His largest new buys are: Encore Wire Corp. (WIRE), Universal Forest Products Inc. (UFPI), VCA Antech Inc. (WOOF), Corning Inc. (GLW) and Walt Disney (DIS).
Encore Wire Corp. (WIRE)
Encore Wire Corporation is a low-cost manufacturer of copper electrical building wire and cable. The company is a significant supplier of both residential wire for interior electrical wiring in homes, apartments and manufactured housing, as well as building wire for electrical distribution in commercial and industrial buildings.
Encore Wire’s financial results are strongly correlated to several key factors, including the volume of product sold and shipped, the cost of copper and other raw materials, the intense competitive pricing of the wire industry, and the efficiency of the company’s operating plants, among others.
Copper is the primary raw material necessary for the company to manufacture its products. The commodity accounted for approximately 81.1% and 73.5% of its COGS in 2010 and 2009, respectively. How the fluctuating price of copper will affect its future operating results is difficult to predict.
Last quarter, the average cost of copper purchased increased 30.7% compared to the second quarter of 2010. This resulted in a 28.6% increase in the price of wire sold, which helped drive net sales to $309.5 million, compared to $236.1 million for the second quarter 2010. COGS rose to 90.1% of net sales, from 86.6% the prior year.
Over the first six months of 2011, the average price of wire sold increased more than the price of raw copper in dollar terms. As a result, margins expanded as the spread between the two increased by 30.4%. The price of copper dove 18.26% over the last month.
Long term, Encore Wire is at $17.55 per share book value, a record. Revenue has trended downward since 2006, but increased to $910 million in 2010 from $650 million in 2009. Encore Wire also has zero debt, zero goodwill and $47 million in cash on its balance sheet.
Van Den Berg bought 552,662 shares of Encore Wire at an average price of $22.53 a share.
Universal Forest Products Inc. (UFPI)
Universal Forest Products Inc. manufactures, treats and distributes lumber products for the do-it-yourself, manufactured housing, wholesale lumber and industrial markets. Its principal products are pressure-treated wood, engineered roof trusses, dimension lumber and value-added lumber products, including lattice, fence panels, deck components and kits for various outdoor products sold under the its PRO-WOOD, Deck Necessities, Lattice Basics, Fence Fundamentals and Outdoor Essentials trademarks.
Universal Forest Products is similar to Encore Wiring in that a significant percentage of the COGS is a single raw material – in this case, commodity lumber products from primary producers. As a result, sales levels depend in large part on lumber costs.
Residential construction revenues decreased 15% in the second quarter 2011 from 2011 as national housing starts fell approximately 11%. Universal Forest has shuttered some operations to offset losses. Gross sales to the retail building materials market decreased 19% over the same period due to lower sales and prices. Gross sales in commercial construction and concrete forming, on the other hand, increased 23% over the same time period, primarily due to an estimated 39% increase in sales.
This year, the lumber market declined until it began to stabilize in June.
This company’s revenue was growing until 2006, then began to decline until 2009, but increased to $1.9 billion in 2010 from $1.7 billion in 2009. Net income was lower, from $24.3 million in 2009 to $17.4 million in 2010. Cash flow has been positive since 2003. It declined to $3 million in 2010 from $124 million in 2009.
Van Den Berg bought 429,521 shares at $27.24 a share.
VCA Antech Inc. (WOOF)
As suggested by the ticker symbol, VCA Antech is a pet care business. It operates a network of freestanding, full-service animal hospitals and also operates a network of veterinary-exclusive diagnostic laboratories.
Spending on pets does not tend to slow during recessions. Sixty-three percent of U.S. households own a pet, and spending on them nearly doubled from 1999-2009. VCA’s revenues grew every year for the last decade, topping $1.3 billion in 2010. Net income declined over the last three years to $110 million in 2010. Margins have been squeezed as well. Gross, operating and net margins shrunk each consecutive year from 2007 to 2010.
Valuation ratios are near historical lows:
The stock used to trade in the $20-$40 range, but fell to a 52-week low of $14.73 in October. Van Den Berg bought 592,730 shares at $18.48 a share.
Corning Inc. (GLW)
Once upon a time, Corning was known for its kitchenware, but now it creates leading-edge technologies for the fastest-growing markets of the world's economy. Corning manufactures optical fiber, cable and photonic products for the telecommunications industry; and high-performance displays and components for television and other communications-related industries. The company also uses advanced materials to manufacture products for scientific, semiconductor and environmental markets.
The LCD glass substrates industry has grown in tandem with the LCD industry, which took off at the beginning of the last decade. Now demand is being driven by more consumers choosing LCD monitors, LCD laptops/ notebooks and smart phones. A few key corporations dominate the majority of the glass substrate industry, one of which is Corning. “The global market for LCD glass substrates is projected to cross 467.2 million square meters by the year 2017,” Global Industry Analysts says. Corning’s revenue has been trending upward to $6.6 billion in 2010 from $5.4 billion in 2009. Net income also improved to $1.8 billion in 2010 from $401 million in 2009. Free cash flow dramatically improved from $226 million in 2008, to $1.2 billion in 2009, to $2.3 million in 2010. The valuation ratios of Corning appear attractive. P/E has fallen to 7.2, only slightly higher than right after the financial crisis in 2009. Similarly, the P/B ratio is 1, the lowest point except for 2002 when the stock crashed. The P/S ratio, 3.2, is at its third lowest point.
Van Den Berg bought 662,025 shares of Corning at $15.02 a share.
Walt Disney (DIS)
Walt Disney Company owns 100% of Disney Enterprises, Inc. which, together with its subsidiaries, is a diversified worldwide entertainment company with operations in five business segments: Media Networks, Studio Entertainment, Theme Parks and Resorts, Consumer Products and Internet and Direct Marketing.
Van Den Berg sold out of his position in Disney in the first quarter of 2011. He made a significant profit on the stock. Beginning when it fell to $19.13 in the first quarter of 2009, he sold portions each quarter as the price rose. His last sell was 804,967 shares for $41.44 a share. He bought 250,295 shares at $34.96.
Disney’s revenue reached $38 billion in 2010, its highest in 10 years, and increased from $36 billion in 2009. It also expanded its gross, operating and net margins.
The company is expanding its parks and resorts offerings, opening its first resort in Hawaii (also its first resort not on the grounds of a Disney theme park), and planning new park rides and attractions based on the hit movie Avatar.
In the quarter ended July 2, Disney’s net income rose to $1.7 billion from $1.5 billion in the same period 2010. For the nine months ended July 2, net income increased to $4 billion from $3.4 billion. Revenue generated from new developments in the parks and resorts segment may help declines elsewhere. Its studio entertainment segment, the only of its segments to post lower revenue in the quarter and nine months ended July 2. And quarter over quarter, studio entertainment and interactive media operating income lost 60% and 32%, respectively. This year it also acquired all of UTV’s software communications as well as its gaming division, Indiagames, the largest gaming studio in an emerging market.
Disney stock fell almost 17% to $32.61 in the last three months, an opportune time for Van Den Berg to buy shares that traded for near or over $40 most of the year to date. Valuation ratios are at the lower end of their historic levels.
See all of Arnold Van Den Berg’s new buys, sells and adds for the third quarter, as well as his complete portfolio here.