Value Investor Pro Mohnish Pabrai Likes These Companies

Includes: BRK.B, C, MAR, T, TEX, ZINCQ
by: FAF Research

Mohnish Pabrai, an Indian-American entrepreneur, investor and philantropist, owns Pabrai Investment Fund, which is a family of hedge funds inspired by Buffett Partnerships that he fortuitously manages with over $500 mm of assets and steadily achieves over average rates of return.

Pabrai mastered the art of investing by learning the strategies of value investors like Ben Graham, Warren Buffett and Charlie Munger. His investment company's fee structure is based on that of the Buffett Partnerships in the 1950s and '60s. Pabrai's primary fund delivered an increasing return, net of fees, of +90% in comparison to a return of -27% for the S&P 500 Index from its beginning on October 1, 2000, through December 31, 2008. Besides, he is author of "The Dhandho Investor: The Low-Risk Value Method to High Returns."

From a personal investor's panorama, I find really interesting to focus on stocks that are big holdings in Mohnish Pabrai's portfolio. I evaluated them via and found some reasons why Mohnish Pabrai could have been interested in investing. 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.

Berkshire Hathaway-B (NYSE:BRK.B)

Established in 1889, Berkshire Hathaway is an Omaha, Nebraska-based holding corporation, which possesses 70 operating units ranging from insurance, railroads, utilities, manufacturing services, retail and home building. The firm has four leading operating sectors: Insurance (accounted for 27% of total incomes in 2010), Regulated Utility Business (20%), Manufacturing, Service & Retailing Operations (50%) and Finance & Financial Products (3%).

Since December 31, 2011, total assets were $392.6 billion (rose 5.5% from December 31, 2010), and shareholders' equity was $169.0 billion (rose 3.7% from December 31, 2010).

Berkshire's property and casualty insurance industry has been the drive of its growth. The company's insurance business (which accounted for about 40% of the firm's 2010 operating revenue) maintains capital strength at remarkably high levels, which differentiates Berkshire's insurance companies from adversaries. Jointly, the aggregate regulated surplus of the company's U.S.-based insurers was about $94 billion by late 2010, up from $64 billion by late 2009. All of Berkshire's primary insurance subsidiaries have a rating of AA+ according to Standard & Poor's and almost all are presently rated A++ (superior) by A.M. Best, as to their financial condition and operating performance. Besides, the firm's insurance business managed to increase float (money held between the time when policyholders submit payment and when funds are ultimately paid out to settle claims) that generates more investment returns. This money has been effectively employed by Warren Buffett to perform profitable investments. Taking into account Berkshire's sound underwriting practices, I believe its insurance firms are skillful enough to generate significant float in the future.

Berkshire's economically delicate non-insurance businesses utilities & energy, and manufacturing, service & retail are after all headed for recovery after undergoing a sharp gains decline in 2009 resulting from the weak economy. The utilities and energy business is expected to bring fundamental growth with increased revenue expectation from BNSF, the railway, which was purchased in February 2010. Revenue from BNSF has been a primary contributor to the overall firm's income. Buffett explained that railroads represent the future and maintains that it is bound to enlarge with growth in population and GDP. He estimates that this railroad will enlarge Berkshire's usual earning capability by nearly 40% pre-tax and by well over 30% after-tax. Furthermore, the MidAmerican utility business is estimated to generate modest normalized annual gains growth, forced by PacifiCorp's rate cases and a drop in some expenses, somewhat offset by steady investment in the business. As reported by Berkshire, demand for utilities will be solid in the future and will lead to an important earnings growth for the firm. Total income for manufacturing, service & retail rose 4.2% in the fourth quarter, revealing improved results across most of the units thanks to better economic conditions and a higher consumer demand.

BRK.B's current net profit margin is 7.14%, currently lower that its 2010 margin of 9.52%.Its current return on equity is 6.37%. Lower than the +20% standard I look for in companies I invest and also lower than its 2010 average ROE of 8.99%.

In terms of income and revenue growth, BRK.B has a 3-year average revenue growth of 10.06%. Its current revenue year over year growth is 5.51%, lower than its 2010 revenue growth of 21.06%. The current Net Income year over year growth is -20.92%, lower than its 2010 Net Income year/year growth of 60.98%.I look for companies that increase both profits and revenue.

In terms of Valuation Ratios, BRK.B is trading at a Price/Book of 1.2x, a Price/Sales of 1.3x and a Price/Cash Flow of 9.3x in comparison to its Industry Averages of 0.8x Book, 1.0x Sales and 10.2x Cash Flow. It is essential to analyze the current valuation of BRK.B and check how is trading in relation to its peer group.

Taking into account Valuation, Berkshire presently trades at 14.1x average analyst 2012 earnings assessment, a 60% discount to the industry average. On a price-to-book basis, the shares deal at 1.2X, a 33% discount to the industry average. The valuation on a price-to-book basis seems appealing, considering that the trailing 12-month ROE is substantially ahead of the industry average.

Berkshire's financial health was tested by the downfall of the credit and equity markets in 2008, which eventually led to the firm losing its AAA credit rating in 2009. Having mentioned that, Berkshire remains one of the most financially strong firms I cover, with the company managing its risk through diversification and a conservative capital position.

Terex Corp. (NYSE:TEX)

Terex Corporation is a worldwide equipment manufacturer catering to the construction, infrastructure, and surface mining industries, whose manufacturing facilities are placed in the U.S., Canada, Europe, Australia, Asia, and South America. The company sells its products through a global distribution network and has four reporting segments: Terex Cranes (Approximately 40% of total revenue in the first nine months of 2010), Terex Construction (25%), Terex Aerial Work Platforms (23%) and Terex Materials Processing (12%).

Terex is changing from a construction and mining equipment firm to a machinery and industrial products industry. It now centers on products and services where it can keep and build solid customer propositions with high returns on capital. As a part of this strategy, the firm divested its mining business in February 2010 to Bucyrus for about $1 billion in cash and about 5.8 million shares of Bucyrus common stock. Besides, management highlighted that mining is an extremely capital intensive business and it would have taken years to put together the infrastructure to service and support new equipment sales, while Bucyrus already has an important presence in this business. The agreement improved Terex's financial flexibility, granting the company the possibility to invest in its present businesses, add new, well-positioned niche manufacturers with sound market presence to its portfolio, as well as pay back debt.

Sales for the Construction segment have been enhancing for the past two quarters after consecutive previous downfalls. The segment's backlog in the third quarter rose 116.8% in comparison with the year-ago quarter and it is now seeing strong growth in orders for its heavier equipment, rigid trucks and material handlers. The momentum is estimated to continue in 2011 and besides, the future new product launches of the upcoming generation of loader backhoe and a new skid steer product line are expected to increase incomes in 2011. The segment has also clearly reduced its operating losses and it is probable to return to profitability considering the boost in sales.

In terms of income and revenue growth, TEX has a 3-year average revenue growth of -8.12%. Its current revenue year over year growth is 47.22%, higher than its 2010 revenue growth of 21.06%. The fact that revenue increased from last year shows that the business is performing well. The current Net Income year over year growth is -87.39%.

In terms of Valuation Ratios, TEX is trading at a Price/Book of 1.4x, a Price/Sales of 0.4x and a Price/Cash Flow of 14.9x in comparison to its Industry Averages of 2.4x Book, 0.8x Sales and 13.3x Cash Flow. It is essential to analyze the current valuation of TEX and check how is trading in relation to its peer group.


The provider of satellite delivered digital television, video, and broadband, DIRECTV Group Inc., offers advanced communication services and created a wide range of entertainment, information, and communication services for home and business use, such as video, data, voice, multimedia, and Internet services.

The company works in two reporting segments: DIRECTV U.S (80.3%) and DIRECTV Latin America (19.7%). DIRECTV U.S. has close to 19.885 million U.S. subscribers and DIRECTV Latin America has about 7.871 million subscribers.

Higher demand for HD DVR services has caused the company to center more on new product development. The Whole-Home DVR was 45% during the quarter in comparison to 40% in the last quarter. Besides, the firm is also thinking in launching a new product called Home Media Center in the future quarters. This new device not only records five shows at the same time but it also has double storage capacity in comparison to classic HD DVR. The lately launched Nomad device, which offers flexibility to customers to watch programs anywhere, is also becoming popular. These new product lines will generate new income streams for the firm from now on. In addition, the firm is also considering launching two more satellites in 2014 and 2015, which I believe will improve even further the service quality of DIRECTV. So, such product innovation and development will diminish churn rate even more and will help the company to fight competition.

In the fourth quarter of 2011, DIRECTV incorporated 125,000 net subscribers in the U.S. and a record high 590,000 in Latin America. Most essentially, ARPU in the U.S. was $101.38 in comparison with $96.64 in the previous-year quarter. Besides, DIRECTV is creating net subscriber addition sequentially, when other large pay-TV operators such as cable TV giant Comcast, Time Warner Cable, and Cablevision systems are still consecutively losing basic video consumers. I believe this great performance was mostly attributable to the reputation of its NFL Sunday Ticket promotion. In addition, other factors like customer screening, target marketing, innovative product developments, abstaining from disputes with content producers and media corporations also ended in such improved performance.

Considering Valuation, currently, DIRECTV is trading at 10.7x fiscal 2012 average earnings estimate. This is at a great discount to the industry average as well as the S&P 500 average. As regards the fiscal 2013 earnings projections, the stock is trading at 8.7x, once again a great discount to the industry average as well as the S&P 500. I believe DIRECTV's long-term growth panorama is intriguing motivated by its growing penetration in the profitable Latin American markets, with continuous technical improvement in the U.S. segment, which derives in better service quality. Management's plan to target high-end customers turned out well as the demand for the firm's HD channels and digital-video recording services acquired huge market traction. Still, macro-economic fluctuations, huge programming costs and growing competitive threat may limit the firm's upside potential.

DirecTV produces strong free cash flow, even though it currently has spent this and more buying back shares. The debt load presently stands at $12.2 billion, net of cash, up from $9 billion by late 2010.

Citigroup (NYSE:C)

Citigroup Inc. is an internationally diversified financial services holding corporation that provides a variety of financial products and services comprising consumer banking and credit, corporate and investment banking, securities brokerage and wealth management to consumers, corporations, governments and institutions. Citigroup possesses about 200 million customer accounts in more than 160 countries and jurisdictions.

In February 2009, the company restructured its businesses into three main segments: Citicorp (83%), Citi Holdings (16%) and Corporate/Other (1%).

I like Citigroup because it has a wide banking model with a significant portion of the revenue being generated from outside the U.S. It has a global footprint with operations in over 160 countries and jurisdictions helping its corporate clients and consumers with their local and global needs. Faced with a slowdown in the U.S. market, Citigroup is emphasizing on growth in the international markets. It is making every effort to expand and tap opportunities in the emerging markets, which are expected to experience a quick pace of GDP growth than their developed counterparts. This strategy augurs well and we expect such efforts to help in augmenting the company s profitability. I like this pick because C is not only undervalued but also is a play on emerging markets middle class growth.

Another big positive about Citigroup is that the bank has one of the strongest balance sheets and reserves. The company's firm-wide allowances are sufficient for covering anticipated future losses, even a huge European debt crisis. The credit quality metrics also continued to improve during the first quarter of 2012. Going forward, the company is expected to benefit from an overall improvement in U.S. credit quality, given the current economic environment as well as a reduction in overall problem assets, particularly at Citi Holdings. Loan loss reserve releases are expected to continue in 2012. I think in the next years Citigroup management will start less conservative and will focus on growth and enhancing shareholders value.

Regarding valuation, C shares currently trade at 8.6x 2012 average analyst earnings estimate, a 25% discount to the industry average. This is a considerable valuation discount that many hedge funds see it as a buy opportunity. On a P/BV basis, the shares trade at 36% discount to the industry average. The valuation on P/BV seems fair, given that C has a ROE of 6.3%, a ratio that is 29% below the industry average.
Citigroup could rise to $37 if the shares trades with a 9x 2012 earnings multiple, a number I think is quite conservative.

Horsehead Holding Corporation (ZINC)

Horsehead Holding Corp., based in Monaca, Pa., is the parent company of Horsehead Corporation, a major U.S. producer of specialty zinc and zinc-based products that employs over thousand people and has six operating locations across the U.S.

On May 4, ZINC Reported Q1 ((NYSE:MAR)) earnings of $0.05 per share, one penny less than the Capital IQ Consensus Estimate of $0.06; revenues fell 89.6% year/year to $11.4 mil vs the $112.92 mil consensus. Management explained:

We are also pleased with the progress on construction of our new zinc production facility in Rutherford County, North Carolina," CEO Hensler said. "We have placed orders for a significant portion of the equipment and work at the site is accelerating. We continue to be on schedule and on budget for a startup in the second half of 2013... "Steel production increased compared with the fourth quarter of 2011 and continued to increase steadily through the quarter. According to industry sources, steel industry capacity utilization averaged 78% during the quarter compared with 75% during the previous quarter. The combination of higher steel production levels and new service contracts which started during the first quarter of 2012 resulted in a 29% increase in dust receipt levels compared with the fourth quarter of last year. Dust receipt levels are expected to continue near these higher levels during the second quarter. I am pleased with the way our recycling plants responded to the significant increase in dust receipt levels. We processed a quantity of dust equivalent to our receipts during the quarter. We still have excess EAF dust recycling capacity which we hope to utilize in the future as EAF-based steel production continues to grow and as we pursue additional service contracts.

ZINC's current net profit margin is 4.76%, currently lower that its 2010 margin of 6.48%. 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 5.53%. Lower than the +20 standard I look for in Companies I invest and also lower than its 2010 average ROE of 6.98%.

In terms of income and revenue growth, ZINC has a 3-year average revenue growth of 0.39%. Its current revenue year-over-year growth is 18.00%, lower than its 2010 revenue growth of 76.59%. 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 -13.39%.

In terms of Valuation Ratios, ZINC is trading at a Price/Book of 1.2x, a Price/Sales of 1.1x and a Price/Cash Flow of 14.0x in comparison with its Industry Averages of 2.4x Book, 2.6x Sales and 8.3x Cash Flow. It is essential to analyze the current valuation of ZINC and check how it is trading in relation to its peer group.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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