Auxier Focus Fund keeps buying undervalued MSFT shares
Before Auxier Focus Fund, Auxier worked for Smith Barney and has earned national awards and recognitions for performance and “integrity, knowledge and commitment.” Much of his success can be attributed to being tutored by Mr. Robert Pamplin, CEO of Georgia Pacific. As Jeff puts it, “Mr. Pamplin always put his shareholders first and believed business should be transparent. He said the language of business is accounting, and that if you can’t speak the language, you can’t make money.”
Interestingly, after Jeff graduated, he started to call or hold personal meetings with some of his investment heroes, before they became known. One of them was Warren Buffett. To this day, the cornerstone of the Auxier Focus Fund is respect for the power of compounding.
Auxier Focus Fund is always interested in undervalued companies with the following features:
* Strong or improving fundamentals
* Consistency in operating results
* A substantial advantage over competition (strong franchise)
* A demonstrated ability to earn high rates of return on capital
* Understandable products
* Honest, competent shareholder-oriented management
* Intelligent capital allocation policies
* Generates substantial free cash flow with nominal mandatory capital requirements
* A strong balance sheet and financial flexibility
Auxier Focus Fund kept buying these Companies in the past quarters. I like MSFT.
Medtronic, Inc. (MDT): MDT is one of the most important medical device companies that develops and manufactures therapeutic medical devices for chronic diseases. Its products include pacemakers, defibrillators, heart valves, stents, insulin pumps, and spinal fixation devices.
Medtronic sells its products not only to health-care institutions but also to individual physicians in the US and overseas. It also holds market-leading positions in spinal products, insulin pumps, and neuromodulators for chronic pain.
Medtronic is now focused on developing emerging technology to treat atrial fibrillation, transcatheter heart valves, and treatment-resistant hypertension. If it succeeds with them, it will end up leading the three largest markets.
Microsoft Corporation (MSFT): MSFT develops the Windows PC operating system, the Office suite of productivity software, and enterprise server products such as Windows Server and SQL Server. While the first two account for 60% of revenue, the server and business tools represent 24%.
Other businesses include the Xbox 360 video game console, Bing Internet search, business software, and software for mobile devices.
Financially speaking, Microsoft is very solid. Its balance sheet is sound with more than $50 billion in cash and cash equivalents and $12 billion in debt. Management expects that in the future, MSFT will be able to generate $20 billion in free cash flow on an annual basis.
In terms of future expectations, Azure platform will surely develop into a larger business and the partnership with Nokia will enable MSFT to obtain a larger market share. Market share gains will turn the online services.
When I evaluate MSFT using my FAST Graphs tool, I can see that the price line (black) appear with a huge distance over the orange line (earnings justified valuation). That tells me that the shares have potential upside from current levels. Also, a P/E of just 10x with earnings and sales that will continue to grow appears unfairly low for me. Also when I see the MSFT P/E and P/S in the charts, they seem truly cheap when I compare how earnings and sales grew. That is why so many Gurus added or initated a position in the stock in last year.
Merck & Co Inc (MRK): Merck is engaged in developing pharmaceutical products to treat conditions in different therapeutic areas such as cardiovascular disease, asthma, infections, and osteoporosis. The company also has a vaccine segment to prevent Hepatitis B, pediatric diseases, HPV and shingles.
It acquired Schering and now, 45% of the sales come from the United States. This acquisition helped Merck to offset competition, patent losses and a range of drugs that were unlikely to be approved. Most importantly, it launched new products, Isentress and Januvia, which had a good start and will enable the company to maintain leadership in the market.
Financially speaking, Merck´s balance sheet is solid with good cash flow generation. In terms of quarter results, total debt-to-EBITDA was 1.7 last year, while debt-to-book capitalization stood at 24.7%. In addition, the company has a dividend yield of 4.9% and management is expected to pay out 45% of next year's earnings to shareholders as dividends.
Last but not least, Merck is analyzing a restructure to cut costs and improve margins in the long term. The idea is to offset patent expirations of products that bring good earnings.
BP PLC (BP): BP is an integrated oil and gas firm with operations across six continents. Upstream operations are expected to produce 3.4 million barrels of oil per day, while downstream operations, 2.4 million barrels.
As regards future expectations, the company is willing to close its asset sales at the beginning of 2012 and is planning an additional divestment of $15 billion before 2014. The idea of the company is to set aside non-core upstream properties and create a stronger portfolio.
This will certainly bring value to shareholders. BP remains one of the more oily super majors, with 63% of production coming from oil.
Bank of New York Mellon (BK): BK is the result of the merger of Mellon Financial and Bank of New York. It was created in 2007 and now it is one of the largest financial services institutions across the globe. The bank is a leader in providing back-office services to other financial firms. The firm has two segments: asset-management and private banking.
Financially speaking, BK is in good health and is recovering from recent lows in capital levels. Furthermore its size enables it to obtain economies of scale in a competitive environment. The bank's balance sheet growth is largely driven by deposits placed by custody clients.
Definitely the merger was a very good move in terms of growth and cross-selling opportunities.