He also outlined his criteria for adding the novelties to their portfolio, which is now 15% technology: sound balance sheets, sound business models, sound management teams and good prices. He is also seeking stocks that have business models that overlap with their long-term horizon, as many in the industry have short business cycles.
The stocks that he mentions are: Cisco Systems (CSCO), Google (GOOG) and Microsoft (MSFT).
Cisco Systems (CSCO)
Cisco is First Eagle’s top holding at the end of the third quarter. Eveillard owned a small holding in the stock since 2008 of an average price of $25 per share, which he was adding to modestly until recently. In the fourth quarter 2010, he began making major purchases, more than quadrupling his holding to 40,412,972 shares. His most recent purchase was 9,442,348 shares at about $16 per share in the third quarter. Today, the stock trades for about $18.50.
Cisco now trades for 13 times earnings, whereas in 2004-2005, it traded for over 40 times earnings. The average P/E for the entire technology sector is 19. Cisco’s P/S and P/B ratios are quite near historical lows as well. See more of Cisco’s valuations here.
In May, CEO John Chambers held a quarterly conference call in which he owned up to Cisco’s previous mistakes and articulated what changes it would make to turn things around, indicating a solid and open management. With all of the actions the company would be taking, he cautioned investors to expect financial results to reflect that lag.
However, First Eagle focuses on the long term and is more interested in economies of scale, which Cisco has, than short-term fluctuations, particularly if management is capable.
“[News about tech companies being hurt by turn in global economy] started with Cisco Systems beginning to kind of pre-announce their weakening order book from local and federal government agencies and it’s kind of just continued all through this year,” Deshpande said on CNBC. “We’re not so exposed to some of those short-life-cycle businesses as much. Where we have potential risk is really for instance PC demand for Intel or Microsoft. As of now prospects appear to be at least reasonable. Regardless, it’s not a moment where we have to be doubly worried about business prospects and the price, because the prices are fairly reasonable.”
Eveillard has a smaller holding of Google, possibly due to its earnings multiple being on the high side. He owned 470 shares going into the second quarter of 2011, then added 208,632 in the second quarter at about $527 per share, and 176,757 at about $551.50 in the third quarter, for a total holding of 385,879 shares.
Google, a fast-growing company that jumped from No. 355 on the Fortune 500 list in 2010 to No. 325 in 2011, has also grown revenues 24% from 2009 to $29.3 billion, and profits by 30%, to $8.5 billion. Google is also the largest search engine by far, with a market cap of $207 billion; its next largest competitor, Baidu.com (BIDU), has a $40.6 billion market cap.
Google’s current P/E ratio is slightly higher than other tech stocks First Eagle owns, at about 20, but far lower than its peak of 91 in 2006. The company also has a P/S ratio of 5.6 and P/B of 3.73, and a supremely sound balance sheet with over $42 billion of cash and just over $5 billion in long-term debt and liabilities. More about Google’s valuation multiples is here.
The company also has plenty of room to expand more into social media and mobile communications. Google+ passed its 40 million user mark in the third quarter, and in its third-quarter conference call, CEO Larry Page noted that they launched 100 features on it in 90 days. The company has closed down more than 20 different products to focus on the products it believes will have most impact, such as Google Maps, Google Chrome and mobile.
“Let me finish by saying that we are still at the very early stages of what technology can deliver,” Page said in closing. “These tools we use online will look very different in 5 years time. We're building those tools now as Google+, which is why I'm so excited to be here.”
First Eagle also has great confidence in Microsoft, making it their seventh largest holding in their portfolio of 318 stocks. It has also been a long-term holding; they have owned stock in the company since prior to 2006, but most recently have been adding to their stake since the second quarter 2010, when the price was about $28. Most recently, they added 482,214 shares in the third quarter 2011 at about $26 per share. Their holding at the end of the third quarter was 19,098,704 shares total.
Microsoft, a technology giant with a $219 billion market cap, has been public since 1986, and is also trading near its lowest multiples of the decade. It currently trades at 9.6 times earnings, far from its 2002 P/E of 120. P/S and P/B ratios are also near their lows, at 3.1 and 3.7, respectively. More about Microsoft’s valuation multiples is here.
Microsoft’s stock price has declined 12% in the last five years, although its revenue has grown at an annual rate per share of 12.5%, and free cash flow grew at 13%. Microsoft also to be an extremely profitable company. In 2011, revenue reached a 10-year high of almost $70, and cash flow also reached a 10-year high of $25 billion. The company has a $57 billion store of cash on its balance sheet, with about $22 billion in long-term liabilities and debt.
The company is well aware of the challenges it faces to stay competitive in the ever-changing tech space. It believes that computing is undergoing a long-term shift from client/server to the cloud, comparable to the transition from mainframe to client server. It is thus working on developing cloud infrastructure, platforms and applications, including products: Microsoft Dynamics Online, Microsoft SQL Azure, Office 365, Windows Azure, Windows Intune and Windows Server.
Video of full CNBC interview:
To view First Eagle’s entire portfolio, go here.