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Robert Rodriguez's Top Q2 Moves: Buys Oshkosh and Interdigital, Reduces Patterson-UTI Energy

July 27, 2011 | About:
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teddycx

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Robert Rodriguez has been the manager of the FPA Capital Fund and the FPA New Income Fund since their inceptions in 1984. He primarily invests in small and mid cap companies, selecting stocks on a fundamental basis. He looks for strong balance sheets, good free cash flow numbers, an understandable business strategy, capable management, and unique business characteristics. He utilizes many metrics in his analysis, targeting companies with low price/normalized earnings, low price/pretax cash flow, low price/book value, low price/replacement value, low market cap/total revenues, and high return on equity. He sells when the stock is selling at a premium P/E to the market, when the basis for the investment has been revised, when management disappoints without expectation of recovery, or when a superior alternative value is available. His portfolio typically contains 25-45 equities, and his investment outlook is 3-5 years. Compared to other investors, Rodriguez is relatively more conservative, usually keeping a good portion of his assets in cash while waiting for the next investment opportunity. His FPA Capital Fund's ten-year cumulative return of 172.9% easily outperformed the S&P 500's cumulative return of 16.4% during the same stretch. According to his second quarter portfolio update, Rodriguez's biggest moves included two new holdings in Oshkosh (OSK) and InterDigital Inc. (IDCC) and a reduction in Patterson-UTI Energy Inc. (PTEN) by 21.16%.

Oshkosh Corporation (OSK)

Rodriguez purchased 576,000 shares of Oshkosh at an average price of $29.90, impacting his portfolio by 1.77%, and the price of the stock has stayed roughly even since. Oshkosh Corporation is a leading designer, manufacturer, and marketer of a broad range of specialty access equipment, commercial, fire & emergency, and military vehicles and vehicle bodies.

According to Oshkosh's second quarter results for the period ending March 31, net sales for the quarter were $1.75 billion, a 39% decrease from last year's $2.86 billion. Net income was also down to $67.7 million, a 77% decrease from last year's $292.6 million. Free cash flow was $54.6 million, down from last year's $237 million and last quarter's $176 million. According to Charles L Szews, Oshkosh Corporation's president and CEO, this year-over-year drop-off was a result of "our transition from high volume production of MRAP-All Terrain Vehicles (M-ATVs) to the gradual launch of production of the U.S. Army's Family of Medium Tactical Vehicles (FMTVs), which will negatively impact our quarterly earnings comparisons throughout fiscal 2011." He also added that they "expect our FMTV sales to rise sharply in the second half of fiscal 2011." Oshkosh is the sole supplier of the FMTV through fiscal 2015.

Although the defense segment saw sales decrease by 57.2% to $972.3 million, access equipment sales increased 72.7% to $471.2 million with "orders nearly doubling and backlog nearly tripling compared to the prior year's second quarter." However, access equipment operating income decreased 61.2%, from $45.8 million last year to $17.7 million this year. This decline is attributed to decreases in intersegment sales at high single-digit operating income margins. Fire & Emergency sales decreased 17.2% to $177.2 million due to weak municipal spending in the U.S. and a shift in the timing of airport product shipments to later in the fiscal year. Commercial segment sales increased 3.9% to $151.7 million due to higher aftermarket parts sales.

Oshkosh has a market cap of $2.7 billion. Its P/E ratio is 5.4, lower than its ten-year historical average. Its P/S ratio is 0.3, lower than its historical average as well. Quarterly sales per share have fluctuated widely in the past four years after they were growing steadily annually between 2000 and 2007. Its P/B ratio is 1.8, also below its historical average after P/B spiked up sharply in late 2009 and early 2010. Quarterly book value per share has been increasing after it dropped sharply between 2008 and 2009, now at $17.00 per share. Return on equity has been decreasing for the past five quarters, now at 17.6% for the most recent quarter.

On 6/21/2011, Oshkosh Defense announced that it will supply more than 5,100 MRAP All-Terrain Vehicle protection kits to the U.S. military following an order from the U.S. Army TACOM Life Cycle Management Command. Oshkosh was also selected to provide tooling and labor to support installation of the protection kits. The awards have a combined value of more than $245 million, and deliveries are expected to be completed by July 2012.

On 7/14/2011, Oshkosh Defense announced that it will build and deliver an additional 400 MRAP All-Terrain Vehicle base variants with integrated underbody protection frollowing an order from the U.S. Army TACOM Life Cycle Management Command. Oshkosh also received an order to continue Field Service Representative support for the M-ATV. The M-ATV order is valued at more than $207 million and is expected to begin in October and completed by November. The FSR order is valued at more than $31 million to-date and will continue through March 2012.

Oshkosh is set to release its third quarter earnings tomorrow, July 28.

InterDigital Inc. (IDCC)

Rodriguez purchased 91,158 shares of InterDigital at an average price of $42.49, impacting his portfolio by 0.4%, and the price of the stock has increased dramatically by 74% since. InterDigital Communications develops and markets advanced digital wireless telecommunications systems using proprietary technologies for voice and data communications and has developed an extensive patent portfolio related to those technologies.

According to InterDigital's first quarter results for the period ending March 31, total revenue decreased by 33% year-over-year from $116.2 million to $78.5 million. This decrease in revenue was due to "the absence of $14.4 million in fixed fee royalties associated with the license agreement with LG Electronics Inc., the renewal of which continues to be negotiated," as well as unusually high levels of sales revenue in the first quarter 2010 stemming from a new patent license agreement with Casio Hitachi Mobile Communications Co. Ltd. These decreases were partially offset by increases in per-unit royalties by 32% due to strong sales of smartphones. Net income decreased from $48.8 million to $23.3 million, a 52% reduction. Free cash flow decreased from a $72.3 million gain last year to a $6.1 million loss this year. The company also completed a private placement of $230 million in senior convertible notes in early April.

InterDigital has a market cap of $3.36 billion. It has a P/E ratio of 26.1, roughly in line with its five-year average. Its P/S ratio is 8.5, above its five-year average. Its P/B ratio is 8.9, roughly in line with its historical average. Book value per share has increased for each of the past eight quarters, now at its historical high of $8.31. However, return on equity has decreased each of the past seven quarters, currently at 24.8%

On 7/26/2011, InterDigital announced that it has filed a complaint with the U.S. International Trade Commission against Nokia, Huawei and ZTE, saying that they have engaged in unfair trade practices by making for importation into the U.S., importing, and selling after importation, certain 3G wireless devices, USB sticks, mobile hotspots, tablets, and components of such devices that infringe seven of InterDigital's U.S. patents.

InterDigital is set to release its second quarter earnings later today, July 27.

Patterson-UTI Energy Inc. (PTEN)

Rodriguez first bought into Patterson-UTI Energy back in the fourth quarter of 2006, when he purchased 3,714,800 shares of the company for an average price of $24.11. He added another 257,500 shares the next quarter for an average price of $22.90 and again added 434,000 more shares in the fourth quarter of 2008 after prices fell sharply to an average of $11.75. Since then, he's been mostly selling shares as the price of the stock rebounded. After a peak holding of 4.2 million, he sold shares periodically so that he held less than 1.7 million by the end of the first quarter of 2011. He sold another 350,000 shares in the second quarter of 2011 for an average price of $29.25, giving him 1,303,700 total shares now. The price of the stock has since increased by 15%.

Patterson-UTI Energy Inc. is one of the leading providers of domestic land drilling services to major & independent oil & natural gas companies. Its subsidiaries provide onshore contract drilling and pressure pumping services to exploration and production companies in North America. It has approximately 360 marketable land-based drilling rigs that operate primarily in the oil and natural gas producing regions across the United States and western Canada as well as pumping services in Texas and the Appalachians. The company is also engaged in the development, exploration, acquisition & production of oil and natural gas.

According to Patterson-UTI's first quarter results for the period ending March 31, revenues more than doubled year-over-year, increasing from $271.6 million last year and $506 million last quarter to $567.4 million. Net income increased more than seventeen-fold year-over-year, from $4.2 million last year and $53.85 million last quarter to $71.3 million, increasing earnings per share from $0.03 per share last year to $0.46 per share this year. Revenues have now increased for each of the past seven quarters after they dropped in early 2009, and net income has increased for each of the past six quarters after it reached its lowest point in mid-2009. Free cash flow for the quarter was a loss of $7.5 million, an improvement over last year's loss of $20.9 million and last quarter's loss of $99 million.

The average number of rigs operating increased from 194 at the same period last year to 207 this year. The company increased its quantity of long-term contracts and completed three new Apex rigs during the first quarter. It expects to complete a total of 25 new apex rigs during 2011 and has long-term contracts for 18 of these rigs.

According to Douglas J. Wall, Patterson-UTI's CEO, the "pressure pumping business achieved quarterly sequential increases in revenues and operating income of 15% and 24%, respectively... despite the unusually harsh winter storms that impacted operations and revenues in both Texas and Appalachia."

According to Mark S. Siegel, chairman of Patterson-UTI, "Our pressure pumping business is also benefiting from the increased activity associated with the oil and liquids-rich plays. The increasing number of wells being drilled, combined with the increasing frac intensity of many of these wells has resulted in a shortage of fracturing horsepower. As a result of this shortage, pricing for our pressure pumping services continues to increase, and we continue to add capacity."

The company also sold its electric wireline business during the first quarter of 2011, reflecting the company's decision to "focus on our core drilling and pressure pumping businesses for both unconventional and conventional wells."

Patterson-UTI has a market cap of $5.2 billion and a P/E ratio of 29.7, above its seven-year historical average though down from its previous year's average. Its P/S ratio is 3.6, higher than its historical average as well. Quarterly sales per share have steadily grown over the past seven quarters. Its P/B ratio is 2.3, in line with its historical average. Quarterly book value per share has slightly dipped after growing steadily for the past eight years, now at $14.65 per share. Return on equity has been increasing recently, up to 12.6%.

Patterson-UTI will release its second quarter earnings tomorrow, July 28.

This is part of GuruFocus Real Time Picks report, which reports the stock trades of Gurus within the last few days. For more information, go to Real Time Picks.

Rating: 3.9/5 (10 votes)

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