Andreas Halvorsen is co-founder of Viking Global Investors LP and currently serves as its CIO. Viking was set up in 1999 and is based in Greenwich, Connecticut. It manages two hedge funds invested in equities worldwide.
Before founding Viking, Halvorsen was a senior managing director and the director of equities at Tiger Management LLC. Besides, he worked as an investment banker in the corporate finance and merger departments of Morgan Stanley. Since starting his company Viking Global in 1999, his Viking Global Equities III fund gained 22% on average a year until March 2009.
When evaluating holdings, I look at companies that generate a high gains rate on capital employed (without using leverage, accounting gimmickry, etc.) - and not the achievement of consistent earnings in gains per share. I believe that gains per share are a smokescreen because lots of companies retain a portion of their previous year's earnings as a way of increasing their equity base. Basically, I want to know how well management achieved its task of producing a return on the operations of the business, given the capital it employs. Some stocks in Halvorsen's portfolio are solid business and follow these guidelines. I take a look at Halvorsen's picks and point out the reason as to why he may have invested in them.
Assured Guaranty (AGO)
Assured Guaranty is a holding company based in Bermuda that provides credit enhancement products to the municipal finance, structured finance and mortgage markets. Assured refrained from insuring the most dangerous bonds related to the housing boom. The company stopped insuring collateralized debt obligations, or CDOs, way before the worst of the lot was issued. This forbearance saved the company from incurring the severe rating downgrades imposed on industry-leading competitors MBIA (MB) and Ambac (ABK), which has essentially led these two former market leaders into a runoff.
Consequently, Assured was catapulted into the lead in insuring municipal bonds. With a unanimous AAA rating for most of 2008, Assured wrote more business at better-than-ever prices. The insurer captured 40%-50% of new insurance written on municipal bonds in 2008 and early 2009, increasing net written premium by 50% in 2008. In 2010, the company was the only active bond insurer, insuring about 10% of all new bonds that came to market. Since municipal bond insurance is paid up front, Assured will have investment income from these premiums from now on.
Assured purchased competitor Financial Security Assurance (FSA) from Belgium/French bank Dexia in July 2009. Like Assured, FSA was also the victim of a downgrade from AAA by Moody's, although Standard & Poor's MHP still rates both Assured and FSA at AAA, but with a negative standpoint for both. But if municipal bonds are to be insured, the market will have to make some allowance for the near-perfect ratings of the collective entity. And with MBIA and Ambac on the sidelines, reeling from deeper downgrades, I believe growth may slow a little from recent trends, but will still be above average.
AGO's current net profit margin is 42.63%, currently higher than its 2010 margin of 39.17%. 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 18.21%, lower than the +20% standard I look for in companies I invest, but higher than its 2010 average ROE of 15.00%.
In terms of income and revenue growth, AGO has a 3-year average revenue growth of 48.71% and a 3-year net income average growth of 124.14%. Its current revenue year over year growth is 38.51%, lower than its 2010 revenue growth of 43.21%. 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 57.10%, lower than its 2010 Net Income y/y growth of 474.22%. 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, AGO is trading at a Price/Book of 0.7x, a Price/Sales of 1.9x and a Price/Cash Flow of 5.2x in comparison to its Industry Averages of 0.9x Book, 1.1x Sales and 12.8x Cash Flow. It is essential to analyze the current valuation of AGO and check how is trading in relation to its peer group.
According to current claims, Assured Guaranty has adequate financial health. Debt/capital is 21%, and the company generates sufficient cash flow to cover interest payments comfortably. Assured has recently profited from a $1.1 billion settlement with Bank of America (BAC) over violations of representations and warranties on insurance policies. Still, if housing continues to slide for an extended period of time, the firm could be on the hook for more claims, which would eat into capital.
Capital One Financial Corp. (COF)
With its headquarters in McLean, Virginia, Capital One Financial Corporation is a diversified banking company centered primarily on consumer and commercial lending and deposit origination. Through its banking and non-banking subsidiaries, Capital One offers various financial products and services to consumers, small businesses and commercial clients in the United States.
Capital One's main subsidiaries include Capital One Bank (USA) National Association (COBNA), which currently provides credit and debit card products, other lending products, and deposit products; and Capital One National Association (CONA), which provides a broad spectrum of banking products and financial services to consumers, small businesses and commercial clients.
Outside the U.S., the firm offers its products mainly through Capital One Bank (Europe) plc, an indirect subsidiary of COBNA in the U.K. and through a branch of COBNA in Canada. Capital One reports the results of its business through three operating segments: Credit Card, Commercial Banking and Consumer Banking.
Basically, Capital One has remained strong with respect to its banking and credit card businesses. In spite of an increasingly competitive deposit market, total customer deposits grew 5% year over year to $128.3 billion in 2011, induced by growth in branch and direct deposits. U.S. Card continues to produce strong returns on a risk-adjusted basis, with continuous expansion in revenue. In August 2011, to further boost its card business, Capital One announced an agreement to acquire HSBC Holdings Plc s U.S. credit card business. I predict the combined entity will create a valuable banking franchise to profit from a large number of branch banking in attractive high growth markets.
Capital One's capital deployment activity through dividend payment reveals its strong capital position. In addition, since December 31, 2011, the company remained well capitalized, with its capital ratios Tier 1 capital ratio of 12.0%, Tier 1 common ratio of 9.7% and leverage ratio of 10.1% well above the regulatory requirements. I expect the firm to continue building capital, resulting in a better financial position that will help meet the Basel III requirements.
COF's current net profit margin is 19.17%, currently higher than its 2010 margin of 16.96%. 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 11.11%, lower than the +20% standard I look for in companies I invest, but higher than its 2010 average ROE of 10.33%.
In terms of income and revenue growth, COF has a 3-year average revenue growth of 5.43%. Its current revenue year over year growth is 0.67%, lower than its 2010 revenue growth of 24.56%. 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 14.73%, lower than its 2010 Net Income y/y growth of 210.29%. 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, COF is trading at a Price/Book of 0.9x, a Price/Sales of 1.6x and a Price/Cash Flow of 3.4x in comparison to its Industry Averages of 2.4x Book, 3.2x Sales and 7.9x Cash Flow. It is essential to analyze the current valuation of COF and check how is trading in relation to its peer group.
As to Valuation, Capital One presently trades at 9.4x our earnings estimate for 2012, 3% discount to the industry average of 9.7x. On a price-to-book basis, the shares trade at 0.8x, which is 47% discount to the 1.5x for the industry average. The valuation on a price-to-book basis looks appealing, considering a positive trailing 12-month ROE compared with the negative industry average.
Our six-month target price of $57.00 accords to 9.8x our earnings estimate for 2012. Combined with the quarterly dividend of $0.05 per share, this target price implies an estimated total return of about 4.8% over that period.
The company is well-reserved and well-capitalized. I believe the probability of financial distress is low.
Chevron Corp (CVX)
Based in San Ramon, California, Chevron Corporation is one of the biggest publicly traded oil and gas company in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related issues. Chevron, in its present form, is the result from the 2001 merger between Texaco and Chevron Corporation. In August 2005, the firm acquired Unocal for $18.4 billion.
It divides its operations into three main segments: Exploration and Production; Manufacturing, Products, and Transportation; and Other Businesses. The company's financial flexibility and solid balance sheet are real assets in this highly-uncertain period for the economy.
Chevron maintains its excellent financial health, with $15.9 billion in cash on hand and an investment-grade credit rating with a debt-to-capitalization ratio of fewer than 10%. Management has set quite a track record of conservative capital management and cash returns to shareholders. It also pays a growing dividend, presently yielding an attractive 3.1%.
Chevron's recent oil and gas development project pipeline is among the best in the industry, targeting volume growth of 20% by 2017 more than twice the rate of growth from 2003 to 2010 impulsed by the big Australian gas projects (Gorgon and Wheatstone).
CVX's current net profit margin is 10.60%, currently higher than its 2010 margin of 9.28%. 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 23.75%. Higher than the +20% standard I look for in companies I invest and also higher than its 2010 average ROE of 19.31%.
In terms of income and revenue growth, CVX has a 3-year average revenue growth of -2.41%. Its current revenue year over year growth is 23.80%, higher than its 2010 revenue growth of 19.40%. The fact that revenue increased from last year shows that the business is performing well. The current Net Income year-over-year growth is 41.37%, lower than its 2010 Net Income y/y growth of 81.47%. 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, CVX is trading at a Price/Book of 1.8x, a Price/Sales of 0.9x and a Price/Cash Flow of 5.4x in comparison to its Industry Averages of 1.8x Book, 0.7x Sales and 6.1x Cash Flow. It is essential to analyze the current valuation of CVX and check how is trading in relation to its peer group.
Taking into account the Valuation, Chevron Corp. is one of the biggest integrated energy companies in the world and has an impressive business model. Its recent oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. In addition, Chevron possesses one of the healthiest balance sheets among rivals, which helps it to capitalize on investment opportunities with the option to make strategic purchases. The resumption of the buyback program not only focuses on the firm's commitment to create value for shareholders, but also highlights the oil giant's confidence in commodity prices.
Besides, Chevron's strategic initiatives aggressive cost reduction initiatives, exiting unprofitable markets and streamlining the organization are estimated to have long-term positive effects for the firm. Nevertheless, being one of the largest integrated oil and gas companies in the world, Chevron is especially susceptible to the downside risk from continued weakness in the global economy. I are also worried by the company's high level of capital spending, which may result in reduced returns from now on.
Chevron has one of the strongest balance sheets and lowest debt/capital ratios among its rival group. Sound cash flow from operations should be sufficient to fund investments and pay the dividend; still, if oil prices retreat significantly, the company may need to increase its debt load.
Metlife Inc (MET)
Established in 1868 and based in New York, MetLife, Inc. is a leading provider of insurance and financial services to a wide spectrum of individual and institutional customers. By virtue of its various subsidiaries and affiliates, the company offers individual insurance, annuities, and investment products. It also provides group insurance as well as retirement & savings products and services to corporations and other institutions.
By means of its domestic and international subsidiaries and affiliates, MetLife serves more than 90 million customers in over 60 countries around the world. Based on life insurance in-force, it is the greatest life insurer in the U.S. Some of its prime subsidiaries and affiliates include Gen America, State Street Research, Metropolitan Property and Casualty, and Texas Life. Outside the U.S., the firm serves customers through direct insurance operations in Japan, Latin America, Asia Pacific, Europe and the Middle East.
MetLife has broadened its core businesses while successfully executing its growth strategy that also includes purchases, mergers, divestitures and alliances. The firm has also been undergoing a development and restructuring stage to keep pace with the economic volatility. Significantly, on November 1, 2010, the company purchased American Life Insurance Company (ALICO) unit of American International Group Inc. (AIG) for $16.4 billion. The payment made to AIG consisted of $7.2 billion in cash and $9.0 billion in MetLife equity and other debt securities.
MetLife has had success in maintaining its operating leverage over the past few of years, even when the effect of the economic downturn was most intense. Moreover, the company is focusing and taking specific initiatives to bring pension-related expenses to a more normal level in 2011 and beyond. As a result, MetLife reached $700 million in pre-tax annualized earnings from its operational excellence initiative in 2010, surpassing the target by $100 million. This also helped the firm exceed its gains guidance in 2010. I believe the company is capable of generating higher operating leverage once the economy regains a stable position. This is also reflected in management's 7% growth guidance for 2012.
MetLife has a sound capital position, ample liquidity and major market positions in its core group and individual insurance businesses, where its revenue continues to be healthy. Moreover, MetLife holds a diminishing risk-profile with improved financial leverage and interest coverage ratios. The company also intends to get rid of some of its debt that is due for maturity in the near future.
In June 2011, MetLife passed about $1.5 billion in policy dividends to eligible life insurance policyholders for 2011, reflecting its financial stability. In addition, after past declining since 2007, net investment earnings improved to $17.6 million in 2010 from $14.8 million in 2009, $16.3 million in 2008. Besides, net derivative gains witnessed an upsurge of $2.9 billion to $4.2 billion for the first nine months of 2011 from the year-ago period.
Furthermore, sound earnings, premiums growth from international businesses and active capital management are the main positive factors that helped ROE to grow to 10% in 2010 after declining to a negative of 9% in 2009. This is also clear from the 16% year over-year growth in book value per share in 2010, which further grew 9.5% to $48.69 at the end of third-quarter 2011.
Moving forward, management's projected book value growth of 28% over 2010, within $56.15 57.25 per share, in 2011 further injects optimism on the fundamentals. These factors are also estimated to help in maintaining a sturdy cash flow while reaching the targeted ROE of more than 11% in 2011 and beyond. Moreover, the firm is also gearing up to propose a fresh capital plan to the Federal Reserve (Fed) in January 2012, to hike dividends and recommence stock buyback, thus deploying its excess capital efficiently. A definite decision is expected by the end of the first quarter of 2012.
MET's current net profit margin is 9.55%, currently higher than its 2010 margin of 5.06%. 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 12.38%, lower than the +20% standard I look for in companies I invest, but higher than its 2010 average ROE of 6.53%.
In terms of income and revenue growth, MET has a 3-year average revenue growth of 11.28%. Its current revenue year over year growth is 34.43%, higher than its 2010 revenue growth of 27.30%. The fact that revenue increased from last year shows that the business is performing well. The current Net Income year-over-year growth is 150.22%.
In terms of Valuation Ratios, MET is trading at a Price/Book of 0.7x, a Price/Sales of 0.6x and a Price/Cash Flow of 4.0x in comparison to its Industry Averages of 1.1x Book, 0.7x Sales and 3.3x Cash Flow. It is essential to analyze the current valuation of MET and check how is trading in relation to its peer group.
As regards Valuation, in spite of several market related headwinds that reduced top-line growth from U.S. business, MetLife came out modestly from 2011. I think that improvement will be achieved in 2012 helped by effective cost management, improved investment returns, a disciplined underwriting approach and higher revenue. Besides, the solid earnings performance in the recent quarter has injected further confidence in MetLife to mitigate the risks surging from other core operations of MetLife in the U.S., mainly the auto-home segment, in order to meet its long-term growth objectives.
Moreover, the ALICO purchase has diversified its income sources and drove results, thus being a feather in MetLife's cap. The divestment of banking segment should liberate the firm of stringent statutory regulations as well. Still, MetLife is exposed to losses in the investment portfolio, driven by low rate environment, although it is backed by a strong statutory capital and diversified business mix, which could help attain a modest upside in the operating gains projection. Thus, I think that MetLife is poised to propel its growth as the economy rebounds in the near to medium term.
MetLife shares presently trade at 7.4x our earnings estimate for 2012, a 31% discount to the 10.7x industry average. On a price-to-book basis, the shares trade at 0.6x, a 25% discount to the 0.8x industry average. The valuation on a price-to-book basis looks appealing, taking into account a trailing 12-month ROE of 10.0%, which is considerably ahead of the 3.1% industry average.
Our six-month target price of $39.00 equates to about 7.7x our gains estimate for 2012. I believe $0.74 per common share annual dividend is secure, implying a total return of 5.5% over that period.
Market improvements since the financial crisis have increased MetLife's equity position and largely improved its financial health. However, the company remains highly leveraged, and its debt load has been rising since its demutualization.
CIGNA Corp (CI)
CIGNA Corp., based in Philadelphia, Pennsylvania and created in 1982, is a result of a merger between Connecticut General Life Insurance Company (CG) and Insurance Company of North America (INA). CI along with its subsidiaries is still one of the biggest investor-owned health service organizations in the United States. Its subsidiaries are leading providers of health care and related benefits, most of which are offered through the workplace, including health care products and services, group disability, life and accident insurance, and workers compensation case management and related services. The company has also certain inactive businesses, including a run-off reinsurance operation.
CI mainly operates through the following five segments:
- Health Care Segment (accounted for 71% of 2011 revenues)
- Disability and Life Segment (14%)
- International Segment (15%)
- Run-off Reinsurance Segment had been discontinued and is now an static business in the run-off mode since the sale of the U.S. individual life, group life and accidental death reinsurance business in 2000
- Other Operations is made up of non-leveraged and leveraged corporate-owned life insurance, deferred earnings recognized from the 1998 sale of the individual life insurance and annuity business and the 2004 sale of the retirement benefits business, and the run-off settlement annuity business.
CI has acquired Healthspring. The purchase will instantly make CI a big player in Medicare Advantage, the U.S. health plan for the elderly and disabled, a market where it was practically non-existent. CI was not interested in entering the segment since it lacked the expertise and could not see a clear path to winning customers. Nevertheless, the Healthspring model lends itself to center on the elderly population and makes targeting the ABD (aged blind and disabled) population more viable. The purchase would triple the amount of Medicare customers it serves to 1.75 million. Medicare is the most wanted after market, since 75% of the senior citizens in U.S are covered by Medicare creating great potential in the segment since the first tranche of baby boomers (people born between 1946 and 1964) turns 65 this year, making 7 million Americans qualified for Medicare in the next five years.
CI is enthusiastically spreading its international business (contributes about 10% of the revenues), which has historically delivered double-digit revenue growth, double-digit earnings growth, with very appealing margins and capital efficiency. For the past five years, international revenue has risen 50%. Management has concretely mentioned the significance of this segment as the way to long-term growth.
In sync with its strategy to enlarge its international operations, Cigna in 2010, acquired Belgium-based Vanbreda International, a provider of expatriate benefits. The purchase has made it the biggest expatriate writer. I estimate the acquisition will be simply accretive in 2011, with the potential for more important accretion in 2012, when the integration cost disappears.
The company is targeting growth globally, particularly in the main Asian markets where the growing middle class demands better care. With no moves in China and Korea, the company expects a further geographic expansion (India) to come. These areas are under-penetrated and represent huge growth potential. I consider CI's current purchase of FirstAssist to be an important way to further diversify its revenue base and bolster the segment. The purchase adds 3 million travel and protection insurance members and also contributes with cross-selling opportunities. Management estimates International earnings will growth of 21% 30% for 2012, with advances in its Health, Life and Accident as well as Global Health Benefits businesses.
CI's current net profit margin is 6.03%, currently lower than its 2010 margin of 6.33%. 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 17.71%. Lower than the +20% standard I look for in companies I invest and also lower than its 2010 average ROE of 22.30%.
In terms of income and revenue growth, CI has a 3-year average revenue growth of 4.82%. Its current revenue year-over-year growth is 3.51%, lower than its 2010 revenue growth of 15.42%. 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 -1.34%, lower than its 2010 Net Income y/y growth of 3.30%. 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, CI is trading at a Price/Book of 1.6x, a Price/Sales of 0.6x and a Price/Cash Flow of 8.7x in comparison to its Industry Averages of 2.1x Book, 0.5x Sales and 9.4x Cash Flow. It is essential to analyze the current valuation of CI and check how is trading in relation to its peer group.
As far as Valuation goes, CI's shares presently trade at 7.8x our gains estimate for 2012, which is at a 24% discount to the industry average. On a price-to-book basis, the shares trade at 1.5x, which is at a considerable premium to the 0.7x industry average. The valuation on a price-to-book basis looks even, considering the trailing 12-month ROE is mostly ahead of the industry average.
Our six-month target price of $46.00 equalize to about 8.1x our gains estimate for 2012. I consider $0.04 per common share annual dividend to be secure, indicating an estimated return of about 4.2% over that period.
CI has a moderately high degree of financial leverage for a managed-care organization, with assets around 6 times equity. The company is subject to financial market volatility by means of its investment portfolio, retained liabilities for discontinued reinsurance products, and underfunded pension plan. Still, these risks are partly alleviated by reinsurance agreements with other insurers and the somewhat reliable free cash flows produced by Cigna's ongoing core businesses.