The market is in turmoil. With today’s more than 3% loss, the S&P 500 is down more than 10% for the year. Many stocks did much worse, especially low-quality companies and financials. However, GuruFocus’ Buffett-Munger portfolio held much better. It is outperforming by more than 6%. Five stocks in the 25-stock portfolio are up by big percentages in spite of the market’s fierce sell-off: Church & Dwight Co. Inc. (CHD), Exponent Inc. (EXPO), First Cash Financial Services (FCFS), Hormel Foods Inc. (HRL) and MICROS Systems (MCRS).
GuruFocus' Buffett-Munger Screener filters for stocks that the younger Warren Buffett and Charlie Munger would have liked. These companies have grown their revenue and earnings consistently for at least a decade. More importantly, they can maintain their profit margin while growing. The portfolio has performed extremely well. Since inception on Dec. 31, 2008, it has gained 52.7%, versus the S&P 500’s gain of 29.17%.
Church & Dwight Co. Inc. (CHD)
Church & Dwight Co. Inc., founded in 1846, is the leading producer of baking soda and owns the Arm & Hammer brand. It operates two segments, consumer domestic, which consists primarily of household and personal care products, and consumer international, which consists primarily of personal care products. Its stock price has risen 23.3% year to date. Shares were added to the Buffett-Munger portfolio at $28.06 per share, and the stock now sells for $43.32 per share, a 54% gain.
Since 2001, Church & Dwight has been expanding its product portfolio to include many recognizable brands through its acquisitions of USA detergents Inc., the consumer products business of Carter-Wallace Inc., Armkel, the former Unilever oral care business, the SPINBRUSH battery-operated toothbrush business from Procter & Gamble, and the net assets of Orange Glo International.
Church & Dwight has a strong balance sheet. It has raised revenue every year since 2002 and free cash flow since 2006. Its margins are also impressive. Gross margins grew almost every year since 2002, to a record-high 44.7% in 2010 and operating margins increased each consecutive year since 2001 to a record-high 17.2%.
The most recent quarter showed similar profitability. Net sales for the quarter ended July 1, 2011, increased 5.3% to $674.9 million compared to last year and free cash flow was $148.1 million compared to $103.3 million last year.
The company is particularly stockholder-friendly. It reported on August 4 that it authorized a $300 million share repurchase program. On the same day it declared its 442nd regular quarterly dividend.
Exponent Inc. (EXPO)
Exponent Inc. is a multidisciplinary organization of scientists, physicians, engineers and business consultants performing in-depth scientific research and analysis in over 90 technical disciplines.
The company is an engineering and scientific consulting firm providing solutions to complex problems. It has been best known for analyzing accidents and failures to determine their causes, but in recent years it has become more active in assisting clients with human health, environmental and engineering issues associated with new products to help prevent problems in the future. The company serves clients in the automotive, aviation, chemical, construction, consumer products, energy, government, health, insurance, manufacturing, technology and other sectors.
Exponent’s stock price is up 6.23% for the year. The Buffett-Munger portfolio added shares at $37.54 a share on Jan. 1, 2011, for a 5.83% gain.
Exponent has also built a solid balance sheet. The company has grown revenue almost every year since 2001, with one aberration in 2009. Cash flow has been less steady, but has trended upward over the last 10 years, rising to a record $33.6 million in 2010. Net margins and operating margins have increased to 10-year record high 11.1% and 17.4% respectively.
Second quarter 2011 results showed continued progress. Total revenues increased 8% to $65 million, compared to $60.4 million last year, and EBITDA improved 13% to $15 million, compared to $13.3 million last year. The company raised its full-year expectations for EBITDA margin to be down only slightly and for growth in revenue before reimbursements to be in the high single digits as compared to 2010.
On June 1, Exponent announced that it authorized an addition $35 million for its share repurchase program. It spent $16 million to repurchase its common stock in the second quarter, bringing the 2011 year-to-date total to $23 million.
First Cash Financial Services (FCFS)
Arlington, Texas-based First Cash Financial Services Inc. is the nation's third largest publicly traded pawnshop operator. The company's pawn stores engage in both consumer finance and retail sales activities. The company's pawn stores provide a convenient source for consumer loans, lending money against pledged tangible personal property such as jewelry, electronic equipment, sporting goods and musical equipment. These pawn stores also function as retailers of previously-owned merchandise acquired in forfeited pawn transactions and over-the-counter purchases from customers.
First Cash Financial Services is up 47% year to date. Shares were added to the Buffett-Munger portfolio at $30.99 a share, and the stock is trading for $49.13 a share on Thursday, for a 58.54% gain. It also hit a new 52-week high of $52.07 on September 20.
The company’s revenue increased from 2001 – 2007, had a slight setback in 2008, and then rose each year from then to 2010. Earnings have increased for 10 consecutive years. It also paid down a considerable amount of debt in the last several years – long-term liabilities and debt fell from about $78 million in 2008 to about $9.8 million in 2010.
Revenue, net income and earnings per share set records in the second quarter of 2011. Revenue grew 27% over last year to $121 million due to its strong operations in the U.S. and Mexico. Most of its revenue, 57%, was generated in Mexico, an increase of 27% from last year, and 45% was derived from domestic operations. In the 12 months leading up to June 30, 2011, First Cash Financial opened 69 new stores in Mexico and 23 in the U.S. It also increased its cash balance to $68 million compared to $46 million last year.
The company repurchased 588,000 shares of its common stock during the trailing 12 months, mostly in the second quarter, at an aggregate cost of $22.4 million. There are still 771,000 shares available for repurchase under its current authorization.
Hormel Foods Corp. (HRL)
Hormel Foods Corporation is a multinational manufacturer and marketer of consumer-branded meat and food products, many of which are among the best known and trusted in the food industry. Products manufactured by the corporation include hams, bacon, sausages, franks, canned luncheon meats, stews, chilies, hash, meat spreads, shelf-stable microwaveable entrees, salsas and frozen processed foods. These selections are sold to retail, foodservice and wholesale operations under many well-established trademarks.
Hormel’s stock price is up 4.37% year to date. Shares were added to the Buffett-Munger portfolio at $19.225 per share, and the stock reached $27.19 per share on Thursday, for a gain of 41.4%.
The company’s revenue increased each consecutive year from 2002 to 2008. In 2009 it fell to $6.5 billion, but then increased to a record $7.2 billion in 2010. Hormel’s gross margins have fallen to their second-lowest point in 10 years, at 17.2%, though its operating margin and net margins rose to their 10-year highs of 8.6% and 5.5%, respectively.
Hormel reported its third-quarter results on Aug. 25, 2011, which showed marked improvements from last year. Dollar sales grew 10% to $1.9 billion, while sales volume was flat. Net earnings increased 15% to $98.5 million from $85.4 million, and revenue increased to $1.9 billion from $1.7 billion.
On August 15, the company paid its 332nd consecutive quarterly dividend, at the annual rate of 51 cents, marking its 83rd year of paying dividends.
MICROS Systems Inc. (MCRS)
MICROS Systems Inc. provides enterprise applications for the hospitality industry worldwide. MICROS Systems are currently installed in table and quick service restaurants, hotels, motels, casinos, and leisure and entertainment operations. MICROS provides property management systems and central reservation and customer information solutions under the brand MICROS-Fidelio for hotels worldwide.
MICROS’ stock price has increased 1.35% year to date. Shares were added to the Buffett-Munger portfolio at $43.86 per share, and the price has increased to $46.80 on Thursday, for a 6.7% gain.
In fiscal 2011, MICROS reported record-setting revenue of $1.01 billion, an increase from $914 million in fiscal 2010. The revenue grew consecutively every year from fiscal 2002 to fiscal 2008, after which it fell to $912 million in 2009. Earnings rose for 10 consecutive years to$227 million in fiscal 2011, and free cash flow rose to $189 million in fiscal 2011 from $193, its 10-year peak, in fiscal 2010. Its gross margin is at a 10-year high of 55.6%, as is its operating margin and net margin, at 22.5% and 14.3%, respectively. The company has also built its cash level to about $780 million, and has $55 million in long-term liabilities.
The company posted its fiscal fourth quarter (ending June 30, 2011) on August 25, which included record revenue, operating income, net income and earnings per share. Revenue increased 10.2% over last year to $274.1 million, GAAP net income increased 22.6% to $41.5 million, and earnings per share increased 19% to 50 cents.
Baron Asset Fund comments on MICROS Systems, its new second-quarter position, “We believe that Micros is the dominant player in a large addressable market. We believe that there are approximately 430,000 hotels globally, including 55,000 chain hotels and 375,000 independent hotels. Micros has approximately 28,000 hotels on its platform, implying market penetration of just 6.5%, and Micros is approximately eight times larger than its nearest competitor. This scale gives Micros significant advantages in research and development, marketing, and the largest trained user base. This increases barriers to entry, and it encourages new customers to consider using Micros. Within hotel chains, there are significant benefits to having a standard PMS system across the enterprise. As a result, Chief Technology Officers often select a single PMS vendor and gradually introduce the system across hotels, giving Micros an embedded growth path to 100% market share within many chains. Marriott, Hilton and Starwood continue to use internally developed software to run their North American operations, and we believe all three represent large potential revenue opportunities if and when they elect to modernize their PMS systems.”
GuruFocus has the rest of the fund’s lengthy analysis here.
As pointed by Warren Buffett, “I would rather buy good companies at fair prices instead of fair companies at good prices.” Check out the Buffett-Munger screener if you are looking for these kinds of companies. Warren Buffett said on Bloomberg TV in a July 2011 interview that he may look at Archer Daniels Midland Co. (ADM) as Berkshire Hathaway (BRK.A)(BRK.B) seeks more acquisitions. General Dynamics Corp. (GD) and Exelon Corp. (EXC) are also the types of companies he finds attractive. Interestingly, out of the three companies he mentioned, two of them, Archer Daniels Midland Co. and General Dynamics Corp., are listed in this Buffett-Munger screener. As put by Fortune magazine, this is an unintentional endorsement from Buffett.
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