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Diamond Hill Capital’s Biggest Fourth Quarter New Buys
Posted by: Holly LaFon (IP Logged)
Date: January 20, 2012 05:29PM
Most of Diamond Hill’s funds were up in the double digits for the fourth quarter, outperforming their benchmark Russell 1000 index. The firm has noticed stocks increasingly moving in correlation with macro-economic forces, which has caused them to take into account the macro view more often, but also creates buying opportunities. The shift has not changed their fundamental approaching to stock picking, however. They still consider the factors that would affect a company’s future cash flows and buy when their estimate of intrinsic value provides a comfortable margin of safety. If there are any major uncertainties in some aspect of the company’s future, they pass. In the last ten years, Diamond Hill delivered a 10-year cumulative return of 204.0%, compared to the S&P 500’s 10-year cumulative of 16.4%.
In the fourth quarter, their four largest new buys are: Walt Disney (DIS), Hanesbrands (HBI), Selective Insurance Group Inc. (SIGI) and Diamond Foods Inc. (DMND).
Walt Disney Co. (DIS)
Diamond Hill bought 1,544,020 shares of Walt Disney in the fourth quarter at an average price of $50. Disney’s stock has a 52-week range of $28.19-$44.34 per share, with the lowest point of the range falling in the fourth quarter. It trades for $39 on Friday.
Diamond Hill noted in their fourth quarter letter, “During the quarter, we initiated a position in multimedia company Walt Disney Co. With a strong franchise and pricing power in many of their business segments, we believe the company will generate significant free cash flow over the long-term and management is committed to returning capital to shareholders through dividends and share repurchases.”
Walt Disney has a market cap of $70.85 billion; its shares were traded at around $39.44 with a P/E ratio of 15.6 and P/S ratio of 1.7. The dividend yield of Walt Disney stocks is 1.6%. Walt Disney had an annual average earnings growth of 14.1% over the past 10 years.
Disney has generated cash flow over $3 billion each year for the last eight years. In the fourth quarter of 2011, it declined 23% when the company made its final payment on its new cruise ship, theme park and resort expansions and other new guest offerings at its global resorts, though operating cash flow was up 6%. Cash from operating activities increased 6.3% for the year, but due to an additional $1.4 billion increase in capex, cash flow decreased by more than $1 billion to $3.4 billion.
Disney paid a dividend of $0.35 from 2008 to 2009, increased it to $0.40 per share in 2010, and increased it to $0.60 in November 2011.
Diamond Hill sold out its long-time position in Hanesbrands in the first quarter of 2010. A year later, it bought 96,555 shares at about $25, and closed out again in the next quarter at $29.44. In the fourth quarter they reestablished a position with 783,656 shares at about $25. This company also has a broad 52-week range of $21.74-$33.36, with the lowest point reached in the fourth quarter.
Diamond Hill said it bought Hanes for its funds after its stock price declined to an attractive discount to intrinsic value following weaker than expected third-quarter sales. It also believes that another apparel manufacturer’s pre-release of fourth-quarter earnings and lowered guidance for 2012 earnings due to slower sales growth and higher cotton prices also sent down Hanesbrand shares. “We believe there are key differences between the two companies,” Diamond Hill said in its fourth quarter letter.
Hanesbrands has a market cap of $2.39 billion; its shares were traded at around $24.57 with a P/E ratio of 9.1 and P/S ratio of 0.5.
The company’s third quarter earnings grew 44%, with operating margin of 12.4%, the highest in its history. Sales increased 5%, below the company’s expectations, due in part to a weak retail environment dueing the back-to-school period and retailers’ focus on tightly managing inventory levels in an inflationary environment. The company noted that its point-of-sales trends rebounded in September and October, and it remains confident it will achieve EPS growth for 2011 of more than 25%.
Selective Insurance Group Inc. (SIGI)
Diamond Hill bought 657,361 shares of Selective Insurance Group in the fourth quarter of 2011 at about $16 per share.
Diamond Hill says part of its reason for buying stock in the company was macroeconomic: “Over the past few quarters there have been signs that commercial property and casualty pricing is beginning to improve, which we believe gives Selective Insurance significant upside leverage as large commercial insurers lead pricing higher.”
Rates in general are increasing, according to an Advisen study, 2011 State of the Insurance Market, but it’s not celebration time yet. The report says that recent rate increases are likely being driven by equal parts market psychology and market economics. Yet the insurance pricing cycle, which has been on a downtrend for years, is showing signs of pulling back up. “In Q3 2011 the composite index posted its first increase since Q4 2005, when sharply higher property premiums in reaction to Hurricane Katrina caused a one quarter bump in the index. In the third quarter of this year, the index increased slightly from 114.42 to 114.68,” the study says.
In the third quarter, Selective Insurance had its highest catastrophe losses in its 85-year history, at $67 million, due in large part to Hurrican Irene. Selective also leads the industry with its tenth consecutive quarter of commercial lines renewal price increases which were 2.7%. Its book value per share has increased from 2008 to 2010, and its return on equity increased from 3.6% in 2009 to 6.1% in 2010. Return on assets increased for the first time in three years, from 0.1% in 2009 to 1.1% in 2010.
Selective Insurance Group Inc. has a market cap of $975.5 million; its shares were traded at around $17.99 with a P/E ratio of 38.3 and P/S ratio of 0.6. The dividend yield of Selective Insurance Group Inc. stocks is 2.9%. Selective Insurance Group Inc. had an annual average earnings growth of 5.2% over the past 10 years.
Diamond Foods Inc. (DMND)
Diamond Hill bought 202,015 shares of Diamond Foods in the fourth quarter of 2011 at about $48 per share. The company’s 52-week range is $26.11-$96.13, with the lowest point falling in the fourth quarter. Diamond Hill said it got the company at a discount when its “stock price declined
precipitously following the announcement of an investigation by their audit committee regarding whether a payment made to walnut growers in September should be accounted for in the fiscal year ended August 2011 or in fiscal year 2012.”
Diamond Foods also headed up 4 percent on Wednesday on reports that David Einhorn of Greenlight Capital sent a letter to investors saying he closed his short position on Diamond Foods.
The investigation of the accounting controversy has delayed Diamond’s proposed acquisition of the Pringles chip brand from Procter & Gamble Co. (PG). The $2.35 billion deal is now expected to close in the first half of calendar 2012, as opposed to its previously expected date of December 2011. Pringles is a billion-dollar brand with sales in over 140 countries. The merger will be immediately accretive, triple the size of Diamond’s snack food business, and create a snack-focused company with total revenues of approximately $2.4 billion.
“The company has become more focused on snack foods with Emerald nuts, Kettle Chips, and Pop Secret popcorn and would be even more so if a proposed acquisition of Pringles from Procter and Gamble is completed,” Diamond Hill said in its third-quarter letter.
Diamond Foods Inc. has a market cap of $716.6 million; its shares were traded at around $32.49 with a P/E ratio of 12.5 and P/S ratio of 0.7. The dividend yield of Diamond Foods Inc. stocks is 0.6%. Diamond Foods Inc. had an annual average earnings growth of 51.7% over the past 5 years.
See more of Diamond Hill Capital’s stock picks and their new fourth-quarter portfolio here.
Guru Discussed: David Einhorn: Current Portfolio, Stock Picks
Stocks Discussed: DIS, HBI, SIGI, DMND,