Richard Snow, who began his career investing the proceeds from the sale of the Snow Family businesses, is the founder of Snow Capital. His reputation grew and others began asking him to administer their assets. Snow Capital Management now controls over $2.6 billion in equity assets, placed under three different strategies, for mutual fund and institutional clients. Its flagship All-Cap Value fund has produced market-beating 15.74% annualized returns since the fund's creation in 1992. Apart from the All-Cap Value fund, Snow Capital also manages client assets under the Large-Cap Value and Small-Cap Value strategies for mutual fund as well as institutional clients.
Snow seeks companies that are financially strong, but with stock prices that have been depressed due to temporary or intermediate-term difficulties. He relies on comprehensive research to determine the probability of a solution, gain confidence in the company's ability to survive the difficulty, and estimate the value of the stock once the difficulty has passed. Snow thinks that, when using this strategy, the problem is protected because the stock price is already depressed making it a fairly safe strategy, capable of achieving significant returns.
I think it is interesting to analyze Richard Snow's holdings to produce seed investment ideas for further research. I think that if a stock is a top holding from a notable portfolio manager such as Snow, the firm must have passed rigorous research standards, so my confidence level to invest in it increases.
Health Management (HMA)
Based in Naples, Fla., and founded in 1977, Health Management Associates operates general acute care hospitals, and other health care facilities, across the U.S. Its objective is to be the highest ranked health care provider of any hospital franchise in the U.S., according to Medicare. Since Sept. 30, 2011, Health Management, by and through its subsidiaries, managed 66 hospitals with an aggregate of 10,441 licensed beds, mostly in non-urban communities, in 15 states, mainly in the southeastern U.S. Outpatient services play a vital role in the provision of healthcare, with approximately half the net revenue coming from outpatient activities.
Health Management shares offer upside potential as the group's operating turnaround begins to improve margins. Higher EBITDA growth has traditionally been a main objective for management. Health Management expects EBITDA margins to improve in the future with efforts to increase revenue, gain higher-yield managed care contracts, and promote better performance of employed physicians.
Growth in sales shows that the company has the resilience to surpass cuts in reimbursement. The company continues to stress its three long-standing initiatives -- i.e., emergency room operations, physician recruitment, and market/service development.
- Emergency Room (ER) Operations: The group noted that its prime priority is still the patient experience in the ER, with important effort dedicated to reducing wait time and enhancing outcome.
- Physician Recruitment and Retention: Management maintains its initiative to improve physician recruitment.
- Market/Service Development: Health Management keeps expanding its service lines by adding specialists in areas like orthopedics, neurology, and cardiology. While the company continues to gain market share in the outpatient department and develops new client base for its physicians, an improvement in inpatient results should also be noticed.
Health Management reaffirmed its obligation to make the business grow, by using free cash flows to acquire hospital systems, which establishes a precedent for additional acquisitions. The company remains willing to undertake acquisitions. It acquired Wuesthoff Health System in 2010 and, in July 2011, it purchased assets of Mercy Health Partners (a subsidiary of Catholic Health Partners) located in east Tennessee. Later on, in February 2012, a subsidiary of the company signed a definitive agreement with Integris Health for a joint venture deal with five hospitals in Oklahoma. As regards the agreement, Health Management will take an 80% stake in each hospital. The group added that the pipeline of hospital purchases is full of potential activity and stands at a top level rarely witnessed in the past. In addition, the quality of acquisition targets is high in terms of condition of the properties and their location.
As in the past, the company may once again analyze strategic alliances with partners who would invest a minority stake in Health Management hospitals, which could lead to a significant cash inflow, allowing the company to deliver and also redeploy capital from assets that are not adequately profitable. Furthermore, a joint venture strategy could result in further penetration of existing markets, and increase Health Management's negotiating leverage with large managed care companies.
Health Management's current net profit margin is 3.08%, currently higher that its 2010 margin of 2.93%. I like companies that increased profit margins in comparison to other years. It is essential to know the reason why that happened. Its current return on equity is 27.71%, higher than the +20% standard I look for in companies I invest but lower than its 2010 average ROE of 34.26%.
In terms of income and revenue growth, Health Management has a three-year average revenue growth of 10.0% and a three-year net income average growth of 2.05%. Its current revenue year over year growth is 13.99%, higher than its 2010 revenue growth of 11.75%. 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 19.09%, higher than its 2010 net income year-over-year growth of 8.6%. I like when Net Income growth is higher than the past.
In terms of Valuation Ratios, Health Management is trading at a Price/Book of 2.2x, a Price/Sales of 0.3x and a Price/Cash Flow of 3.1x in comparison to its Industry Averages of 3.2x Book, 0.6x Sales and 5.8x Cas Flow. It is essential to analyze the current valuation of the company and check how is trading in relation to its peer group. In regard to Valuation, at the current price, the shares of Health Management are trading at a P/E of about 8x our fiscal 2012. EPS assessment of $0.86, in comparison with its rivals mean of about 12.4x. The group's policy of paying attention to the patients experience in the ER is paying off and it has led to the recruitment of more physicians. This way, Health Management's specialty recruitment and its market/service development are expected to provide acuity over the medium term as group hospitals become more adept at managing higher acuity patients.
Besides, Health Management's implementations of modern surgical systems in its hospitals should continue to grow its surgical market share. The group has announced that it has a rich pipeline of high-quality purchase targets. Bad debts have fairly stabilized but full uncompensated care is still on the higher side. Furthermore, they are doubtful about weakness in hospital admissions, in the relevant markets, and the group's ability to rapidly implement operational improvements at acquired facilities. The debt amount on the balance sheet remains sizable. The company's contractual agreements, with commercial managed care organizations, somewhat softens its exposure to government programs, such as Medicare and Medicaid.
International Business Machines (IBM)
International Business Machines was established in the State of New York in 1911 as Computing-Tabulating-Recording Co. (C-T-R). Then in 1924, the name was changed to International Business Machines Corporation. The company participates in the development and manufacturing of advanced information technology, including computer and storage systems, software and microelectronics. Primary operations are categorized into the Global Technology Services (GTS) segment (38.3% of fiscal 2010 revenue), Global Business Services (GBS) segment (18.2%), Systems and Technology segment (18%), Software segment (23%) and Global Financing segment (2%).
I think IBM's strong growth reflects its decision to implement higher-value, productivity efforts that bring about longer-term benefits, as well as its transformation into a globally integrated enterprise. IBM concentrates on high-growth, high-value segments of the IT industry. IBM's growth efforts, including its smarter planet and industry frameworks, growth markets, business analytics, and optimization and cloud computing have delivered significant growth and generated high profit margins for the group. It is expected for these initiatives to deliver at least $50 billion in revenues by fiscal 2015. By 2015, the company expects to create smarter planet and smarter commerce revenues of $10.0 billion and $20.0 billion, respectively. Besides, business analytics is estimated to produce $16.0 billion, while cloud computing is expected to deliver $7.0 billion in revenues by 2015.
There is optimism about the company's long-term growth and estimate it to post stronger results, supported by its initiatives in the aforementioned areas. The group's data center solution and cloud computing initiative will also foster growth. IBM is a leader in the middleware business with almost 33.0% market share. Its middleware products include Websphere, Lotus, Tivoli and Rational that are used to connect different types of software systems. With an investment of over $60.0 billion in R&D since 2000, IBM has created an Analytics Solution center, Business Resilience service delivery centers and Cloud computing centers all around the world. I expect these centers will help increase revenues from now on.
There is optimism about IBM's growing gain margins. New initiatives helped IBM produce gross profit margin of 46.1% in 2010, up from 45.7% in 2009. Margins rose for the seventh consecutive year. This shows improved business mix, operating leverage and the constant success of the company's productivity initiatives. IBM is also profiting from a higher mix of high-margin Services and Software businesses (comprising 91% of profit in 2010) that have derived in improved margin and profitability. IBM expects to achieve $0.75 in additional EPS from the change toward higher-margin businesses. The group expects software alone to contribute virtually 50% to its profit by 2015. New product ramp up in the highest-margin server product lines, as well as incremental product launches in the hardware and software space are estimated to soar IBM's market share and bring about margin expansion in the long term.
IBM's current net profit margin is 14.83%, currently lower that its 2010 margin of 14.85%. Its current return on equity is 73.43%, higher than the +20% standard I look for in companies I invest in and also higher than its 2010 average ROE of 64.96%. In terms of income and revenue growth, IBM has a three-year average revenue growth of 1.05% and a three-year net income average growth of 8.73%. Its current revenue year-over-year growth is 7.05%, higher than its 2010 revenue growth of 4.30%. The current Net Income year-over-year growth is 6.89%, lower than its 2010 net income year-over-year growth of 10.49%. In terms of Valuation Ratios, IBM is trading at a Price/Book of 11.8x, a Price/Sales of 2.3x and a Price/Cash Flow of 12.6x in comparison to its Industry Averages of 5.4x Book, 2.0x Sales and 10.7x Cash Flow. It is essential to analyze the current valuation of IMB and check how it is trading in relation to its peer group.
As far as Valuation goes, IBM shares have risen 23.0% year to date compared to a 2.2% decline in S&P 500. IBM's present trailing 12-month earnings multiple is 14.2x, vs. the 18.9x average for its rival group and 16.9x for the S&P 500. In the last five years, IBM shares have traded in a range of 9.4x to 18.3x trailing 12-months earnings. Thus, it is currently trading hardly above the midpoint of the historical range, indicating limited upside from current levels. At present, IBM is trading at 13.6x our 2011 earnings per share estimate, which represents a discount to the peer group and but a premium to the S&P 500. The present 31.3% discount to the rival group for 2011 is slightly lower than the 44.5% average discount for the historical period, indicating some downside risks. Furthermore, investment in IBM is expected to generate just 10.7% over the next five years, compared to the peer group average of 18.5%. We, therefore, believe that the discount attributed to the shares is justified.
I believe indeed that IBM is a fundamentally solid company and has a strong market position, but its caution is based on valuation considerations, and I'm positive about the company's long-term growth. However, increasing competition could be a drag on its results. IBM has roughly $17 billion in cash and equivalents, and about $31 billion in debt. It generates adequate cash from operations to cover its debt obligations while continuing to invest in growth opportunities.
Teva Pharmaceutical (TEVA)
With its headquarters in Israel, Teva Pharmaceutical is the world's largest generic pharmaceutical manufacturer operating in 60 countries. Teva runs 53 finished dosage sites, 17 research and development centers, and 21 active pharmaceutical ingredient manufacturing sites. The group also develops and sells branded pharmaceuticals, including Copaxone, one of the leading multiple sclerosis drugs of the world. Branded drug sales represent roughly 37% of revenue. Teva's worldwide low-cost operations, expansion into developing markets, complex generic manufacturing capabilities, and drug pipeline should preserve the company's growth, profitability, and market dominance.
Having more than the double of the next competitor's revenue, Teva's broad market exposure, massive manufacturing infrastructure, and vertically integrated operations position the firm as a leader in the generics industry. The generics market is highly fragmented, particularly in low-cost labor markets such as India and China, but a select few firms control the lion's share of global generics production. Thanks to a history of rapid acquisitions, Teva has amassed nearly a quarter of industry market share, massive economies of scale, and vertically integrated operations. According to our estimates, Teva, Sandoz (a subsidiary of Novartis), Mylan, and Watson account for about half of all generics sales.
Teva, the largest generic drug manufacturer, has much to gain from the large value of patents set to expire through 2013 in the U.S. and Europe, but growth in these markets may suffer as patent expiration opportunities substantially decline after the patent cliff. While post patent cliff growth in the U.S. and Europe is suspense, I believe Teva can prosper through its focus on emerging markets and complex generics. After recent acquisitions in Peru and Japan, I believe Teva will continue to aggressively expand its international operations, especially in fast growing emerging markets. The company's joint venture with Procter & Gamble to develop worldwide branded over-the-counter pharmaceuticals creates a compelling growth opportunity as well.
Besides, Teva's manufacturing capabilities give it the upper hand in developing complex generics, which often have less competition thanks to difficult manufacturing, approval, and marketing requirements. Teva's pipeline of complex generics includes respiratory products (like GlaxoSmithKline's Advair) and biosimilars, which are almost equivalent versions of biotech drugs. In our opinion, biosimilars are one of the largest opportunities for Teva and I think the complexity of manufacturing and marketing these drugs will restrict competition and uphold profitability for the successful contenders. Along with Novartis and Hospira, Teva is one of the three leasing biosimilar competitors in Europe. Whereas the U.S. biosimilar approval guidelines are still in the last stage, Teva has already filed an application in the U.S. for a biosimilar version of Amgen's Neupogen. Teva and others have had mixed success and slow market share profits with their European biosimilar launches, but it remains to be seen if these product launches in the U.S.-likely to begin in 2014 -- will prove more beneficial.
Teva's current net profit margin is 15.07%, currently lower that its 2010 margin of 20.66%. Its current return on equity is 12.5%, lower than the +20% standard I look for in companies I invest in and also lower than its 2010 average ROE of 16.18%. In terms of income and revenue growth, TEVA has a 3-year average revenue growth of 18.2%1 and a 3-year net income average growth of 63.18%. Its current revenue year over year growth is 13.59%, lower than its 2010 revenue growth of 15.99%. The current Net Income year over year growth is -17.17%, lower than its 2010 net income y/y growth of 66.55%.
In terms of Valuation Ratios, Teva is trading at a Price/Book of 1.7x, a Price/Sales of 2.1x and a Price/Cash Flow of 9.3x in comparison to its Industry Averages of 2.6x Book, 2.5x Sales and 12.9x Cash Flow. It is essential to analyze the current valuation of Teva and check how is trading in relation to its peer group.
In relation to Valuation, Teva ended 2011 on a strong note with the U.S. generics business showing signs of resurging. Fourth quarter gains of $1.59 per American Depository Share (ADS) were a penny above the Zacks Consensus Estimate and 27.2% above the year-ago earnings. Fourth quarter revenues rose 28.5% to $5.7 billion, just above the Zacks Consensus Estimate of $5.6 billion. There's an estimate that generic sales will improve in early 2012 given the exclusive generic launch of Zyprexa. Approval for generic Lovenox would be an important boost for the stock. The increase in dividend is encouraging as well. At the same time, Teva's acquisition of Cephalon should help the company expand and strengthen its branded and specialty pharma business. Nevertheless, the Copaxone patent case remains an overhang. I think Teva will go after small deals and purchases to reduce its dependence on Copaxone. Teva's present trailing 12-month earnings multiple is 8.9, compared to the 17.9 average for the industry and 14.2 for the S&P 500. At present, the stock is trading at 7.9x our 2012 EPADS estimate.
Teva boasts sound financial health as management has demonstrated financial conservatism by keeping low financial leverage and maintaining plenty of cash on the balance sheet. In spite of an aggressive acquisition strategy, management appears to have carefully avoided overpaying for acquisitions. Teva has historically kept a debt-to-capital ratio near 0.3 over most of the last decade with an EBITDA interest coverage ratio constantly in the double digits. Teva concluded 2011 with approximately $1 billion in cash.
Archer Daniels (ADM)
One of the leading food processing companies in the world, Archer Daniels Midland processes oilseeds, corn, wheat, cocoa, and other feedstuffs, and is also one of the leading manufacturers of vegetable oil, protein meal, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients. Archer Daniels has also a global grain elevator and transportation network for procurement, storage, cleansing and transportation of agricultural commodities. The company, based in Illinois, reports its operating results under four segments:
- Agricultural Services division (47% of total revenue in fiscal 2011)
- Oilseeds processing division (33%)
- Corn processing segment (12%)
- Other business segment (8%)
Archer Daniels Midland, one of the largest agricultural commodity companies, has a highly diversified agricultural origination, processing and distribution network. The company produces corn, soybeans, wheat, and cocoa through farmers, processes these materials through its refineries, and creates value along the chain. Furthermore, it generates trading revenue through its extensive knowledge about the shifts in the global market prices. From now on, I expect the company to continue its R&D efforts to create additional applications for these crops and expand the variety of feed stocks into areas like palm, sugar and other biomass.
ADM's worldwide network is a strong competitive advantage over regional players. ADM is exposed to price risks with both feedstock and commodity end products, similar to a refiner or commodity chemical company. Nevertheless, the main difference is ADM owns its network for collection and distribution, which provides the company with some level of bargaining power, particularly with upstream suppliers.
It was a tough quarter for ADM and the operating environment was challenging. Ongoing weakness in global oilseeds margins, lower results in corn and poor international merchandising results hurt their second quarter profits.
The company remains positive about the long-term fundamentals of its business and the growing earnings power of the company and it continues to execute its plan to drive shareholder value: prioritizing capital projects, implementing productivity measures and returning capital to shareholders through increased dividends and share buybacks.
Today, Archer Daniels Midland Company reported financial results for the quarter ended Dec. 31, 2011. The group reported net earnings for the quarter of $80 million, or $0.12 per share, both down 89 percent from the same period a year ago. Adjusted earnings per share -- which excludes the impact of LIFO, PHA-related impairment charges and other adjustments -- was $0.51 per share, 58 percent lower than the previous year quarter. Segment operating profit 1, after excluding the impact of the PHA-related charges, was $648 million, decreased 52 percent from the record quarter a year before.
AMD's current net profit margin is 30.79%, currently higher that its 2010 margin of -10.8%. Its current return on equity is 4.15%, lower than the +20% standard I look for in companies I invest in but higher than its 2010 average ROE of -3.71%.
In terms of income and revenue growth, AMD has a 3-year average revenue growth of 4.94% and a 3-year net income average growth of 4.15%. Its current revenue year over year growth is 30.79%, higher than its 2010 revenue growth of -10.8%. The fact that revenue increased from last year show me that the business is performing well. The current Net Income year over year growth is 5.49%, lower than its 2010 net income y/y growth of 14.61%. 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, AMD is trading at a Price/Book of 1.2x, a Price/Sales of 0.2x and a Price/Cash Flow of 4.5x in comparison to its Industry Averages of 1.3x Book, 0.3x Sales and 4.9x Cash Flow.
With respect to Valuation, Archer Daniels continues to announce disappointing quarterly result. The company's second-quarter 2012 gains dropped almost 58% from the previous-year quarter, mainly due to ongoing weakness in global oilseeds margins, lower results in corn and poor international merchandising results. Although Archer Daniels is expanding its global trail in the key agricultural regions through acquisitions and joint ventures, but resourcing of commodities and stringent external finance may represent a threat to its operating performance.
At present, Archer Daniels trailing 12-month earnings multiple is 11.8x, compared with the 32.3x industry average and 14.3x for the S&P 500. For the last five years, Archer Daniels shares have traded in a range of 5.5x to 18.5x trailing 12-month earnings. The stock is performing at a discount to the rival group, based on forward earnings estimates. ADM relies on commercial paper to support its working capital needs, which can experience sizable swings during the harvest season and in rising commodity price environments. Throughout fiscal year 2011 that concluded June 30, the company's working capital needs swelled materially due to volatile commodity prices.
ADM raised more than $4 billion in new financing during the year to deal with the high liquidity needs ($1.75 billion of which were in re-marketing of debt and $1.75 billion in new equity). There is an estimate that the company's working capital will remain at a higher level due to record high corn and soybean prices. The firm had $1.4 billion of cash and marketable commodity securities by the end of 2011, and maintains a marketable commodity inventory of $7.1 billion. The latter is treated as one step more liquid than regular inventories, since about two thirds of it flows out of the company as trading and merchandizing inventory. The increase in working capital, funded with debt and equity issuance, puts the group's debt at 35% of its total capital structure, similar to the company's credit metrics a year before. Generally, ADM targeted to keep its debt/cap ratio at about 35%, which I believe is a prudent level for the company with such high volatility in operations.