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RSP Annual Review Part III in 3D

Recs

3

December 21, 2011 – Comments (0)

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)

Hits

•  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.

Miss

•  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)

Hits

•  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.

Miss

•  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)

Hits

•  Warren

•  Edward

•  Buffett

•  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.)

Miss

•  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)

Hits

•  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.

Miss

•  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.


Takeaways

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.

Foolish best,

Jason (long Berkshire Hathaway)

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