Having emotional discipline is a critical asset for any investor, but particularly for those who are value oriented. Even if investors had access to the innermost thoughts of Michael Price or Warren Buffett, they might still fail miserably in the market if their emotions ultimately dictated their actions. Controlling spontaneous reactions and not letting them guide one's decision making is what having emotional discipline is all about. Emotional discipline is the value investor's greatest strength. It is the foundation upon which all is built. Investors who possess a high degree of emotional discipline have a significant advantage, competing more effectively in the public markets. In the article I analyze Fir Tree Partners holdings. Fir Tree is one of the best value oriented hedge funds. I give my opinion based on each company's fundamentals and projected growth.
Express Scripts (ESRX)
In the last earnings report, ESRX beat revenue expectations. Express Scripts reported Q1 adjusted earnings of $0.73 per share, $0.04 worse than the Capital IQ Consensus Estimate of $0.77 while revenues rose 9.4% year/year to $12.13 billion vs the $11.47 billion consensus. I like the fact that ESRX reported solid revenue growth. Management issued in-line guidance for fiscal year 2012, forecasting adjusted EPS of $3.36-3.66 vs. $3.65 Capital IQ Consensus Estimate. Management continues to expect the acquisition of Medco to be slightly accretive during the integration period and moderately accretive once the integration is complete, which is anticipated in the first half of 2014.
I recommend to buy shares of ESRX as the company is now positioned to be the dominant industry leader and should realize at least $1 billion in annual net synergies from the MHS acquisition once the integration is complete. Moreover, long-term industry fundamentals remain solid, including the generic wave, mail-utilization opportunities, and specialty pharmacy penetration.
Google reported earnings that beat expectation. The company reported Q2 earnings of $10.12 per share, $0.03 better than the Capital IQ Consensus Estimate of $10.09 while revenues rose a strong 39.0% year/year to $9.61 billion vs the $8.41 billion consensus. The market got very encouraged to see such revenue growth. Google also reported solid paid clicks growth. Its Q2 paid clicks increased +1% in comparison to last quarter and +42% y/y. The market pays attention to that.
I note that core net revenue growth was 21% y/y, which was below average analyst estimates at 22% but organic growth was steady at 25%. I believe that search improvements along with mobile and display growth offset a slowing in search queries.
I like the fact that Google's management continues to invest in display technologies, which has helped Google attain a strong position in the market. According to research firm eMarketer, Google is expected to be the fastest growing platform over the next few years, taking 22% of the market by 2014. By then, Facebook is expected to fall back to the second position with a 17% market share, with Yahoo s 8% pushing it to the third position. Google's gains are expected to come from its mobile display ads, Youtube and DoubleClick. I recommend Google because shares are still cheap and the business is one of the strongest in the whole technology sector.
Fir Tree Partners also invested in Equinix (EQIX). I have a bullish view in EQIX based on two key growth factors. First, a positive outlook for global data center demand. Second, despite EQIX's share outperformance, current valuation does not appear to price-in any upside from a REIT conversion, which I view as likely in 2014
News Corporation (NWSA)
I think that it was encouraging to see that NWSA management confirmed that it intends to pursue the separation of its publishing and media and entertainment businesses into two distinct publicly traded companies. Upon closing of such a transaction, shareholders would hold interests in a world-class publishing company, consisting of the largest collection of best-in-class publishing assets and a new digital education group. I think that the spin-off will create an unmatched global media and entertainment company. Each separated company will benefit from enhanced strategic alignment and increased operational flexibility.
I recommend NWSA because its management is taking shareholder-oriented actions to unlock value. The announced spin-off represent two important developments:
- Shedding exposure to Europe and to challenged publishing assets
- Isolate the overhang of the phone hacking scandal.
I think the spin-off would be positive for shareholders. This split would separate NWSA's low growth print businesses from the faster growing entertainment segments, such as TV and film. It also separates US businesses from international businesses, allowing for more geography-specific investing.
Fir Tree also invested in Time Warner Cable (TWX), another media company I like. Time Warner recently beat expectations. TWX reported Q1 earnings of $0.67 per share, excluding non-recurring items, $0.02 better than the Capital IQ Consensus Estimate of $0.65 while revenues rose 4.4% year/year to $6.98 billion vs the $6.82 billion consensus. Management reaffirmed its 2012 full-year business outlook and increased its share buyback plan.
In the last earnings report, Yahoo reported Q2 earnings of $0.27 per share, excluding non-recurring items, $0.01 better than the Capital IQ Consensus Estimate of $0.26 while revenues rose 0.5% year/year to $1.08 billion vs the $1.09 billion consensus. I think the revenue growth was too small for a technology company.
Cash flow from operating activities for the second quarter of 2012 was $275 million, a 17 percent decrease compared to $331 million for the same period of 2011. Free cash flow was $93 million for the second quarter of 2012, a 2 percent decrease compared to $96 million for the same period of 2011. I think that the most interesting take-aways from the earnings call included:
- Management repurchased $456 million of shares in 2Q12
- Sale of YHOO's 20% of Alibaba for $7 billion still on track to close by November, 2012
- Normalized operating income was $228 million which represented 21% of revenue. This is 250 basis points higher than guidance
- Display revenue was up 1% y/y in comparison to going down 4% in each of last 2 quarters.
I prefer Microsoft (MSFT) over YHOO. Fir Tree also holds a concentrated position in MSFT. Microsoft share are undervalued at just 11x earnings. The company also beat analyst expectations in the past quarter.