Tweedy, Brown Company LLC is an investment firm led by four managing directors: William H. Browne, Thomas H. Shrager, John D. Spears and Robert Q. Wickoff Jr. As of March 31, 2011, it has over $702.7 million in portfolios. It is a value investing firm that follows in the footsteps of Ben Graham. The Tweedy Brown Value Fund returned 10.5% in 2010 and 2.8% in 2011 through March 31. In the first quarter 2011, Tweedy Browne Co LLC bought Cisco (CSCO), Johnson & Johnson (JNJ), Wells Fargo (WFC), Sk Telecom Co. Ltd. Sponsored (SKM), Sysco Corp. (SYY).
From the company’s web site: “Most investments in Tweedy, Browne portfolios have one or more of the following investment characteristics: low stock price in relation to book value, low price-to-earnings ratio, low price-to-cash-flow ratio, above-average dividend yield, low price-to-sales ratio as compared to other companies in the same industry, low corporate leverage, low share price, purchases of a company’s own stock by the company’s officers and directors, company share repurchases, a stock price that has declined significantly from its previous high price and/or small market capitalization.”
Cisco Systems Inc. (CSCO)
Cisco Systems Inc. is the worldwide leader in networking for the Internet. Cisco Systems Inc. has a market cap of $98.34 billion; its shares were traded at around $17.79 with a P/E ratio of 12.4 and P/S ratio of 2.4. The dividend yield of Cisco Systems Inc. stocks is 1.4%. Cisco Systems Inc. had an annual average earnings growth of 23% over the past 10 years. GuruFocus rated Cisco Systems Inc. the business predictability rank of 2.5-star.
Tweedy Brown acquired 3,687,747 shares in first quarter 2011 at an average price of $19.45 per share. In its first quarter shareholder letter, Tweedy Brown said that Cisco appealed to them because it was financially strong and statistically cheap with a dominant market position and potential for growth. They believe that the stock’s price has been down due to perceived competitive threats and possible slower rates of growth. They believe they bought the stock at about one third of its intrinsic value.
Cisco had net income of $7.8 billion in net income in 2010, up from $6.1 billion net income in 2009. Second quarter 2011 net revenue was down to $1.53 billion from $1.85 billion the year prior and $1.93 billion the quarter prior. February 10, the day the company announced second quarter results, the stock dropped steeply about 17%. Similarly, on Nov. 10, 2011, when the company announced first quarter 2011 results, the stock dropped about 20%.
In the third quarter, Cisco reported lackluster earnings again. Net income fell 18% to $1.8 billion, or $0.33 per share, from the second quarter’s $2.2 billion, or $0.37 per share. However, cash flows from operations were up to $3.0 billion in the third quarter of fiscal 2011 versus $2.6 billion in the previous quarter, and were unchanged from the same quarter in 2010 which was also at $3.0 billion.
In the last two quarters, 14 gurus bought into or added to their holdings in this once-flourishing company, as many believe the shares are significantly undervalued.
Johnson & Johnson (JNJ)
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johnson has a market cap of $180.2 billion; its shares were traded at around $65.76 with a P/E ratio of 13.6 and P/S ratio of 2.9. The dividend yield of Johnson & Johnson stocks is 3.3%. Johnson & Johnson had an annual average earnings growth of 9.3% over the past 10 years. GuruFocus rated Johnson & Johnson the business predictability rank of 4-star.
Tweedy Brown bought 214,020 more shares of Johnson & Johnson stock in the first quarter, for a total of 2,863,448 shares owned. The firm paid an average price of $60.67 per share. Johnson & Johnson has a favorable stock price history: up 13% over the last five years, up 2.78% the last year, and up 7.5% year to date. Tweedy Brown did not comment on Johnson & Johnson in its quarterly letter except to say that it was a top contributor to portfolio return on an absolutely basis in the fourth quarter.
Johnson in Johnson just had a 10-year-record net income of $13.3 billion in 2010. First quarter 2011 sales were $16.2 billion, a 3.5% increase to over first quarter 2010. Domestic sales declined 0.6%, but international sales were up 7.3%. The company said in its first quarter report that operational sales grew primarily due to several of its major pharmaceutical products. This month, traces of fungicide appeared in Johnson & Johnson’s HIV treatment Prezista and a recall has been issued.
In addition, Johnson & Johnson acquired a new company and is in the process of acquiring another, which could further increase profits. It bought Crucell, a global biopharmaceutical company based in the Netherlands, in the first quarter 2011 for euro $1.75 billion. It also announced that it had entered into a definitive agreement to acquire Synthes for $21.3 billion to form what it calls “the world’s most innovative and comprehensive orthopaedics business.” However, the agreement states that each share of Synthes will be purchased for CHF55.65 cash and CHF103.35 in Johnson & Johnson common stock, which has drawn criticism from many investors, including Warren Buffett. At his annual shareholder meeting in Omaha, Neb., he said he would have liked the deal more if Johnson & Johnson had paid only in cash as the inclusion of stock suggested that management was undervaluing its own shares. Berkshire Hathaway has a $2.79 billion investment in Johnson & Johnson common stock as of Dec. 31, 2010.
Wells Fargo & Company (WFC)
Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage and consumer finance services through stores, its Internet site and other distribution channels across North America as well as internationally. Wells Fargo & Co. has a market cap of $150.63 billion; its shares were traded at around $28.53 with a P/E ratio of 11.7 and P/S ratio of 1.6. The dividend yield of Wells Fargo & Co. stocks is 1.7%. Wells Fargo & Co. had an annual average earnings growth of 5.4% over the past 10 years.
Tweedy Brown completely sold out its position in Wells Fargo in the fourth quarter 2008. The firm then bought over 1 million shares in the third quarter of 2010, 152,898 shares in the fourth quarter of 2010, and 301,160 shares in the first quarter of 2011 at $32.24 per share.
Wells Fargo has strong financial results of late. In 2010 it had net income of $12.7 billion, representing a strong comeback from its low of $2.7 billion in 2008 during the credit crisis. The fourth quarter of 2010 was also its strongest of the year, with $3.4 billion of net income. First quarter 2011 net income was an all-time record of $3.8 billion, or $0.67 per diluted common share. Wells Fargo had free cash flow of $18.8 billion overall for 2010; however, in the fourth quarter it reported net losses of $4 billion. Its total liabilities amount to $1.1 billion as of Dec. 31, 2010.
Wells Fargo’s $20.3 billion revenue was down $1.2 billion fom the prior quarter due to a $741 million decline in mortgage banking fee income.
In its first quarter financial results, the company reported that loans were slightly down due to a “planned reduction” of some loans (presumably a writeoff or sell or subprime loans), but excluding those, average loans “increased modestly.” Average loans increased $402 million compared to the previous quarter. Many quarters had linked-quarter average loan growth as well. “The increase in loan balances this quarter reflected new customer relationships, as well as increased borrowing by existing commercial customers,” said Chief Financial Officer Tim Sloan.
Sk Telecom Co. Ltd. (SKM)
SK Telecom Co. is the world's first commercial CDMA digital cellular service. Sk Telecom Co. Ltd. has a market cap of $12.67 billion; its shares were traded at around $19.8 with a P/E ratio of 11.4 and P/S ratio of 1.2. The dividend yield of Sk Telecom Co. Ltd. stocks is 3.6%.
Tweedy Brown bought 247,870 shares of SK Telecom at $17.88 per share in the first quarter 2011, bringing their total ownership to over 7 million shares.
SK Telecom had revenue of KRW 3.132 trillion (up 2.7% from last year), operating income of KRW 598 billion (up 16.9% over last year), and net income of KRW 560.7 billion (up 35.7% from last year). SK Telecom reached 6 million smartphone subscribers as of May 4, and projects it will surpass its 10 million smartphone subscriber target for the year by offering both high-end and less expensive smartphones.
Sysco Corp. (SYY)
Sysco Corporation is the largest North American distributor of food and food related products to the foodservice or “food-prepared-away-from-home” industry. Sysco Corp. has a market cap of $18.17 billion; its shares were traded at around $31.19 with a P/E ratio of 16.6 and P/S ratio of 0.5. The dividend yield of Sysco Corp. stocks is 3.3%. Sysco Corp. had an annual average earnings growth of 8.6% over the past 10 years. GuruFocus rated Sysco Corp. the business predictability rank of 3.5-star.
In the first quarter 2011, Tweedy Brown bought 112,065 shares at $29.64 per share. They now own 436,543 shares of Sysco. Sysco is another stock Tweedy Brown called a “top contributor” to their portfolio in the first quarter. Sysco stock is up 2.5% over the last year and almost 6% year to date.
In 2010, Sysco had 10-year-record net income of $1.18 billion, an increase from $1.06 billion in 2009. Fourth-quarter 2010 income was $258 million, down from $299 million the prior quarter and $268 a year before.