Analysis of Mason Hawkins's Southeastern Management and Top Holdings: CHK, DELL, DTV, YUM , L
The stated objective of the Partner Fund is “to seek long-term capital growth,” without any special consideration to dividend income. Like many value-oriented funds, the firm seeks equities that are significantly undervalued, with a view that equity ownership is a fractional ownership of the entire operational enterprise. As such, Hawkins looks for businesses that have a proven and simple business model, financially strong, maintains a competitive and sustainable “moat,” and the ability to generate free cash flow consistently. Furthermore, Hawkins looks for management teams that are honest, competent, and focused on maximizing value for their shareholders. To minimize their risk, Southeastern Management looks for investment opportunities in which a 60% margin of safety can be yielded from its intrinsic price. To render the intrinsic price of a business, the firm utilizes two methods:
A. Assessment of liquidation value based on current economic value of assets and liabilities.
B. Discounted cash flow based on projected future free cash flow with a “conservative discount rate”.
The two aforementioned methods are then checked against comparable transactions to verify the scope of accuracy in the calculated value. From time to time, the fund also utilizes the P/V ratio (Price / Value) as a single indicator, rather then as absolute, because as the firm stated, this ratio yields very little information by itself. Only in conjunction with a completed round of due diligence, can this metric be used effectively in analyzing investment opportunities. In additional, besides equity investments, the fund dabbles into options and future contracts when pertinent, to both hedge risk and to amplify gains.
Looking forward, Hawkins notes that the markets are especially volatile, with large swings and reversals occurring daily with no significant new developments to merit it. Hawkins feels that this is a sign that the markets are purely reactive rather then adaptive to all news, no matter how insignificant. He noted that equity funds as a whole had a net outflow of cash in the recent months, which compounded with an inflow of cash to bond funds, reflects the flight to safer investments and overall investor sentiment. Furthermore, he noted that a report in Investors Intelligence indicated that there is a large reversal of bull sentiment among investment advisors across the industry. Nonetheless, Hawkins feels that through the usage of a disciplined investment strategy, the firm has founded that in the current environment, “opportunities for reward are more abundant”.
The overall performance of the fund has been largely positive with a cumulative return of 1263.9% since the Partner’s fund inception. Comparatively speaking, the benchmark S&P 500 has returned 686.9% for the same period. In annualized terms, the fund has returned an average of 11.39% annually, while the S&P 500 has returned 8.88% for the same period. However, in 2007 and 2008, the fund underperformed the benchmark, suffering losses of .4% and 50.6%, while the benchmark gain 5.61% in 2007, and lost 37% in 2008. In 2009 and 2010, the firm outperformed the benchmark by 27.1% and 2.8% respectively. Year to date, the Partner fund has trended a return of 10.2% while the benchmark returned 6%.
The following charts demonstrate the sector breakdown of all equities held by the firm, and the top five holdings of the aggregate portfolio as of Q2 of 2011 as per the firm’s 13F filings. As can be seen in the first chart, the majority of the firm’s holdings are in consumer services, financials and industrials. Most of the rebalancing changes between Q1 and Q2 were minor in nature, with the biggest holding increase seen in telecommunications, and the largest reduction in oil& gas holdings. As of Q2 of 2011, the firm managed $25.56 billion in approximately 117 equities through all three of their funds. The top five holdings comprise approximately 38.26% of all equities held. DirecTV and Yum! Brands saw large reductions in shares held, while Chesapeake, Dell and Loews saw substantial increases in shares held.
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Chesapeake Energy Corporation (CHK)
The Chesapeake Energy Corporation produces and markets natural gas products through 4 primary channels: Exploration and production, marketing, gathering and compression, and service operations. Their shares closed at $30.38 with a market capitalization of $20.08 billion. Hawkins paid an average price of $27.1 per share of CHK, rendering a potential capital gain of 12.1%. From quarter to quarter, Hawkins increased his holdings of CHK by 9.78%. CHK is the largest holding of the portfolio, at 10.11% of all equities held.
CHK has a P/E ratio of 27.27, a P/B ratio of 1.66, and a P/S ratio of 2.18. Revenues for the year approximated $9.3 billion, with a net income of $1.7 billion, yielding a net margin of approximately 18.94%. Earnings were reported at $1.11 per share, with a dividend yield currently standing at 1.15%. Over the last 10 years, CHK has, on average, grown its revenues and book value by 13.4% and 21.2% respectively.
Chesapeake Energy recently found a location in the Niobrara Shale Formation that is producing approximately 1,270 barrels of oil equivalents, with a terminal yield of 200 barrels per day. In other news, in the month of August, the NY State Attorney General opened an investigation into CHK over their shale gas wells, along with other energy conglomerates.
GuruFocus rated CHK with the business predictability rank of 1 star.
Dell Inc. (DELL)
Dell is a multi-channeled computer hardware and software company operating through four primary segments: Large enterprise, public, small and medium business and consumer. Shares of Dell closed at $13.97, with a market capitalization of $25.49 billion. DELL was acquired at an average price of $20.13, yielding a capital loss of approximately 30.6%. From quarter to quarter, Dell’s net position increased by 2.31%. Dell is currently the second largest holding of the firm, at 9.77% of all equities held.
DELL has a P/E ratio of 7.48, a P/B ratio of 3.52, and a P/S ratio of .42. Revenues were reported at $61.49 billion for the year, with a net income of $2.6 billion, rendering a profit margin of 4.28%. Dell reported earnings of $1.87 for the fiscal year, and at the moment, offers no dividend to their investors. Historically, on an annual basis, DELL has grown its revenues and earnings by 11.4% and 6% respectively over the last 10 years.
Dell recently expanded their board of directors with 3 new members, with backgrounds ranging from oil, investment banking, to a former chief of staffer for the White House. In other news, there are reports of Baidu teaming with Dell to produce tablets and mobile phones.
GuruFocus rated DELL with the business predictability rank of 1 star.
DirecTV provides television services through their DirecTV US and Latin American divisions. DirecTV closed at $41.42, with a market capitalization of $30.58 billion. The firm paid an average price of $25.20 per share of DTV, rendering a potential capital gain of 64.3%. DTV is the third largest holding of the firm, at 7.28% of all equities held. From quarter to quarter, the firm reduced their holdings of DTV by 21.84%.
DTV has a P/E ratio of 13.57 and a P/S ratio of 1.29. Earnings were $3.05 for the year, with a net margin of 9.59% being reported on revenues of $24.1 billion. In terms of historical growth rates, DTV on average has grown its revenues and earnings by 24.5% and 40.1% respectively, over the last 5 years.
Currently, there are three competitors bidding for Hulu, a digital content provider, remaining: Amazon, Google, and DirecTV. In other developments, Comcast recently dropped a lawsuit against DirecTV over a dispute of misleading advertisements.
GuruFocus rated DTV with the business predictability rank of 1 star.
Yum! Brands (YUM)
Yum! Brands operates KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W All-American Food Restaurants thorough a combination of franchising and licensing agreements. Shares of YUM! closed at $51.53 with a market capitalization of $23.93 billion. An average price of $34.58 was paid per share of YUM, yielding a potential capital gain of 49%. Hawkins reduced his holdings of YUM by 11.25% quarter to quarter. Furthermore, by September of 2011, Hawkins has further reduced his holdings of YUM by 28.64%, or approximately 7.5 million shares.
YUM has a P/E ratio of 20.65, a P/B ratio of 15.63, and a P/S ratio of 2.15. Earnings of $2.50 were reported per share, with a dividend yield of 1.94%. For the same period, a net margin of 10.39% was earned on revenues of $11.34 billion. YUM has grown its revenues and earnings by 8.8% and 13% annually, over the last 10 years.
YUM! Brands is currently lobbying the federal government to have their restaurants be eligible to participate in the food stamp program, following states like California and Florida in this movement. In other news, YUM plans to double the number of restaurants it has in Russia by 2015, to a total number of 300 restaurant fronts.
GuruFocus rated YUM with the business predictability rank of 4 stars.
Loews Corporation (L)
The Loews Corporation engages in the commercial property and casualty insurance industry, and the exploration, production, and marketing of natural gas products and facilities. L closed at $35.96 with a market capitalization of $14.53 billion. Hawkins accumulated shares of L at an average price of $37.82, rendering a capital loss of approximately 5%. From quarter to quarter, Hawkins increased his holdings of Loews by 19.10%.
The Loews Corporation has a P/E ratio of 12.88, a P/B ratio of .8, and a P/S ratio of .98. Revenues of $14.61 billion were reported, with a bottom line income of approximately $2 billion, rendering a net margin of 13.73%. Earnings per share were $2.79, with a minor dividend yield of approximately .70%. Over the last 5 years, on an annual basis, the Loews Corporation has grown its revenues and earnings y 2.6% and 4.5% respectively.
Analysts at BGB Securities recently initiated coverage of Loews, placing a “buy” rating on L, with a price target of $47, a potential capital gain of 30.7% from its current trading price.
GuruFocus rated L with the business predictability rank of 1 star.
For more information regarding Mason Hawkins and Southeastern Asset Management’s most current portfolio, click here.