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T. Rowe Price’s Brian Rogers Buys Two Spin-Offs, a Science Company & Loews in the Fourth Quarter
Posted by: guruhl (IP Logged)
Date: January 25, 2012 11:30PM
Brian Rogers has been portfolio manager of T. Rowe Price Equity Income Fund (PRFDX) since its inception in 1985. His investing style is conservative and value-oriented, and he prefers stocks of established firms that are undervalued or out of favor and that pay above average dividends. As for the future, Rogers does not believe the U.S. will have another recession, but will more likely have a “growth recession,” which is marked by low economic growth and high unemployment. He also believes investors are being too cautious due to the European sovereign debt crisis and the U.S. budget deficit being unresolved. Instead, he believes, the events have created opportunities for long-term equity investors. High-quality companies with cyclical exposure, attractive dividend yields, and the ability to persist through difficult times are consequently available at attractive prices.
In the fourth quarter, his largest new buys are: Thermo Fisher Scientific (TMO), Beam Inc. (BEAM), Xylem (XYL) and Loews (L).
Thermo Fisher Scientific (TMO)
Rogers bought 4,250,000 shares of Thermo Fisher Scientific for $48 per share in the fourth quarter. It hit a 52-week high of $65.86; then, it hit a 52-week low of $43 per share in the fourth quarter when Rogers bought. Thermo Fisher makes analytical instruments, lab equipment, software, service, consumables and reagents. Thermo Fisher Scientific has a market cap of $20.12 billion; its shares were traded at around $52.48 with a P/E ratio of 13.4 and P/S ratio of 1.8. Thermo Fisher Scientific had an annual average earnings growth of 12.7% over the past 10 years. GuruFocus rated Thermo Fisher Scientific the business predictability rank of 2.5-star.
Thermo Fisher’s stock price began sliding in earnest at the end of July when the company released its second quarter financial results. However, most of its results were positive. Its earnings per share grew 22% to a record $0.99. Revenues grew 12% to a record $2.9 billion, and it closed the acquisition of Dionex to create a leading chromatography company, and announced it would acquire Phadia to strengthen leadership in specialty diagnostic. The company also bought back 3.8 million shares in the quarter for $225. It then raised its adjusted EPS and revenue guidance for fiscal 2011.
The third quarter had similarly great results. Revenues grew 13% to a record $2.97 billion, along with adjusted EPS grew 23% to a record $1.07. It bought back 4.0 million shares of company stock for $225 million and completed the acquisition of Phadia.
The last 10 years showed similar trends. Revenue per share grew at an annual rate of 10.4% over the last 10 years, and free cash flow per share grew at a 42.7% annual growth rate. Liabilities, however, have mounted to about $8 billion, with about $1 billion cash on its balance sheet.
Beam Inc. (BEAM)
Beam Inc. is a premium spirits company. The Company provides a range of spirits, including bourbon, liqueur, rye, vodka, scotch, rum, gin, brandy, cognac, cordials, tequila, and sherry worldwide. It is the remainder of the former Fortune Brands holding company, which spun off several of its unrelated businesses. Beam Inc. has a market cap of $8.17 billion; its shares were traded at around $52.73 with a P/E ratio of 19.6 and P/S ratio of 1.1. The dividend yield of Beam Inc stocks is 1.5%.
Rogers originally bought 4,538,200 shares in the second quarter 2011 at about $64 per share, but sold out in the third quarter at about $58 per share. In the fourth quarter he re-opened a position with 3,488,200 shares at about $50 per share.
Beam’s stock has increased 18% since it changed its name on Sept. 19, 2011. As a standalone spirits business, the company’s net sales increased 20% and diluted earnings per share increased 13% to $0.53 from $0.47 in the year-ago quarter. Net sales increased 10% and diluted earnings per share were up 11% from the start of the year to Nov. 3, 2011.
"As anticipated, growth in Beam's third-quarter operating income was tempered by factors including our increase of more than 20% in brand investment plus start-up costs related to new products. Starting here in the fourth quarter, increases in brand investment will moderate to a rate more in line with sales growth," said Matt Shattock, president and chief executive officer of Beam.
The company expects that its global spirits market will grow at a low-single-digit rate in 2011. In January, it hired a managing director of emerging markets for Asia Pacific/South America region, a newly created role that will focus on driving increased brand and market growth in Beam’s two largest emerging markets, Brazil and India, as well as Japan and Korea.
Xylem Inc. provides water technology solutions, water and wastewater treatment solutions and industrial pumps and related technologies. Xylem Inc. has a market cap of $4.87 billion; its shares were traded at around $26.14. The dividend yield of Xylem Inc. stocks is 0.4%.
Rogers likely received his 2,626,100 shares of Xylem at in the fourth quarter 2011 when it spun off of one of his holdings, ITT Corp. (ITT), and began trading as a standalone company on the NYSE on Oct. 14, 2011. Since then it went up 10%.
Xylem’s third-quarter revenue grew 17% year over year, to $939 million. Orders increased 19%, operating income increased 17%, and its free cash flow equaled $235 million. The company also completed its acquisition of YSI, bringing its analytical instrumentation platform to $300 million.
Keeley Funds wrote about the ITT spin-off of Xylem in its annual letter to shareholders: “Although we are intrigued by a number of recent opportunities, we believe that the three-part breakup of ITT Corp., which will take place in the fourth quarter of 2011, looks very compelling. The original ITT was founded in 1920. From 1960 to 1977, with Harold Geneen at the helm, ITT acquired more than 350 companies – at one time securing deals at the rate of one acquisition per week. ITT’s portfolio of companies included well-known businesses such as Sheraton Hotels, Avis Rent-a-Car, Hartford Insurance and Continental Baking, the maker of Wonder Bread. Under Geneen’s management, ITT grew from a medium-sized business with $760 million in sales to a global conglomerate with $17 billion in sales. In 1995, ITT split into three separate independent companies: ITT Corporation, which was focused on the hotel and gaming businesses, ITT Hartford which became a stand-alone insurance operation, and ITT Industries, which started as a collection of manufacturing companies (which subsequently changed its name back to ITT Corporation). On January 12, 2011, ITT Corporation announced its plans to separate into three independent publicly traded companies by the end of the year: ITT Corporation (ITT) – Industrial Products, Xylem Inc. (XYL) –Water Products and Services, and Exelis Inc. (XLS) – Defense and Infrastructure Solutions. While we have conducted research on all three components of the restructuring, we believe two of the three opportunities to be the most compelling and expect to establish positions soon after the spin-offs are completed.”
Rogers bought 1,450,000 shares of Loews Corp. in the fourth quarter at $38 per share. The company’s stock hit its 52-week low of $32.90 in that quarter. Loews Corporation is a holding company. Its subsidiaries are engaged in the following lines of business: property, casualty and life insurance; the production and sale of cigarettes; the operation of hotels; the operation of offshore oil and gas drilling rigs; and the distribution and sale of watches and clocks. Loews Corp. has a market cap of $15.23 billion; its shares were traded at around $38.44 with a P/E ratio of 12.4 and P/S ratio of 1.1, which are not very low compared to its history.
The dividend yield of Loews Corp. stocks is 0.6%. Loews Corp. had an annual average earnings growth of 5% over the past five years and 17.6% free cash flow growth over the past ten years. In 2010, its cash flow was negative $159 million.
Loews Corp. is one of only four companies that have 100% Buy ratings. "Really the common trend you're seeing in all these (top rated) companies, are companies that are either expected to see large earnings growth in 2012 — in the double-digit range 10-20% or higher; or companies where the long-term growth rate is expected to be in the double-digit range,” says John Butters, senior earnings analyst at Factset. Ten GuruFocus gurus hold Loews stock.
See Brian Rogers’ complete portfolio here.
Guru Discussed: Brian Rogers: Current Portfolio, Stock Picks
Stocks Discussed: BEAM, L, TMO, XYL, ITT, PRFDX,