GPC´s Net Profit Margin is 4.54%, currently higher than its 2010 margin of 4.24%. 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 GPC is 20.27%. That is higher than the +20% standard I look for in companies I invest in and also higher than its 2010 average ROE of 17.56%.
In terms of income and revenue growth, GPC has a 3 year average revenue growth of 4.19% and a 3 year Net Income average growth of 5.93 %. Its Current Revenue Year over Year growth is 11.16%, lower than its 2010 Revenue growth of 11.44%. The current Net income year over year growth is 18.84%, lower than its 2010 Net Income y/y growth of 19.0%. I do not like it 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, GPC is trading at a Price/Book of 3.4x, a Price/Sales of 0.8x and a Price/Cash Flow of 15.5x in comparison to its Industry Averages of 4.2x Book, 1.3x Sales and 21.4x Cash Flow. It is essential to analyze the current valuation of GPC and check how is trading in relation to its peer group.
In terms of Valuation, shares of Genuine Parts Company are now trading at 16.2x the company's 2012 EPS estimate of $3.95. The company´s current trailing 12-month earnings multiple is 17.8, in comparison to the 19.9 average for the peer group and 14.4 for the S&P 500. Over the last five years, shares of Genuine Parts have traded in a range of 9.6x to 18.3x trailing 12-month returns. The stock is also trading at a premium to the peer group, based on forward earnings estimates. The current P/E, which is close to the upper-end of the historical range, is at a 6% premium to the peer group for 2012.
Genuine Parts has $500 million in long-term debt, and a respectable level of cash on its balance sheet. Interest coverage remains very high, and leverage measures are low, including a total debt / EBITDA ratio that usually stays around 0.6 times, and a total adjusted debt / EBITDAR ratio that reflects the company's use of operating leases, but generally stays around 1.8 times. Moreover, Genuine Parts produces strong cash flow from operating activities, and requires limited capital expenditures.
American Express Co (AXP)
With its origin in 1850, American Express Company, headquartered in New York, is a diversified financial services company, with worldwide operations and a solid brand name. It is a significant player in charge and credit payment card products, and travel-related services around the world. The company is mainly organized in two groups, the Global Consumer Group and the Global Business-to-Business Group. Considering a combination of factors, the company primarily operates through five reportable sections:
U.S. Card Services (USCS) 50% Full Year Fiscal 2011 Revenue
International Card Services (ICS) 17%
Global Commercial Services (GCS) 16%
Global Network & Merchant Services (GNMS) 17%
Corporate & Other
Because of its creditworthy customers, American Express has recovered from the recession more quickly than its rivals. Furthermore, less reliance on revolving credit and back-end fees has helped it acquire a competitive advantage for the company, while also improving its overall risk profile, which is encouraging to any investor to invest in AXP. The company´s ongoing EGG program has been focusing on diversifying its revenue mix in the areas of eCommerce, mobile payments and fee-based businesses in emerging markets through business-to business initiatives. The launch of the revolutionary prepaid debit card and the Target prepaid was another such initiative to build a new revenue-generating platform, targeting customers of bank giants. According to Mercator Advisory Group, consumers used funds worth $41 billion through prepaid cards in 2010, substantially up from $29 billion in 2009 and $19 billion in 2008. While the trend continued to escalate throughout 2011, I expect the growth momentum to continue at least over the next 2-3 years. Another positive from AXP is that the company is also focusing on operating in the regulation-exempted category apart from enhancing its core processing capabilities. Besides, American Express has established a $100 million fund in order to meet the expansion needs in digital commerce. Such low risk and high return strategies are expected to generate, within five years, more than $3.0 billion in fees from these activities.
Another strong reason to invest in AXP is that American Express has potential for increased market penetration, merchant acceptance and brand recognition, as it is expanding its list of network partners. Its Global Network & Merchant Services business has been performing very well, with billed business or spending on cards growing at a compound annual rate of 25% since 1999, and grew 28% year over year in 2010, followed by a modest 15% growth in 2011. Apart from this, the company´s card services have geared up meaningfully across its footprint in 2010 and 2011, and delinquency rates also improved significantly in 2011, reflecting a gradual recovery in the fee-per-card and billed business. Moreover, a healthy spending among customers has also assisted the company to record the lowest default rates in 2011, which should continue into 2012. Spending on cards is thought to improve further with the increase of network partners and merchant acceptance, which will make the company sustain its double-digit top-line growth and palliate the risk of volatile interest income growth.
AXP´s Current Net Profit Margin is 16.47%, currently higher than its 2010 margin of 14.58%. I 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 AXP is 28.18%. That is higher than the +20% standard I look for in companies I invest in, and also higher than its 2010 average ROE of 26.49%.
In terms of income and revenue growth, AXP 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 than its 2010 Revenue growth of 12.47%. The current Net income year over year growth is 21.64%, lower than its 2010 Net Income y/y growth of 90.47%.
In terms of Valuation Ratios, AXP is trading at a Price/Book of 3.6x, a Price/Sales of 2.3x and a Price/Cash Flow of 6.5x in comparison to its Industry Averages of 2.4x Book, 3.2x Sales and 7.8x Cash Flow. It is essential to analyze the current valuation of AXP and check how is trading in relation to its peer group.
The shares of American Express currently trade at 11.8x the average analyst EPS estimate for 2012, a 30% discount to the 16.8x for the industry average. Amex's business gushes cash, which allows the firm to return capital to investors. I think severe financial distress is not a common scenario.
Natl Fuel Gas (NFG)
National Fuel Gas Company is deeply involved in the business of owning and holding securities issued by its subsidiary companies. The company is a broadened energy company consisting of the following six reportable business segments: Utility; Pipeline and Storage; Exploration and Production; International; Energy Marketing; and Timber.
Why buy NFG? Because National Fuel Gas' traditional natural gas utility provides cash-flow stability and steady dividends, while its growing oil and gas exploration and production segment provides growth potential well beyond most utilities and its integrated cousins. This company may provide more excitement than traditional income investors want. For those willing to take a little more risk, however, NFG could be a profitable investment, especially if gas prices strengthen.
NFG has four major operating segments: the gas utilities in New York and Pennsylvania, pipeline and storage, natural gas marketing, and exploration and production. It is also beginning to build a midstream business around the Marcellus. The regulated utility and pipeline businesses have been the backbone of NFG's earnings, and are the source of this company's narrow economic moat. This is because of the natural distribution monopoly the utility enjoys in its service territories, as the cost to replicate its large network of pipes and risers would be prohibitive
NFG's exploration and production arm, Seneca Resources, has accounted for a greater share of profits in the last few years. Traditionally a conservatively-run business, Seneca expanded its drilling program. The company´s efforts and capital spending are focused on its Appalachian acreage position, which includes roughly 745,000 net acres in the much-hyped Marcellus Shale.
The slide in gas prices has made some of this activity less economic, especially drilling in what the company refers to as its Upper Devonian acreage, but NFG's drilling program in Appalachia will still be relatively aggressive, given how low gas prices have decreased. Its acreage position in the Marcellus could be quite enviable due to fee ownership of the land, but given the heterogeneous geology, it remains unknown how much gas will ultimately be recoverable. Thus far, the most promising acreage seems to be held by lease, which would eliminate the company's returns advantage from fee ownership.
Management estimates Marcellus potential of 8 trillion-15 trillion cubic feet total, as it further risks its Pennsylvania footprint. Seneca could also have some interesting upside in its acreage from the Utica Shale, but that play is in the early stages of testing.
NFG´s Current Net Profit Margin is 14.53%, currently higher than its 2010 margin of 12.83%. I 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 NFG is 14.21%. Lower than the +20% standard I look for in companies I invest in, and also higher than its 2010 average ROE of 13.55%.
In terms of income and revenue growth, NFG has a 3 year average revenue growth of -9.51% and a 3 year Net Income average growth of -1.3 %. Its Current Revenue Year over Year growth is 1.04%, higher than its 2010 Revenue growth of -14.19%. The current Net income year over year growth is 14.38% lower than its 2010 Net Income y/y growth of 124.32 %.
In terms of Valuation Ratios, NFG is trading at a Price/Book of 2.1x, a Price/Sales of 2.4x and a Price/Cash Flow of 6.2x in comparison to its Industry Averages of 1.8x Book, 1.0x Sales and 6.9x Cash Flow. It is essential to analyze the current valuation of NFG and check how is trading in relation to its peer group.
NFG has a healthy balance sheet, but will need to take on additional debt to help fund increased exploration and production activity. For now, the company has room to do so while continuing to return a healthy dividend. The company is, after outspending operating cash flow in 2012, accelerating its Marcellus drilling and infrastructure program. The net debt/capital ratio stood at 36% at the end of the fiscal first quarter of 2012. A total debt/EBITDA to head over 2 times by year-end 2012 and average just above 2 times through 2016 is expected.
Us Cellular (USM)
With 6.0 million subscribers in 26 states, United States Cellular Corporation (U.S. Cellular), based in Chicago, Illinois, is the sixth greatest wireless telecom operator in the U.S. by customer base. The company is the largest subsidiary of Telephone and Data Systems [TDS], a diversified telecom service provider offering wireless and wire line services. U.S. Cellular´s network provides service to approximately 12.7% of the U.S. population. The company has only one reportable segment, Wireless Operation, with coverage markets placed in the U.S
The company produces revenue from two sources, Service and Equipment Sales:
Service (93% of 2010 revenues)
Equipment Sales (7%)
One point I like about USM is that in October 2010, U.S. Cellular launched The Belief Project, which centers not only on price plans and handsets, but also provides a compelling high-value portfolio of products and services. The plan includes several innovative services such as One and Done contracts; a solid loyalty rewards program; simplified bundled national rate plans; protection against bill with overage protection, caps, and forgiveness; phone replacement program; faster phone upgrades and discounts on online auto pay. The company has now approximately 2.3 million customers under the Belief plan. Moreover, the project is expected to have a positive impact on long-term returns by increasing post-paid subscribers by at least 10% over the next several years and helping to growth in average revenue per customer.
USM's Current Net Profit Margin is 4.03%, currently higher than its 2010 margin of 3.17%. I 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 USM is 4.93%. That is lower than the +20% standard I look for in companies I invest in and also higher than its 2010 average ROE of 3.84%.
In terms of income and revenue growth, USM has a 3 year average revenue growth of 0.78% and a 3 year Net Income average growth of 74.42%. Its Current Revenue Year over Year growth is 3.97%, higher than its 2010 Revenue growth of -0.86%. The current Net income year over year growth is 28.64%, higher than its 2010 Net Income y/y growth of -34.18%. I like when Net Income growth is higher than the past.
In terms of Valuation Ratios, USM is trading at a Price/Book of 1.0x, a Price/Sales of 0.8x and a Price/Cash Flow of 3.6x in comparison to its Industry Averages of 1.6x Book, 1.0x Sales and 4.1x Cash Flow. It is essential to analyze the current valuation of USM and check how is trading in relation to its peer group.
Regarding Valuation, U.S. Cellular´s current trailing annual earnings multiple is 23.7x, compared to the 18.2x average for the peer group and 16.4x for the S&P 500. The company´s shares have traded in a range of 9.9x to 37.1x trailing annual earnings over the last five years. The stock is trading at a premium to the peer group as well as S&P500 benchmark, based on forward earnings estimates.
U.S. Cellular is still well-positioned to benefit from the favorable response to Belief Project and rising demand for smartphones that is driving growth in data services. Moreover, the company´s increased investments in advanced network technology deployment, along with its expected foray into the LTE services in 2012, are also expected to forecast well, despite several integration problems, intense competition, pricing, regulatory pressures and economic uncertainty.
Dish Network Cp (DISH)
Based in Englewood, Colorado, DISH Network Corporation was founded in 1980. The company, along with its subsidiaries, operates the DISH Network direct broadcast satellite [DBS] subscription television service in the U.S, and provides service to 14.337 million subscribers. On January 1, 2008, the company spun-off its technology and set-top box business and certain infrastructure assets into a separate publicly-traded company called EchoStar Corporation.
DISH Network operates through three reportable sections such as:
Subscriber Related Revenue approximately 99% of the company s total revenue in 2011.
Equipment Sales & Other Revenue
Equipment Sales (EchoStar)
I got attracted to invest in DISH Network Cp because this company is transforming itself from a low-priced leader in the U.S. pay-TV industry into a fine service provider to reduce its subscribers churn rate. The company is focusing its marketing efforts on higher-priced subscribers while raising the prices of its products and to cut back discounting. DISH Network aims at increasing distribution of highly rated DVR and HD (High-Definition) equipments, as value additions to drive subscriber growth and retention. I also was attracted by the management´s decision for marketing promotions, together with increasing investment in technologically advanced equipment, which will sustain the company´s future growth.
DISH Network has just introduced an innovative HD whole-home DVR called Hooper, together with a sidekick called Joey. The device will enable the user to watch TV shows and movies in 4 different rooms at the same time and will be able to record 6 HD shows at once. Hooper is developed with a built-in 2-terabyte hard disk that can store 2,000 hours of sports and entertainment content.
I think management is deeply committed to develop DISH Network as storage for spectrums that can be used to grow a viable pay-TV distribution network. The recently obtained spectrums from TerreStar Networks Inc. and DBSD North America Inc. offer most valuable assets of the wireless industry. By using these slots of airwaves, the company can create a formidable video-on-demand service over a wireless network of mobile handsets, such as smartphones and tablets, or can monetize these airwaves with significant financial gain.
The fact that DISH Network is negotiating with several content developers to obtain rights to distribute online video versions of the programs might encouraged Mario Gabelli to invest in this company, because this negotiation will enable DISH Network to stream cable channels of the media companies to Internet browsers. Furthermore, the company is distributing place shifting HDDVR developed by Sling Media that enables its subscribers to view programs from their respective pay-TV subscriptions on Internet and mobile platforms. DISH Network renewed its agreements with Frontier Communications, ViaSat, and Charter Communications to offer digital TV service to the latter s customers who are mainly settled in the rural areas, thus further extending the company´s reach in every corner of the country.
DISH´s Current Net Profit Margin is 10.79%, currently higher than its 2010 margin of 7.79%. I like companies that increase profit margins in comparison to other years. It is essential to know the reason why that happened. In terms of income and revenue growth, DISH has a 3 year average revenue growth of 6.54% and a 3 year Net Income average growth of 18.85%. Its Current Revenue Year over Year growth is 11.4%, higher than its 2010 Revenue growth of 8.37%. The current Net income year over year growth is 53.94%, lower than its 2010 Net Income y/y growth of 54.94%.
DISH Network is now trading at 11.4x average analysts fiscal 2012 earnings estimate. This is at a huge discount to both the S&P 500 average and the industry average. According to the fiscal 2013 earnings estimate, the stock is trading at 10.6x, again, a huge discount to both the S&P 500 average and the industry average. Management´s decision for marketing promotions in order to increase subscriber base together with increasing investment in technologically advanced equipments may sustain its future growth.
Acquisition of Blockbuster, DBSD, TerreStar and legal settlement with TiVo are thought to help the company to streamline its businesses and become a feasible alternative to rival pay-TV subscribers. In the meantime, the stock price has soared nearly 51% in the last year, which may restrict above market gain anytime soon.
DISH has made its way through all of its problems to generate fairly consistent free cash flow. At the end of the third quarter, the firm was sitting on about $3.4 billion in cash versus $8.4 billion in debt, putting net debt at a modest 1.4 times EBITDA.
Disclosure: I am long (AXP).