Portfolio manager of the FPA Crescent Fund and Contrarian
Value Strategy at
First Pacific Advisors
,
Steven Romick
, added one new domestic stock to his portfolio in the third
quarter: Analog Devices Inc. (
ADI
). The largest additions to the 10 holdings he increased are:
Interpublic Group of Companies Inc. (
IPG
), American International Group Inc. (
AIG
) and Oracle Corp. (
ORCL
).
Romick's diversified, risk-averse FPA Crescent Fund gained almost
20% over the 12 months ending June 30, 2012. He continues to
employ his bottom-up value strategy of buying cheap, typically
out-of-favor assets at discounts that would prevent permanent
impairment of capital, which he discusses in his
October GuruFocus interview
.
"The fact that we feel that we cannot lose money over a period of
time is a margin of safety. You can't just look at margin of
safety as being a discount to an asset value," he said in the
interview.
Analog Devices Inc. (
ADI
)
Romick purchased 3.47 million shares of Analog Devices at an
average price of $39. The new holding accounts for 2.2% of his
portfolio.
Analog Devices designs, manufactures and analog, mixed-signal and
digital signal processing (DSP) integrated circuits (ICs) that
measure and convert information such as temperature and light
into digital data. Such devices are found in the majority of
electronic equipment in the industrial, automotive,
communications and consumer markets. Analysts estimate that its
converter (44% of its business) market share ranges between 40%
and 48.5%, according to Gartner and Databeans.
Analog Devices' stock has declined 1.33% since it transferred to
Nasdaq on April 4. Romick tends to seek stocks in out-of-favor
industries, and semiconductor stocks have declined 11% year to
date, compared to a 12.7% gain for the S&P 500.
Analog Devices grew EBITDA per share at a 10.6% annual rate over
the last five years and free cash flow at 8.2%. Its 2011 free
cash flow declined to $778 million from $880 million in 2010.
From 2007 to 2011, it has returned more than 100% of its free
cash flow to shareholders in the form of share repurchases and
dividends.
Analog Devices has an $11.39 billion market cap and traded on
Monday for $38.55 with a P/E ratio of 17.7 and P/S ratio of 3.8.
The dividend yield of Analog Devices stocks is 3.2%. GuruFocus
rated Analog Devices
the business predictability rank of 4-star
.
Interpublic Group of Companies Inc. (
IPG
)
Romick purchased 2,658,200 shares of Interpublic Group at an
average price of $11, bringing his total holding to 7,080,000
shares.
Interpublic is one of the world's largest advertising and
marketing services conglomerates, operating in over 100
countries. Its stock has gained almost 18% year to date.
Interpublic's EBITDA grew at a five-year rate of 9.5% and revenue
at 0.4%. Free cash flow declined to $133 million in 2011 from
$721 million in 2010, and has been positive annually since 2007.
In the first half of 2012, the company repurchased 11 million
common shares at an average price of $11.
John Rogers, head of Ariel Investments, commented on Interpublic
in his second-quarter letter:
"... When confronted with economic challenges, companies can and
often do quickly scale back marketing and advertising to save
money. And yet, IPG not only grew but was able to show margin
expansion over the last four years-a period when tepid economic
growth was a headwind. All the while, the company also managed to
buy back half a billion dollars of dilutive convertible debt. In
so doing, Debt/EBITDA substantially improved from 2.81x to 1.92x,
which ultimately provided the company access to more favorable
debt markets. This level of debt reduction, along with the
company's repurchase of 52 million shares, has cut its diluted
share count from 553 million to 438 million shares-a 20% decrease
in shares outstanding. It is worth noting that even after this
hefty $700 million spend, the company still had the ability to
issue its first dividend in nearly a decade."
Interpublic has a $4.92 billion market cap. Its shares on Monday
traded around $11.45 with a P/E ratio of 14.6 and P/S ratio of
0.7. Interpublic's dividend yield is 2.1%.
American International Group Inc. (
AIG
)
Romick in the third quarter added 680,500 AIG shares at an
average price of $33, raising his total holding, which he
initiated last quarter, to 4,320,500 shares. AIG have rallied
almost 58% year to date.
AIG is the insurance giant rescued by government bailouts early
in the 2008 financial crisis. The insurer that year reported a
$99.3 billion loss, though it has increased net income each
subsequent year, most recently reporting $16 billion in 2011.
After reporting revenue of $11 billion in 2008, revenue fell
annually from $96 billion in 2009 to $64 billion in 2011. Free
cash flow fell in tandem, from $18 billion in 2009 to $35 million
in 2011.
Though some investors leapt on AIG shares close to when they
plummeted from the fiscal crisis - such as Bruce Berkowitz who
bought in each 2010 quarter and doubled down in the second
quarter of 2011 - other Gurus waited for AIG to get more on its
feet. Eleven Gurus initiated AIG positions in the first half of
2012, of which six initiated in the second quarter, including
Third Point's Daniel Loeb, who discussed the purchase at length
in his third-quarter letter:
"Longer term, we believe the company's operational turnaround
will help AIG realize its intrinsic value, as Chartis, AIG's
property and casualty arm, improves its return on equity to the
targeted 10 - 12% by 2015," Loeb wrote.
AIG on Tuesday trades for $36.65, about two-thirds of its $58.82
second-quarter book value. It has a market cap of $57.8 billion,
a P/E ratio of 18.4 and P/S ratio of 1.
Oracle Corp. (
ORCL
)
Romick bought 695,000 shares of Oracle at an average price of
$31, bringing his total holding to 5,155,000 shares. Oracle has a
52-week range of $24.91 to $33.81.
Oracle, an enterprise software and computer hardware products and
services company that services every Fortune 100 company, has
seen its stock increase 22% year to date. The company has an
18.2% five-year annual EBITDA growth rate, and 18.2% free cash
flow rate. It has also achieved 10 straight years of net income
growth. In 2011, it generated a decade-high $13.1 billion of free
cash flow, increased from $10.9 billion in 2010.
Oracle has been aggressively repurchasing shares. In its first
fiscal quarter 2013 (ended Aug. 31, 2012) it bought back 104.2
million shares for $3.1 billion, after spending almost $6 billion
on buybacks in the full-year 2012.
In its first fiscal quarter, Oracle's revenues declined 2% year
over year, with 19% declines in hardware systems revenues, and 4%
increase in software (including new software licenses, cloud
software subscriptions, software license updates and product
support) revenues.
Oracle President Mark Hurd expects double engineered system sales
and its new cloud business to drive the company's growth in
upcoming years, he said in the first-quarter press release. The
company expects double engineered systems sales to exceed $1
billion in the next year, and the cloud business is nearing a $1
billion annual run rate.
Oracle Corporation has a $151.36 billion market cap. Its shares
were traded at around $31.29 with a P/E ratio of 13, P/S ratio of
4.1 and dividend yield of 0.8%. GuruFocus rated Oracle the
business predictability rank of 5-star.
See Steven Romick's portfolio here. Also check out the
Undervalued Stocks, Top Growth Companies and High Yield stocks of
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