Primecap Management - Solid Companies trading at depressed P/E
The fund was founded by Howard B. Schow, who acts as its chairman and CEO.
The Primecap team has a strategy to find stocks. It garners an outlook of the company for a term of three to five years to see if it is profitable. Investment decisions are based on evaluating the value of the company and the market price of the stock. A company is valuable for the management team if it has good free cash flow, and sound assets.The firm has a propietary valuation model that they implement to see which Company is cheap in any sector. By this way, Primecap selects equities based in both a qualitative research of the business and a quantitative valuation of the business and its parts.
By analyzing their portfolio I found several stocks that are interesting for a further study. I use a tool called FAST Graphs, that helps me evaluate at a glance which stocks are cheap or overvalued. FAST graphs calculates each Company fair value (organge line) and compares it with the price (black line) and the "normalized" P/E line (blue line). By this way I can check which of the stocks in any Guru portfolio are worth studying.
UNITED CONTINENTAL HOLDINGS INC (UAL):
UAL is the holding company for United Airlines and Continental Airlines. It operates in the airlines industry. The company comprises two business segments: Mainline and Regional Affiliates and is present in the Americas, Europe, Asia and Africa through operations from their hubs in Chicago, Cleveland, Denver, Guam, Houston, Los Angeles, New York, San Francisco, Tokyo and Washington, D.C.
United is extending its presence in China. This footprint should bring great opportunities, particularly because international flights charge higher fares.
The company is managed by Jeffrey Smisek, whose incentive-based compensation structure enabled UAL to outperform its peers.
Last but not least, the company launched a new Boeing 787, the Dreamliner. This new model has increased fuel efficiency and capabilities.
HEWLETT PACKARD CO (HPQ): Hewlett Packard is one of the leading global providers of computing and imaging solutions and services for business and home. The company is committed to take advantages from the opportunities provided by Internet and the proliferation of electronic services. It is divided into the following businesses: Imaging and Printing Systems, Computing Systems and Information Technology Services.
Financially speaking, HPQ is trading at the bottom vis-à-vis its five year valuation. The current P/S ratio is 0.4 and the current P/E ratio is 7.6. HPQ’s current P/B ratio is 1.3 and it has averaged 2.5 over the past 5 years with a low of 1.3 and a high of 3.5.
HPQ is undervalued according to FAST Graphs tool. We can see that HPQ always traded near its fundamental valuation (orange line) but that changed in 2010, when the stock started in a huge downtrend and its price got far away from a justified valuation price. HPQ P/E of just 6.9 is too low according to what HPQ traded in the past.
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DISCOVER FINL SVCS (DFS): Discover Financial Services operates the Discover Card with a broad number of card members, the Discover Network with millions of merchant and cash access locations, and the Goldfish credit card business in the United Kingdom.
Discover has been significantly benefitted from the use of electronic payment methods in lieu of cash and checks.
Since its inception in 1986, Discover has grown to become one of the largest card issuers in the U.S. and a leading innovator and driver of change in the credit card industry.
DFS has entered into several agreements that will certainly improve its market share. to start with it made a deal with Banco Popular de Puerto Rico to expand Discover card acceptance in the region. Secondly, it closed a deal with WorldPay to increase acceptance of its cards.
Expense and capital management will support operating leverage and earnings in the quarters to come. Discover is also interested in inorganic growth.
As regards quarter results, sales have increased from 2009 to 2011. The volume climbed 8% y/y to reach $75.1 billion.
By looking at FAST Graphs tool, DFS appear with a relatively small undervaluation according to the justified earnings valuation line (orange). According to FAST Graphs valuation, the stock should trade near $45.
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FREEPORT-MCMORAN COPPER & GO (FCX): Freeport-McMoRan is engaged in mineral exploration and development, mining and milling of copper, gold, and silver in Indonesia, and the smelting and refining of copper concentrates in Spain and Indonesia.
Freeport has the capacity to increase the output of copper insofar as prices remain strong. Freeport merged with Phelps Dodge and the merger has placed the company in the second place as regards copper production. The deal has extended the operating base.
Freeport is financially healthy. In 2011, the company had $4.4 billion in cash and $3.5 billion in debt. Fortunately, some of the debt was repaid. In terms of debt maturities, there are not significant ones in the near term.
By looking at FAST Graphs chart, it is easy to see that FCX is a very volatile stock but both its P/E and price have room for appreciation. I think that if China does not make a hard landing, FCX should trade back near $75.
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DELL CP (DELL): Dell Inc. is a premier provider of products and services required for customers worldwide to build their information-technology and Internet infrastructures.
Dell designs, manufactures and customizes products and services to customer requirements, and offers an extensive selection of software and peripherals.
It includes the following segments: enterprise solutions and services, software and peripherals, client products, and financial services.
Dell has recently had a very aggressive buyback initiative. It used $5.6 billion to repurchase shares in the last quarters. Therefore, outstanding shares dropped from 1.93 billion to 1.80 billion.
In terms of acquisitions, they have been a growth engine for Dell. At the beginning of 2011, the company completed the acquisition of Compellent Technologies Inc. The deal will enable Dell to have access to the firm´s customer database and channel partners. That is not the only deal. Dell also acquired Perot Systems to widen the range of IT services and increase cross-selling opportunities.
Last but not least, Dell acquired Equal Logic to add a higher-margin product line.
Dell keeps innovating and introducing new products and services. With this technique it has been able to incorporate new customers and increase the market share.
Some of the new products include the ultra-thin personal computer Latitude Z and Adamo XPS series.
Dell is largely focused on the SMB segment, through which it intends to provide more secure data transaction and protection services. Another segment of interest for Dell is the Electronic Medical Records. Electronic Medical Records help doctors and hospitals to organize medical records of patients in a manner that makes tracking the clinical history of patients from anywhere in the world convenient.
Financially speaking, Dell is a sound company that is able to generate strong cash flows. Indeed cash flow increased to $2.4 billion and the quarter closed with $15.1 billion in cash and short-term investments versus $14.4 billion in the previous quarter.
]According to FAST Graphs tool, DELL has a target price of 30, that comes from its earnings justified valuation line (orange). Dell has a P/E of just 7.9 which discounts zero growth for the coming years. I think that is unwarranted considering the Company is migrating to service business (higher margins), has a superb management team, lead by Michael Dell and a solid worldwide brand.[/b][ Enlarge Image ]