Aberdeen Asset Management's Top Buys: 2 Potential Longs, 1 To Avoid

by: The Analyst Hub

Founded in 1983, Aberdeen Asset Management PLC is an investment advisory and hedge fund firm managing over $50 billion in equities. Aberdeen Asset Managers Ltd. employs a bottom-up, fundamental approach, investing in established companies that are attractively priced and have quality management teams and solid business models. The firm maintains a long-term focus in employing buy and hold strategies. Aberdeen determines a company's worth based on quality and price. The quality component places emphasis on reviewing the management strength, business focus, balance sheet and corporate governance. The price component is determined relative to key financial ratios, the market, peer group and business prospects. A top-down analysis is also performed as a secondary measure when building a portfolio. Investments typically have higher ROE, ROA and lower debt-to-equity than the market average.

The following is a list of its top seven buys from the last quarter according to its latest 13F filing with SEC.



Shares Held - 09/30/2011

Shares Held - 12/31/2011

Change in shares

Vale S.A.





Pepsico Inc.





Petroleo Brasileiro





Tenaris SA





Fomento Econ





Lukoil Oil Company





Banco Santander-Chile





My favorite long candidates among above stocks are Petroleo Brasilerio (PBR.A) and Tenaris (TS). However, one stock I would like to avoid from the above list is Pepsico (PEP).

Petroleo Brasileiro is a Brazilian integrated oil and gas company. It operates in five segments: exploration and production; refining, commercialization and transport of oil and natural gas; petrochemicals; distribution of derivatives, electrical energy, biofuels and other renewable energy sources.

Petrobas has one of the strongest fundamentals among the global oil companies, with several catalysts for its stock price appreciation, including strong production growth momentum; additional expected announcements related to ongoing exploration work in Brazil, and new projects coming on stream in its international units. From a short term perspective, I expect the company's 2012 output to be better than 2011. Petrobas' output in 2011 was adversely affected by unusually high maintenance. Things are expected to be better in 2012, with fewer disruptions from unscheduled maintenance. Full year production from the key units such as the P-56 and P-57 should also help to add a bit more growth than 2011.

Tenaris S.A. is a holding company which is engaged in the business of manufacturing of steel pipe and distributing operations. The Company operates in two business segments: Tubes and Projects. Tenaris has underperformed the broader markets in the last couple of years, making the stock valuations pretty attractive. Its stock performance is expected to reverse going forward, with margins and volumes grinding higher over the coming quarters as demand for premium OCTG significantly outpaces the growth in the overall market. I see following catalysts for the stock:

  • Strong levels of activity in Oil & Gas sector, which is helping Tenaris in improving volumes
  • Improving mix due to higher sales of premium products, particularly in US shales. Premium products have ~40% margins as compared to ~20% margins of conventional OCTG products.
  • Price Adjustments, particularly in premium products
  • Improvement in raw material costs, which is expected to reflect in P&L over next several quarters

One stock in the above list which I would like to avoid is Pepsi Co. Pepsi has invested almost $7 billion in acquisitions in last 24 months in its attempts to diversify beyond its core soft drinks business. This is more money than it had spent in total in the prior decade. This spending has come at a cost of ad expense, which has badly underpaced its #1 global competitor Coca-Cola.

Pepsi's ad spend has been ~3% of sales vs. 8% for Coca-Cola. This has led to market share losses in Pepsi's core business and has hurt brand development and innovation. The acquisition deals haven't yielded great results either, as is evident from Pepsi's EBIT margin decline (-240 bps) since 2008. On the other hand, Pepsi's debt/EBITDA ratio has increased to 1.85x now from 0.65x three years ago.

Going forward, the weak fundamentals trends are expected to continue in the near term, given weak U.S. consumer spending, commodity cost pressures, market share losses and unfavorable y/y forex trends. Consensus estimates remain too high for 2012 which I believe are unrealistic.

The company is trading at comparable valuations with other consumer stocks like the Hershey Co. (NYSE:HSY), Kraft Foods (KFT), Coca-Cola, Procter & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL) which are growing volume as fast and have better cash usage. I see a further downside in Pepsi as investors shift to better avenues.

The only upside risk I see to my short thesis is Pepsico's business review, which it will discuss with analysts and stockholders early this year. The company has extended this review, which was earlier scheduled to be completed by December. In my opinion, this delay only signifies that fundamentals are becoming incrementally worse, and it is not easy to change the direction of the trend.

I won't be worrying if the company comes up with any superficial discussion or optical value creators, like spin-offs, etc., after the review. However, any major cost-cutting initiative will be a slight positive for the stock. I won't change my negative thesis in the near term unless there are some major management changes in the company, and to be honest, I don't see much likelihood of that happening.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.