Tweedy Browne Adds Wells Fargo, Johnson & Johnson, and Federated Investors
In the 1930s and 1940s, legendary investor Benjamin Graham worked with Tweedy as its largest client, and the firm modeled its investment philosophy closely after Graham's ideas. Like many other value-oriented investment groups, Tweedy Browne targets companies that trade at a significant discount to their intrinsic value, typically between 40-50%.
Key characteristics that they look for include low P/E ratios, low P/B ratios, low P/S ratios, increased insider buys, above average dividend yield, low corporate leverage, and prices trading far from their high values. As a security approaches its intrinsic value, Tweedy, Browne sells its position in order to reinvest in other undervalued stocks.
Since the inception of Tweedy's value fund in 1993, the fund has produced a 8.74% annual return vs. the S&P 500's annual return of 8.28%. According to Tweedy's second quarter portfolio update, its largest moves included additions in Wells Fargo (WFC), Johnson & Johnson (JNJ), and Federated Investors (FII).
Wells Fargo & Co. (WFC)
Tweedy bought its current holdings in Wells Fargo back in the third quarter of 2010, purchasing 1,179,221 shares for an average price of $26.08. It added another 450,000 shares over the next two quarters as prices slightly increased. In its most recent portfolio update, Tweedy added to its holdings by 125% at an average price of $28.41, impacting its portfolio by1.89% and giving it a total of 3,674,844 total shares. The price of the stock has since dropped 9%.
Wells Fargo & Company provides retail, commercial, and corporate banking services primarily in the United States. The company operates in three segments: Community Banking; Wholesale Banking; and Wealth, Brokerage and Retirement.
According to its second-quarter report, Wells Fargo reported record quarterly net income of $3.9 billion, up 29% from last year and up 5% from last quarter. Revenues were $20.4 billion, up from last quarter's $20.3 billion though down from last year's $21.4 billion. Net interest income increased $27 million from the last quarter to $10.7 billion, driven by low-cost deposits that enabled the company to grow assets while reducing long-term debt. Noninterest income grew $30 million over last quarter to $9.7 billion, though this was down from last year's $9.9 billion. The quarterly growth was due to deposit service charges increasing 6% and card fees growing 5%, reflecting customer account growth and higher credit spending, although some of the gains were seasonal. Noninterest expenses were $12.5 billion, down $258 million over last quarter and $270 million over last year.
Total loans were $751.9 billion at quarter's end, up from last quarter's $751.2 billion. Average core deposits were $807.5 billion, up 6% over last year and up 5% over last quarter. Average core deposits accounted for 107% of average loans. Capital increased in the quarter, with Tier 1 common equity reaching 9.2% compared to last quarter's 8.9% and last year's 7.6%. The company redeemed $3.4 billion of trust preferred securities and repurchased 35 million shares of its common stock.
Net loan charge-offs continued to decline as a percentage of average loans, down to 1.52% as compared to 1.73% last quarter and 2.02% last year. This decline reflected lower losses in virtually every loan category and continued improved delinquency trends. Nonperforming assets made up 3.71% of total loans, down from last quarter's 4.06% and last year's 4.26%. This reflected an improved credit landscape and more market liquidity. Return on assets was 1.27%, the highest for the company in three years.
Wells Fargo currently has a market cap of $133 billion. Its stock trades with a P/E ratio of 9.8, near a ten-year low for the company. Its P/S ratio is 1.4, below its ten-year average. Its P/B ratio is 1.1, also below its ten-year average. Return-on-equity for the company has remained around 10% for the past ten quarters.
Johnson & Johnson (JNJ)
Tweedy has held Johnson & Johnson since 2006, back when it had 376,000 shares of the company at an average price of $59.58. The firm has slowly added to its holdings in the company over the past five years, buying more than 475,000 shares in the first two quarters of 2009 at an average price of $54.30. Since fourth quarter 2009, Tweedy has added to its holdings in Johnson & Johnson every quarter. In its most recent move, Tweedy increased its position by another 111,000 shares at an average price of $64.82, impacting its portfolio by 0.24% and giving it a total of 2,974,366 shares in the company. The price of the stock has since dropped 5%.
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. The company's worldwide business is divided into three segments: Consumer, Pharmaceutical and Professional.
Johnson & Johnson's revenue has grown by an average 9% annually over the past 10 years. According to its second quarter reports, the company grew sales by 8.3% year-over-year to $16.6 billion on the strength of recently launched products. However, net earnings decreased by 19.5% year-over-year to $2.8 billion. Excluding after-tax charges for special items including litigation costs, acquisition costs, and recall costs, net earnings for the quarter would have totaled $3.5 billion, an increase of 4.9% year-over-year
Worldwide consumer sales were $3.8 billion, a 4.0% increase over last year, though this consisted of a 1.8% operational decline and a positive impact from currency of 5.8%. Domestic sales decreased 8.5% while international sales increased 12.4%. Over-the-counter medicines were impacted by the suspension of manufacturing at the McNeil Consumer Healthcare facility as well as efforts to improve quality, offset by operational increases in skin care and baby care products.
Worldwide Pharmaceutical sales were $6.2 billion, an increase of 12.2% over last year, including a 7.0% from operational growth and a positive impact from currency of 5.2%. This includes strong performance from recently launched products as well as existing products. The FDA also approved three new medications for use.
Worldwide Medical Devices and Diagnostics sales of $6.6 billion increased 7.2% over last year, including a 1.3% increase in operational growth and a 5.9% positive currency impact. Surgical care products, minimally invasive products, Ortho-Clinical diagnostics' products, Diabetes care's products, electrophysiology business, disposable contact lenses, and DePuy's sports medicine all contributed to the increase. Lower sales in the Cardiovascular Care business partially offset this growth. The FDA approved two new products during the period.
The stock currently trades at a P/E ratio of 12.8, below its ten-year historical average though in line with its recent three-year average. It's P/S ratio is 2.8, near its seven-year average. Quarterly sales per share have been generally trending upwards, now at $5.90. It's P/B ratio is 2.9, near its historical low. Book value per share has meanwhile been trending upwards, now at a high of $21.85. GuruFocus has awarded the company a four-star predictability rating.
On 4/27/2011, Johnson & Johnson announced that it had entered into a definitive agreement to acquire Synthes Inc., a global manufacturer of orthopedic devices for approximately $21.3 billion.
In July, Johnson & Johnson completed its acquisition of several over-the-counter cough and cold brands in Russia from J. B. Chemicals & Pharmaceuticals Limited. It also completed the divestiture of its Animal Health business to Elanco, a division of Eli Lilly and announced a definitive agreement to divest the assets of its Ortho Dermatologics division in the U.S. to subsidiaries of Valeant Pharmaceuticals International, Inc.
Federated Investors Inc. (FII)
Tweedy has held Federated investors since the first quarter of 2006, when it had 2.1 million shares at an average price of $33.88. Between 2006 and 2008, Tweedy sold more than half of its holdings over the period as prices generally increased. When the stock plummeted from $40.90 to $19.90, Tweedy held its remaining 900,000 shares. As the price of the stock rebounded in late 2009, Tweedy doubled its holdings at an average price of $26.50. In its most recent move, Tweedy added another 275,467 shares to its holdings at an average price of $25.40, impacting its portfolio by 0.22% and giving it a total of 2,107,314 shares. The price of the stock has since fell by 23%.
Federated Investors Inc. is a provider of investment management and related financial services. Federated sponsors, markets and provides investment advisory, distribution and administrative services primarily to mutual funds. These funds are offered through banks, broker/dealers and other financial intermediaries who use them to meet the needs of their customers; these customers include retail investors, corporations, and retirement plans.
According to Federated Investors' second quarter report, net income was $42.4 million for the quarter, down 11% from last year's $47.7 million. Total revenue was $225.8 million, down 2% from last year's $231.5 million as a result of increases in voluntary fee waivers to maintain positive or zero net yields in money market funds during the quarter. This decrease in revenue was partially offset by an increase from higher average money market, equity, and fixed-income assets.
Average managed assets for the quarter were $354.2 billion, up $17.1 billion over last year though down $2.1 billion over last quarter. Fixed income assets were $42.4 billion at quarter's end, up $4.4 billion over last year and $0.6 billion over last year. Equity assets were $31.4 billion at quarter's end, up $4.6 billion over last year and down $0.2 billion from last quarter. Money market assets were $265.7 billion at quarter's end, up $5.2 billion from last year and down $5.4 billion from last quarter.
Federated has a market cap of $2 billion. Its stock trades with a P/E ratio of 11.3, below its ten-year average. Its P/S ratio is 2.15, also below its ten-year average. Its P/B ratio is 3.85, near its ten-year low. Quarterly revenue for the company had been increasing from 2000 to 2008, but it fell towards the end of 2009 and have remained relatively flat at around $240 million since. The debt-to-equity ratio for the company stands at 1.11.
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