David Alan Tepper is the founder of Appaloosa Management, which is a $3 billion hedge fund investment firm based in Chatham, N.J., just west of New York City. David Tepper started investing at a very young age. He initially became interested in the stock market watching his father trade stocks in his hometown of Pittsburgh. Today, as founder of Appaloosa Management, Tepper has earned an international reputation for producing some of the highest returns amongst fund managers on Wall Street. He looks for value and distressed sectors that could offer high potential in the future. I think it is essential to analyze stocks that Tepper researched and bought into his fund. I use whalewisdom.com to analyze Tepper's holdings.
Ford Motor Company (F)
Ford Motor Company engages in the development, manufacture, distribution and service of vehicles and related parts worldwide. The company operates through two sectors, Automotive and Financial Services. The automotive sector offers vehicles primarily under the Ford and Lincoln brand names. This sector markets cars, trucks, and parts through retail dealers in North America, and through distributors and dealers outside North America. The Financial Services sector offers various automotive financing products to and through automotive dealers.
On April 27, Ford reported earnings that beat expectations. Ford's reported Q1 [MAR] pre-tax operating profit of $0.39 per share, 3 cents better than the Capital IQ Consensus Estimate of $0.36. One of the weakest points is the lower wholesale volumes reported (-45K units to ~1.4 mln), reflecting in part weaker economic conditions in Europe, contributed to the decline from a year ago. Ford generated positive Automotive operating-related cash flow of $900 million in the first quarter, the eighth consecutive quarter of positive performance. As part of the company's long-term strategy to de-risk its global funded pension plans, Ford announced that it will offer to about 90,000 eligible U.S. salaried retirees and U.S. salaried former employees the option to receive a voluntary lump-sum pension payment.Overall, Ford remains on track with its financial metrics for 2012. Management announced that it expects operating margin to improve from 2011.
Recently, both Tepper and Leon Cooperman initiated positions in Ford. They see that is trading at just 5.92x Forward P/E and 0.29x Sales. Multiples too cheap to ignore.
I think the stock will continue trading with no clear trend. While the Company has a strong management and its business areas in the US are recovering well, they are heavily exposed to Europe. The stock could be cheap but if European fears persist, Ford could keep trading in the $12-10 range for the medium term.
International Paper Co (IP)
International Paper Company (IP) is a global paper and packaging company based in Memphis, Tennessee, with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its businesses through four segments: The Industrial Packaging segment (approximately 39% of total revenue in the first nine months of 2011), The Distribution Segment or Xped (25%), The Printing Papers segment (23%) and The Consumer Packaging segment (13%).
I like IP because the Company continues with a well-planned growth by acquisitions strategy. I like the acquisition of Texas-based Temple-Inland. The takeover is International Paper´s largest since its August 2008 acquisition of Weyerhaeuser Co.'s corrugated-packaging business for $6 billion. The combination increases International Paper's share of the North American corrugated-packaging market to about 40% from the current 27%. The acquisition is expected to augment the bottom line in the very first year and yield synergies of $300 million annually within two years of closing, derived largely from operations, freight, logistics, selling expense and overheads. Recently, the company completed the acquisition of a majority stake in leading Indian paper company Andhra Pradesh Paper Mills Limited. This trade made International Paper the first global paper and packaging company to have an important presence in India's growing paper and packaging industries.
I like IP's exposure to emerging markets. The International Paper llim joint venture in Russia has been growing rapidly; This company's initial investment in Ilim was $600 million. It has also received $234 million in dividends, recovering about 39% of the investment. The Ilim joint venture s working on the two major projects which should be complete by 2012 end. A pulp mill is being modernized, upgraded and broadened in Bratsk, which will be the closest and lowest-delivered-cost softwood pulp mill to China. A new paper machine at Koriatza mill in Russia will be added as the Russian market is growing at about 6% a year. These represent a combined $1 billion of investment and International Paper is expecting over 20% returns. In China, the International Paper-Sun joint venture is setting up a new consumer paperboard line that should come online late in 2012. These initiatives will contribute to both earnings and cash flow greatly going forward.
IP´s Current Net Profit Margin is 5.15%, currently higher than its 2010 margin of 2.56%. 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 IP is 19.93%. Lower than the +20% standard I look for in companies I invest in, but higher than its 2010 average ROE of 10.02%.
As regards Valuation, shares of International Paper are currently trading at 9.3x consensus analysts 2012 EPS estimate of $3.43. The company's trailing annual earnings multiple is 10.1, compared with the 41.5 average for the peer group. International Paper´s shares have traded in a range of 2.8x to 31.5x trailing annual earnings over the last five years. The stock is also trading at a discount to the peer group based on forward earnings estimates.
While International Paper is not likely to run into any financial health issues in the next few years, a protracted and steep secular decline in IP's core markets coupled with a large debt maturity in 2018 could trigger some concerns later this decade. During 2011, IP's long-term debt increased to $9.2 billion as the company geared up to acquire Temple-Inland. In addition, the firm's pension plans ended 2011 with a deficit of $2.4 billion.
Masco Corporation (MAS)
Masco Corporation , based in Taylor, Michigan, produces, sells, and installs home improvement and building products. About 75%-80% of the company´s sales are generated from operations in North America, primarily in the U.S. International operations are located principally in Belgium, China, Denmark, Germany, the Netherlands, and the U.K. The company´s primary two customers are The Home Depot Inc. and Lowe's Companies Inc. Masco operates five business sectors: Plumbing Products (39%), Cabinets and Related Products (16%), Installation and Other Services (15%), Decorative Architectural Products (23%), and Other Specialty Products (7%).
Recently Masco reported earnings that beat expectations. MAS reported Q1 earnings of $0.05 per share, excluding items,$0.05 better than the Capital IQ Consensus Estimate of ($0.00). It was a good release, since revenues rose 7.0% year/year to $1.88 bln vs the $1.83 bln consensus. Management explained:
Our first quarter results improved compared to last year and we remain cautiously optimistic for the balance of 2012. We are making progress on our strategic initiatives, which include leveraging our brands, reducing our costs, improving our Installation and Cabinet segments and strengthening our balance sheet. Our installation and cabinet businesses improved their performance by over $25 million in operating profit, in aggregate compared to first quarter 2011. Although the cabinetry business continues to be challenged by aggressive promotional activity and consumers' deferral of big ticket purchases, both businesses are benefiting from improved residential new construction and total cost productivity. We continue to believe we will achieve significant improvement in both cabinetry and installation in 2012. Although weak Euro Zone macro-economic conditions remain a concern for 2012, North American housing activity appears to be improving, and we continue to believe we are positioned to outperform the industry recovery.
Recently RBS Capital Markets upgraded Masco to Sector Perform from Underperform and raised their target to $16 from $15 based on their incrementally optimistic outlook for the housing market and strong trends in repair and remodel spending.
In terms of Valuation Ratios, MAS is trading at a Price/Book of 9.2x, a Price/Sales of 0.6x and a Price/Cash Flow of 19.8x in comparison to its Industry Averages of 1.9x Book, 0.9x Sales and 18.1x Cash Flow. It is essential to analyze the current valuation of MAS and check how is trading in relation to its peer group.
Shares of Masco Corporation are currently trading at 26.2x the 2012 average analyst EPS estimate of $0.35. The stock is also trading at a meaningful premium to the peer group, based on forward earnings estimates. The current P/E is at a 103% premium to the peer group for 2012. The slowdown in new home construction, high cost of energy, growing unemployment and declining consumer confidence, should hamper Masco´s financial results in the upcoming quarters. However, certain company-specific initiatives including successful mergers, restructuring actions and efficient cost management may produce favorable results. If the US housing market keeps its rebound, MAS could be an interesting play.
It is expected Masco's financial health closely track that of the housing market. Yet, management has taken action to drive back disaster. Since housing peaked in 2006, the firm has revamped its manufacturing operations and reduced selling, general, and administrative expense significantly. The company has continued to generate decent free cash flow in spite of a dramatic fall in sales. With the housing market currently struggling through a drawn out bottoming process, Masco has returned to roughly break-even profitability, excluding impairments and rationalization charges.
Valero Energy (VLO)
Valero Energy Corporation is the largest independent refiner and marketer of petroleum products in the U.S., with a refining capacity of 3.0 million barrels per day in its 16 refineries placed throughout the U.S., Canada and the Caribbean. Valero is also a leading ethanol producer with 10 ethanol plants in the Midwest that have a combined capacity of 1.2 billion gallons per year. Valero organizes its business into three reportable sectors: Refining, Ethanol and Retail. Valero s Refining operations contributed about 77% of its 2010 operating income, with Retail and Ethanol businesses accounting for 14% and 9%, respectively.
With $2.8 billion in cash at the end of the third quarter, I think the company certainly has the financial flexibility to make several acquisitions, thus expanding its refining footprint, which is why I think Tepper decided to invest. Its recently acquired Pembroke refinery is one of the largest and most complex facilities in Western Europe, with a crude capacity of 220 thousand barrels per day. Despite the refinery´s light, sweet crude slate does not essentially fit the heavier, sour crude diet that characterizes Valero´s U.S. refining complex, Pembroke benefits from a sourcing advantage in the North Sea, as well as the ability to run high acid crudes.
I also attracted by the fact that The Pembroke refinery acquisition and more recently the Meraux Refinery purchase provide operational synergy with the company´s current objective of increasing footprint along the Gulf Coast. The attractive acquisitions and operational improvements made by the company positions Valero favorably to grow earnings and cash flow in the coming years.
VLO´s Current Net Profit Margin is 1.66%, currently higher than its 2010 margin of 0.39%. 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 VLO is 13.29%. Lower than the +20% standard I look for in companies I invest in, but also higher than its 2010 average ROE of 2.18%.
Valero´s financial position seems to be stable, with almost $3 billion in cash and a reasonable net debt/capital ratio of 20% at the end of the third quarter. Cash from operations should be sufficient to cover recently increased capital-spending plans. If conditions worsen, Valero may need to cut back its capital budget or raise additional funds.
Microsoft Corporation (MSFT)
Microsoft Corporation, headquartered in Redmond, Washington, is one of the largest broad-based technology suppliers in the world today. Although software is the most important revenue source, the company's offerings also include hardware and online services. In addition, Microsoft offers support services in the form of consultation, training and certification of system integrators and developers. The company reports revenue in five separate segments, each of which targets a specific user group: Windows & Windows Live (30%), Microsoft Business Division (30%), Server and Tools (24%), Entertainment and Devices Division (24%) and Online Services Division (4%).
I like that Microsoft is now committed to build a position in the mobile space. Late last year, the company announced that it would start building an OS to support the ARM architecture. This was an important decision strategically, as the major weakness in Intel´s x86 architecture is with respect to the power it needs. This is the reason it has failed to gain traction in the mobile space, where battery life is a great deal. Since Microsoft´s new Windows 8 OS supports ARM architecture, the company will be better-positioned in the mobile computing space (an area where it continues to lag the iOS and Android significantly). Yet, Windows is a much better-known and familiar OS with backward compatibility, so there should be some stickiness in demand.
Management execution has been accurate in recent times, which has helped Microsoft build a net cash and short term investments balance of $57.4 billion ($6.82 per share). Microsoft also generates approximately $5-6 billion a quarter from operations and cash flow has been increasing in the last few quarters. The great amount of cash provides the flexibility required to pursue any growth strategy, whether by way of acquisitions or otherwise, and this is yet another fact that investors must pay attention.
MSFT´s Current Net Profit Margin is 33.10%, currently higher than its 2010 margin of 30.02%. I like Companies that increased profit margins in comparison to other years. Current Return on Equity for MSFT is 44.84%. Higher than the +20% standard I look for in Companies I invest in and also higher than its 2010 average ROE of 43.76%.
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.
As regards Valuation, Microsoft shares are now trading at 10.8X its trailing annual earnings compared to 43.6X for the peer group and 13.9X for the S&P 500. The significant discount to the peer group is on account of investor concerns regarding Microsoft´s share losses in mobile computing platforms.
Over the past five years, the shares have traded in the range of 8.6X to 23.2X trailing annual earnings. Hence, it is currently trading at the low end of the historical range. I think that lots of hedge fund managers are watching this.
Microsoft´s balance sheet is very strong, with nearly $52 billion in cash and cash equivalents, and about $12 billion in debt. I expect the company to generate more than $20 billion in free cash flow annually, allowing it to comfortably service the debt while continuing to invest in expanding the business.
Other Companies that Tepper invested
I like the GOOG bet. Google is trading at just 11.90 Forward P/E and 3.24x Book, multiples that are very low in historical standards. Recently comScore released its monthly comScore Search analysis of the U.S. search marketplace. Google Sites led the U.S. explicit core search market in April, with 66.5% market share (up 0.1 percentage points), followed by Microsoft Sites (MSFT) with 15.4 percent (up 0.1 percentage points) and Yahoo (YHOO) Sites with 13.5 percent. This confirms that GOOG is the true leader in that huge-growth segment.
Regarding Citigroup, JMP Securities Capital Markets recently wrote a very interesting report which says they expect the shares and earnings of big bank names to fall significantly over the balance of 2012 due to a confluence of material events, both at home and abroad, led by an increasingly troublesome situation in Europe. JMP believes a Greek exit of the Euro is probable (vs. merely plausible in 2010 and 2011), and they fear material damage in the Eurozone will result, both directly and via contagion to other PIIGS countries. JMP also noted that the U.S. is heading towards a mandated deficit reduction cliff, and key market-related tax cuts are likely to soon expire, which make things difficult for big money centers.