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Diamond Hill Capital Sees Value in Comcast, VF, CareFusion and Staples
Posted by: Holly LaFon (IP Logged)
Date: April 20, 2012 11:55AM

In the fourth quarter, Diamond Hill Capital Management (DHIL) added only four new stocks to their portfolio: Comcast (CMCSA), VF Corp. (VFC), Carefusion Corp. (CFN) and Staples (SPLS). Diamond Hill are value investors looking for companies worth significantly less than their intrinsic value. Over the last ten years, Diamond Hill’s small cap fund returned 125.6%, beating the S&P 500’s 34.9% return.

Diamond Hill purchased 3,185,761 shares of Comcast (CMCSA) for their portfolio at an average price of $26 per share. After a brief dip in the latter quarters of 2011, Comcast’s shares have rallied 24% year to near their 52-week high of $30.41 after the company reported its year-end results which included 11 months of results with NBC Universal, which Comcast acquired 51% of in January 2011.

Revenue at the combined companies increased 47% to $55.8 billion, earning per share increased 16.3% to $1.50, and free cash flow increased 30.1% to $7 billion.

The company is in turn paying out more to shareholders. It has authorized a new $6.5 billion stock repurchase program and plans to repurchase $3 billion worth of share in 2012. The dividend was also raised 44% to $0.65 per share annually.

Diamond Hill added 645,801 shares of VF Corp. (VFC), the world’s largest apparel company with $9.5 billion in annual sales and ninth-largest by market cap, at an average price of $132 per share. VF is U.S.-based global apparel company that markets products primarily under its owned brand names and acquired Timberland in November 2011. Since early 2009 its stock has been on an almost uninterrupted upward trajectory to a 52-week high of $150.27.

VF Corp. has been growing its revenue at a pace of 5.5% over the last 10 years, and EBITDA at 9.7%. It has increased the cash on its balance sheet to a record $1.6 billion, with $3.1 billion in debt, which doubled from 2010. The dividend has risen each of the last ten years, and was $2.61 per share in 2011.

Diamond Hill bought 120,950 shares of Carefusion Corp. (CFN) at an average of $23 per share. The company’s shares had fallen to near their 52-week low in January but began to rise after the company reaffirmed fiscal 2012 revenue guidance of 3% to 5% revenue growth and narrowed earning per share growth to a range of $1.75 to $1.85.

The company’s free cash flow has been dwindling for the past three years, from $674 million in 2009 to $198 million in 2011. Currently, it is focusing on leveraging operational efficiencies to reduce complexity and drive bottom-line growth that outpaces its top-line growth. Last year, it expanded outside the U.S. through its acquisition of automation innovator Rowa.

The firm’s smallest new position is Staples Inc. (SPLS). It bought 11,493 shares at an average price of $14.50. Staples is an office products company with operations in North America, Europe, Australia, South America and Asia. In the last five years its stock price dropped 41%, and it has a low P/E of 11.2.

Staples’ revenue has grown every year for the past ten, at a rate of 9.8%, and EBITDA increased at a rate of 11.2%. It has generated positive free cash flow for the past ten years, which improved to $1.2 billion in fiscal 2012 from $1 billion in 2011.

Growth has slowed recently though. In fiscal 2011, total sales increased 2% to $25 billion over the prior year, and net income increased 12%. North American retail sales increased 1%, and the company opened 20 stores and closed 12 stores in the U.S. and opened 11 stores and closed 2 stores in Canada. International sales increased 3% in U.S. dollars.

For 2012, the company expects slow growth in the U.S. economy and soft demand in Europe, with sales growth in the low single digits.

In April, SEC reports showed that pay for Staple’s chairman and CEO Ronald Sargent dropped 42% to $8.9 million, after the company’s stock fell 39% in 2011 and growth was weak.

See Diamond Hill Capital Management’s complete portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Diamond Hill Capital.

Guru Discussed: Diamond Hill Capital: Current Portfolio, Stock Picks
Stocks Discussed: CMCSA, VFC, CFN, SPLS, DHIL,
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