Ray Dalio was born in 1949 in Jackson Heights, Queens, New York, United States. He is an American businessman and creator of Bridgewater Associates. Ray Dalio acquired an MBA from Harvard Business School in 1973 and in that same year became Director of Commodities at Dominick & Dominick LLC. After spending a year there, he traded futures at the brokerage firm of Shearson Hayden Stone, where his role involved assisting businesses hedge their market risk by using futures. One year after that he established Bridgewater Associates. We know the rest of the story.
I think it is very important to buy Companies that sell products or services that needed or desired, have no close substitute and are not regulated. I investigated Ray Dalio portfolio and discovered that he also shares those business tenets. I will depict his holdings and see which of his picks I could research further. I got Dalio's portfolio from whalewisdom.com.
Annaly Cap Mgmt (NLY)
Annaly Capital Management is the owner, manager, and financier of a portfolio of real estate related investment securities, including mortgage pass-through certificates, collateralized mortgage obligations (or CMOs) and agency callable debentures. Besides, it manages other securities representing interests in or obligations backed by pools of mortgage loans. The firm wholly-owned subsidiaries offer diversified real estate, asset management and other financial services. The company's principal business goal is to produce net income for distribution to investors from its Investment Securities and from dividends it receives from its subsidiaries.
On May 2, NLY reported Q1 (MAR) earnings of $0.54 per share, $0.06 better than the Capital IQ Consensus Estimate of $0.48. The Company also reported total interest income of $854 mln. Management said:
"Risks continue to evolve in the market, with an emphasis on sovereign weakness, slow economic growth, central bank activism and the implications of proposed regulatory reforms. Against this background of potential challenges to global financial stability, we continue to see the benefits of being conservative in our business. It enables us to maneuver through these markets to deliver attractive risk-adjusted returns to shareholders, protect our portfolio and maintain our flexibility to take advantage of investment opportunities as they arise."
What called my attention is that FBR Capital issued a quite bearish research after NLY reported earnings. They said that that 1Q12 results that did not seem as rosy as the market may have perceived. While tangible book value increased slightly, "core" EPS of $0.44, excluding gains on sales of MBS, came in well below the current quarterly dividend payout of $0.55. FBR Capital continues to believe that Annaly's monster portfolio ($120B) is less attractive than that of smaller, more nimble peers. In their thesis they also believe that Annaly's portfolio spread will continue to be under pressure in 2012, and that the dividend is in danger.
I like NLY because it trades low risk, government-sponsored guarantees. Also, in this low interest rate environment, mortgage REIT structures are the winners. But the strongest point is NLY's proven management. Mark Farrell (CEO) has managed the subprime mess with relative ease.
What is very attractive about NLY story is its dividend yield. The Company has paid an average of over 13% in the last years and it seems to continue in the future as NLY has $4.6b in cash and a conservative balance sheet.
Donnelley (RRD)
Established in 1864 and based in Chicago, Illinois, R.R. Donnelley & Sons Company is the largest printing company in the U.S. and globally, providing various worldwide printing services to a large variety of businesses across the globe. The firm also plays an active role in offering a variety of related services like logistics and distribution for print customers and mailers.
R.R. Donnelley is busily engaged in making strategic purchases to improve its geographical presence, increase the global outsourcing business and enlarge product and service offerings. Since 2007 up to now, the firm has purchased 10 companies. In 2009, it purchased PROSA, a Web printing firm and Prospectus Central, an e-delivery firm. In December 2010, Donnelley purchased San Francisco-based Nimblefish Technologies, a provider of multi-channel marketing services to leading retail, technology, telecom and hospitality companies. In November 2010, the firm purchased Bowne & Co., a provider of digital one-to-one printing services for health care, transactional communications, financial services, marketing communications and other applications. The purchase is estimated to be accretive to the Company's earnings in the first full year after the close of the transaction. Bowne has transactions in North America, Latin America, Europe and Asia. The firm's focus on purchase will enlarge and improve its offering to its current customers and provide an opportunity for its products to reach new clients. I remain positive on the purchase of Bowne and think the firm's continued focus on purchases will spur its already leading market position and drive long-term growth.
R.R. Donnelley is a major provider of printing solutions and has managed to gain market share thanks to its comprehensive global manufacturing and service platforms, scale and geographic presence, its solid relationship with blue-chip customers and highly professional sales staff. In an effort to enlarge its business, the firm is closing new agreements and looking for new alliances and partners for its various products and services.
On February, Barclays initiated select Publishing and Printing and Business Development Companies names. Firm says publishing and printing companies show stable cash flow profiles and RR Donnelley is their top pick in the space.
In terms of Valuation Ratios, RRD is trading at a Price/Book of 2.3x, a Price/Sales of 0.2x and a Price/Cash Flow of 2.7x in comparison to its Industry Averages of 2.7x Book, 1.5x Sales and 10.7x Cash Flow. It is essential to analyze the current valuation of RRD and check how is trading in relation to its peer group.
R.R. Donnelley is in unsteady financial health, with a net debt/EBITDA of aprox. 3 times. The Company is one of the better operators in the commercial printing sector, but I do not like its recent aggressive capital allocation decisions and I'm uncomfortable with its $3.5 billion of net debt (in addition to the $500 million pension shortfall) due to the competitive and cyclical nature of the industry. The debt maturities are spread out over a long period, but I believe a multiyear recession could force Donnelley to issue equity or tap credit markets at an inconvenient time. EBIT covers interest expense aproximately 2.1 times, and the five-year Cash Flow Cushion is 1.94. I presently grant R.R. Donnelley a BB credit rating, which implies moderate default risk.
Bce Inc (BCE)
BCE Inc. is the biggest communications service provider in Canada and it serves as the holding firm for Bell Canada. The company provides local and long-distance phone service to approximately 70% of the Canadian population, primarily in Ontario and Quebec.
The Company's 100% subsidiary Bell Canada operates the firm's wireline (Bell Wireline) and wireless (Bell Wireless) businesses, Bell Media and the satellite TV operation, known as ExpressVu. Bell Canada is the major local exchange carrier in Ontario and Quebec.
The firm offers wireless, data communications, telephone, high-speed Internet, direct-to-home satellite television and voice over IP services. It also provides integrated information and communications technology services to businesses and governments, and it is the Virtual Chief Information Officer to small and medium businesses.
BCE Inc. informs operating results in four segments, that is to say, Bell Wireline, Bell Wireless, Bell Media and Bell Aliant. About 85% of the firm's 2010 revenue was produced by Bell Canada, and the remaining sales were derived from Bell Aliant.
The firm's wireless segment is estimated to grow with important investments in network coverage, upgraded broadband services, customer retention as well as accelerating smartphones activations and data usage. In 2009, BCE launched its high-speed packet access plus (HSPA+) technology wireless network that provides downlink speed of up to 21 megabits per second (Mbps) and already attends 96% of the Canadian population. BCE continues to extend the updated version of HSPA+ Dual Cell technology to more Canadians, providing speeds to a maximum of 42 Mbps. Since October, the network is available to 70% of the Canadian community. Besides, BCE launched 4G Long-Term Evolution (LTE) wireless networks, which provides download speeds of up to 115 Mbps and upload speeds of up to 70 Mbps, in some Canadian markets in September. The firm will be covering more markets in urban areas by the end of this year and in the next. The rural and remote Canada deployments are at the mercy of the 700 MHz wireless spectrum, which is estimated to be auctioned in 2012 or 2013. As regards smartphones, BCE presented two LTE superphones - the HTC Raider 4G LTE and LG Optimus LTE in November. These superphones function on LTE networks where it is applicable, oppositely they use HSPA+ network.
Video operation is quickly growing among Canadians who are switching to mobile, online and digital TV platforms. BCE completed its $3.2 billion purchase of CTV Inc. in April 2011, a full quarter ahead of the original schedule, and began a new business unit, Bell Media. The purchase hastens Bell's video growth for mobile, online services and satellite TV system with an aggressive cost structure and improves FTTH network deployment in largest urban areas. CTV is poised to profit from the strengthening TV and digital advertising market during the year and will be about C$0.07 accretive to gains in the nine-month period (April to December 2011).
BCE's current net profit margin is 11.39%, currently lower that its 2010 margin of 11.98%. Its current return on equity is 17.70%. Lower than the +20% standard I look for in Companies I invest but higher than its 2010 average ROE of 15.12%.
In terms of income and revenue growth, BCE has a 3-year average revenue growth of 3.35%. Its current revenue year over year growth is 7.90%, higher than its 2010 revenue growth of 1.88%. The fact that revenue increased from last year shows me that the business is performing well. The current Net Income year over year growth is 6.61%, lower than its 2010 Net Income y/y growth of 26.29%.
In terms of Valuation Ratios, BCE is trading at a Price/Book of 2.9x, a Price/Sales of 1.6x and a Price/Cash Flow of 6.3x in comparison to its Industry Averages of 1.6x Book, 1.1x Sales and 4.2x Cash Flow. It is essential to analyze the current valuation of BCE and check how is trading in relation to its peer group.
During the last five years, the firm's shares have traded in a range of 8.2-21.6x trailing 12-month gains. The stock is trading at a discount to the rival group and at a premium with the S&P 500, according to 2012 earnings valuations.
I believe it continues to profit from the purchase of CTV and the acquisition of the new Bell Media unit that will result in upward earnings going forward. The firm's best-in-class HSPA+ network, steady growth in smartphone adoption and an expanding LTE wireless network are estimated to boost wireless growth prospects. On the wireline front, BCE keeps profiting from improving NAS erosion, high-speed FTTN and FTTH networks as well as increasing traction in both Fibe Internet and Fibe TV services. Nevertheless, BCE operates in an environment full of new wireless carriers. The wireline business is still questioned by competition from cable companies and other alternative service providers.
BCE produces important amounts of free cash flow, which it is using together with monetizing underestimated assets to cancel debt. Bell has nearly CAD 175 million in cash equivalents on the books and has consistently increased its dividend during the past few years. In 2011, BCE raised its dividend 10.2% (on a per common share basis), and its payout ratio is currently on the low end of its policy of 65%-75% of gains.
Leggett & Platt (LEG)
Based in Carthage, Missouri, Leggett and Platt Inc. is a worldwide manufacturer that envisions, designs, and manufactures a wide variety of engineered components and products found in many homes, offices, retail stores, and automobiles. The firm's most significant product lines include: components for residential furniture and bedding, retail store fixtures and point of purchase displays, and components for office furniture. Besides, Leggett produces non-automotive aluminum die castings, drawn wire steel, automotive seat and lumbar systems, and bedding industry machinery. The firm has more than 140 production facilities established in 18 countries.
Recently LEG missed earnings. They reported Reported Q1 earnings of $0.30 per share,$0.03 worse than the Capital IQ Consensus Estimate of $0.33; revenues rose 5.7% year/year to $947 mln vs the $910.12 mln consensus. The Company issued in line guidance for FY12, forecasting EPS of $1.25-1.45 vs. $1.31 Capital IQ Consensus Estimate; Management also gave forward revenue numbers with FY12 revs of $3.65-3.85 bln vs. $3.73 bln Capital IQ Consensus Estimate.
LEG's current net profit margin is 4.22%, currently lower that its 2010 margin of 5.26%. 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 10.95%. Lower than the +20% standard I look for in Companies I invest and also lower than its 2010 average ROE of 11.55%.
In terms of income and revenue growth, LEG has a 3-year average revenue growth of -3.74%. Its current revenue year over year growth is 8.24%, lower than its 2010 revenue growth of 9.95%. 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 -13.19%, lower than its 2010 Net Income y/y growth of 57.96%. 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, LEG is trading at a Price/Book of 2.5x, a Price/Sales of 0.9x and a Price/Cash Flow of 10.2x in comparison to its Industry Averages of 2.4x Book, 0.9x Sales and 13.6x Cash Flow. It is essential to analyze the current valuation of LEG and check how is trading in relation to its peer group.
Taking into account Valuation, Leggett and Platt's present trailing 12-month earnings multiple is 19.4x in comparison with the 26.9x industry average and 14.0x for the S&P 500. During the last five years, its shares have traded in the range of 13.4x to 33.0x trailing 12-month gains. The stock is trading at a premium to its rival group according to forward earnings estimates.
Block H & R (HRB)
H&R Block Inc. is a major provider of tax preparation services, hiring100,000 tax professionals and serving more than 550 million clients. Through its subsidiaries, the firm offers tax, retail banking, accounting and business consulting services and products. Brothers Henry W. Bloch and Richard A. Bloch established the firm in 1955. The firm was organized as a corporation in 1955 under the laws of the State of Missouri and is located in Kansas City, Missouri. It provides tax services through retail tax offices in the U.S., Canada and Australia, and its H&R Block At Home software and online solutions. At present, the firm has two reportable segments: the Tax Services segment and the Corporate segment.
Recently the Company announced a record total of US clients. HRB reported that total U.S. tax returns prepared fiscal year-to-date through April 18 reached a record 22.2 mln, up 4.5% compared to the prior year period. The company reported client growth for the second consecutive year in both its U.S. retail and digital channels. Total digital tax returns prepared increased 12.3% fiscal-year-to-date through April 18, led by online(1) unit growth of more than 20%. Total U.S. retail returns prepared grew 1.0%, while aggregate net U.S. retail tax preparation fees grew 1.1% for the comparable period.
H&R Block is still centered to increase new client growth. The firm concluded on five drivers that would assist it to grow the amount of new clients to serve in the forthcoming tax season. The five client drivers comprise changes to Emerald Advance program, a new free EZ tax professional sampling program, early-season bank settlement product offerings, a new marketing campaign, and competitor conversion program. These initiatives aided the firm to gain market share in digital space. In 2011, total returns prepared grew 6% over 2010, whereas in the U.S. it grew 6.5%, record growth since 2001. The firm's client base in digital grew by 800,000, with online growth of about 29% while in retail Tax Services clients increased by more than 500,000.
HRB's current net profit margin is 10.76%, currently lower that its 2010 margin of 12.37%. Its current return on equity is 28.10%. Higher than the +20% standard I look for in Companies I invest but lower than its 2010 average ROE of 33.67%.
In terms of income and revenue growth, HRB has a 3-year average revenue growth of -2.62%. Its current revenue year over year growth is -2.58%, higher than its 2010 revenue growth of -5.12%. The current Net Income year over year growth is -15.26%, lower than its 2010 Net Income y/y growth of -1.32%.
In terms of Valuation Ratios, HRB is trading at a Price/Book of 6.2x, a Price/Sales of 1.4x and a Price/Cash Flow of 8.1x in comparison to its Industry Averages of 3.5x Book, 1.3x Sales and 9.1x Cash Flow. It is essential to analyze the current valuation of HRB and check how is trading in relation to its peer group.
With regards to Valuation, the shares of H&R Block presently trade at 11.5x average 2012 earnings estimate, a 14% deduction to the industry average of 13.4x. On a price-to-book basis, the shares trade at 6.0x, which is a 6.2% deduction to the industry average of 6.4x. The valuation on a price-to-book basis seems stretched
Debt/EBITDA (gains before interest, taxes, depreciation, and amortization) was 1.0 for fiscal 2010, which I believe to be a malleable level for such a steady business.
Additional stocks that Dalio likes
Dalio added to his position in Microsoft (MSFT), Hewlett Packard (HPQ) and Verizon (VZ).
I think MSFT offer a reasonable margin of safety considering it has a Forward P/E of just 9.8x and a P/BV of 3.65x, in the lower end of its multiple historic range. The Company has a superb balance sheet, with 6.92 in cash per share.
I do not like HPQ. The Company is losing market share and it has several problems in their business structure. The stock could trade with cheap multiples but the business does not offer future growth. I remain on the sidelines as I would like to get more comfortable with Company's ability to accelerate business over the next few quarters.
Regarding VZ, the Company recently delivered double-digit earnings growth and strong cash flow this quarter. I saw that VZ built momentum coming out of 2011, and its results show that the Company continues to execute in the key growth areas of its business. Verizon Wireless produced both great growth and great margins, and also produced another strong quarter of FiOS growth. I am confident these solid results will give VZ's bulls reasons to buy the stock at current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
