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Pioneer Investments Buys Discover, Mosaic; Adds Capital One

August 06, 2011 | About:
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Pioneer Investments is an investment company with over $250 billion in assets under management. Its Pioneer Fund is the third oldest mutual fund in the United States, having generated a cumulative return of more than 1,000,000% since its inception in 1928. The company has maintained a value investing tradition, targeting undervalued companies with capable management, strong products, and steady growth potential. It utilizes proprietary research to determine a company's intrinsic value and identifies relevant risk factors and performance drivers. Its portfolio is driven by a risk budgeting methodology that attempts to optimize resource allocation, and the company considers both top-down macroeconomic trends as well as bottom-up analysis. In its second quarter portfolio update, Pioneer Investments bought Discover Financial Services (DFS) and Mosaic Company (MOS) and added to its positions in Capital One Financial (COF).

Discover Financial Services (DFS)

Pioneer Investments bought 3,936,252 shares of Discover for an average price of $24.13, impacting its portfolio by 0.2%. The price has since fallen 3%. Discover Financial Services operates as a credit card issuer and electronic payment services company primarily in the United States. The company offers Discover Card-branded credit cards to individuals and small businesses over the Discover Network. It also provides loan services, deposit products, and savings and retirement accounts.

According to Discover's second quarter report, net income for the quarter was $600 million, more than doubling the $258 million recorded last year. Revenue net of interest expenses grew 5% year-over-year from $1.66 billion to $1.74 billion. This was driven by Discover card sales volume growing a strong 9% over last year to $25 billion while total loans increased 5% from the prior year to $52.5 billion. The increase in loans included a $3.7 billion increase in private student loans and a $640million increase in personal loans, partially offset by a $367 million decline in credit card loans. The increase in student loans includes the acquisition of $3.1 billion in private student loans in the first quarter of 2011. Payment Services increased pretax income by 19%, and transaction volume for the segment grew 24%.

The delinquency rate for credit card loans over 30 days past due reached a record low of 2.79%, an improvement of 206 basis points from last year and 80 basis points from last quarter. The credit card net charge-off rate decreased to 5.01% for the quarter, down 355 basis points from last year and 95 basis points from last quarter. Provision for loan losses decreased 76%, or $548 million, due to lower charge-offs and a reduction in the allowance for loan losses. Improved credit performance enabled a reserve release of $401 million for the quarter versus a release of $277 million last quarter.

On 6/15/2011, the company announced that a share repurchase program had been approved, enabling Discover to purchase up to $1 billion of its common stock.

On 5/12/2011, the company announced that it had reached a definitive agreement acquire all of the operating and related assets of Home Loan center for approximately $55.9 million, adding a residential mortgage component to Discover's direct-to-consumer banking business.

Discover has a market cap of $12.8 billion. The stock trades with a P/E ratio of 7.7, roughly close to its historical average, though the stock has only been publicly traded since mid-2007. Its P/S ratio is 1.5, slightly above its historical values. Its P/B ratio is 1.7, also above its historical value. Return on assets has increased steadily the past five quarters since hitting its lowest point in the first quarter of 2010. Earnings per share is at a historic high of 1.09 and has also been growing steadily the past five quarters. Its five-year PEG according to Yahoo Finance is .73, lower than American Express, Mastercard, andVisa. However, its debt-to-equity ratio is 7.43 when accounting for all liabilities. When considering only long-term debt, its debt-to-equity ratio is 2.38.

Mosaic Company (MOS)

Pioneer Investments previously bought into Mosaic company during its surge to peak prices in 2007 and early 2008 when it purchased 196,500 shares for an average price of $131.69 in the second quarter of 2008. It sold those shares next quarter when average prices came down to $106.68. In the first quarter of 2009, Pioneer investments bought another 361,232 shares of Mosaic when prices were at an average of $39.96 and sold them the next quarter when prices climbed to an average of $47.36, netting an 18.5% return.

In its most recent move, Pioneer Investments initiated a new holding, purchasing 1,020,548 shares at an average price of $70.27, impacting its portfolio by 0.13%. The price has since fallen by 9%. The Mosaic Company is one of the world's leading producers and marketers of concentrated phosphate and potash crop nutrients. For the global agriculture industry, Mosaic is a single source for phosphates, potash, nitrogen fertilizers and feed ingredients.

According to Mosaic's fourth quarter report for the period ended May 31, net earnings were $649 million, or $1.45 per diluted share, compared to $396 million, or $.089 per diluted share, last year. Net sales increased 54% year-over-year, from $1.9 billion to $2.9 billion. This was driven primarily by higher selling prices, partially offset by increased phosphate raw material costs and potash resource taxes. Net sales in Potash totaled $982 million, a 41% increase over last year. Potash production was 2.2 million tons, up from last year's 1.9 million tons. Net sales in Phosphates were $1.9 billion, a 58% increase over last year. Production was 2.1 million tons, compared to 1.9 million tons last year. The company generated almost $1 billion in operating cash flow during the quarter, and free cash flow was $607 million, an increase over last year's free cash flow of $257.1 million.

The company's potash expansion program continued to make progress whilst maintaining operational efficiency in its Phosphates segment. Maintenance efficiency improved approximately 60% year-over-year, and improved mine operations resulted in a 4.3% year-over-year increase in rock production at Mosaic's largest producing mine. The company also completed its split-off from Cargill, a move that "enhances Mosaic's strategic and financial flexibility and greatly increases the liquidity of its common stock."

Mosaic has a market cap of $17.7 billion. The stock trades with a P/E ratio of 14.8, slightly below its historical average. Its P/S ratio is 1.7, below its historical average. Its P/B ratio is 1.5, very near its historical low. The company has a strong balance sheet with a debt-to-equity ratio of 0.35.

Capital One Financial Corp. (COF)

Pioneer Investments previously owned a large position in Capital One in 2008, when it purchased 1,807,750 shares of the company at an average price of $47.36. The next quarter it sold out all of its shares for an average price of $48.07, a small return of 1.5%. In the fourth quarter of 2010, Pioneer Investments purchased a small holding of 7,154 shares in Capital One at an average price of $39.49. It later added 15,079 shares the next quarter when prices jumped to $49.35.

This past quarter, the firm added 7405.7% to its position in Capital One at an average price of $52.06, impacting its portfolio by 0.16% and giving it 1,668,743 total shares in the company. The price of the stock has since dropped 17%. Capital One Financial is a holding company whose subsidiaries provide a variety of products and services to consumers using its proprietary information-based strategy. The corporation's principal subsidiary, Capital One Bank offers credit card products. Capital One Services, Inc., another subsidiary of the corporation, provides various operating, administrative and other services to the corporation and its subsidiaries.

According to Capital One's second quarter report, total revenue was $4.00 billion, an increase over last year's 3.90 billion though a decrease from last quarter's $4.08 billion. The decrease over last quarter was due to a $85 million decrease in non-interest income, driven by payment protection insurance requirements in the UK business and an adjustment to the company's rewards liability. Operating expenses increased $40 million from last quarter due to period-specific partnership expenses, adjustments to compensation programs, and expenses to implement the payment protection insurance requirements. Overall, net income for the quarter was $911 million, compared to $1.0 billion last quarter and $608 million last year.

Period-end loan balances increased $4.9 billion over last quarter, driven largely by the addition of a $3.7 billion Kohl's portfolio in the Domestic Card Segment. Purchase volume increased to $34.3 billion from last quarter's $27.8 billion, due to the addition of Kohl's, seasonality, and strong growth in purchase volume. Average loans grew by $2.8 billion quarter-over-quarter to $127.9 billion, though average earning assets grew only $603 million. The company's Tier 1 common equity ratio rose to approximately 9.2%, up 80 basis points from last quarter. This was partially a result of stronger earnings. Return on average assets was 1.90%, down from last quarter's 2.08% though better than last year's 1.63%. Delinquency rate for loans greater than 30 days decreased to 2.90%, down from last quarter's 3.07% and last year's 3.81%.

Capital One has a market cap of $19.8 billion. The stock trades with a P/E ratio of 5.6, very near its historical low. Its P/S ratio is 1.0, slightly below its ten-year average. Its P/B ratio is 0.8, also slightly below its ten-year average. Its five-year PEG according to Yahoo Finance is 0.82, slightly higher than that of Discover's. However, its debt-to-equity ratio is 0.86, indicating a stronger balance sheet.

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: 2.4/5 (9 votes)

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