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Dodge & Cox Found Value in Their Top 5 Conviction Picks

December 28, 2011 | About:
Federico Flom

Federico Flom

6 followers
Van Duyn Dodge and E. Morris Cox founded Dodge & Cox in 1930. In the past 12 months, the company stock fund gained 64.45%.

Dodge & Cox's investment approach is focused on the long term fundamental outlook and current valuation for each company in their Funds' diversified portfolio.

Dodge & Cox employs a team research approach in making investment decisions. The investment decisions are made by the Investment Policy Committee which is made up of nine members.

Dodge & Cox believes that a well-tuned, group decision making process enhances individual thinking and moves the portfolio beyond dependence on any single person.

The Dodge & Cox team is guided both in what they buy and what they sell by an ongoing search for superior relative value, steering clear of popular choices that come at a price they would rather not pay. Investing when valuations are low creates greater potential for capital appreciation. They look to be long-term owners of companies whose current valuations don't reflect their long-term earnings and cash-flow prospects.

Here are five picks that reflect the company's approach:

GlaxoSmithKline PLC (GSK):

At prices in the low $40s, Dodge & Cox did not add to their GSK position

GlaxoSmithKline ranks as one of the largest companies by market capitalization in the pharmaceutical industry. The company conducts its business across multiple therapeutic classes, including cardiovascular, metabolic, respiratory, neurological and antiviral, as well as vaccines and consumer products. Prescription drug and vaccine sales account for close to 80% of total sales.

GlaxoSmithKline has used its vast resources to create the next generation of medicines. The company's innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat.

Glaxo ranks in the top tier of the pharmaceutical industry. It has created multiple opportunities for new blockbuster drugs thanks to its resources.

In terms of quarter results, total sales increased 3% operationally. On the bottom line, earnings per share increased 1% year-over-year as higher costs — largely due to an unfavorable mix of lower-margin products — weighed on earnings growth.

Glaxo is well positioned in developing orphan drugs, which tend to carry strong pricing power and usually face less competition. The strong purchase power has been triggered by the launch of new vaccines and pipeline drugs.

Glaxo is one of the best-positioned pharmaceutical companies to emerging markets. This should definitely help drive growth over the long term.

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Novartis AG (NVS): Dodge & Cox started reducing their position in the last several quarters ago and used the last correction to keep reducing their NVS position

Novartis develops and manufactures health care products within its four main operating segments: branded pharmaceuticals, generic pharmaceuticals, diagnostic and vaccines, and consumer products

The company has diversified operating platforms and an industry-leading number of new potential blockbuster drugs.

Novartis is financially healthy. In quarterly results, the company reported a 12% increase in sales and strong operating leverage with their core operating income up 15%.

Free cash flow was very strong for the quarter at $3.7 billion, and it presented innovation in the quarter and three key approvals.

Novartis operates across multiple segments, and this provides greater stability in earnings compared with firms that are focused on only one business.

The company uses its cash beneficially for shareholders, as 100% of cash flow after acquisitions and dividends is used to buy back shares.

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Hewlett-Packard Co: (HPQ) went down in the last quarter and Dodge & Cox found deep value in these shares, adding to their position when HPQ touched the low $20s.

Hewlett-Packard manufactures and sells information technology products and services to businesses and consumers worldwide. Its services include personal computers, accounting for 30% of sales; printers, accounting for 20% of sales and enterprise storage and servers, which represent 13%. The remainder of company sales comes from software, financing and other corporate investments.

HP's services engagements are typically large, long-term in nature, and expensive for the customer to migrate to another vendor. In 2011 it grew revenue 1%, non-GAAP EPS 7% and free cash flow 8%. And it generated $12.6 billion of cash flow from operations.

HP's global reach and well-run logistics provide an efficient platform to assimilate and distribute new Technologies. HP is effectively targeting technologies to acquire in storage and networking that will help it build an all-in-one portfolio for enterprise data centers.

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Vodafone Group Plc (VOD): Dodge & Cox kept reducing their position in the last quarter

Vodafone is the second-largest wireless phone company in the world behind China Mobile (CHL). It is also the largest carrier in terms of the number of countries served. Vodafone has majority or joint control in 22 countries and minority or partnership interests in many others. The firm's objective is to be the communications leader across a connected world.

The firm also produces large amounts of free cash flow, which should enable it to handle its interest payments. In terms of revenue, group service revenue grew 15%.

Vodafone's scale and scope around the world provide cost advantages, as programs can be developed in one market and then rolled out to the rest at minimal additional cost.

Because the firm is not an incumbent telephone operator, it has no legacy problems like major underfunded pensions, civil-servant employees, or regulations mandating universal telephone service. Vodafone has developed M-Pesa, which allows money to be transferred via cell phone, for emerging-market customers who don't have bank accounts.

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Wells Fargo & Co (WFC): Dodge & Cox used the last correction to keep adding to their WFC position. It is interesting that they have the most conviction in WFC over other banking shares.

With the purchase of Wachovia, Wells Fargo has become a nationwide bank and was catapulted into the top tier of U.S. banks.

Its diversified businesses generated record net income of $4.1 billion in the third quarter, an increase of 21% from a year ago, and a record EPS of $0.72, an increase of 20% from a year ago.

Their focus on meeting their customers' financial needs led to robust deposit growth and their strongest quarterly loan growth since the merger with Wachovia almost three years ago. They also benefited this quarter from lower expenses and continued improvement in credit quality.

Wells Fargo is a market-share leader in online banking. Online customers tend to be more profitable than traditional banking clients. With Wachovia, Wells has national scale.

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Rating: 3.7/5 (9 votes)

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