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Mario Gabelli Buys National Semiconductor, Graham Packaging Company, Adds Lubrizol

August 11, 2011 | About:
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Mario Gabelli is the founder, chairman and CEO of Gabelli Asset Management Company Investors (GAMCO), a firm that manages over $30 billion in global investments. Gabelli is a proponent of the Graham-Dodd school of analysis and uses a bottom-up approach that examines the private market value of a firm. He targets undervalued companies that have a high probability of reaching their intrinsic value over time. He has also successfully made investments by identifying broad macro trends. His Asset Fund has earned a 10-year cumulative return of 87.5%, outperforming the S&P 500, which returned only 16.4% over the same stretch. According to his second quarter portfolio update, Gabelli bought National Semiconductor (NSM), Graham Packaging Company (GRM) and added to his holdings in Lubrizol (LZ).

National Semiconductor Corp. (NSM)

Gabelli bought 4,210,600 shares of National Semiconductor for an average price of $24.06, impacting his portfolio by 0.75%. The price of the stock has since increased 2%. National Semiconductor Corp. is an analog company that creates analog devices and subsystems. National's products include power management circuits, display drivers, audio and operational amplifiers, communication interface products and data conversion solutions. National's key analog markets include wireless handsets, displays and a variety of broad electronics markets, including medical, automotive, industrial and test and measurement applications.

According to National Semiconductor's fiscal fourth quarter report for the period ended May 29, sales were $374.1 million, up 9% from the prior quarter's $343.9 million but down 6% from last year's $398.5 million. This was a result of increased sales to the broad-based industrial power market and improvements in the automotive and communications infrastructure areas, partially offset by flat sales in the wireless handset business and lower Japanese sales due to the March earthquake and tsunami. However, factory utilization dropped slightly during the quarter in order to reduce days of inventory from 109 days to 96 days. Net income for the quarter was $67.1 million, an increase from last quarter's $59.4 million but down from last year's $79.2 million.

According to National's CEO, "Business conditions were a little better than we expected in the quarter. With bookings up 21%, the first increase for three quarters, we were able to get back to meaningful quarterly revenue growth.”

On April 4, 2011 it was announced that National had entered into a definitive agreement to be acquired by Texas Instruments Incorporated for $25 per share in an all-cash transaction. The company incurred approximately $14 million of expenses attributable to the planned merger, mostly included in SG&A expenses. A number of outstanding stock options were exercised subsequent to the merger announcement, resulting in an increase in average share count from 247 million to 256 million diluted shares.

On a fiscal year comparison, for fiscal 2011, National reported sales of $1.52 billion and net income of $298.8 million. In fiscal 2010, National reported sales of $1.42 billion and net income of $209.2 million. Gross margin increased from 65.9% last year to 68.3%. The debt-to-equity ratio at quarter's end was 1.23, compared to 3.00 at the same period last year.

National Semiconductor has a market cap of $6.26 billion. The stock trades with a P/E ratio of 20, above its 52-week average though roughly in line with its five-year average. Its P/S ratio is 4.1., higher than its five year-average. Its P/B ratio is 7.3, on the low end of its five-year average. Return on equity for the company has decreased every quarter since the period ended May last year, when it was 74.4%. For the most recent quarter, return on equity was 31.6%.

On 7/11/2011, National Semiconductor introduced a family of analogy-to-digital converters that are the industry's first to directly sample radiofrequency signals beyond 2.7 GHz, sampling at up to 3.6 Giga-samples per second with third-order intermodulation distortion up to -71 dBc. The family dramatically reduces board size and component count for 3G/4G basestation, military and SDC applications.

On 7/27/2011, National Semiconductor announced that it has an arrangement with Audi AG to provide analog integrated circuits and subsystems for Modular Infotainment Device technology for Audi's next-generation vehicles.

Graham Packaging Company (GRM)

Gabelli purchased 1,891,500 shares of Graham Packaging at an average price of $22.50, impacting his portfolio by 0.34%. The price of the stock has since increased 13%. Graham Packaging is a U.S. based company engaged in the design, sale and manufacture of value-added, custom blow-molded plastic containers for branded consumer products. Graham Packaging supplies plastic containers for hot-fill juice and juice drinks, sports drinks, drinkable yogurt and smoothies, nutritional supplements, wide-mouth food, dressings, condiments and beers. The Company also supplies plastic containers for yogurt drinks, liquid fabric care products, dish care products and hard-surface cleaners. Graham Packaging is also the supplier of one-quart/liter plastic motor oil containers in the U.S., Canada and Brazil.

According to Graham Packaging Company's second quarter report, net sales for the increased to $821.2 million, up 25.8% over last year. The increase was driven by the acquisition of Liquid Container, higher resin costs that were passed on to customers and favorable exchange rates. However, operating income decreased to $49.0 million, down from last year's $90.8 million. This was a result of increased SG&A expenses stemming from a $39.5 million charge for the termination of the merger agreement with Silgan Holdings and $7.7 million in fees and expenses related to the merger transactions. Net interest expense also increased to $52.8 million, up $11.1 million over last year's net interest expense, due to the interest expense on the debt related to the acquisition of Liquid Container and a higher effective interest rate on their term extended term loans. As a result, net income for the quarter was a loss of $28.4 million, as compared to last year's gain of $33.5 million.

Along the company's different segments, sales in north America increased by $145.9 million, or 25.4%, due to the Liquid Container acquisition, the increase in resin costs passed on to customers and slightly higher volumes. Sales in Europe were up $10.1 million, or 18.5% and sales in South America were up $4.9 million, or 20.1%, both due to higher resin costs and favorable exchange rates offsetting lower volumes. Sales in Asia were $7.5 million, reflecting the company's new presence in China and Japan. The company also completed its acquisition for the assets of Techne - Technipack Engineering Italia S.r.I., a manufacturer of blow molding machines, for a total of €8.8 million in the quarter.

According to CEO Mark Burgess, "Our Food and Beverage franchise continued to be relatively strong and we added operations in Japan in support of one of our largest global Food and Beverage customers. We remain pleased with the legacy Liquid Container business and are on track against our integration and synergy achievement goals. Our acquisition of Techne's assets rounds out our machine technology platform and gives us another avenue to explore profitable growth in international markets."

Graham Packaging Company has only been trading publicly since the start of 2010. The company has a market cap of $1.7 billion. Its stock trades with a P/E ratio of 19.52 and a P/S ratio of 0.62. The company has reduced its net debt by $19.4 million since the beginning of the year, down to $2,660.5 million. However, the company has an equity deficit of $520.85 million. Free cash flow has been relatively even, at $62.2 million compared to last year's $62.9 million.

On 6/17/2011, Graham Packaging Company announced a definitive merger agreement under which Graham Packaging will be acquired by Reynolds Group Holdings Limited in an all-cash transaction for $25.50 per share, or a total of approximately $4.5 billion including assumed indebtedness. Reynolds intends to finance the payment of the purchase price through fully committed financing and cash on hand. However, it has been reported that Graham Packaging Company's bondholders plan to reject the company's offer to buy back or change terms of outstanding debt, which may complicated the takeover.

Lubrizol Corp. (LZ)

Gabelli first purchased shares of Lubrizol in the first quarter of 2011, buying 1,067,700 shares of the stock at an average price of $113.93. In his latest move, he added another 596,300 shares at an average price of $134.28, impacting his portfolio by 0.58% and giving him 1664,000 total shares in the company. The price has since stayed roughly flat. Lubrizol Corp. is a global fluid technology company concentrating on high-performance chemicals, systems and services for industry and transportation. The company develops, produces and sells specialty additive packages and related equipment used in transportation and industrial finished lubricants. The company groups its product lines into two operating segments: chemicals for transportation and chemicals for industry.

According to Lubrizol's second quarter results, consolidated revenues for the quarter increased 17% over last year, from $1.40 billion to $1.63 billion. The increase was largely due to a 13% improvement in the combination of price and product mix, favorable currency impact of 3% and 1% higher volume. Earnings for the period were $191.3 million, including after-tax merger-related and restructuring charges of $0.6 million associated with the company's pending merger transaction with Berkshire Hathaway. This is compared to last year's $201.4 million in earnings, which included after-tax restructuring and impairment charges of $0.3 million. Excluding the special charges in both periods, adjusted earnings per share were $2.91 for the quarter, up over last year's $2.88 per share. This was a result of the improved combination of price and product mix, favorable impact of reduced shares outstanding and higher volume which offset the impact of higher raw material costs, higher selling, testing, administrative and research (STAR) expenses, higher manufacturing costs, reduced income from foreign currency gains and a higher effective tax rate.

Among Lubrizol's different segments, revenues for the Additives segment increased to $1.2 billion compared to last year's $1.01 billion. The increase in revenues was due to an improvement in the combination of price and product mix, favorable currency, as well as slightly higher volume. Operating margin was 23.5%, in line with the company's target range of 24%-26%. In the Advanced Materials segment, revenues increased to $434 million, compared with $393 million last year. Improved combination of price and product mix and favorable currency more than offset a slight decline in volumes. However, operating income decreased due to lower volumes and higher raw material costs.

On 3/14/2011, Berkshire Hathaway and Lubrizol first announced their definitive agreement for Berkshire Hathaway to acquire 100% of outstanding Lubrizol shares for $135 per share in an all-cash transaction, valued at approximately $9.8 billion, including approximately $0.7 billion in net debt. On 6/9/2011, Lubrizol's shareholders "overwhelmingly approved" the acquisition of Lubrizol by Berkshire Hathaway. The transaction is projected to close within the next one to three months.

Lubrizol has a market cap of $8.6 billion. The stock trades with a P/E ratio of 12.3, below its ten-year average. Its P/S ratio is 1.6, near its ten-year high. Its P/B ratio is 3.2, also above its ten-year average. GuruFocus has awarded Lubrizol a four-star predictability rating.

On 7/20/2011, Lubrizol announced that it planned to expand its additives testing capabilities in order to better serve the needs of its global customer base, locating the new technical services lab initially on the campus of Jilin University in Zhuhai, Guangdong, China. The new additives laboratory builds on Lubrizol’s long established presence in Asia and will support Lubrizol’s ongoing sales and manufacturing efforts in the region.

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: 2.5/5 (10 votes)

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