Valuation of Donald Yacktman Top Holdings: NWSA, MSFT, PG, PEP, KO
Though today investors are happy with his funds, they underwent tough times in the past. By the end of the 1990s, as he was investing in non-tech small cap stocks, his fund was hit by the tech boom. The fund's board even tried to remove him from his position, and investors ran away. No one was expecting what was about to happen. The dot-com bubble burst, and Yacktman rose from the ashes.
Between 2003 and 2007, he gave a less significant performance but he managed to offer a decent return for a couple of years.
When the 2008 crisis hit, he showed an outstanding way of managing his funds. As he had a good cash position and his portfolio was packed with defensive stocks, he was able to use the cash to buy stocks at very low prices.
Then, he bet on consumer-based cyclical stocks, which were underpriced based on normal earnings, and when thing got worse, they even bought financial stocks.
In 2009, instead of owning a financial or cyclical stock, he moved back towards consumer franchise companies.
How did he manage to successfully overcome these crises and still offer good results?
To understand his strategy let’s imagine a triangle. The base of the triangle is a low purchase price; the other two sides are good businesses and shareholder-oriented management. No wonder his current portfolio is filled with large caps such as Coke (KO) and Pfizer (PFE), stocks that are high quality and yet generated better returns than the general market.
This tendency of moving from lower quality stocks to higher quality stocks and back again to lower quality ones has earned him a reputation as “Flexible Value Investor.” Though this may look risky to investors, his funds have a very good record.
Yacktman’s Top Holdings
News Corporation (NWSA)
Compared to his growth potential, News Corp is priced at a discount. Both its P/E ratio and forward P/E ratio are below the market. Last year, News Corp paid a dividend yield of 0.9%. In the last five years, annualized EPS growth was 5.47%. With a market cap of $41.4 billion, it is expected to keep growing at the same pace. The stock has also a low total debt/equity ratio of 0.5, and price to book ratio and price to sales ratio are below the market. On a long-term basis, News Crop. has great market-beating potential. Their target price estimate is $20.59 and the stock has 96.62% upside potential based on 9.7% EPS growth estimate.
With the price of its shares at $26 per share, Microsoft looks quite cheap too. There are many reasons why Microsoft’s shares are trading below their true value. For one thing, Einhorn, a long-time shareholder, has criticized CEO Steve Ballmer for his failed initiatives in the areas of social networking and online research. Also, investors believe that Apple, Google, Facebook and others will reduce its profits. However, Wall Street consensus estimates call from Microsoft to earn $2.52 in FY11 and $2.77 in FY12 up from $2.10 in FY10, driven by an increase in sales from $62 billion in FY10 to $70 billion in FY11 and $74 billion in FY12.
Procter & Gamble (PG)
According to Fortune magazine, this consumer goods company is the fifth “most admired company.” However, it is slightly more undervalued than its competitor on a multiples basis. The stock currently trades at 15.6x and 13.3x past and forward earnings but offers a good dividend yield of 3.4%, once again much better than its peers. Although it may be affected by a fall in the consumer expenditures (the greatest part of the sales come from Europe), PG could be at its low and undergo a strong recovery in the years to come.
Coca-Cola has also shown that despite the worldwide crisis it is still offering goods results. KO has a "2020 strategy" that focuses on both growing their emerging markets franchises and generating a better ROI through selling underperforming bottlers that KO own to reliable third party bottlers, such as FEMSA. KO looks fair priced but it could have potential value if KO's emerging market businesses keeps performing and they succeed in selling bottlers to focus in marketing and innovation, actions that KO does great, and will lighten their business model.
I prefer to invest in KO rather than PEP because I believe that as Coke accelerates its refranchising of bottling operations valued at $20-$30 billion, KO will have the ability to step up brand development and innovation investments at a much faster rate than any efficiency and productivity measures that PEP can yield. But PEP shares are currently undervalued. PEP has historically (over the last 10 years) traded at a premium to the average food stocks but currently PEP trades at a 10% discount (see chart below). I think a 10% premium is instead warranted today given PepsiCo’s position as the global leader in snacks. Applying a 16x multiple (a 10% premium to food stocks at 14.5x) to the average Analyst 2012 EPS estimation of $4.73 yields a potential price in the 70s level.