OK, maybe it's not really in 3D. But as promised Fools, here are the next four companies up for review in my RSP:
Clorox (NYSE: CLX)
• Gaining market share overall. Last quarter Clorox’s total company share was up 1.4 percentage points since FY08 versus private label’s one point.
• Home care is the company’s largest segment and they are growing share here.
• Sales up 9% in the international segment last year. Greatest volume gains were in well-established business in Argentina, expansion of Glad business in China, and distribution gains in various small emerging countries in Asia and Middle East.
• We knew it would more than likely be a concern and commodity costs are pressuring margins a bit. They have been able to offset this in many cases. For example, a 12% price increase on Clorox and 5% on Clorox 2.
Elbit Systems (Nasdaq: ESLT)
• The most recent quarter marked the 6th consecutive quarter of improving backlog up to $5.7 billion. Backlog matters as it eventually is converted into revenue (as long as the contracts complete).
• The company continues to maintain diverse global exposure with U.S. (34%); Israel (23%); Europe (17%); and the rest of the world (26%) representing revenue breakdown.
• Seemingly endless announcements of new contracts thanks in part to the number of areas the company specializes in including: airborne, land, C4I and electro-optics. Higher demand also leading to better gross margin.
• Less company specific but on a macro level Europe is a mess and it seems that financial crises are spreading. We are going to see some tightening of the purse strings, it’s a matter of how much I think.
Berkshire Hathaway (NYSE: BRK.B)
• OK seriously, very rarely do I put share buybacks in the “hits” category. They’re usually OK I guess, but often ill-timed and not the most productive use of capital. In this case I think it was a smart move as Berkshire was/is trading at exceptionally cheap levels and when Buffett himself calls it a best buy, we should probably listen.
• With the recent news that he will have his son serve as the non-executive chairman, Buffett has (hopefully) sealed the company’s fate that his legacy will carry on. I don’t believe this is something Howard will take lightly and the fact that he will be there to help the company move on I think will be a positive.
• Berkshire is a bit of a proxy to the greater economy, but this also serves as a source of tremendous strength in that the diversity of the companies under the Berkshire umbrella keeps it from being overexposed to any one real problem. (The exception here is in insurance and reinsurance, but those operations are also well-diversified.)
• I know the investment in Bank of America was on terms that only Buffett could muster, but I’m still not completely sold on how smart a move it was. Seems a bit more like an effort on his part to use his sway to convince us that things are really OK. It may turn out alright for him (in fact I’m sure it will considering the dividend yield alone), but as it stands he’s down to the tune of about $1.5 billion or so which isn’t exactly inspiring.
Gap (NYSE: GPS)
• Management continues to do a good job of returning cash via dividends and buybacks. Shares outstanding at the end of 2Q was 510,206,631; at the end of Q3 it was 488,305,236 so during Q3 they bought back 21,901,395 shares and according to the release in Q3 they spent $645 million which implies about $29.45 per share, but remember they also returned $55 million in dividends. We know that buybacks offset dilution, it’s a matter of how much. While it could be better at least we’re seeing the share count coming down.
• Focus on tripling their presence in China in 2012; this implies 45 stores and is encouraging to see as China continues to prove itself to be very taken with American brands.
• Cotton prices are a big deal for retail clothing. From the recommendation:
”Management recently made a key mistake in assuming that cotton prices had peaked. Because March through May represents its heaviest buying months for the holiday season, the company got caught holding the bag, and higher cotton prices have cut into initial earnings estimates.”
On the most recent call management noted that cotton prices are improving, down from the holiday peak. While prices are a bit higher for Spring 2012 versus Spring 2011, they are trending in the right direction.
• Same store sales continue to drag for the company as a whole. Resorting to heavy discounts is part and parcel in retail and if it has to be done, margins compress, profits shrink and the world looks generally less cool. However the one upshot here is that as they continue to streamline operations, close unprofitable stores and work to reignite the brands, when comps start coming back Mr. Market should be in a notably better mood.
As it stands Clorox and Elbit are two of the laggards on the card. Clorox, if you recall, was the subject of an Icahn takeover at one point and while that fizzled I think that’s OK as I’m still quite positive on the company. Elbit Systems is another one that suffers from being in an unloved industry and to top it off it’s located in Israel, so there is a little more risk there. However the underlying business is performing nicely, so no worries there either.
I don’t know that there’s much to say about Berkshire that hasn’t already been said. It’s probably going to remain in this portfolio until The Fool forces me to liquidate it (hopefully that won’t come anytime soon). And Gap is my resident value play on the scorecard. I’m keeping a close eye on this one; as it creeps up to my estimation of how much I think it’s reasonably worth, I’ll certainly consider unloading it to pocket the gain unless the story is different at the time (and it very well may be).
Until then, I am very happy with these four companies in the portfolio and don’t anticipate changing a thing. If I were to pick one that I’d consider adding to, honestly right now I’d consider Gap as I think retail is one of those things that just ebbs and flows and when the positive news starts coming out for this company as I believe it will (lower cotton prices, better comps), the stock will pop.
Jason (long Berkshire Hathaway) [more]
Welp, it's Christmas week so I suspect we will have it fairly light here at HQ. I'll be in all week just because we're up here for Christmas anyway so it'll be nice and quiet to get some things done that I've been putting on the back burner. Namely screening for some new ideas. Always looking for new ideas.
So as of market close on December 15, 2011 the Motley portfolio has returned 9.86% versus the market's 4.3% which means my edge over the market shrank a bit to 5.56 points. It was a pretty brutal week to say the least and a couple of companies that have been soaring came back to earth. Joy Global is the one that sticks out in my mind as they announced earnings last week. The stock got hammered, but there's nothing to worry about. You can check out my take here if you missed it before:
And here we go with review part deux. The next four companies on the scorecard:
Starbucks (Nasdaq: SBUX)
• The recent acquisition of Evolution Fresh is a great step forward in the company's "evolution" into new market opportunities.
• Restructuring into new geographic regions is important to the long-term vision of a global leader. We now have the China and Asia Pacific, Americas and EMEA regions.
• You cannot say enough about leadership in this case; ceo Howard Schultz may very well be the secret sauce. He’s passionate, he loves this business and he still owns 2.55% of the shares outstanding.
• The risk that comes with getting so big is that the experience loses all nuance, all personality. They must keep that feel of the little Italian cafe that inspired Schultz in the first place. Growth is good, but not if it causes you to stray from your original reasons for success and the brand may not translate as well globally as they hope; we'll have to see.
White Mountains Insurance (NYSE: WTM)
• Just keep on keeping on, tendered offers to buy back stock implying value and insiders still own more than 12% of the shares outstanding.
• Deals like Esurance are their specialty, they do it very well. Consider that they sold Esurance to Allstate for $1 billion and it increased the company’s book value by approximately $80 per share.
• The company’s investment portfolio is still geared more toward fixed income given the volatile markets and global uncertainty. This form of capital protection will serve the company well when things become a bit clearer.
• Exposure to global risk, European bonds/banks, natural disasters as reinsurers. There could be more exposure than meets the eye, similar to Berkshire Hathaway in this regard. However this is somewhat mitigated with wise and deliberate management, asset allocation.
Higher One (NYSE: ONE)
• Continue to grow signed students enrolled metric as they bring more schools on.
• New contracts will be with multiple banks enable them to spread risk a bit.
• Founders are very tied to the business and its success; message of spreading financial literacy is one that I really like.
• Legislation is always something that could come out of nowhere crimping profitability; I would like to see them diversify their revenue streams beyond banking and interchange fees at some point.
Heartland Express (Nasdaq: HTLD)
• Top notch owners tied to the business; insiders still own more than 35% of the shares outstanding.
• Love the market they cover in short-to mid range; that’s what they focus on and they leave the intermodal to others.
• According to FTR (Freight Transportation Research) trucking continues to outperform the general economic recovery and while it is slow, it’s tracking right along with the trucking recovery from 2001.
• High fuel prices can put a real crimp on profits. Further stagnant economy means less goods being shipped back and forth, so macroeconomic concerns aplenty with recession in Europe. Further the anticipated driver shortage due to regulation in 2012 will be a hurdle to clear in regard to pricing. Only the best will be able to pass those costs along.
I think it goes without saying but I'll say it anyway: I have zero interest in selling any of these. In fact I really want to add to SBUX, ONE and HTLD, so keep an eye out. HTLD is looking particularly interesting at this point given the trucking data I've read and its price today. I knew when I bought it that it wasn't cheap:
"Couple that with operating margins trending up over time and I can see shares being worth anywhere between $18-$20 today -- not much of a margin of safety, but the stock rarely looks cheap."
Given what the market's witnessed since that recommendation at the end of March (hint: it's down), I've got no worries here. It's a small cap that is tied to general economic conditions. That sucks maybe for now, but the business is still fundamentally sound. So I guess I've got some thinking to do.
Gotta say, golf in Georgia in December...money. Beautiful weather for sure. But I'm also glad to be back and I never really stop thinking about stocks. That stuff runs through my mind even on the golf course!
So as of market close on December 8, 2011 the Motley portfolio has returned 12.51% versus the market's 5.81% which means my edge over the market is 6.7 points and down ever-so slightly from last week. But it continues to beat the market and that's a streak I'm proud of.
I've been so busy working on the review issue for Stock Advisor that I've not had much chance to look for new ideas lately. That said, I do have a list of a few companies I want to add to the portfolio and I may just do that this month, price be darned! That's where adding in halfs or even thirds comes into play. And now that I know the money will continue to roll in for the portfolio every month, I am going to need to build up some positions as I won't go over 20 stocks in the portfolio. More than 20 becomes difficult to effectively manage, and truthfully it's about as diversified as I prefer to be. I don't even own 20 stocks in my own personal portfolio. The other point is to try to maintain about a 10% cash standing in order to take advantage of anything that may come up.
I had another fun week with some Market Foolery stuff. You can always find those here:
I also grabbed another spot on the John Phillips Show last night out in LA. That's the interesting thing that's being kicked around I mentioned a few weeks ago. They brought up the possibility of a nightly spot which seems like it would be pretty cool. It's not always just stocks either. We get into macro things and dabble in some other newsworthy events. It's always a lot of fun, so I hope it works out. They're in the process of examining a potential new time slot, so we'll probably talk more about the nightly thing at the beginning of the new year. But I still get on there once a week or so now which is fun. It's great practice too and they're really nice folks. And hey, it's LA man.
That's about it on my side of the world right now. I'll keep on keeping on and hope you all do the same. It's time for holiday parties, so please make sure to stay safe out there. No shame in calling a cab ;)