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Jeff Auxier Adds BNY Mellon, Merck, Medtronic; Buys Aflac

August 09, 2011 | About:
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Jeff Auxier is the manager of Auxier Focus Fund. Auxier typically screens companies for good value, low risk, and the potential for strong returns. He prefers companies with strong or improving fundamentals, including consistent operating results, substantial free cash flow, strong balance sheets, and high rates of return on capital. He also looks for shareholder-oriented management that allocates capital well and companies with substantial competitive advantages and understandable products. The Auxier Focus Fund has a earned a ten-year cumulative return of 88.8%, outperforming the S&P 500's 16.4% return over the same timeframe. In his second quarter portfolio update, Auxier added Bank of New York Mellon (BK), Merck (MRK), and Medtronic (MDT) and bought Aflac (AFL).

Bank of New York Mellon Corporation (BK)

Auxier held 54,266 shares of Bank of New York Mellon in the fourth quarter of 2010 when the average price was $27.49. He added another 9,000 shares the next quarter when prices rose to $30.64. In his most recent move, Auxier added to his position by an additional 167.16% at an average price of $27.84, impacting his portfolio by 1.08% and giving him 169,254 total shares in the company. The price of the stock has since dropped by 26%.

Bank of New York Mellon is a bank holding company and one of the world's larger financial institutions. They provide comprehensive financial services to individuals, small and mid-sized businesses, multinational corporations, financial institutions, governments and public agencies worldwide. Their products and services are organized into five business lines: Securities Servicing and Global Payment Services, Private Client Services and Asset Management, Corporate Banking, Global Markets and Retail Banking.

According to BNY Mellon's second quarter report, total revenue in the quarter was $3.85 billion, a 15% increase over last year's $3.34 billion and a 6% increase over last quarter's $3.65 billion. Investment service fee totaled $1.8 billion, increasing 27% over last year and 4% over last quarter. Both increases were a result of net new business, higher depositary receipts revenue, and higher securities lending revenue. Investment management and performance fees increased 14% over last year and 2% over last quarter to $779 million, reflecting higher market values and net new business. Net interest revenue was $731 million, a 5% increase over last quarter due to growth in client deposits and purchases of high quality securities. Noninterest expenses increased 21% over last year and 4% over last quarter to $2.69 billion, largely due to acquisitions, higher legal expenses, and increases in employee salaries. Net income as a result was $735 million, increasing over last year's $658 million and last quarter's $625 million.

Assets under custody and administration increased to a record $26.3 trillion at quarter's end, a 21% increase over last year, reflecting the acquisitions of Global Investment Servicing and BHF Asset Servicing in the third quarter of 2010. Net new business accounted for a 3% sequential growth. Assets under management increased to a record $1.3 trillion at quarter's end, a 22% increase over last year and a 4% increase sequentially due to net new business and a year-over-year change in market values. Tier 1 capital ratio increased to 14.1%, up from last year's 13.5% and last quarter's 14.0%, due to earnings retention. Examining other important financial metrics, return on common equity was 8.8%, up from last quarter's 7.7% though relatively even to last year. Long-term debt to equity ratio is 56%, an improvement over last year. The company also repurchased 9.8 million common shares in the quarter and announced an agreement to sell its Shareowner Services business.

BNK Mellon has a market cap of $24.5 billion. The stock trades with a P/E ratio of 8.7, a ten-year low for the company. Its P/S ratio is 1.8, near its ten-year low. Its P/B ratio is 0.7, also near its ten-year low. Book value per share for the company has reached a high of $27.40.

Merck & Co. Inc. (MRK)

Auxier held 51,577 shares of Merck in the fourth quarter of 2010 when the average price of the was $36.06. He added another 5,300 shares the next quarter when prices dipped slightly to $33.46. In his most recent move, Auxier added to his position in Merck by 115.33% at an average price of $35.47, impacting his portfolio by .92% and giving him a total of 122,474 shares in the company. The price has since dropped 16%.

Merck & Co., Inc. provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. The company serves drug wholesalers and retailers, hospitals, government agencies, physicians, physician distributors, veterinarians, animal producers, and managed health care providers, as well as food chain and mass merchandiser outlets in the United States and Canada.

According to Merck's second quarter report, total sales for the quarter were $12.15 billion, up 7% over last year's $11.35 billion. Favorable foreign exchange effects accounted for 4% of the increase. Total expenses were $10.4 billion, relatively flat compared to last year. Net income for the quarter was $2.02 billion, a marked improvement over last year's $752 million. However, excluding acquisition costs, restructuring costs, and other select items, adjusted net income was $2.95 billion for the quarter, an increase over last year's adjusted income of $2.70 billion. Free cash flow for the quarter was $2.49 billion, down from last year's $2.99 billion. Free cash flow has been positive for each of the past seven quarters.

The revenue increase was driven by a 7% increase in Pharmaceutical sales, which made up 85% of the company's revenue in the quarter. Top performers included the diabetes franchise of JANUVIA/JANUMET, growing 35% year-over-year, and Remicade, a treatment for inflammatory diseases, growing 26% year-over-year. Animal Health sales increased 10% over last year as well, with 8% coming from favorable foreign exchange effects. The growth was primarily led by increased sales of new products in cattle, companion animal, and poultry. Consumer Care sales decreased by 1% due to weaker CLARITIN allergy sales, partially offset by increases in suncare products.

During the quarter, VICTRELIS, a oral hepatitis C protease inhibitor, was approved by the FDA and by the European Medicines Agency. The launch of the product in the U.S. is underway. The Japanese Ministry of Health, Labour, and Welfare also approved three products: GARDASIL, ZOLINZA, and CUBICIN. Merck also announced the acquisition of exclusive rights to develop and commercialize the investigational intravenous formulation of vernakalant in Canada, Mexico, and the U.S.

Merck stated that it remains on track to achieve its goal of $3.5 billion in annual cost synergies by the end of 2012. The company plans to aggressively reduce its cost structure to invest in long term profitable growth opportunities and operate more efficiently. It announced the next phase of its Merger Restructuring Program, expecting to reduce its workforce as measured by the end of 2009 by an additional 12-13% by the end of 2015 whilst hiring new employees in "strategic growth areas of the business."

Merck has a market cap of $93 billion. The stock trades with a P/E ratio of 8.4, slightly below its ten-ear average. Its P/S ratio is 2.0, near its ten-year low. Its P/B ratio is 1.6, also near its ten-year low. Its debt-to-equity ratio is .316.

Medtronic Inc. (MDT)

Auxier held 77,669 shares of Medtronic back in the fourth quarter of 2010 when the average price of the stock was $35.04. In his most recent move, he added another increased his position by 62.3% at an average price of $40.31, impacting his portfolio by 0.75% and giving him a total of 127,670 shares in the company. The price has since dropped 23%.

Medtronic is the world's leading medical technology company, pioneering device-based therapies that restore health, extend life and alleviate pain. Primary products include those for bradycardia pacing, tachyarrhythmiamanagement, atrial fibrillation management, among others. Medtronic operates its business in one reportable segment, that of manufacturing and selling device-based medical therapies. The company does business in more than 120 countries. The company's product lines include cardiac rhythm management, neurological and spinal, vascular and cardiac surgery.

Medtronic has had very steady revenue growth over the past ten years at an annual rate of 12.3%. According to the company's quarterly report for the period ended April 29, revenues increased by 2.4% year-over-year and by 8.4% quarter-over-quarter to $4.3 billion, a fourth quarter record. This was driven by emerging technologies and emerging markets growth of more than 20% and steady growth in the Coronary & Peripheral, Structural Heart, Endovascular, Diabetes, and Surgical Technologies businesses. This growth was offset with setbacks in the implantable cardiac defibrillator and Spinal markets. Net income decreased to $776 million, a 19% decrease year-over-year and a 16% decrease quarter-over-quarter. However, excluding restructuring charges and litigation charges, adjusted net income was $966 million, down 2% from last year's adjusted net income. Free cash flow also decreased to $677 million, the lowest it has been in the past six quarters.

For the fiscal year, 2011 net earnings were $3.096 billion, essentially flat, with diluted earnings per share of $2.86, an increase of 3%. Fiscal revenue was $15.933 billion, a 1% increase over last year. International revenue increased 6% over last year, representing 43% of total company revenues. Debt-to-equity ratio for the fiscal year ended at .616, a decrease over last year's .651.

Medtronic has a market cap of $33.4 billion. The stock currently trades with a P/E ratio of 9.3, very near its ten-year low. It also has a P/S ratio of 2.1, also very near its ten-year low, and its P/S ratio has been trending downwards over the past decade. Quarterly sales per share meanwhile has been steadily increasing, now at $4.02 per share. Its P/B ratio of 2.1 is near its historical low as well, and its P/B ratio has been trending downwards over the past decade too. Its book value per share has also been steadily trending upwards, now at a high of $14.93. GuruFocus has awarded Medtronic a 4-star predictability rating.

Aflac Inc. (AFL)

Auxier initiated a new position in Aflac this past quarter, purchasing 40,020 new shares at an average price of $50.31, impacting his portfolio by 0.74%. The price has since decreased by 25%.

AFLAC Inc. is a general business holding company and acts as a management company, overseeing the operations of its subsidiaries by providing management services and making capital available. Its primary business is supplemental health and life insurance, which is marketed and administered primarily through its subsidiary, American Family Life Assurance Company of Columbus.

According to Aflac's second quarter report, total revenue for the quarter rose 2.2% over last year to $5.1 billion for the quarter. However, net earnings decreased over last year, from $581 million to $280 million, including of realized investment losses of $668 million in conjunction with the company's "proactive investment derisking objectives," compared to investment losses of $89 million last year. Operating earnings, defined by the company as profits derived from operations before realized investment gains and losses from securities transactions, impairments, and derivative and hedging activities, as well as nonrecurring items, were $733 million for the quarter, compared to $639 million last year. Stronger yen/dollar exchange contributed to this increase; excluding the impact from stronger yen, operating earnings per share increased 7.4%.

As a result of the company's proactive investment derisking program, Aflac has reduced peripheral Eurozone, perpetual, and financial exposures. At the start of 2008, sovereign and financial investments in peripheral Eurozone countries made up 5.9% of the total investments and cash, declining to 2.8% by the end of the second quarter of 2011. At the start of 2008, investments in perpetual securities made up 14.7% of total investments and cash, declining to 8.0% by the end of the second quarter of 2011. At the start of 2008, investments in financial securities made up 41.9% of the total portfolio and declined to 30.1% by the end of the second quarter of 2011. As a result of the proactive investment derisking program, the company has no direct investment exposure to Greece, only senior indebtedness in Ireland, and lower exposure to Portuguese investments.

According to Chairman and CEO Daniel P. Amos, "“Like the first quarter, realized investment losses reflected the significant progress we’ve made with our proactive investment derisking program. I am pleased with where we are with that initiative and believe the extensive sales and impairments of riskier investments are largely behind us. However, we will continue to closely monitor Aflac’s consolidated $93 billion portfolio."

Aflac has a market cap of $17.4 billion. Its P/E ratio is 6.2, reaching a new ten-year low. Its P/S ratio is 0.8, near its ten-year low. Its P/B ratio is 1.5, also near its ten-year low. Book value per share is at a near high at 23.44 per share. Both quarterly net income and free cash flow have been positive every quarter since 2000. GuruFocus has awarded Aflac a 3.5-star predictability rating.

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: 2.3/5 (11 votes)

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