First Pacific Advisors
is a money management firm located in California with about $20.1
billion in assets under management. Two managing partners at the
firm are the celebrated value investors
. Core values at the firm are long-term thinking and paying less
for securities than their intrinsic value to avoid permanent
In the second quarter, the firm's managers found 9 new
opportunities for their portfolio of 130 stocks. The largest new
buys are: CareFusion Corp. (
), Health Net Inc. (
), Ares Commercial Real Estate Corp. (
), Enzon Pharmaceuticals Inc. (
CareFusion Corp. (
is a pharmaceuticals and biotechnology company that helps
hospitals increase the quality of their care. FPA bought
3,695,000 shares of the company at an average price of $25, in
between its narrow 52-week range of $22.30 and $27.29 per share,
and near the same price it was trading at the beginning of 2010,
$26, several months after it began trading on the NYSE subsequent
to spinning off from Cardinal Health in August 2009. In 2011 it
underwent a major restructuring and divided into two segments:
Medical Systems and Procedural Solutions, and involved the laying
off of 850 employees.
According to filings, CareFusion's revenue has been rising since
the spin-off in 2009, while net income has been mixed. In the
most recent quarter ended March 21, 2012, the company's revenue
increased by $77 million to $919 million, due to strong
performance in its Medical Systems segment, helped by its
acquisition of Rowa in August 2011, while revenue from its
Procedural Solutions segment declined, impacted by its sale of
Onsite services in 2011.
The company also had to increase reserves in its Medical Services
segment due to costs associated with problems in some of its AVEA
ventilators in the quarter ended Sept. 30, 2011. The total charge
was about $9 million for the nine months ended March 31, 2012.
CareFusion is a cyclical company and typically has higher sales
in its second and fourth quarters and lower sales in its first
and third quarters of its fiscal year. (FPA bought during its
fiscal fourth quarter.)
Romick comments on CareFusion in his
: "In this country, it has dominant market positions in a
majority of its businesses. CFN's products and services are
particularly attractive because they help lower hospitals'
operating costs. With new, highly motivated and experienced
management at the helm, we believe CFN could improve its R&D
productivity and grow international sales at a faster rate. This
should translate into better long-term EPS growth. Management's
actions to date should increase the company's operating margin to
a level more commensurate with its strong share position and in
line with similarly positioned medical device companies. The
company is trading at ~10x cash earnings and it has minimal net
debt leverage, so we find CFN to be an attractive investment."
Health Net Inc. (
is another health care company, which focuses on administering
health benefits through group, individual, Medicare, Medicaid and
the U.S. Department of Defense. In April, it sold its Medicare
PDP business to CVS Caremark (
). FPA previously made a significant profit on this stock. It
bought a total of 2,881,700 shares in the third and fourth
quarters of 2009 at average prices of $15 and $19.50, then sold
out in the first and fourth quarters of 2010 at average prices of
$24.50 and $27.
Their new investment is of 508,000 shares at an average price of
$30. The stock has since slumped 31% from that price.
After a run of top-line growth from 2002 to 2009, the company's
revenue has been in decline, and earnings dipped to $72.1 million
or 80 cents per share in 2011, compared to $204.2 million or
$2.06 per share in 2010. The decline was due to the setback of a
legal judgment in the first quarter of 2011 that cost $177.2
million pretax in charges and resulted in a $108.2 million net
loss for the quarter.
In the second quarter ended June 30, 2012, the company warned
that its future results would be negatively impacted by higher
medicare and Medicaid costs. It lowered its GAAP EPS projections
for 2012 to a range of $1.45 to $1.55, down from the previously
expected $2.85 to $3.00 per share. The company particularly
struggled with lower Western Region Operations and Government
Contracts net earnings from higher than expected commercial
health care costs and higher than expected Medicaid health care
"We currently are actively engaged in what we believe are
productive discussions with the state of California's Department
of Health Care Services (DHCS) on a wide range of issues,
including rates for Medi-Cal and the SPDs," said Jay Gellert,
Health Net's chief executive officer. "Based on our experience to
date, current SPD rates are inadequate. We are hopeful that these
discussions with DHCS will result in a process intended to ensure
adequate rates going forward.
In the second quarter, the company's revenues increased 7.1% year
over year due to an increase in health plan services premiums.
For the six months ended June 30, its revenue was down 5.7%
primarily due to a decline in Government Contracts revenue from a
change in one of its contracts.
Ares Commercial Real Estate Corp. (
is a commercial real estate loan company located in Chicago, Ill.
It is one of three investment teams of Ares Private Debt Group.
FPA bought 218,112 shares of Ares in the second quarter, so it
accounts for just 0.048% of his portfolio. The company began
trading on the NYSE in April 2012, and shares are down more than
7% to date. Its IPO price was $18.50 per share, and shares sell
on Wednesday for $16.68.
In its only SEC filing so far, the company reported financial
results for the first quarter of 2012. Ares Commercial reported
that it had cash of $4.6 billion at March 31, 2012, compared to
$1.2 billion at Dec. 31, 2011. Net earnings for the quarter were
$508 million. Commencing with the year ended Dec. 31, 2012, the
company intends to be taxed as a real estate investment trust
Enzon Pharmaceuticals Inc. (
is a biopharmaceutical company that develops and commercializes
therapeutics for the treatment of cancer and related diseases.
FPA bought 379,826 shares of the company at an average price of
$6.50. Seth Klarman owns 18.63% of shares outstanding, and 12.2%
is owned by Carl Icahn. FPA's new position accounts for a mere
0.033% of their portfolio.
The company has been trading on the NASDAQ since 1984 and around
the turn of the millennium traded for more than $70 per share.
Over the last five years the stock has declined a little more
Its financial history shows that during this relatively stagnant
period for its stock, the company's revenue per share declined at
an annual rate of 25% and it suffered net losses in 2010 and
2011. However, the company in 2010 sold its specialty
pharmaceuticals company, which affected its financial reporting
so that without the divested company, it earned $51.4 million in
2009 and $57 million in 2008. Enzo has since repositioned itself
as a research and development company.
Enzo has four product candidates: PEG-SN38 and mRNA antagonists
targeting the Androgen Receptor (AR), Hypoxia-Inducible Factor-1a
(HIF-1a) and Survivin. Its strategy is to advance its pipeline as
quickly as possible. Currently it derives revenues from royalties
and licensing agreements with other companies for sales of
products including its Customized Linker Technology. The majority
of its royalties revenue came from royalties on a product called
PEGINTRON� which is marketed by Merck & Co. (
For the six months ended June 30, 2012, the company's royalty
revenue decreased 4% year over year to $20.1 million, largely due
to reduced foreign sales of PEGINTRON. The company reduced
expenses through several restructuring programs over the last
year which reduced salary and benefits expenses, and other cost
savings measures. The company also repurchased 0.8 million shares
for a cost of %5.3 million during the second quarter.
See the rest of FPA's portfolio here. Also check out the
Undervalued Stocks, Top Growth Companies and High Yield stocks of
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