“…I found many books from the 1920s and 1930s on business. Among them was a book written by Benjamin Graham and David Dodd on security analysis. It changed my life and my investment philosophy forever.”
The fund’s stated objective is the growth of long term capital, with income as a secondary consideration. First Pacific utilizes a fundamental, bottoms-up approach to select investment opportunities, with special attention to equities that may have fallen out of favor as reflected in their P/E and P/B ratios. In order to minimize risk from investing in these so called “fallen” equities, meticulous research is utilized to find deep-value in these companies with strong leadership. Furthermore, special consideration is given to the following factors:
A. Current / future levels of profitability.
B. Book Value
C. Replacement cost of assets
D. Free Cash flow
E. Overall balance sheet health
As a result of their deep-value oriented strategies, their performance boasts of a 15.10% annualized return vs. the S&P 500 benchmark of 8.72% for the last 20 years. In terms of a more recent time frame, this year to date, the Capital Fund has returned 13.20% vs. the benchmark of 5.92%. Furthermore, in order to maintain their current success, the fund, as of July 9, 2004, has been closed to outside investors as FPA felt that this would allow the fund to maintain their investment flexibility.
FPA’s portfolio composition can be seen in the following tables. As seen in the table, a great deal of their fund is currently invested into oil & gas companies, along with industrials and consumer services. The fund composition remained largely the same quarter to quarter, with the exception of the elimination of financial stocks from their portfolio. At the moment, the current average P/E ratio of the overall fund is 17.7, with a P/B ratio of 1.9.
Overall Portfolio Composition
Oil & Gas
“Primarily we feel that we can know a lot more about a few companies and therefore, be more knowledgeable investors. As the number of companies increases, our ability to know them and understand them decreases significantly.”
As stated earlier, as of Q1 of 2011, the Capital Fund has $1.4 billion under management. This sum is divided into two categories, as $976 million is invested into 19 equities, while the remaining sum is held as cash and their equivalents. The Capital Fund on average holds between 25-40 equities, with a long term focus in order to minimize portfolio turnover. The following tables demonstrate the top five holdings of the Capital Fund. 50.14% of the fund is concentrated into the following five equities, and as reflected in their portfolio composition, 3 of the top 5 equities operate in the oil & gas industries.
Top Five Holdings for Q1
Total Value of Equity Portfolio
“In our investment deliberations, we always evaluate a stock, not only from how much it might rise but, very importantly, how much might the downside risk be, and are we getting paid sufficiently for the potential risk.”
Rowan Companies (RDC)
Rowan Companies is an international provider of drilling services, and manufacturer of drilling, mining, and timbering equipment. Their shares trade at $41.21 with a market capitalization of $5.21 billion. FPA paid an average price of $31.18, representing a potential 32.16% capital gain. Rowan Companies is the largest holding of FPA, comprising 11.69% of the equity fund.
Rowan Companies has a P/E ratio of 17.36, P/B ratio of 1.38, and a P/S ratio of 2.84. Their earnings for the year were $2.37, and at the moment, Rowan Companies currently does not pay out a dividend. Their profit margin was 15.40% on revenues of $1.8 billion. For the last 5 years, on an annualized basis, Rowan has grown its revenues and earnings by 7% and 1.4% respectively.
FBR Capital maintained its outlook of outperform on Rowan, while Morgan Stanley downgraded Rowan to equal weight from overweight.
GuruFocus rated Rowan Companies with the business predictability rank of 3.5 stars.
Ensco PLC (ESV)
Ensco is a contract drilling company providing services through four operating segments: Deepwater, Asia Pacific, Europe and Africa, and the Americas. Ensco currently trades at $58.55, with a market capitalization of $8.40 billion. This is a potential capital gain of 19.42%, as FPA paid an average price of $49.02 per share. Ensco is the second largest holding of FPA, comprising 11.08% of the overall fund.
Ensco has a P/E ratio of 18.62, a P/B ratio of 1.40, and a P/S ratio of 4.94. Their most recent earnings for the year were $3.15, with a dividend yield of 2.39%. Their bottom line income was $579 million on revenues of $1.696 billion, a 34% margin. Ensco has grown its earnings and revenues by 33% and 15.1% annually for the last 10 years.
Ensco received the ratings of “buy” and “outperform” by Canacccord Genuity, and FBR capital respectively. Jefferies placed a price target of $64 on Ensco, a potential capital gain of 9.3% from its current trading price. Ensco recently purchased IData and IGL 178 product lines from Quantum 3D, which grants access to a development line focusing on digital display devices.
GuruFocus rated ESV with the business predictability rank of 4.5 stars.
Rosetta Resources (ROSE)
Rosetta Resources is an oil & gas company located in Houston, Texas. They are involved in the exploration, acquisition, development and production of oil properties. Their shares currently trade at $45.55 with a market capitalization of $2.39 billion. Rodriguez paid an average of $18.32 per share of Rosetta Resources, a large potential capital gain of 148%.
Rosetta has a P/E ratio of 124.48, a P/B ratio of 4.37, and a P/S ratio of 7.62. Rosetta Resources posted earnings of $.37 for the year on sales of $308 million. Their net income was $19.05 million, yielding a 6.2% margin.
Rosetta Resources sold their oil properties in Colorado and California for $255 million. Portions of this sale are expected to be received in Q3 of 2011 after the transaction is completed. Furthermore, ROSE received the rating of “neutral” from Susquehanna and Zack’s respectively.
Arrow Electronic (ARW)
Arrow Electronics provides material planning, design services, inventory management, and other services to companies in the electronic and OEM market. Arrow Electronics currently trades at $45.81, with a market capitalization of $5.29 billion. First Pacific has an estimated cost average of $26.60 per share, yielding a potential capital gain of 72.21%.
Arrow has a P/E ratio of 10.26, a P/B ratio of 1.6, and a P/S ratio of .28. Their most recent earnings for the year were $4.47 per share with sales posted at $18.74 billion. With a net income of $479.63 million, this yields a profit margin of 2.55%. For the last 10 years, on an annualized basis, Arrow has grown its revenue and book value by 7.1% and 7.8% respectively.
Arrow raised its guidance for Q2 of 2011 with expected sales between $5.55-$5.95 billion. Furthermore, they expect earnings per share to fall between $1.30-$1.40. This surpassed the general consensus of most analysts, as they had expectations of $5.26 billion in sales, and earnings of $1.20 per share.
GuruFocus rated Arrow with the business predictability rank of 1 star.
Avnet Inc. (AVT)
Avnet is an industrial provider of services and electronic components to their consumers in the electronic sector. Operating through their subsidiaries, they provide a diverse range of services from supply chain management to system integration. Their shares currently trade at $36.54, with a market capitalization of $5.55 billion. FPA paid an average price of $23.95 per share, yielding a potential capital gain of 52.5%.
Avnet has a P/E ratio of 9.85, a P/B ratio of 1.83, and a P/S ratio of .29. Their earnings were $3.71 for the year, upon posted revenues of $19.16 billion. Their net income was $410 million, yielding a profit margin of 2.14%. Avnet has grown its revenue and book value by 4.2% and 3.2% annually for the last 10 years.
Avnet posted superior-then-expected earnings for Q3, but issued Q4 guidance below analyst expectations. In other developments, they have also reached an agreement with Circuitco to distribute Texas Instrument’s Beagle board products. Longbow Research placed a “buy” rating on Avnet, with a price target of $47.00, which is a potential capital gain of 28.6% with respect to the current trading price.
GuruFocus rated Avnet with the business predictability rank of 1 star.
For more information pertaining to Robert Rodriguez, and First Pacific Advisors, please visit: http://www.gurufocus.com/ListGuru.php?GuruName=Robert+Rodriguez