John Rogers founded his money management firm Ariel Capital Management LLC back 1983. He tries to assign intrinsic values to the companies he researches, and buy them when they are undervalued. He highlighted three companies on his website: Carnival Corporation, Hospira, Inc. and Mattel, Inc.
Carnival Corporation (NYSE: CCL)
Carnival Corporation is one of the world's largest multiple-night cruise companies. Carnival Corp. has a market cap of $22.5 billion; its shares were traded at around $36.75 with a P/E ratio of 17.5 and P/S ratio of 1.7. The dividend yield of Carnival Corp. stocks is 1.1%. Carnival Corp. had an annual average earning growth of 14.2% over the past 10 years. GuruFocus rated Carnival Corp. the business predictability rank of 2.5-star.
This is Ariel Funds’ comment on CCL:
Superior Balance Sheet
Carnival’s fortress-like balance sheet, industry-leading capital allocation and profitability have enabled the company to distance itself from the competition. In today’s difficult credit environment, Carnival is able to purchase new ships without borrowing, whereas its competitors must rely on third parties to finance their purchases, which puts them at a structural disadvantage.
Best Captain in Cruising
Micky Arison, Carnival’s CEO, literally grew up in the industry. He started in Carnival’s sales department, served as reservations manager in 1974, became vice president of passenger traffic in 1976, and moved up to president in 1979. In 1990, Micky took over as CEO of Carnival Cruise Lines from his father who built Carnival into a global leader from scratch. Given his long tenure in the industry, Micky has proven himself an innovator. An additional bonus for shareholders is Micky thinks like a shareholder, after all, he owns nearly 30 percent of Carnival. We are comfortable being in the same boat with Micky for the long run.
With the current clouds hanging over the stock, Carnival trades near 13x the company’s anticipated fiscal year earnings. We view this as very compelling for a dominant industry leader with a recognized brand and solid balance sheet. The market has gotten so negative on the stock that it is currently valuing the company below the replacement cost of its current fleet.
As of June 30, 2010, shares traded at $30.24, a 41% discount to our steadily growing private market value of $50.97.
Hospira, Inc. (NYSE: HSP)
Hospira Inc is a global specialty pharmaceutical and medication delivery company dedicated to Advancing Wellness by developing, manufacturing and marketing products that help improve the safety and efficacy of patient care. Hospira Inc. has a market cap of $9.21 billion; its shares were traded at around $55.04 with a P/E ratio of 15.4 and P/S ratio of 2.4. Hospira Inc. had an annual average earning growth of 11.2% over the past 5 years.
This is Ariel Funds’ comment on HSP:
Innovation Maintains a Wide Moat
Hospira’s business has high barriers to entry. First, injectable pharmaceuticals are far more complex to manufacture than pills. The solubility of different pharmaceutical ingredients and stabilization of those products in liquid form vary greatly. Second, Hospira has proprietary packaging technology that decreases medical errors through bar-coding and software, increases efficiency in product delivery through easy-use syringes, and decreases product waste. Third, manufacturing these complex products is heavily regulated. Some facilities must be sterile, for instance, and approved by the Food and Drug Administration for a particular product only. As such, Hospira’s facilities are costly to operate and can therefore take years to receive manufacturing approval. Finally, Hospira is currently the only American manufacturer to launch a biosimilar in Europe. As you may know, a biosimilar is a generic biologic. With billions of dollars of biological products losing patent protection in the coming years globally, this innovative product should offer Hospira another highly competitive advantage.
Biotech revenues are about $90 billion worldwide and growing 12% annually. Hospira has launched the biosimilar product of Epogen (EPO) in Europe. This launch is a highly strategic and first-to-market venture, as many countries currently do not have an approval process or “pathway” for a biological drug to have a generic drug as chemical pills do today. Europe was the first region to offer a pathway for biosimilar drugs. Biosimilars are highly complex and require an extremely high level of expertise. This is potentially a large opportunity for Hospira as biosimilars are rolled out worldwide in the coming years. Other countries are looking and learning from Europe’s experience in launching biosimilars as a means to implement a pathway within their own countries. The driver of this biosimilar focus is to lower the cost of these highly expensive, fast growing health care products. This remains an extremely controversial topic within the U.S. as the details to a product approval or “pathway” are still being debated.
As of June 30, 2010, Hospira shares traded at $57.45, an 11% discount to our private market value of $64.33.
Mattel, Inc. (NYSE: MAT)
Mattel, Inc. designs, manufactures, and markets a broad variety of family products on a worldwide basis through both sales to retailers anddirect to consumers. Mattel Inc. has a market cap of $8.35 billion; its shares were traded at around $23.22 with a P/E ratio of 14 and P/S ratio of 1.5. The dividend yield of Mattel Inc. stocks is 3.2%. Mattel Inc. had an annual average earning growth of 4% over the past 10 years.
This is Ariel Funds’ comment on MAT:
Led by CEO Bob Eckert for the past 10 years, Mattel’s leadership team has demonstrated an ability to manage the company in any environment. With his prior experience as CEO of Kraft Foods, Eckert brings an extensive understanding of consumers to Mattel. This management team has demonstrated an ability to reinvigorate brands, as it has updated Hot Wheels and Polly Pocket, while focusing on the brands that matter most. And rather than try to create the hot new toy of the season, they are focused on developing franchises that pay off over the long term.
As of June 30, 2010, shares traded at $21.16, a 30% discount to our private market value of $30.07.