Mr. Barrow, is also the lead portfolio manager for the Vanguard Windsor II and Selected Value Funds. He graduated from the University of South Carolina with a BS. For the 10-year period ended 3/31/2010, the Selected Value Funds averaged 9.33% a year, while the market had negative returns.
Their portfolios always exhibit below-market price-to-earnings ratios, below-market price-to-book ratios, and above-market dividend yields, regardless of market conditions. With this safe and secure traditional approach, clients often decide to rely on Barrows expertise when it comes to their investments.
From a personal investor's panorama, I find really interesting to focus on stocks that are big holdings in Barrow's portfolio. I evaluated them and found some reasons why a Professional Investor would have selected them. I'm in the search for companies that I can understand, with favorable long-term prospects that are operated by qualified people and, essentially, are available at attractive prices.
International Business Machines Corporation (IBM)
International Business Machines Corporation was incorporated in the State of New York in 1911 as Computing-Tabulating-Recording Co. (C-T-R). The name was later changed to International Business Machines Corporation in 1924. The company focuses on the development and manufacturing of advanced information technology, including computer systems, software, storage systems and microelectronics. Major operations are divided into the Global Technology Services (GTS) segment (38.3% of fiscal 2010 revenue), Global Business Services (GBS) segment (18.2% of fiscal 2010 revenue), Systems and Technology segment (18.2% of fiscal 2010 revenue), Software segment (23.2 % of fiscal 2010 revenue) and Global Financing segment (2.1% of fiscal 2010 revenue).
One reason to invest in IBM is the Company's growing emerging market exposure. With the strength of its global on-demand model (responding to customer demand with flexibility and speed), IBM is experiencing strong revenue growth in all geographical regions, particularly in the growth markets worldwide, which allowed Warren Buffett and Barrow not to hesitate when deciding to invest in this company. Besides, IBM generates more than 50.0% of its revenue outside the U.S., with the emerging markets contributing a significant part of the growth. IBM has been gaining a lot of traction in the emerging markets of the Asia-Pacific and Africa, with many government agencies and private organizations from different verticals such as telecommunications, oil & gas and banking choosing the company s services and technical support, thus ensuring steady flow of orders and market share gains across regions. IBM continues to expand its operations in Africa by opening new branches, expanding operations to at least 23 countries across the continent. This is expected to increase its African investment to $12.5 billion by 2015. Other than Africa and the BRIC countries, IBM also remains focused on increasing its footprint in South-East Asia as the company continues to build data centers to exploit the potential of cloud computing through its comprehensive solutions and services. IBM has 13 global cloud labs, of which seven are based in Asia-Pacific countries. The growth markets are expected to contribute 30.0% to IBM s total revenue by 2015. This is a huge number considering the strenght that IBM has in developed Countries.
I believe that IBM´s strong growth reflects is decision to implement higher-value, productivity initiatives providing longer-term benefits, as well as its transformation into a globally integrated enterprise. IBM focuses on high-growth, high-value segments of the IT industry. IBM's growth initiatives, including its smarter planet and industry frameworks, growth markets, business analytics, and optimization and cloud computing have driven substantial growth and generated high profit margins for the company. These initiatives are expected to deliver at least $50 billion in revenues by fiscal 2015. The company expects, by 2015, to have generated smarter planet and smarter commerce revenues of $10.0 billion and $20.0 billion, respectively, by 2015. Furthermore, business analytics is expected to deliver $16.0 billion, while cloud computing is estimated to deliver $7.0 billion in revenues by 2015. All of these growth scenarios are very bullish for IBM investors. I remain optimistic about the company´s long-term growth and expect it to post stronger results, aided by its initiatives in the above-mentioned areas. The company´s data center solution and cloud computing initiative will also drive growth. IBM is a leader in the middleware business with nearly 33.0% market share. IBM s middleware products include Websphere, Lotus, Tivoli and Rational that are used to connect different types of software systems. With an investment of over $60.0 billion in R&D since 2000, IBM has built an Analytics Solution center, Business Resilience service delivery centers and Cloud computing centers all over the world. These centers are supposed to help increase revenues, going forward.
IBM-NYSE´s Current Net Profit Margin is 14.83%, currently lower than its 2010 margin of 14.85%. Current Return on Equity for IBM-NYSE is 73.43%. Higher than the +20% standard I look for in Companies I invest and also higher than its 2010 average ROE of 64.94%.
In terms of income and revenue growth, IBM has a 3 year average revenue growth of 1.05% and a 3 year Net Income average growth of 8.73 %. Its Current Revenue Year over Year growth is 7.05%, higher than its 2010 Revenue growth of 4.30%. 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 6.89%, lower than its 2010 Net Income y/y growth of 10.49%.
In terms of Valuation Ratios, IBM is trading at a Price/Book of 11.8x, a Price/Sales of 2.3x and a Price/Cash Flow of 12.5x in comparison to its Industry Averages of 5.4x Book, 2.1x Sales and 10.8x Cash Flow. It is essential to analyze the current valuation of IBM-NYSE and check how is trading in relation to its peer group.
IBM has nearly $17 billion in cash and equivalents, and about $31 billion in debt. The firm generates enough cash from operations to cover its debt obligations while continuing to invest in growth opportunities.
Teva Pharmaceutical Industries Limited (TEVA)
Teva Pharmaceutical Industries Limited is a global pharmaceutical company, with base in Petach Tikva, Israel, involved in developing, manufacturing, and marketing not only branded and generic drugs but also active pharmaceutical ingredients (APIs) in North America, Europe, Latam, Asia, Israel. Teva´s generic product portfolio includes tablets, capsules, liquids injectables, inhalants. The company´s main branded products include Copaxone and Azilect. Teva´s branded product portfolio consists of respiratory products like ProAir for the treatment of bronchial spasms and exercise-induced bronchospasm, and Qvar for chronic bronchial asthma. Its main segments are Respiratory (5% of 2010 revenue mix), API (4%), Women´s Health (2%), Biosimilars (1%), Innovative (20%) and Generic (68%).
Teva is the world´s largest generic drug company as regards both total and new prescriptions. It is essential to know that the company enjoys a leading position in the US, which is the world s largest generic market. Teva remained on its leadership position in the US. Teva´s generic business is believed to offer solid growth opportunity thanks to many products going off-patent in the next few years, for several of which the company has filed abbreviated new drug applications (ANDAs). Another reason to invest is that Teva has a robust portfolio of generic products and should be able to maintain its strong position in the global generics market thanks to new product launches over regular intervals. The generic version of Lilly´s (LLY) Zyprexa is yet another major product release for Teva. Teva has partnered with Dr. Reddy s Laboratories for the exclusive generic launch of Zyprexa.
Teva is also working on strengthening its position in key emerging generic markets, where generics penetration is low and growth and profitability potential high.
When analyzing this company for investing, it is key to understand that Biogenerics is the new area of growth; Teva is after spending a significant amount of R&D dollars on building its portfolio of biopharmaceutical and biogeneric products which represent a new and important area of growth for the company. According to IMS, global biopharmaceutical sales went over $100 billion in 2010. Given the high cost of innovative biological therapies, there should be substantial demand for safe and reasonably priced biogeneric alternatives. The company´s biopharmaceutical product portfolio consists of Tev Tropin, Ratiograstim, Eporatio, and TevaGrastim. In order to build its biogeneric pipeline, Teva has been pretty active on the deal-making and acquisition front.
TEVA-NASDAQ´s Current Net Profit Margin is 15.07%, currently lower than its 2010 margin of 20.66%. I do not like when Companies have lower profit margins than the past. That could be a reason to analyze why that happened. Current Return on Equity for TEVA-NASDAQ is 12.50%. Lower than the +20% standard I look for in Companies I invest and also lower than its 2010 average ROE of 16.18%.
In terms of income and revenue growth, TEVA-NASDAQ has a 3 year average revenue growth of 18.21% and a 3 year Net Income average growth of 63.18 %. Its Current Revenue Year over Year growth is 13.59%, lower than its 2010 Revenue growth of 15.99%. The current Net income year over year growth is -17.17%
In terms of Valuation Ratios, TEVA is trading at a Price/Book of 1.7x, a Price/Sales of 2.1x and a Price/Cash Flow of 9.3x in comparison to its Industry Averages of 2.6x Book, 2.5x Sales and 12.9x Cash Flow. It is essential to analyze the current valuation of TEVA and check how is trading in relation to its peer group. Generic sales are expected to improve in early 2012 given the exclusive generic release of Zyprexa.
Approval for generic Lovenox would be a great boost for the stock. The increase in dividend is also encouraging. Meanwhile, Teva´s acquisition of Cephalon should help the company expand and strengthen its branded and specialty pharma business. However, the Copaxone patent case remains an overhang. I believe Teva will pursue small deals and acquisitions to reduce its dependence on Copaxone.
This company exhibits strong financial health as management has demonstrated financial conservatism by the maintenance of low financial leverage and keeping plenty of cash on the balance sheet. Despite an aggressive acquisition strategy, management appears to have prudently avoided overpaying for acquisitions. Teva has historically maintained a debt-to-capital ratio near 0.3 over most of the last decade with an EBITDA interest coverage ratio systematically in the double digits. Teva ended 2011 with approximately $1 billion in cash.
Murphy Oil Corporation (MUR)
Murphy Oil Corporation is a global oil and gas exploration and production company with refining and marketing operations in U.S. and U.K, which is based in El Dorado, Arkansas. The company conducts its upstream operations in the U.S., Canada, Congo, the U.K., and Malaysia. It also operates in Indonesia, Australia, and Suriname. The Exploration and Production (E&P) section (13% of 2010 revenue) explores and produces crude oil, natural gas and natural gas liquids worldwide. Refining and Marketing (R&M) section (87% of 2010 revenue) refines crude oil and other feedstock into petroleum products, such as gasoline and distillates; buys and sells crude oil and refined products; and transports and markets petroleum products.
I think that Murphy Oil Corporation could be a solid pick for 2012 because this company continues to augment shareholder value by maintaining a superior E&P production profile. The company keeps maintaining its historically impressive exploration portfolio, achieving exploration successes in Malaysia (Siakap, Sarawak, Kikeh field), the Republic of Congo (Turquoise, Azurite field) and the Gulf of Mexico (Thunder Hawk). Another reason to invest is that the company is actively expanding its geographic footprint, with exploration work currently progressing offshore Australia, Indonesia and Suriname. MUR is also reaching its North American shale plays acreage with projects at Tupper, Eagle Ford and Seal EOR. Along with its recent entry into Brunei Darussalam, Kurdistan and the Southern Alberta Basin Bakken, opportunities for growth in 2011 abound.
This company also owns one of the best upstream affluence themes among the domestic oil and natural gas integrated companies and independent E&P group. While Murphy´s asset base clearly has a sizable refining footprint, its growth centers on a robust exploration program. The fascinating exploration line-up has provided Murphy with a magnificent production profile, which results in a solid EPS growth opportunity. The company expects production increases in 2012 to primarily come from Tupper West, Sarawak gas and oil from Eagle Ford Shale and Seal. Murphy performed its plan to re-position itself into a pure-play E&P company by exiting its refining business in the U.S. The company closed the sale of its U.S. refineries located at Superior in Wisconsin and Meraux in Louisiana recently for cash proceeds of $960 million.
MUR´s Current Net Profit Margin is 3.15%, currently lower than its 2010 margin of 3.42%.Current Return on Equity for MUR-NYSE is 10.28%. Lower than the +20% standard I look for in Companies I invest.
In terms of income and revenue growth, MUR has a 3 year average revenue growth of 0.38% and a 3 year Net Income average growth of -20.55 %. Its Current Revenue Year over Year growth is 37.56%, higher than its 2011 Revenue growth of 6.09%. The current Net income year over year growth is -4.72%, lower than its 2010 Net Income y/y growth of 9.35%. 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, MUR is trading at a Price/Book of 1.2x, a Price/Sales of 0.4x and a Price/Cash Flow of 5.1x in comparison to its Industry Averages of 1.7x Book, 0.7x Sales and 5.9x Cash Flow. It is essential to analyze the current valuation of MUR-NYSE and check how is trading in relation to its peer group.
As regards Valuation, Murphy´s exploration line-up provides a strong production profile, which feeds a strong EPS-growth opportunity. Furthermore, the company´s low debt-to-capital ratio gives it great financial flexibility to fund development projects. However, concerns on the restoration of activity in the Gulf of Mexico and a cautious outlook on exploration successes keep me on the sidelines.
In spite of the large increase in capital spending that began in 2011, this company still looks likely to have a cash flow profile that can easily fund capes and dividends. This derives from the large amount of production expected to come on line during the next few years. Operating cash flow is expected to rise from $2.9 billion in 2011 to $3.9 billion by 2015. This would handily cover the expected roughly $3 billion of capital spending and $200 million-$300 million in dividends per year. Barring the absence of a major acquisition, I expect Murphy will maintain its low debt levels and strong financial health.
McDonald's Corp. (MCD)
McDonald´s Corp. , the Oak Brook, is a leading fast food chain founded in 1948, based in Illinois. This company runs more than 33,000 restaurants in 117 countries as of December 31, 2011. It is mainly involved in operating and franchising 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 franchised as well as affiliated restaurants. The company´s major markets are Australia, Europe, Brazil, Canada, China, France, Germany, Japan (a 50%-owned affiliate), the U.K. and the U.S.
Why to invest in it? Because the company´s revitalization initiative, the Plan to Win program, which started in April 2003, continues to spur growth. Under this plan, McDonald´s aims not only to sustain growth by increasing restaurant visits, providing everyday value, innovating new menu items, but also to re-image restaurant along with market campaigns. Additionally, management´s re-franchising strategy involves a shift to a greater percentage of franchised restaurants. Around 80% of total restaurants are now franchised. As the company will reduce its capital requirements, I believe re-franchising a large chunk of its system will provide another engine for EPS growth and ROE expansion. Alongside, free cash flow will continue to grow, allowing reinvestment for increasing brand recognition and improving shareholders return. Lastly, since major portion of its business is refranchised, McDonald´s will be less affected by the inflation compared to its peers. The company 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.
McDonald´s keeps growing same-store sales, maintaining healthy traffic and outperforming its peers.
The company´s better-than-expected global comparable sales came on the heels of the product innovation, along with value menu offerings, McCafe premium beverages and a variety of core items that perked up the comps, another reason Mr. Barrow might have analyzed for investing. Beverages remain a sweet spot for McDonald´s both domestically and internationally. Beverages added more than the initially targeted $125,000 in sales per store per year. Internationally, McCafe is now centered on hot beverages. The company has identified a number of markets to test or add Real Fruit Smoothies and Frappes over the next few years, starting with Australia. The company still sees a lot of room in circulating breakfast products worldwide. In 2012, the company will leverage its success with line extensions and addition of new flavors as well as promotional food events to build sales.
MCD´s Current Net Profit Margin is 20.38%, currently lower than its 2010 margin of 20.55%.Current Return on Equity for MCD-NYSE 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%.
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 fact that revenue increased from last year show me that the business is performing well. The current Net income year over year growth is 11.26%, higher than its 2010 Net Income y/y growth of 8.69.I like when Net Income growth is higher than the past.
In terms of Valuation Ratios, MCD-NYSE is trading at a Price/Book of 6.8x, a Price/Sales of 3.7x and a Price/Cash Flow of 14.0x in comparison to its Industry Averages of 6.8x Book2.3x 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.
Regarding Valuation, McDonald´s currently trades at 17.6x the fiscal 2012 earnings estimate, a 25.1% discount to the industry average. On a price-to-book basis, the shares trade at 7.8x, which is trading at a 73.3% premium to the industry average. The six-month target price of $105.00 equates to 18.4x the earnings estimate for fiscal 2012. This price target entails an expected total return of 6.3% over that period.
McDonald's is in excellent 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 divided by debt and other debtlike commitments) is over 2 times. I believe McDonald's could support incremental debt, thanks to leverageable assets on its balance sheet and a solid free cash flow profile. McDonald's gets an issuer credit rating of AA-, implying very low default risk.
WellPoint Inc. (WLP)
With headquarter in Indianapolis, Indiana and constituted in November 2004 from the merger of Anthem Inc. and WellPoint Health Networks Inc., WellPoint Inc. is the largest publicly traded managed care organization in terms of membership serving more than 34.3 million medical members as of December 31, 2011. It is also an independent licensee of the Blue Cross Blue Shield Association (BCBSA), a federation of 39 separate health insurance organizations and companies in the United States, which provides insurance to over 100 million Americans. WellPoint is the greatest BCBS plan providers in the United States. This company operates through three sections: Commercial Business (58% of revenues), Consumer Business (30%) and other (12%).
WellPoint has strengthened its portfolio through the acquisition of Medicare specialist CareMore Health Group in order to expand its presence in the U.S. government program for the elderly. While the acquisition will help WellPoint get deeper into the integrated and individualized health care markets of California, Arizona and Nevada, the deal is expected to break-even in 2012 and adds to earnings from 2013 onwards. In addition, WellPoint collaborated with Health Care Service Corp. (HCSC) and Blue Cross Blue Shield of Michigan (BCBSM) to purchase a stake in Bloom Health, a private online health insurance exchange, attempting to expand its health insurance business. WellPoint, along with HCSC and BCBSM, aims to increase Bloom Health s coverage to all 50 U.S. states from the current 19 states by the end of 2012.
WellPoint´s strong capital and cash position have fueled cash dividends and stock repurchases and this trend will continue. While the company began cash dividend payouts in early 2011, it has also been sharply buying back shares for more than a year now and is constantly utilizing its excess capital to retain the investors' confidence. management plans to buy back 2.5 million shares during 2012.
WLP Current Net Profit Margin is 4.36%, currently lower than its 2010 margin of 4.91%. Current Return on Equity for WLP is 11.24%. Lower than the +20% standard I look for in Companies I invest .
In terms of income and revenue growth, WLP has a 3 year average revenue growth of -0.30% and a 3 year Net Income average growth of 2.05 %. Its Current Revenue Year over Year growth is -9.73%, lower than its 2010 Revenue growth of 3.43%. The current Net income year over year growth is -8.73%, higher than its 2010 Net Income y/y growth of -39.17%. I like when Net Income growth is higher than the past.
In terms of Valuation Ratios, WLP-NYSE is trading at a Price/Book of 1.0x, a Price/Sales of 0.4x and a Price/Cash Flow of 7.2x in comparison to its Industry Averages of 2.0x Book, 0.5x Sales and 9.2x Cash Flow. It is essential to analyze the current valuation of WLP-NYSE and check how is trading in relation to its peer group.
In terms of Valuation, WellPoint´s shares trade now at 8.5x the 2012 earnings estimate, a 31% discount to the 12.3x industry average. On a price-to-book basis, the shares trade at 1.0x, a 52% discount to the 2.1x industry average. The valuation on a price-to-book basis looks attractive, given the trailing annual ROE of 11.7% that is significantly above the industry average of 8.4%.
WellPoint features a strong financial health. The company is believed to be able to generate normalized free cash flows of at least $2.5 billion annually, and balance sheet leverage is appropriate with a 30% debt/capital ratio.
UnitedHealth Group (UNH)
Based in Minnesota and incorporated in January 1977, UnitedHealth Group Inc. is a broadened health and well-being company, serving more than 70 million Americans. The company leverages core competencies in advanced technology-based transactional capabilities; health care data, knowledge and information; and health care resource organization andcare facilitation, through its diversified businesses. These core competencies aim at two market areas health benefits and health services. Health benefits are offered by UnitedHealthcare and Public and Senior Markets Group, which includes Ovations and AmeriChoice. Health services are provided by Enterprise Services Markets Group, which includes OptumHealth, OptumInsight, and OptumRx.
Key segments: UnitedHealthcare (77.0% of 2011 revenues), OptumHealth (5.0%), OptumInsight (2.0%), OptumRx (16.0%).
UNH has a superb balance sheet. The company has also reduced its debt ratio by 1% year over year to 29%. Its debt ratio has been standing at an average of 32.1% for the past five years. UnitedHealth is also consistent in its dividend paying capability. Total dividends paid increased 45% year over year in 2011. And the company repurchased $3 billion in shares, $500 million more than the upper end of its scheduled plan for the year. Historically, the company had favored share buybacks and mergers over dividend payments as a way to deploy capital. UnitedHealth has been generating strong cash flow from operations and this action further signals strong longer-term cash flow prospects. It ended the year with excess cash of $1.6 billion. The company´s firm capital management is also shown in its return on equity, which has averaged at 18.97% for the past five years.
UNH-NYSE´s Current Net Profit Margin is 5.05%, currently higher than its 2010 margin of 4.92%.
In terms of income and revenue growth, UNH has a 3 year average revenue growth of 7.86% and a 3 year Net Income average growth of 19.98 %. Its Current Revenue Year over Year growth is 8.19%, higher than its 2010 Revenue growth of 8.05%. The current Net income year over year growth is 10.96%, lower than its 2010 Net Income y/y growth of 21.25%.
In terms of Valuation Ratios, UNH is trading at a Price/Book of 2.0x, a Price/Sales of 0.6x and a Price/Cash Flow of 8.4x in comparison to its Industry Averages of 2.0x Book, 0.5x Sales and 9.2x Cash Flow. It is essential to analyze the current valuation of UNH and check how is trading in relation to its peer group.
Regarding Valuation, UnitedHealth´s shares currently trade at 11.0x the 2012 earnings estimate, an 11% discount to the 12.3x industry average. On a price-to-book basis, the shares trade at 2.0x, at par with the industry average. The valuation on a price-to-book basis looks attractive, given a trailing 12-month ROE of 18.3% is far ahead of the industry average ROE.
UnitedHealth is in good financial health, being interest income greater than interest expense and a 30% debt/capital ratio. I expect the company to generate at least $4 billion in free cash flow annually.