I like to analyze what professional managers are doing with their portfolios. As Ben Graham said, an investment operation is one which, upon thorough analysis, promises safety of principal and satisfactory return. Operations not meeting these requirements are speculative. I research very carefully each stock that I think of adding to my portfolio. One starting point is evaluating what Hedge Fund managers are doing with their money. Because they have large teams of analysts that spend the whole day analyzing fundamental data of each company, I have found over the years that studying new purchases or concentrated bets from the best managers is a great starting point for a methodical investment research. In this article I study Jean Marie Eveillard holdings. Eveillard is a French international investor who currently serves as the senior investment adviser to First Eagle Funds. I studied Eveillard picks via whalewisdom.com
Cisco (CSCO) - My opinion: SELL
Recently Cisco reported a weak earnings report, that included a guidance that was below estimates. Basically, order growth slowed down in the last quarter, although the decline was largely related to the enterprise and Europe. However, the numbers themselves are not as much a concern as management commentary, which was very cautious. Management gave clear indications that the weakness in Europe was spreading, so there was the possibility of further downside going forward. I think that although Cisco has not lost ground to competitors, this uncertainty increases the risk to estimates and has the potential to keep the lid on share prices.
After the earnings report, FBR Research wrote a paper explained that Cisco managed an earnings beat in a quarter for which in-line sales results were primarily supported by strong sales in APJC and by strength in service-provider markets, offset slightly by sluggish enterprise sales due to uncertainty and instability in Europe. FBR says that a combination of continued macro uncertainty, competitive pressures from Huawei and continued trends toward commoditization of Cisco important products will keep investors cautious. I agree completely with that.
I prefer Microsoft to Cisco given that both stocks are undervalued but I see MSFT business more defensive than CSCO.
Regarding valuation, CSCO is trading at cheap multiples but I think it will be a "value trap" because forward numbers will come lower. CSCO current trailing P/E is 10x, compared to 23.2x average for the peer
group and 14.0x for the S&P 500. Over the last five years, Cisco's shares have traded in a range of 10.7X to 26.5X trailing 12-month earnings.
Microsoft (MSFT) - My opinion: BUY
David Einhorn, another pro investor I follow also invested in Microsoft. I explained his thesis in a recent article.
I think that Microsoft has a dominant position in the PC market, with its operating systems being used in the majority of PCs worldwide. The company will launch its Windows 8 operating system in 2012, seeing steady adoption on both desktop and mobile platforms despite growing competition, weak consumer confidence and macro headwinds. Given the growing importance of mobile platforms, Microsoft has been taking steps to build a position in the mobile computing segment. I think that the announcement to start building an OS to support the ARM architecture is essential. This was an important decision strategically, since the major weakness in Intel s x86 architecture is with respect to the power it consumes. This is the reason it has failed to gain traction in the mobile space, where battery life is of great importance. 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).
My opinion is that MSFT future pipeline is strong and will surprise the market. Shares are trading with multiples that imply almost zero growth for the mid-term. That can be seen in MSFT's P/E. Microsoft shares are currently trading at 10.6x its trailing twelve months earnings compared to 45.9X for the peer group and 13.5x 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. However, I expect Windows 8 to gain traction in addition to XBox upgrades and new servers & Office launches.
Sysco (SYY) - My opinion: HOLD
Sysco is the leading foodservice distributor in the U.S. and Canada, with about a 17.5% share of this estimated $225 billion market. Although food distributing is generally a low-margin, capital-intensive business, economies of scale have allowed Sysco to post returns consistently on invested capital in excess of our estimate of the firm's cost of capital. Sysco has developed a wide-reaching distribution network over which to spread high fixed costs, and which no other competitor has been able to replicate. I think that is SYY key competitive advantage.
Recently, SYY reported Q3 earnings of $0.49 per share, excluding non-recurring items,$0.05 better than the Capital IQ Consensus Estimate of $0.44 while revenues rose 7.6% year/year to $10.51 bln vs the $10.46 bln consensus. Food cost inflation, as measured by the estimated change in Sysco's product costs, was 5.5%. While the company's overall rate of inflation has recently eased somewhat, inflation remains at a high level, with double-digit price increases in the meat and poultry categories. Sales from acquisitions (within the last 12 months) increased sales by 0.7%, and the impact of changes in foreign exchange rates for the third quarter decreased sales by 0.2%.
After the report Barclays downgraded SYY to Underweight from Equal Weight and lowered their target to $27 from $28 saying at Sysco's 2012 analyst meeting, they heard more urgency than in the past about the need to manage costs, as well as more detail about the steps that will be taken. The firm sees great risk in this, however, since all of Sysco's initiatives require the organization to accept far greater centralization than historically. Some projects will also impact customers, who are still struggling with soft demand yet have lots of choice of distributors so will not tolerate much disruption
Morningstar has a price target of $36 implying a forward P/E of 16x, EV/EBITDA of 8.8 and a Free Cash Flow yield of 4.6%. To me SYY is a hold because given the fragile state of today's consumer, I expect that restaurant traffic (and ultimately consumer spending levels) could remain volatile, which hinders near-term sales, but that food cost inflation props up sales growth offsetting the pressures created by soft consumer spending. Sysco is a solid Company but I prefer to pass on this opportunity and maybe wait for a better entry level.
Conoco-Philips (COP) - My opinion SELL
I prefer RIG to COP If I were to invest in the energy sector. I explained why Soros invested in RIG here.
Recently ConocoPhillips reported Q1 earnings of $2.02 per share, excluding non-recurring items, $0.04 worse than the Capital IQ Consensus Estimate of $2.06. Adjusted earnings for the quarter were flat compared with the prior year, as impacts from lower production volumes and refining margins were offset by improvements from higher commodity prices and marketing margins. Adjusted earnings per share increased 11% due to the company's ongoing share repurchase program. Management explained:
We operated according to plan during the first quarter of 2012, achieving production and refinery utilization targets. We continued to progress our asset divestment program and execution of our major projects and growth plans. We also accomplished several repositioning milestones, including obtaining a favorable IRS ruling and final board of directors' approval. Beginning May 1, 2012, our company will become two leading, independent energy companies, ConocoPhillips and Phillips 66.
After the report Argus Research wrote that while COP's performance lags that of CVX and XOM, the performance gap had been narrowing until the first quarter and Argus thinks it can tighten even more going forward. As a result, while production may lag in the near term COP's unit profitability and capture rate should also resume their upward track. In overall they are bullish on COP.
I do not feel comfortable investing in this stock because the business is heavily affected by macro scenarios that could be very bearish in the coming months. Oil price is very volatile and gas prices continue in a deep downtrend. COP operates in a business that I can not understand. I give this stock a SELL because I think that the downtrend in the whole energy sector will deepen in the coming months.
American Exrpess (AXP) - My opinion: BUY
American Express is a superb Company with a strong moat. AXP is a Warren Buffett's stock that I analyzed in a recent article.
Recently, AXP delivered a solid earnings beat with a superb ROE multiple. AXP reported Q1 (MAR) earnings of $1.07 per share,$0.07 cents better than the Capital IQ Consensus Estimate of $1.00 while revenues rose 8.3% year/year to $7.61 bln vs the $7.57 bln consensus. I like the fact that credit quality continued to be at historically strong levels. Management is executing very well and that can be seen in the superb Return on Equity that AXP as a business after the plan was a healthy 10.8%, which expresses.
I estimate that the recent share repurchase approval, combined with the 11% increase in the quarterly dividend from $0.18 to $0.20, results in an FY12 return of capital equal to roughly 100% of projected income. While I expected AmEx to be among the top performers given its fee-heavy revenue stream and low reliance on balances, I am positively surprised by how much AXP outperformed the 19 BHC average.
I think AXP is a buy because I feel comfortable with AXP's current competitive advantage over its peers and the results the Company is providing. Valuation is very compelling too. American Express currently trade at 13x consensus earnings estimate for 2012, a 15% discount to the 15.5x for the industry average. On a P/BV basis, the shares trade at 3.6x, which is at 44% premium to the 2.5x for the industry average. The valuation on a P/BV basis looks reasonable given AXP strong Return on Equity.
Other stocks that Eveillard likes
Recently BK reported that its assets under custody and administration amounted to a record $26.6 trillion at March 31, 2012, an increase of 4% compared with the prior year and 3% sequentially. The increases were driven by net new business and higher market values. Assets under management, excluding securities lending assets, amounted to a record $1.3 trillion at March 31, 2012. This represents an increase of 6% compared with the prior year and 4% sequentially. The year-over-year increase primarily reflects net new business and higher market values. On a sequential basis, the increase resulted from higher market values. I think that BK is a solid financial pick but I do not feel comfortable investing in the banking sector in this type of uncertain and volatile market. I like to buy super-defensive businesses that I am sure they will keep growing regardless of the economic picture.
Regarding MMM, recently FBR Captial met with MMM's management and they expressed confidence in achieving FY12 EPS guidance. They said that demand trends in Europe appearing to stabilize at lower levels (volume down 3-5% YoY since 3Q11) with expectations of modest positive growth later this year mostly due to easier comps. In China, management expects growth to pick up in 2H12 with 3M seeing some benefit from the modest easing of credit to small/medium businesses. I think that MMM is one of the most solid picks in the Industrial sector that has solid pricing power and effective cost control measures.
Given MMM's ongoing cost control, any revenue recovery should result in rapid realization of the underlying earnings power and improvement in sentiment.