As the Portfolio Manager of the investment partnership The Baupost Group, Seth Klarman has helped the company average returns of nearly 20% annually since its inception. He is a value investor with a wide array of investments, ranging from traditional value stocks to more unusual securities such as distressed debt, liquidations and foreign equities or bonds.
Klarman has a conservative approach with investing, warning that one shosuld be cognizant of the risks incurred in investing rather than simply focusing on return numbers. He has an interesting penchant to simply sit on cash holdings whenever investment opportunities are scarce, having before held nearly half of his portfolio in cash.
His book "Margin of Safety" has become a standard for value investors, selling for upwards of $1,000 now that it is out-of-print. According to his second quarter portfolio update, Klarman initiated new positions in Microsoft (MSFT) and BP (BP) that significantly impacted his equity portfolio.
Microsoft Corp. (MSFT, Financial)
In the second quarter, Klarman purchased 12,000,000 shares of Microsoft at an average price of $25.04, impacting his portfolio by 12.95%. The price of the stock has since risen 1%. Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers, and intelligent devices; server applications for client/server environments; knowledge worker productivity applications; and software development tools.
According to Microsoft's fourth quarter report for the period ended June 30, revenue was a fourth quarter record of $17.37 billion, up 8% over last year. For the fiscal year, revenue was $69.94 billion, up 12% over last year. Strong sales in Server and Tools products, the 2010 Microsoft Office system, and the Xbox 360 platform helped lead the revenue increase in both the quarter and the fiscal year, partially offset by lower Windows revenue. Operating income was $6.17 billion for the quarter and $27.16 billion for the year, up 4% and 13% respectively as a result of the revenue increase though operating costs increased. Cost of revenue increased 17% in the quarter and 26% for the year, due to higher costs associated with online offerings, and increased volumes of Xbox 360 consoles and Kinect sensors sold. Overall, net income increased 30% to $5.87 billion for the quarter, and net income for the year was $23.15 billion, up 23% over last year.
Among Microsoft's different business fronts, Microsoft Business Division revenue grew 7% in the quarter and 16% for the year as Office 2010 sales continued their strong performance. Server & Tools revenue grew 12% in the quarter and 16% for the year, the fifth consecutive quarter of double-digit growth, led by Windows Server, System Center, and SQL Server. Windows and Windows live Division revenue declined 1% for the quarter and decreased 2% for the year, largely due to the impact of the prior year Windows 7 launch. Online services Division revenue grew 17% in the quarter and 15% for the year, driven by increases in search revenue. Bing's U.S. search share increased 340 basis points year-over-year. Entertainment & Devices Division revenue grew 30% in the quarter and 45% for the year, carried by the ongoing momentum of the Kinect console and Xbox Live.
Microsoft generated $5.3 billion in free cash flow in the quarter, up 9.4% over last year's $4.8 billion. Overall, the company generated $24.6 billion in free cash flow for the year, up 11.5% over last year's $22.1 billion. Capital expenditures totaled $2.4 billion, up slightly over last year's $2.2 billion. The company's debt-to-equity ratio was .209, down slightly from last quarter's .223. Return-on-equity was 41.2%, slightly up over last year's 40.6%.
Microsoft has a market cap of $212 billion. Its stock trades with a P/E ratio of 9.51, below its ten-year average. Its P/S ratio is 3.03, also below its ten-year average. Quarterly sales per share have been increasing over the past decade, causing its P/S metric to decline over the same stretch. Its P/B ratio is 3.71, near a ten-year low, and book value per share has almost climbed back to its 2004 peak. GuruFocus has awarded Microsoft a predictability rating of 4.5-stars.
On 8/15/2011, Google (GOOG) announced that it has entered an agreement to purchase Motorola Mobility (MMI) for $12.5 billion. This has fueled speculation as to whether Microsoft will make a move on to acquire a hardware developer in order to match Apple's (AAPL) and Google's model of developing both the hardware and software aspects of their smartphones. Currently, Microsoft has an agreement with Nokia (NOK) when the latter agreed to make Windows 7 OS phones. The move also puts Microsoft in legal conflict with Google over Android patents, as Microsoft and Motorola are already involved in a number of claims on each others' technology.
BP Plc (BP, Financial)
Klarman purchased 5,500,000 shares of BP during the quarter at an average price of $44.40, impacting his portfolio by 10.11%. The price of BP has since fallen 11%. BP Plc is the holding company of one of the world's largest petroleum and petrochemicals groups. Their main activities are exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and manufacturing and marketing of petrochemicals.
According to BP's second quarter report, revenues for the quarter increased from $75.8 billion last year and $88.3 billion last quarter to $103 billion. Recorded profit was $5.6 billion, up from last year's $17.2 billion loss but down from last quarter's $7.1 billion gain. Replacement cost profit, which adjusts for inventory changes, was $5.3 billion, up from last year's $17.0 billion loss, though both are down from last quarter $5.5 billion. This was primarily due to a $32.2 billion cost in response to the gulf oil spill last year. Higher oil and gas prices and refining margins also contributed to the company's profits, partially offset by lower production and higher costs, many of which are "temporary and specific to the company’s circumstances at this time."
The company's Exploration and Production segment saw replacement cost profit increase slightly year-over-year, from $6.2 billion last year to $6.6 billion, both of which are down from last quarter's replacement cost profit of $8.4 billion. The primary factors included higher realizations partially offset by lower production volumes. Improved contribution from gas marketing and trading as well as higher earnings from equity-accounted entities also helped offset higher costs in the Gulf of Mexico, higher turnaround and related expenses, and higher exploration write-offs. Production for the quarter was 3,433 mboe/d, 11% lower than last year's as a result of the suspension of drilling and the continuing divestment program.
The company's refining and marketing segment saw replacement cost profit decrease to $1.3 billion, down from last quarter and last year's $2.08 billion. Small losses in supply and trading, reduced economic utilization at the Texas City refinery, higher turnaround activities, and certain one-off charges offset an improved refining environment, contributing to the decreased replacement cost profit. Refining through puts in the fuels value chains reduced by over 170 mb/d compared with the same period last year due to operation issues at the Texas City refinery. Petrochemicals production volumes were also down about 8% in the quarter, driven by shutdowns at the Texas City petrochemicals site, a tornado at the Decatur plant, and turnaround activity at the Cooper River plant.
According to the company's update on the Gulf of Mexico oil spill, the majority of the shoreline clean-up phase was completed during the first quarter, with limited work done in the second quarter to clean impacted marshes and barrier islands. The company continues to monitor the shorelines, aiming to assign shorelines to no further treatment (NFT) status. The majority of impacted shoreline has already been transitioned to NFT. Decontamination of the Enterprise drilling rig and seabed survey work were completed during the second quarter, and no further activity is planned at the well site. The company has paid $6.8 billion to fund economic and environmental restoration of the Gulf of Mexico and $6.3 billion for individual, business, and government claims.
BP generated $4.8 billion in free cash flow, its first positive free cash flow numbers in four quarters. Capital expenditures were $6.5 billion, an increase over last quarter and last year's $4.8 billion. BP announced that it expects future cash flows to grow faster than output. The growth is expected in both its upstream and downstream businesses as the company continues to work towards its strategic goals. Debt-to-equity ratio was .433, down from last quarter's .456 though up from last year's .354. Return-on-equity was 20.7%, down from last quarter's 27.6%.
BP has a market cap of $126 billion. Its stock trades with a P/E ratio of 5.64, equal to its ten-year historical low. Its P/S ratio is 0.41, below its ten-year average. Quarterly sales per share reached a record high last quarter at $33.02 per share. Its P/B ratio is 1.17, also near a historical low. Book value per share is also at a record high at $34.48 per share.
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.
Klarman has a conservative approach with investing, warning that one shosuld be cognizant of the risks incurred in investing rather than simply focusing on return numbers. He has an interesting penchant to simply sit on cash holdings whenever investment opportunities are scarce, having before held nearly half of his portfolio in cash.
His book "Margin of Safety" has become a standard for value investors, selling for upwards of $1,000 now that it is out-of-print. According to his second quarter portfolio update, Klarman initiated new positions in Microsoft (MSFT) and BP (BP) that significantly impacted his equity portfolio.
Microsoft Corp. (MSFT, Financial)
In the second quarter, Klarman purchased 12,000,000 shares of Microsoft at an average price of $25.04, impacting his portfolio by 12.95%. The price of the stock has since risen 1%. Microsoft develops, manufactures, licenses, and supports a wide range of software products for a multitude of computing devices. Microsoft software includes scalable operating systems for servers, personal computers, and intelligent devices; server applications for client/server environments; knowledge worker productivity applications; and software development tools.
According to Microsoft's fourth quarter report for the period ended June 30, revenue was a fourth quarter record of $17.37 billion, up 8% over last year. For the fiscal year, revenue was $69.94 billion, up 12% over last year. Strong sales in Server and Tools products, the 2010 Microsoft Office system, and the Xbox 360 platform helped lead the revenue increase in both the quarter and the fiscal year, partially offset by lower Windows revenue. Operating income was $6.17 billion for the quarter and $27.16 billion for the year, up 4% and 13% respectively as a result of the revenue increase though operating costs increased. Cost of revenue increased 17% in the quarter and 26% for the year, due to higher costs associated with online offerings, and increased volumes of Xbox 360 consoles and Kinect sensors sold. Overall, net income increased 30% to $5.87 billion for the quarter, and net income for the year was $23.15 billion, up 23% over last year.
Among Microsoft's different business fronts, Microsoft Business Division revenue grew 7% in the quarter and 16% for the year as Office 2010 sales continued their strong performance. Server & Tools revenue grew 12% in the quarter and 16% for the year, the fifth consecutive quarter of double-digit growth, led by Windows Server, System Center, and SQL Server. Windows and Windows live Division revenue declined 1% for the quarter and decreased 2% for the year, largely due to the impact of the prior year Windows 7 launch. Online services Division revenue grew 17% in the quarter and 15% for the year, driven by increases in search revenue. Bing's U.S. search share increased 340 basis points year-over-year. Entertainment & Devices Division revenue grew 30% in the quarter and 45% for the year, carried by the ongoing momentum of the Kinect console and Xbox Live.
Microsoft generated $5.3 billion in free cash flow in the quarter, up 9.4% over last year's $4.8 billion. Overall, the company generated $24.6 billion in free cash flow for the year, up 11.5% over last year's $22.1 billion. Capital expenditures totaled $2.4 billion, up slightly over last year's $2.2 billion. The company's debt-to-equity ratio was .209, down slightly from last quarter's .223. Return-on-equity was 41.2%, slightly up over last year's 40.6%.
Microsoft has a market cap of $212 billion. Its stock trades with a P/E ratio of 9.51, below its ten-year average. Its P/S ratio is 3.03, also below its ten-year average. Quarterly sales per share have been increasing over the past decade, causing its P/S metric to decline over the same stretch. Its P/B ratio is 3.71, near a ten-year low, and book value per share has almost climbed back to its 2004 peak. GuruFocus has awarded Microsoft a predictability rating of 4.5-stars.
On 8/15/2011, Google (GOOG) announced that it has entered an agreement to purchase Motorola Mobility (MMI) for $12.5 billion. This has fueled speculation as to whether Microsoft will make a move on to acquire a hardware developer in order to match Apple's (AAPL) and Google's model of developing both the hardware and software aspects of their smartphones. Currently, Microsoft has an agreement with Nokia (NOK) when the latter agreed to make Windows 7 OS phones. The move also puts Microsoft in legal conflict with Google over Android patents, as Microsoft and Motorola are already involved in a number of claims on each others' technology.
BP Plc (BP, Financial)
Klarman purchased 5,500,000 shares of BP during the quarter at an average price of $44.40, impacting his portfolio by 10.11%. The price of BP has since fallen 11%. BP Plc is the holding company of one of the world's largest petroleum and petrochemicals groups. Their main activities are exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and manufacturing and marketing of petrochemicals.
According to BP's second quarter report, revenues for the quarter increased from $75.8 billion last year and $88.3 billion last quarter to $103 billion. Recorded profit was $5.6 billion, up from last year's $17.2 billion loss but down from last quarter's $7.1 billion gain. Replacement cost profit, which adjusts for inventory changes, was $5.3 billion, up from last year's $17.0 billion loss, though both are down from last quarter $5.5 billion. This was primarily due to a $32.2 billion cost in response to the gulf oil spill last year. Higher oil and gas prices and refining margins also contributed to the company's profits, partially offset by lower production and higher costs, many of which are "temporary and specific to the company’s circumstances at this time."
The company's Exploration and Production segment saw replacement cost profit increase slightly year-over-year, from $6.2 billion last year to $6.6 billion, both of which are down from last quarter's replacement cost profit of $8.4 billion. The primary factors included higher realizations partially offset by lower production volumes. Improved contribution from gas marketing and trading as well as higher earnings from equity-accounted entities also helped offset higher costs in the Gulf of Mexico, higher turnaround and related expenses, and higher exploration write-offs. Production for the quarter was 3,433 mboe/d, 11% lower than last year's as a result of the suspension of drilling and the continuing divestment program.
The company's refining and marketing segment saw replacement cost profit decrease to $1.3 billion, down from last quarter and last year's $2.08 billion. Small losses in supply and trading, reduced economic utilization at the Texas City refinery, higher turnaround activities, and certain one-off charges offset an improved refining environment, contributing to the decreased replacement cost profit. Refining through puts in the fuels value chains reduced by over 170 mb/d compared with the same period last year due to operation issues at the Texas City refinery. Petrochemicals production volumes were also down about 8% in the quarter, driven by shutdowns at the Texas City petrochemicals site, a tornado at the Decatur plant, and turnaround activity at the Cooper River plant.
According to the company's update on the Gulf of Mexico oil spill, the majority of the shoreline clean-up phase was completed during the first quarter, with limited work done in the second quarter to clean impacted marshes and barrier islands. The company continues to monitor the shorelines, aiming to assign shorelines to no further treatment (NFT) status. The majority of impacted shoreline has already been transitioned to NFT. Decontamination of the Enterprise drilling rig and seabed survey work were completed during the second quarter, and no further activity is planned at the well site. The company has paid $6.8 billion to fund economic and environmental restoration of the Gulf of Mexico and $6.3 billion for individual, business, and government claims.
BP generated $4.8 billion in free cash flow, its first positive free cash flow numbers in four quarters. Capital expenditures were $6.5 billion, an increase over last quarter and last year's $4.8 billion. BP announced that it expects future cash flows to grow faster than output. The growth is expected in both its upstream and downstream businesses as the company continues to work towards its strategic goals. Debt-to-equity ratio was .433, down from last quarter's .456 though up from last year's .354. Return-on-equity was 20.7%, down from last quarter's 27.6%.
BP has a market cap of $126 billion. Its stock trades with a P/E ratio of 5.64, equal to its ten-year historical low. Its P/S ratio is 0.41, below its ten-year average. Quarterly sales per share reached a record high last quarter at $33.02 per share. Its P/B ratio is 1.17, also near a historical low. Book value per share is also at a record high at $34.48 per share.
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.
