I like to evaluate what professional fund managers do with their portfolios. After I found several stocks that they share I examine the peculiarity of each company, that is, its business and management aspects plus how it compares with other businesses in the same industry. It is essential to invest in companies that are superior in relation to its competitors. I think that reading only the financial reports of a company is not enough to justify an investment. The essential point is to invest in companies that are within my circle of competence. I also emphasize each company's future prospects and management capability. In this article I analyze Don Yacktman's top picks. Yacktman is the founder of Yacktman funds, one of the best mutual funds in the industry. I analyzed his holdings via whalewisdom.com
Pepsico (PEP)
Pepsico recently reported earnings that beat expectations. PEP reported Q1 earnings of $0.69 per share, excluding non-recurring items, $0.02 better than the Capital IQ Consensus Estimate of $0.67 while revenue rose 4.1% year/year to $12.43 billion vs the $12.39 billion consensus. Constant currency net revenue increased 5 percent, led by double-digit growth in the Europe and AMEA divisions and mid-single-digit growth in PepsiCo Americas Foods. Net revenue benefited from 5.5 percentage points of effective net pricing, offset by negative foreign currency translation of 1 percentage point. I like the fact that management reaffirmed guidance for FY12, forecasting FX adjusted EPS -5% to ~$4.18, which may not be comparable to $4.10 Capital IQ Consensus Estimate. The company says FX is currently a 2% headwind, which would calculate to EPS of $4.09.
I think its valuation is quite compelling compared with peers. PEP's current trailing P/E is 15.1x compared with the industry average of 20.6x.
I like PEP's strong new product pipeline, robust international sales, ongoing manufacturing productivity initiatives and an active buyback stock program, which are all positives. PepsiCo is experiencing strong growth in the developing and emerging markets by providing a wide array of innovative products, backed by strong commercial programs, which has led to double-digit volume growth across a number of markets. In the fourth quarter of 2011, Pepsi reported double-digit revenue growth in Asia, Middle East and Africa fueled by double-digit growth in China, India, and the Middle East.
News Corporation (NWSA)
I like News Corporation's leading global franchises in TV, film and print. My belief is that the company is positioned to beat most of its peers by growing fiscal-year 2013 adjusted operating income in the mid-teens. The stock trades at the bottom of its peer group due largely to concerns with M&A risk and of contagion from the UK hacking scandal. I think that the company's continued aggressive share repurchases will help to reduce the multiple discount and, coupled with strong earnings growth, lead to price appreciation.
The company reported strong earnings. News Corp reported Q3 earnings of $0.37 per share,$0.06 better than the Capital IQ Consensus Estimate of $0.31 while revenue rose 1.8% year/year to $8.4 billion vs the $8.25 billion consensus.
I think that despite economic upheaval and the phone hacking scandal that resulted in the closure of the publication of "The News of the World," News Corporation experienced healthy performances across cable networks and its film studios, which were the catalysts that drove the quarter's performance.
After advertising revenue was hit hard by the recent economic downturn, News Corporation made efforts to add diverse revenue streams to hedge against economic cycles. The retransmission and affiliate fees from cable and satellite partners for the right to retransmit broadcast programming have been another source of revenue, which the company thinks would scale new heights in the coming years.
Microsoft (MSFT)
I believe expectations for PC shipments in 2012 face macro headwinds and could shake out lower, as euro weakness, consumerization of IT, and supply chain issues put pressure on the PC market. But I believe that Windows 8 is generating a lot of interest and I think that Microsoft could be the less affected company in the PC space if the macro environment deteriorates further.
I think that the market has viewed MSFT as "dead money" or a "value trap" over the past few years. My bullish investment thesis for MSFT is built under the number of new releases in several of MSFT's key products (Office 2010, Windows 7, Kinect, etc.). I think that company has one of the most promising product cycles (Windows 8, Windows 8 Server, Office 12, etc.) in its history in front of it, and is levered to numerous secular trends (cloud computing, virtualization, big data, etc.), which should enable MSFT to outpace IT spending and outperform its peers for the foreseeable future.
The shares are cheap. MSFT is trading at just 9.5X Forward P/E and EV/Ebitda of 6.65x. I think that MSFT shares offer a reasonable margin of safety and exposure to exciting products.
Sysco (SYY)
I think that Sysco is a high quality company with a strong moat. Sysco 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 revenue rose 7.6% year/year to $10.51 billion vs the $10.46 billion consensus.
Sysco operates a market-leading distribution business spanning food, restaurant supplies and equipment to everyone who sells or creates meals. Sysco owns nearly 20% share of this $200 billion+ industry, and it is hoping to increase this figure via large investments and by providing superior service in what we describe as a highly fragmented industry.
I like Sysco's business model and prospects for gaining market share in the near future. SYY has an enormous sales and distribution channels that its competitors simply cannot match.
I think that SYY is an attractive yield play (4% dividend yield) that trades at a reasonable valuation. Its forward P/E is just 14x and P/S a very conservative 0.4x.
Coca Cola (KO)
Coca-Cola is a solid pick from Yacktman. The company is generating great results driven by strong volumes and a more favorable product mix. I think the market is encouraged by the company's double-digit volume growth in India, as well as KO's high single-digit growth in China. I believe that shares are undervalued at just 17x consensus earnings 2012 forecast, compared with a five-year average annual range of 15.9-20.5x. The stock also appears favorably valued based on price/sales and price/cash flow multiples.
During the last reported quarter, the company saw positive volume growth across all five geographic operating groups. Coca Cola also continued to gain volume and value share globally in the nonalcoholic beverages and in every sparkling and still beverage category in which KO compete. Despite the challenges in Europe, the company is executing on all fronts, to drive performance and share gains. I think this is the reason that KO shares perform better than the market.
I think KO's management remains firmly committed to building strong brands and creating value in the United States to capture more than the fair share of the industry's profitable growth. In the last conference call, management expressed that in China it saw that there has been some moderate slowdown but it also believes that this is a natural progression and it is a positive for the long-term sustainable growth of the country. Another plus is KO's big stock buyback plans. Net share repurchases were near $850 million, which places the company on track to achieve the $3 billion target growth for 2012.
Other Yacktman stock investments
Don Yacktman also holds Pfizer (PFE) and Avon (AVP).
I like the combination of PFE and Wyeth businesses. Pfizer intends to commit more resources toward development of treatments in the fields of oncology, cardiology, metabolic disorders, neuroscience, immunology, inflammation and vaccines. These are areas in which the company believes it can take leading positions and ones where Wyeth has some complementary products and research. The company spent $9.4 billion on research and development in 2011. Pfizer' s decision to cut its R&D spend in 2012 indicates its intention to streamline R&D efforts.
Regarding Avon, it is interesting to see that since Coty pulled its bid for the company, AVP shares have sold off to pre-Coty bid levels. This has piqued the interest of many investors who are asking if shares are in a bottoming process. According to a recent report from UBS, investors start to focus on new management's plan to turn around the company. They see four major problems at Avon today:
- uncompetitive representative compensation,
- inadequate IT systems,
- cost of business is rising in the emerging markets, and
- low competitive products.
I would avoid AVP until I see more clarity in the new management's strategy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
