Francis Chou is the President of Chou Associates Management Inc., headquartered in Toronto. In 2005, he was named fund manager of the decade by the Canadian Investment Award. His approach is to "find bargains and maintain discipline; if you cannot find bargains stay in cash".
The Investment Philosophy of Chou Associates Management consists of methodological value-oriented approach to investing. This involves a detailed analysis of the strengths of individual companies, with much less focus on short-term market factors. Chou pays attention reviewing a company's balance sheet, cash flow profile, profitability, industry position, special strengths, future growth potential and management ability.
From an individual investor's point of view, I consider truly interesting to focus on stocks that are huge holdings in Francis Chou's portfolio. I review them and found some reasons why Francis Chou could have been seduced to invest. I look for corporations that I can comprehend, with favorable long-term prospects that are operated by competent people and are available at attractive prices. Portfolio holdings of Chou can be seen at whalewisdom.com.
Nokia Corporation (NOK)
Being the largest mobile phone maker of the world, Nokia , in its core mobile phone business, is fusing advanced mobile technology with personalized services to enable people to always stay connected. The company also offers Internet services, comprehensive digital map information, and equipment, solutions and services for several communications networks (2G/3G/4G) throughout the world.
Nokia reports in three revenue generating sectors: Devices & Services (61.3%), Nokia Siemens Network (35.9%) and Location & Commerce (2.8%).
Microsoft (MSFT)-Nokia combination is thought to be a good competitor to Apple's (AAPL) iOS and Google's (GOOG) Android in the near future. Windows Phone 7 has already created a strong developer community. More than 55,000 applications are now available for this ecosystem, which is a key feature for the success of any smartphone. Nokia is utilizing its expertise on hardware design and language support to innovate the Windows Phone 7 platform in areas like imaging. Microsoft will pay $1 billion to Nokia over a period of 5 years relating to promotional expenses for Windows based smartphone, which will mitigate the marketing expenses of Nokia and will have positive impact on the company´s margins in the upcoming years.
Nokia Siemens Networks (NSN), the 50-50 joint venture between Nokia and Siemens, will reduce its headcount by a massive 17,000 throughout the world, which will be approximately 23% of its global work force. NSN is focusing primarily on wireless broadband networks, customer experience management, and professional services and has started disinvestment of its non-core businesses.
In the last earnings release, NOK reported that revenues fell 29.3% year/year to EUR7.35 bln vs. the EUR7.51 bln consensus. Nokia reaffirmed that it expects its non-IFRS Devices & Services operating margin in 2Q12 to be similar to or below the 1Q12 level of negative 3.0%. This outlook reflects that the first quarter 2012 benefit related to lower warranty costs is expected to be non-recurring. Nokia continues to target to reduce Devices & Services non-IFRS operating expenses by more than EUR 1 billion for the full year 2013, compared to the full year 2010 Devices & Services non-IFRS operating expenses of EUR 5.35 billion. Nokia plans to accelerate and substantially deepen Devices & Services cost savings, consistent with its strategic focus. Nokia will share further details as quickly as possible. Nokia and Nokia Siemens Networks expect Nokia Siemens Networks non-IFRS operating margin to clearly improve in the second quarter 2012 compared to the first quarter 2012 level of negative 5.0%. Nokia Siemens Networks continues to target to reduce its non-IFRS annualized operating expenses and production overheads by EUR 1 billion by the end of 2013, compared to the end of 2011. Management highlighted, "we are taking deliberate measures to continue to renew our Series 40 platform, and we plan to strengthen our line-up in Q2 2012."
In terms of income and revenue growth, NOK has a 3 year average revenue growth of -8.65%. Its Current Revenue Year over Year growth is -8.92%, lower than its 2010 Revenue growth of 3.57%. I do not like when current revenue growth is less than the past year. It generally shows that business is decelerating for some reason.
In terms of Valuation Ratios, NOK is trading at a Price/Book of 1.3x, a Price/Sales of 0.4x and a Price/Cash Flow of 13.0x in comparison to its Industry Averages of 2.3x Book, 1.7x Sales and 12.0x Cash Flow. It is essential to analyze the current valuation of NOK and check how is trading in relation to its peer group.
Regarding Valuation, Nokia is currently trading at 23.2 the fiscal 2012 earnings estimate. This is at a significant discount to the industry average, but a premium over the S&P 500 average. As regards the fiscal 2013 earnings estimate, the stock is trading at 12.4x, again a great discount to the industry average but at a premium to the S&P 500 average. I believe the main reason for this massive valuation discount is the serious concern regarding the company´s smartphone sector. Nokia´s top line has still not recovered from the onslaught of global economic downturn. Moreover, continuous loss of global market share derived from lack of popular operating system like Android or iOS is also hurting its profitability going forward. Nevertheless, the recent launch of much-hyped Windows-based smartphones together with the popular demand of dual-sim handsets is believed to deliver much improved results in the upcoming quarters.
RadioShack Corporation (RSH)
RadioShack Corp., one of the leading consumer electronics specialty retailers in the U.S., offers innovative products and services from leading brands. Its products range from wireless telephones and communication devices, such as scanners and global positioning satellite navigation units to flat panel televisions, residential telephones, DVD players, computers, and direct-to-home satellite systems, home entertainment, wireless, imaging, and computer accessories, general and special purpose batteries, wire, cable, and connectivity products, and digital cameras, radio-controlled cars and other toys, satellite radios, and memory players. This company operates in two reportable sectors as follows: Company Operated Stores (83.7%) and other (16.3%).
In the last earnings release, RadioShack reported earnings of $0.12 per share, in line with the Capital IQ Consensus Estimate consensus of $0.12; revenues rose 6% year/year to $1.39 bln vs. the $1.35 bln consensus. RadioShack ended the fourth quarter with a cash balance of $591.7 million. Inventories stood at $744.4 million at the end of the quarter, up $20.7 million compared to the end of the 2010 fourth quarter, reflecting increased investment in mobility products. Comparable store sales for company-operated stores and Target Mobile centers increased 2.2 percent during the 2011 fourth quarter. The increase was primarily attributable to higher postpaid wireless sales of AT&T Wireless (T) and Verizon (VZ) Wireless products and services. Tablet devices also contributed to the increase in comparable store sales. These increases were partially offset by a decline in Sprint (S) and T-Mobile postpaid wireless sales, in addition to lower sales of digital cameras and digital music players.
RSH´s Current Net Profit Margin is 1.65%, currently lower 2010 margin of 4.61%. 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 RSH is 9.05%. Lower than the +20% standard I look for in Companies I invest and also lower than its 2010 average ROE of 21.80%.
In terms of income and revenue growth, RSH has a 3 year average revenue growth of 1.20% and a 3 year Net Income average growth of -27.49 %. Its Current Revenue Year over Year growth is 2.63%, higher than its Revenue growth of -0.24%.
The current Net income year over year growth is -64.97%, lower than its 2010 Net Income y/y growth of 0.54%. 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, RSH is trading at a Price/Book of 0.9x, a Price/Sales of 0.2x and a Price/Cash Flow of 3.1x in comparison to its Industry Averages of 4.1x Book, 1.0x Sales and 12.3x Cash Flow. It is essential to analyze the current valuation of RSH and check how is trading in relation to its peer group.
Regarding Valuation, RadioShack is currently trading at 11.2x the fiscal 2012 earnings estimate. This is at a discount to the S&P 500 average but a premium over the industry average. Regarded the fiscal 2013 earnings estimate, the stock is trading at 9.8x, again a discount to the S&P 500 average but a premium over the industry average. RadioShack is facing serious margin pressure, which is likely to continue during 2012.
Gradual decline of core electronics retail business may not be offset by wireless sales in short term. Growing competitive threat from several fronts may also derive in lower wireless sales going forward. RadioShack is taking a series of measures to enhance its wireless product segment, however, I believe it will take time and will affect the company´s overall earnings due to huge drainage of cash for marketing and promotion. No immediate catalyst for the company is observed.
RadioShack's debt/EBITDA is about 2.8 times, after redeeming $308 million of 7.375% notes in March 2011 and issuing $325 million of 6.750% senior notes due 2019 in May 2011. Since December 2011, RadioShack held about $592 million in cash, and around $671 million in debt. Thus it can be deduced that the firm is capable of paying its debt in the immediate future. Nevertheless, management has doubled its dividend to $0.50 per share (yielding an expected dividend payout ratio of about 0.5 in 2011). Given deteriorating business conditions in recent quarters, management canceled the $200 million share repurchase program that was announced in the fourth quarter, and I believe the dividend program could be in danger if the firm is not able to show signs of improving profitability in the coming quarters.
Vodafone Group Plc (VOD)
Vodafone Group Plc , headquartered in Newbury, United Kingdom, is the world's largest revenue generating wireless communications operator and the second largest (behind China Mobile) carrier based on subscriber count. The company offers a variety of products and services, including voice, messaging, data and fixed-line solutions and devices to assist customers in meeting their total This company operates independently and through affiliates, notably under the Vodafone brand name.
Vodafone is the leading wireless operator in the U.K. and has a great presence in Europe, the Middle East, Africa, Asia Pacific and the United States communications needs.
The fact that Vodafone is devoted to its shareholders in the form of increased dividends and share buybacks may have attracted Chou to invest. In spite of the loss of cash dividends of £0.5 billion from the sale of stakes in China Mobile and SFR, Vodafone reiterated its 7% per annum dividend per share growth policy every year until March 2013.
Thus, the company will pay an interim dividend of £0.035 per share, representing an increase of 7% from last year. Furthermore, Vodafone will pay a special and second interim dividend of £0.04 per share, which is a part of the Verizon Wireless dividend, amounting to £2 billion ($3.3 billion). In February, 2012, both the interim dividends were paid. Moreover, the proceeds generated from the divestment of minority interests would be used in paying down the company s debt. As of December 31, 2011, Vodafone reduced its net debt sequentially by 2.7%, after making spectrum payments of 1 billion, repurchasing share of 0.8 billion and proceeds from Polkomtel disposal of £0.8 billion. The divestment will also help Vodafone to reward shareholders in the form of share buybacks totaling £4 billion.
VOD´s Current Net Profit Margin is 17.37%, currently lower than its 2010 margin of 19.44%. 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 VOD is 8.96%. Lower than the +20% standard I look for in Companies I invest and also lower than its 2010 average ROE of 9.79%.
In terms of income and revenue growth, VOD has a 3 year average revenue growth of 8.95% and a 3 year Net Income average growth of 5.65 %. Its Current Revenue Year over Year growth is 3.18%, lower than its 2010 Revenue growth of 8.42%.
In terms of Valuation Ratios, VOD is trading at a Price/Book of 1.0x, a Price/Sales of 1.9x and a Price/Cash Flow of 7.8x 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 VOD and check how is trading in relation to its peer group.
Regarding Valuation, Vodafone is now trading at a discount to the peer group and the S&P 500 benchmark, based on forward earnings estimates.
I believe Vodafone´s new growth strategy and exiting minority holdings will endure its position relative to its peers. Although growing share gains from emerging markets, Vodafone´s profitability remains restricted due to persistent revenue erosion in Italy and Spain, challenging Indian operations, regulatory and competitive pressure, and reduced MTRs.
For many years, Vodafone took on debt to pay for acquisitions. Nevertheless, recently it has begun selling minority stakes to reduce its debt and buy back stock. The Company also generates large amounts of free cash flow, which should enable it to handle its interest payments. If it needed to, Vodafone could reduce its dividend to meet its interest payments, but I think such a need is highly unlikely.
Chunghwa Telecom Co. (CHT)
The largest telecom service provider in Taiwan, Chunghwa Telecom Co. Ltd. , offers services such as local calling, domestic and international long-distance call, wireless, and Internet access/data services. A large portion of Chunghwa's success over the past decade has been driven by its sustainable leadership in providing fixed-line services, including local call and long-distance call. Chunghwa listed its American Depository Shares on the New York Stock Exchange in July 2003.
Chunghwa reports in five revenue generating segments: Mobile Communications Segment (42.8%), Internet Segment (11.4%), Domestic Fixed-line Communications Segment (36.5%), International Fixed-line Communications Segment (7%) and Non-telecom Business Segment (2.3%).
Chunghwa, the dominant telecom operator in Taiwan, owns 80% of broadband market share, coupled with 96% of local fixed-line and 77% of long-distance fixed-line market share. The company also commands 34% of the Taiwanese wireless market share. A recent ruling of the Taiwanese government has changed the pricing right of a landline-to-mobile call in favor of the fixed-line operator from mobile operator. This shift in government policy boosted Chunghwa's revenue, which I think attracted Chou to invest. Moreover, management sets a yearly revenue target of approximately $7.6 billion by 2015, which will be an improvement of 16% from 2010.
Another vital point that interested Mr. Chou is that Chunghwa has experienced significant subscriber growth for its mobile Internet services due to a rising demand for 3G mobile broadband and smartphones in Taiwan. Mobile subscriber base at the end of 2011 was 10.072 million, up 4.1% year over year. Out of this, 3G wireless subscriber base was 6.047 million, comprising an impressive 60% of total mobile subscriber base. In the last quarter, Mobile VAS revenue was $130.8 million, up 30.7% year over year. Internet VAS revenue was $19.6 million, up 14.5% year over year. Mobile Internet subscriber base was 1.5 million. The company now awaits its Mobile Internet subscriber base to reach 2.2 million by the end of 2012.
CHT´s Current Net Profit Margin is 23.52%, currently higher than its 2009 margin of 22.06%. 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 CHT is 12.87%. Lower than the +20% standard I look for in Companies I invest and also higher than its 2009 average ROE of 11.64%.
In terms of Valuation Ratios, CHT is trading at a Price/Book of 2.0x, a Price/Sales of 3.5x and a Price/Cash Flow of 9.7x 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 CHT and check how is trading in relation to its peer group.
Chunghwa is now trading at 16.3x the fiscal 2012 earnings estimate. This is at a huge premium to both the S&P 500 average and the industry average. Regarded the fiscal 2013 earnings estimate, the stock is also trading at 16.3x, again a great premium to both the S&P 500 average and the industry average. Chunghwa maintains leadership position in the high-speed broadband market.
The company has a solid balance sheet and I am optimistic regarding Chunghwa´s future growth prospects as the company advances infrastructure for a converged IP-based next-generation network.
BP Plc (BP)
Headquartered in London, England, BP plc is one of the world's largest energy companies, offering its customers fuel for transportation, energy for heat and light, retail services and petrochemical products. It operates in three sectors: Exploration and Production, Refining and Marketing, and Other Businesses and Corporate. Of the company´s total 2010 revenue, Refining and Marketing, Exploration and Production, and Other Businesses and Corporate segments accounted for 89%, 10% and 1%, respectively.
The company is offloading its non-core upstream properties while building a portfolio with potentially stronger growth from a smaller base. BP is also divesting the Carson, California and Texas City, Texas refineries, which hold half of its U.S. capacity. The sale is expected by the first half of next year. It has retained three refineries with the greatest competitive advantage, which is expected to improve profits.
BP remains aiming at a string of upstream activities: I believe that its new strategy of active portfolio management, higher exploration activity with additional precautionary actions as well as refining and marketing repositioning will produce value for shareholders, which may called Chou attention. The company expects to bring 17 additional material upstream projects online starting this year through 2014. The cash margins per barrel on these projects are thought to be double the average of BP´s current portfolio, and in turn boost cash flow.
The company also detailed that half of the improvement in cash flow would be spent on growth capex, while the balance would be placed toward shareholder returns (dividends and/or share buybacks) and reducing debt to the lower half of its 10 20% target range.
As regards Valuation, I consider the gradual economic recovery after the GoM tragedy and the company´s concentration on upstream activity as favorable factors. Management remains positive on the company´s growth profile and looks forward to recovery, as well as consolidation in order to reduce operational risk or oil spill related assignments. The company's new strategy of active portfolio management, higher exploration activity, and refining and marketing repositioning is thought to create value for shareholders.
However, the British oil giant faces considerable risk from a decline in natural gas processing margins and a reduction in domestic oil and gas drilling and end market demand, which could lower the growth rate.
BP should produce sufficient operating cash flows to cover its capital investment and dividends, minus a large and prolonged decline in oil and gas prices. Free cash flow and the company's recent asset divestments should be enough for BP to fulfill its Macondo obligations and either pay off or refinance near-term debt maturities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.