Donald Yacktman is the President and Co-Chief Investment Officer of Yacktman Asset Management Co, as also Co-Manager of The Yacktman Funds. Before founding the firm in April, 1992, Yacktman served for ten years as the Senior Portfolio Manager of Selected Financial Services, Inc. During the same period, he also served for nine years as the Portfolio Manager of the Selected American Shares mutual fund and was selected as Portfolio Manager of The Year by Morningstar in 1991.
Yacktman joined Selected Financial Services, Inc. in 1982 from Stein Roe & Farnham, where he served as a portfolio manager since 1968. Furthermore, Yacktman holds a B.S. Magna Cum Laude in economics from The University of Utah and an MBA with distinction from Harvard University.
During the past 10 years, Yacktman Focused's 13 percent average annual return was the best showing among 500 comparable funds. At 12 percent, the Yacktman fund was No. 2. Yacktman, 70, uses the same method to assess stocks for both the Yacktman fund, launched in 1992, and the Focused fund, launched in 1997, concentrating money in fewer stocks.
The manager, based in Austin, looks for companies with strong, predictable cash flows. He purchases when these companies are trading for less than he estimates the cash flows are worth. Yacktman's approach hurt him in the late 1990s, when he refused to purchase technology stocks he considered overpriced. In 1999, the Focused fund lost 22 percent, compared with a gain of 21 percent for the Standard & Poor's 500-stock index.
When investing I consider myself as a business analyst, not a market or macroeconomic analyst. This means that I invest with the outlook of a businessperson. I look at the business holistically, analyzing all the quantitative and qualitative aspects of its management, financial position, and its purchase price. I believe that Donald Yacktman also shares this basic view. This is why I find interesting to research his holdings and see which of his picks I could research further.
Microsoft Corp (MSFT)
Redmond, Washington-based Microsoft Corporation is one of the major broad-based technology providers in the world today. Even though software is the most important revenue source, the company's offerings also include hardware and online services. Besides, Microsoft offers support services in the form of consultation, training and certification of system integrators and developers.
The company posts revenue under five separate segments, each of which targets a specific user group:
- Windows & Windows Live (Windows) - (30% of 2010 revenue)
- Microsoft Business Division (MBD) - (30%)
- Server and Tools - (24%)
- Entertainment and Devices Division (EDD) - (13%)
- The Online Services Division (OSD) - (4%)
The presentation of the Windows Phone 7 operating system was a turning point in Microsoft's mobile strategy. This OS was a complete separation from Microsoft's earlier operating systems.
Unlike earlier versions, Microsoft also designed the hardware running the OS, thereby eliminating many issues related to performance and user experience. Previous versions of WinMo were offered as a license, with a number of compatibility issues that were detrimental to user experience. The agreement with Nokia, wherein Nokia phones will be based on the Windows Phone 7 OS, has created a huge opportunity for Microsoft.
Nokia rules the emerging markets, particularly in Asia, although the company has been losing share in the recent past. Microsoft's superior OS may enable Nokia to recover market share. Furthermore, the latest iteration (Mango) could also help Nokia (and Microsoft) pick up some share in developed markets, where Apple, Research In Motion and Android-based phones have been gaining traction.
Microsoft stands to gain because Nokia will incur the hardware costs, leaving Microsoft to enjoy the higher margins typical of a software business. Meanwhile, the licensing is the result of a close relationship (rather than previous licensing of the OS to all and sundry), so compatibility issues can be minimized. Most recently, Microsoft presented the Windows Phone 7.5 (Mango), which further builds upon the platform. IDC believes the Windows Phone OS will grow into the second largest OS with a 20% global share of the smartphone market by 2015.
Microsoft's Bing search engine is gaining market share. Whereas most of the recent gains have been at the expense of Yahoo, there is reason to believe that the firm is also chipping away at Google in specific verticals, such as travel. Besides, share gains are not restricted to the U.S. alone; some solid Google markets, such as the U.K. are also showing a slight movement in preferences.
Strategic actions, like the agreement with HP to make Bing the default search engine on most of its PCs, have helped. Apple is growing into a bigger Google competitor, which could prove to be of strategic importance to Microsoft. For example, Apple renamed the search tab on its devices, switching from Google Search to Search, possibly indicating that it could offer choices here. There is excitement to see that while the fledgling search business keeps generating losses, these losses are on a gradual decline. Further improvements could, therefore, be seen soon.
MSFT's current net profit margin is 33.1%, currently higher that its 2010 margin of 30.02%. I like companies that have increased profit margins in comparison to other years. It is essential to know the reason why this has happened. Its current return on equity is 44.84% - higher than the +20% standard I look for in companies I invest and also higher than its 2010 average ROE of 43.76%.
In terms of income and revenue growth, MSFT has a 3-year average revenue growth of 5.0% and a 3-year net income average growth of 9.4%. Its current revenue year over year growth is 11.94%, higher than its 2010 revenue growth of 6.93%. The fact that revenue increased from last year shows me that the business is now performing well. The current net income year-over-year growth is 23.4%, lower than its 2010 average of 28.77%. 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, MSFT is trading at a Price/Book of 4.2x, a Price/Sales of 3.8x and a Price/Cash Flow of 9.4x in comparison to its Industry Averages of 4.1x Book, 4.0x Sales and 10.8x Cash Flow. It is essential to analyze the current valuation of MSFT and check how is trading in relation to its peer group.
Regarding Valuation, Microsoft shares are presently trading at 10.8x the trailing twelve months earnings compared to 43.6x for the peer group and 13.9x for the S&P 500. The important discount to the rival group is on account of investor concerns regarding Microsoft's share losses in mobile computing platforms. Still, while this is a near-term negative, I estimate Windows 8 will gain traction next year.
For the past five years, the shares have traded in the range of 8.6x to 23.2x trailing twelve months earnings. Thus, the stock is currently trading at the low end of the historical range.
The company is also trading at a significant discount based on forward estimates for fiscal 2012 and 2013. The present 75% discount to the peer group according to the 2012 estimate is somewhat greater than the historical average of 66%. So the shares are likely to trade up.
Nevertheless, the expected growth in earnings over the next five years 9.6%, trailing the 19.5% growth expected of the peer group. Microsoft has a strong balance sheet, with nearly $52 billion in cash and cash equivalents, and about $12 billion in debt. I believe the company will generate more than $20 billion in free cash flow annually, allowing it to comfortably honor debt, while continuing to invest in expanding its business.
News Corp Inc-A (NWSA)
Established in 1922 and based in New York, News Corporation , is a diversified global media company operating under six reporting segments: Cable Network Programming (which includes STAR Group Limited); Filmed Entertainment; Television; Direct Broadcast Satellite Television; Publishing; and Other.
- Cable Network Programming (24% of fiscal 2011 revenue)
- Filmed Entertainment (21%)
- Television (14%)
- Direct Broadcast Satellite Television (11%)
- Publishing segment (27%)
- Other division, consisting of IGN Entertainment Inc. and other internet properties (3%)
News Corporation's international presence has helped broaden its client base and product portfolio. It mainly operates in the United Kingdom, Continental Europe, Australia, Asia and Latin America, apart from the United States. I expect its strong international exposure to drive growth in the coming quarters.
The company has also taken a leap towards an online subscription-based model for general news content. News International, a subsidiary of News Corporation, has started charging readers for online content for The Times of London and Sunday Times of London starting from June 2010.
In spite of the economic upheaval and the phone hacking scandal that resulted in the closure of the publication of The News of the World, News Corporation's second-quarter 2012 earnings of $0.39 per share beat the Zacks Consensus Estimate of $0.34, and surged 34% from the year-ago quarter.
Total revenue also rose 2%. Sound performances across cable-television networks and film and television studios were the catalysts that drove the quarter's performance.
After advertising revenue was severely affected by the recent economic downturn, News Corporation was striving to add diverse revenue streams to hedge against economic cycles. The retransmission and affiliate fees from cable and satellite partners for the right to retransmit broadcast programming have been another source of income, which the company thinks would scale new heights in the next few years.
NWSA's current net profit margin is 8.2%, currently higher that its 2010 margin of 7.75%. I like companies that have increased profit margins in comparison to other years. It is essential to know the reason why this has happened. Its current return on equity is 10.03% - lower than the +20% standard I look for in companies I invest and also lower than its 2010 average ROE of 10.51%.
In terms of income and revenue growth, NWSA has a 3-year average revenue growth of 0.41% and a 3-year net income average growth of -20.19%. Its current revenue year-over-year growth is 1.91%, lower than its 2010 revenue growth of 7.74%. I do not like it 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 7.88%.
In terms of Valuation Ratios, NWSA is trading at a Price/Book of 1.8x, a Price/Sales of 1.5x and a Price/Cash Flow of 11.7x in comparison to its Industry Averages of 2.2x Book, 1.3x Sales and 9.1x Cash Flow. It is essential to analyze the current valuation of NWSA and check how is trading in relation to its peer group.
With regards to Valuation, News Corporation's present trailing 12-month earnings multiple is 14.3x, compared with 23.0x for the industry average and 14.3x for the S&P 500. During the last five years, News Corporation's shares have traded in a range of 5.1x to 21.4x trailing 12-month earnings. The stock is performing at a premium to the peer group, based on fiscal 2012 earnings estimates and at a discount based on fiscal 2013 earnings estimates.
News Corp. is in strong financial shape, particularly after withdrawing its bid for BSkyB. Since June 2011, the company had about $13.5 billion in debt and $12 billion in cash. I believe EBITDA will cover interest expense 8 times on average through fiscal 2016. The company has granted an issuer credit rating of A- to News Corp.
Pepsico Inc (PEP)
Based in Purchase, NY, PepsiCo, Inc. is a major global snack food company and the second largest soft drink company, providing food and beverage products in more than 200 countries. The firm is organized under four broad business segments: PepsiCo Americas Foods (PAF), including Frito-Lay North America (GM:FLNA), Quaker Foods North America (QFNA), Latin America Foods (LAF); PepsiCo Americas Beverages (PAB), PepsiCo Europe and PepsiCo Asia, Middle East and Africa (AMEA). The four business units consist of six reportable segments that include:
- FLNA (20% of sales in 2011)
- QFNA (4%)
- LAF (11%)
- PAB (34%)
- Europe (20%)
- AMEA (11%)
A solid new product pipeline, sound international sales, on-going manufacturing productivity efforts, and an active stock program are all positives for PepsiCo. Nationally, management is implementing multiple initiatives to counter the weak retail environment for carbonated soft drinks (CSDs). In addition to a sound new product initiative in diet carbonated beverages, non-carbonated beverages, and healthier snacks, the company utilizes new packaging to shift consumers to more profitable purchases. PepsiCo has also strong partnerships with bottlers, particularly Pepsi Bottling Group. To cater to the tastes of more health conscious consumers, Pepsi has launched a new mid calorie drink of Pepsi Next, which will be available at retail store from March 2012.
PepsiCo is witnessing solid growth in the developing and emerging markets by providing an array of innovative products, supported by strong commercial programs, which has led to double-digit volume growth across a number of markets. In the fourth quarter of 2011, Pepsi informed double-digit revenue growth in Asia, Middle East and Africa fueled by double-digit growth in China, India and the Middle East. Beverage volume also increased in the double digits in India, Saudi Arabia and Vietnam. Management also plans to invest up to $3 billion in Mexico in the next five years to encourage the growth of beverage brands along with Sabritas and Gamesa snacks. Besides, the company plans to invest $1 billion in the Russian market, including investments in a new beverage facility in Domodedovo and a snacks plant in Azov.
The company is also keen on expanding its business through purchases. With the purchase of WimmBill-Dann in September, Pepsi owns the largest food-and-beverage business in Russia, bringing the company closer to its strategic objective of building a $30 billion nutrition business by 2020.
In January 2012, PepsiCo created a strategic alliance with the agricultural cooperative for cranberries and grapefruit growers, known as Ocean Spray, whereby the two companies will collaborate to manufacture and distribute a portfolio of cranberry and blueberry-based beverages through its Latin America drinks division.
In November 2011, Pepsi purchased Brazilian cookie company Grupo Mabel, which brought brands like Mabel, Elbi's, Kelly and Skiny into Pepsi's portfolio of snacks. It has also plans to acquire Brazilian local cookie maker Marilan Alimentos. The acquisition will give Pepsi the number two position in the Brazilian biscuit market. In addition, the firm has diversified beyond fizzy caffeinated drinks.
The Frito-Lay division of salty snacks that includes Tostitos, Lay's chips and Doritos has been part of PepsiCo for many years. Gatorade sports drinks, Tropicana juices and Quaker oatmeal products also contribute to the top line. The company, along with GEUSA, a subsidiary of GEUPEC (Grupo Embotelladoras Unidas, S.A.B. de C.V.) and Empresas Polar, created a new joint venture, establishing a nationwide beverage company in Mexico.
Furthermore, the company rolled out several other profitable initiatives, including the Power of One program that leveraged the DSD (direct store delivery) system and brought more PepsiCo products to retailers' shelves. Frito-Lay s MAX It! productivity program for manufacturing and distribution operations increased snack-making capacity by 10% and keeps enhancing efficiency. Besides, the company plans to implement a three-year productivity program expected to generate over $500 million in incremental cost savings in 2012, $500 million in 2013, and an additional $500 million in 2014.
PEP's current net profit margin is 9.69%, currently lower that its 2010 margin of 10.93%. I do not like when companies have lower profit margins that the past. This could be a reason to analyze why that happened. Its current return on equity is 30.73% - higher than the +20% standard I look for in companies I invest, but lower than its 2010 average ROE of 33.27%.
In terms of income and revenue growth, PEP has a 3-year average revenue growth of 15.42% and a 3-year net income average growth of 7.81%. Its current revenue year-over-year growth is 14.98%, lower than its 2010 revenue growth of 33.79%. 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 1.95%, lower than its 2010 Net Income y/y growth of 6.29%. I do not like 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, PEP is trading at a Price/Book of 5.0x, a Price/Sales of 1.6x and a Price/Cash Flow of 11.7x in comparison to its Industry Averages of 4.6x Book, 2.1x Sales and 13.9x Cash Flow. It is essential to analyze the current valuation of PEP and check how is trading in relation to its peer group.
With respect to Valuation, PepsiCo shares presently trade at 15.2x our earnings estimate for 2012, a 16.9% discount to 18.3x, the industry average. On a price-to-book basis, the shares trade at 4.8x, a 29.7% premium to the industry average of 3.7x.
Even though the purchase of Pepsi's North American bottlers measurably increased the company's debt (to $26.8 billion in 2011 from $8 billion in 2009), I view the firm as financially steady, with the prospects of default remote. Even with its increased debt burden, I estimate the company's debt/EBITDA ratio will remain below 2, and EBITDA to cover interest expense by about 15 times on average for the next five years. At present, the company assigns Pepsi an issuer rating of AA-, implying very low default risk.
Procter & Gamble (PG)
The Procter & Gamble Company, based in Cincinnati, Ohio, is a major household products and cosmetics company, which manufactures and markets over 300 brand name products in more than 160 countries. The company is known for its impressive product development capabilities, marketing prowess, and a solid global distribution network. The company is divided into the following reportable segments:
- Beauty (24% of total revenues in fiscal 2011)
- Grooming (9%)
- Health Care (14%)
- Grooming (9%)
- Snacks and Pet Care (4%)
- Fabric Care and Home Care (30%)
- Baby Care and Family Care (19%)
Effective February 2011, the three Global Business Units (GBU) have been joined into two, i.e., Beauty.& Grooming and Household Care.
A leading growth driver for Procter & Gamble has been the constant expansion of its portfolio of brands, both through internal development and acquisition. Product innovation is strongly seconded by management and the company has had a strong tradition of not only introducing blockbuster new products, but also establishing entire new categories.
The product categories for a synthetic laundry detergent, disposable diapers, and fabric softener were not in existence until Procter & Gamble presented Tide, Pampers and Downy, respectively. Further over the last 18 months, the company amplified its portfolio to practically 40 new category/country combinations in the developing markets. Recent expansions have included Safeguard in Africa, Downy in Indonesia and Oral-B in Nigeria. Oral Care extension with Oral-B toothpaste in Colombia, Chile, Argentina and Peru are in the pipeline. These are expected to increase revenue in the next few months.
The rapid pace of product innovations, supported by strong marketing, has helped the company to continue to deliver solid results. The company has 24 power brands together producing more than $1 billion in revenues and a number of new brands are expected to achieve that sales level in the future. New innovations like Crest 3D White, Downy Unstopables and Fusion ProGlide have generated decent sales in the respective quarters.
Management is committed to improving the company's position in the faster growing developing markets. Management revealed that emerging markets accounted for 35% of the global sales of the company in fiscal 2011. It expects these developing markets to continue to contribute to growth, and believes that their contribution to global sales will reach about 37% of sales and about 45% of volume by the end of fiscal 2012.
In the second quarter, market share in Asia grew almost 2 points. In India, Pampers shipments increased 50% backed by a combination of market growth and the most important product upgrade since 2007. The launch of low cost Mach3 razors has also increased the market size in India for wet shaving systems by 15% in only one year. Procter & Gamble generates solid free cash flow annually.
During fiscal 2011, the company produced over $9.9 billion in free cash flow, reflecting 84% cash flow productivity. The cash flow gives management the opportunity to invest in product innovations, acquisitions, and brand development. It has a long-term goal of generating a free cash flow productivity of 90% or greater.
PG's current net profit margin is 14.01%, currently lower that its 2010 margin of 15.86%. I do not like when companies have lower profit margins than in the past. This could be a reason to analyze why that happened. Its current return on equity is 18.32% - lower than the +20% standard I look for in companies I invest and also lower than its 2010 average ROE of 20.59%.
In terms of income and revenue growth, PG has a 3-year average revenue growth of 0.33% and a 3-year net income average growth of -0.77%. Its current revenue year-over-year growth is 4.59%, higher than its 2010 revenue growth of 2.93%. The fact that revenue increased from last year shows that the business is performing well. The current Net Income year-over-year growth is -7.37%, lower than its 2010 Net Income y/y growth of -5.21%. I do not like 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, PG is trading at a Price/Book of 2.9x, a Price/Sales of 2.4x and a Price/Cash Flow of 15.0x in comparison to its Industry Averages of 4.0x Book, 1.9x Sales and 14.2x Cash Flow. It is essential to analyze the current valuation of PG and check how is trading in relation to its peer group.
In relation to Valuation, Procter & Gamble shares presently trade at 15.5x our earnings estimate for 2012, a 1.9% discount from the industry average of 15.8x. On a price-to-book basis, the shares trade at 2.8x, an 81.8% discount from the industry average of 14.8x. The valuation on a price-to-book basis looks even, considering a trailing 12-month ROE of 18.1%, which is way behind of the industry average of 162.4%.
P&G is a prudent firm with a strong balance sheet. The company has a Morningstar credit rating of AA, generated $13 billion in cash from operations in 2011, and has an interest coverage ratio of more than 19 times earnings before interest and taxes.
C. R. Bard, Inc. (BCR)
C. R. Bard Inc. , based in Murray Hill, New Jersey, is engaged in the design, manufacture, packaging, distribution, and marketing of medical, surgical, diagnostic, and patient care devices worldwide. The company was publicly-traded in 1963 and has approximately 11,000 employees. It serves hospitals, physicians, and clinics in the U.S., Europe, and Japan.
The Vascular division contributed 29% of C.R. Bard's net sales in fiscal 2011, followed by Oncology (27%), Urology (25%), Surgical Specialties (16%) and Other (3%).
The company's resource depth and focused innovation are its leasing competitive advantages. C.R. Bard has a reasonably solid pipeline with a substantial number of projects in each business segment. Several new product launches (including pelvic/hernia repair products, ablation system for atrial fibrillation and PICC/ports line extensions) are expected to back growth moving forward and help the company reach its sales target.
The company has introduced its next-generation SorbaFix and PermaFix hernia fixation devices. Besides, it has introduced the Ventralex ST umbilical hernia repair product and the Ventrio ST ventral hernia repair system. In addition, in hernia fixation, C. R. Bard has commenced full commercial release of its Echo PS mesh positioning system. Moreover, it has launched the Meridian vena cava filter in the U.S.
In Urology, the company has rolled out its Alyte pelvic floor repair mesh (with sacrosuspension and sacrocolpopexy indications). In general, the company launched 51 new products in 2011. As regards pipeline products, C. R. Bard plans to launch its next-generation Denale filter in the U.S. in second-half 2013. Furthermore, it has launched the NuVia family of single-incision pelvic floor repair kits in Europe and is awaiting approval in the U.S. The company expects to present its Sherlock 3CG tip confirmation technology with an expanded label in second-half 2012.
C.R. Bard has begun a four-point growth strategy. It includes sales force expansion, complementary product acquisitions, increased internal product development and cost management. The firm continues to successfully execute this strategy with sustained R&D investment producing new high-margin products, enhanced by key acquisitions and divestitures and a larger sales force. With respect to this, we view that the acquisition of Medivance bodes well with C.R. Bard's business model and will increase its offerings in the critical care settings (including myocardial infarction, traumatic brain injury and stroke).
Besides, C.R. Bard bought medical devices maker ClearStream Technologies last year. The company expects these deals to be accretive to its earnings in 2012. Lately, C.R. Bard scooped up Lutonix Inc. The purchase will enable it to expand into the large and lucrative market for drug-coated balloons. Drug-coated balloons have been gaining attention recently, as surgeons look for effective means to treat diseased arteries without having to leave a permanent implant. The global peripheral vascular market for drug-coated balloons is forecast to hit roughly $1 billion annually over the next ten years. At present, there are no approved drug-coated balloons available for use in the U.S.
BCR's current net profit margin is 11.32%, currently lower that its 2010 margin of 18.72%. I do not like it when companies have lower profit margins that the past. This could be a reason to analyze why that happened. Its current return on equity is 19.22% - lower than the +20% standard I look for in companies I invest and also lower than its 2010 average ROE of 26.62%.
In terms of income and revenue growth, BCR has a 3-year average revenue growth of 5.71% and a 3-year net income average growth of -7.65%. Its current revenue year-over-year growth is 6.48%, lower than its 2010 revenue growth of 7.31%. I do not like it 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 -35.59%, lower than its 2010 Net Income y/y growth of 10.67%. 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, C.R. Bard is trading at a Price/Book of 4.6x, a Price/Sales of 2.9x and a Price/Cash Flow of 11.7x in comparison to its Industry Averages of 2.8x Book, 2.5x Sales and 14.3x Cash Flow. It is essential to analyze the current valuation of the company and check how is trading in relation to its peer group.
With regards to Valuation, C.R. Bard's present trailing 12-month earnings multiple is 14.7x, in comparison to the 35.6x average for the peer group and 13.9x for the S&P 500. During the last five years, the firm's shares have traded in a range of 13.4x to 25.2x trailing 12-month earnings. The stock is trading at a discount to the rival group, according to forward earnings estimates. I expect new product flow and an expanded sales force to bring about organic revenues growth and help the company to meet its sales goal.
The company is also making prudent use of cash in the form of purchases and share repurchases. The purchase of SenoRx has expanded its product portfolio beyond its existing product range meant for ultrasound imaging. Still, the company takes a cautious stance as it accounts for increased competition, as well as regulatory and pricing headwinds. Besides, a soft U.S. market may continue to weigh on the company.
C.R. Bard is still in strong financial health. Since September 2011, the company held $767 million in cash. The company issued $750 million in notes in December 2010, bringing its debt total to $900 million. I believe it can use free cash flow to pay off its debt when due. In the meantime, the company will use its cash to fund a repurchase program and dividends.