Larry Robbins' Top Conviction Picks - 'In Glenview, we like health care and industrial solid companies'
Larry Robbins is known in the investment sphere for betting on large-cap stocks. In addition, he is known for taking an activist role in terms of management, that is to say, he expresses his concerns on what management teams at some of his investments do and requires changes.
In 2010, Glenview Capital Management celebrated its 10th anniversary. The 10 year-period represented gains of 301%, significantly surpassing the S&P.
Larry says: “The firm continues to generate attractive risk-adjusted returns.” “We remain constructive on the investment environment over the medium-term supported by attractive valuations, excessive corporate liquidity and a growing economy.”
Larry focuses on two ways to make money: earnings growth or multiples growth.
I created a short list of his top conviction picks in the last quarters. By doing that, I concluded that TMO is interesting for futther study because the company has a solid presence in emerging markets, the management is proven and prospects are solid.
LIFE TECHNOLOGIES CORP (LIFE): Robbins INCREASED his position 10.91%
LIFE is a company that provides products and services to help researchers in scientific exploration activities. The company is specifically engaged in providing biotechnology tools.
LIFE is present in more than 100 countries and owns rapidly growing intellectual property estate made up of patents and exclusive licenses.
Currently, LIFE is under analysts´ price target, which is $51. In August two insiders made new purchases at higher levels. In terms of figures, the company has a forward P/E of 9.5, and earnings have grown at an average clip of 21% in the last ten years.
The stock is selling for less than the operating cash flow. Last but not least, beta is low and for the next three years, earnings are expected to grow 14% in average.
LIFE's net profit margin has averaged 10.54% since 2010-12. It is currently lower than its 2007-12 average of 11.17% but higher than its 2004-12 average of 8.64%. In terms of that, the company has fair multiples.
ROE currently is 8.94% which is lower than the target ROE I am looking for in a solid company (above 20%) but it is higher than its 2008-12 ROE of 1.21%. That shows that business has improved.
Revenue growth is quite neutral, averaging 9.38% annual growth in the last two years, while net income grew 161% year over year, which is quite impressive.
One risk comes from a sustained slowdown in government and academic research funding. Although the company does not expect the scenario to worsen in the near future, it is repositioning itself for a slower growth environment by lowering its cost structure and increasing its focus on R&D initiatives.
Larry Robins researched LIFE and saw that the company's revenue growth over the past few years has been robust. Since 2007, EPS has grown at a CAGR of 20.3% from $2.03 to the current level of $3.55 in 2010. Moreover, free cash flow has more than doubled over the same period. Over the last two years, the company has been focusing on creating the optimal portfolio of products through innovations and acquisitions, the latest being Ion Torrent
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MCKESSON CORP (MCK): Larry Robbins INCREASED his position 9.54%
MCK is the world's largest health care service and technology company that provides unique supply and information management solutions.
The company is comprised of two business segments: Health Care Supply Management and Health Care Information Technology. In addition its customer base is made up of hospitals, homecare providers, and retail pharmacies, among others and operates in North America, United Kingdom, Ireland, Asia Pacific and Israel.
An important characteristic of MCK is its ability to make high profits in generic drugs. This is particularly important given the expiration of brand name patents.
MCK had a very low net profit margin of 1.16% during the period 2010-12. Its ROE is 16.30% which is lower than its average of 18.4% from 2010 to 2012.
MCK's multiples appear neutrally valued over the industry averages. The company trades with a P/E of 17x, P/B of 2.7x and P/S of just 0.2x which appear almost the same as industry averages of 16.6x, 2.7x and 0.2x.
I think Larry Robbins was attracted by the fact that McKesson is a major player in the pharmaceutical and medical supplies distribution market. The company's Distribution Solutions segment continues to perform well, with sales increasing to $108.9 billion in fiscal 2011. This segment caters to a wide range of customers and businesses and should benefit from increased generic utilization and an aging population. Due to the economic slowdown, a large number of people are moving toward higher-margin generic drugs, and the use of generic drugs should increase significantly over the next few years as several branded prescription drugs are scheduled to go off patent, like Johnson & Johnson's (JNJ) Concerta (patent expired) and Pfizer's (PFE) Lipitor (expires Nov. 30, 2011).
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Crown Castle International CORP. (CCI): Larry Robbins INCREASED his position 8.55%
CCI is the owner and operator of towers and transmission networks for wireless communications and broadcast transmission companies. It has operations in the U.S., Puerto Rico and the UK.
Customers currently include many of the world's major wireless communications and broadcast companies, including Bell Atlantic Mobile, BellSouth, AT&T Wireless, Nextel, Metricom and the British Broadcasting Corporation.
According to the last quarter report for 2011, the company generated site rental revenue of $469 million, an increase from that same period of 2010. Site gross margin averaged $347 million and adjusted EBITDA was $332 million.
CCI has a negative profit margin and also a very weak ROE. These are not good facts about this business. Its revenue growth in the last two years of 11.4% year over year has been lower than its average growth of 16.4% from 2005 to 20012. Also, multiples do not appear cheap: CCI trades at a P/E of 85x, P/B of 6x and P/S of 7x in comparison to industry averages of 17.4x, 1.6x and 1.2x.
I think Robbins bought CCI because wireless services are advancing rapidly in terms of additional features and capabilities. Much of the infrastructure and upgrades require effective site management of cell towers and equipment. Crown Castle effectively addresses this opportunity as 95% of its quarterly revenue is currently derived from wireless service providers. The company accumulates most of its revenue from long-term (typically 5-10 year) tower leases.
CCI Crown Castle is generating strong operating cash flow and its acquisition of Global Signal facilitated increasing financial performance with consolidating synergies. Deployment of high-speed 3G/4G network demands broader coverage, which in turn generates the need for tower companies to expand and more effectively provide services to their clients. I believe that the company's success in the wireless tower market will continue in the long run due to the enormous growth of mobile Internet traffic. However, its high level of current valuation may restrict above-market potential anytime soon.
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TYCO INTERNATIONAL LTD SWITZERLAND (TYC): Robbins INCREASED his position 24%
TYC manufactures electrical and electronic component and undersea telecommunications systems and it is considered the largest in its industry. Apart from manufacturing, it is considered and installer, and provider of fire protection systems and electronic security services.
Robbins surely liked the relative stability of the global security and fire markets, as well as a high and predictable cash generation, limited balance sheet risk and easy cost-out opportunities. There is a potential catalyst in the company's solid balance sheet and healthy liquidity position. Robbins probably believes the company is likely to put its cash to work resuming share buybacks and/or tag-a-long acquisitions over the next several months. It is encouraging to see the relative strength in recurring revenues, ADT's sequential margin improvement and the lack of deterioration in its customer base.
In terms of valuation, TYC's current trailing 12-month earnings multiple is 16.5X, compared to the 19.9X average for the peer group and 18.0X for the S&P 500. Over the last five years, shares of TYC have traded in a range of 6.8X to 21.4X trailing 12-month earnings. The stock is trading at a discount to the peer group, based on forward earnings estimates. The current 32.9% discount to the industry average for 2011 is approximately at the middle of the historical range, with adequate room for appreciation.
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THERMO FISHER SCIENTIFIC INC. (TMO): Robbins INCREASED his position 6.14%
Thermo Fisher Scientific is the world leader in serving science through two premier brands, Thermo Scientific and Fisher Scientific
The former offers a complete range of high-end analytical instruments and laboratory equipment, software, consumables, etc for laboratory workflow solutions. The latter is engaged in equipment, chemicals, supplies and services for healthcare, scientific research, safety and education.
Now, the company is analyzing a possible split into three publicly traded companies. The purpose of this split is to increase shareholder value and gain flexibility to carry out acquisitions and mergers.
TMO's net profit margin has averaged 9.6%, which is higher than its average of 7.81% from 2007-20012. This shows that the business is in good shape, and the ROE is the highest in the last five years, 6.75% average from 2010-12 in comparison to 5.36% from 2007-2012.
TMO is trading with a P/E of 19.5x, which is higher than the industry average of 18.7x. But its P/B of 1.3x and P/S of 1.8x appear undervalued in comparison to industry averages of 2.6x and 2.4x.
I think Robbins likes the strong international operations growth that comprised 41% of TMO revenues in fiscal 2010. Maintaining its previous trend, the company recorded robust growth in Asia-Pacific countries, including China and India, both growing at above 20% during the quarter, a trend expected to continue for the time being. As a part of Thermo Fisher's plans to focus on the Asia-Pacific, it has decided to build a new factory in Suzhou, China, thus bolstering the R&D infrastructure there. This will provide the company the required capacity to produce laboratory consumables for growing local life sciences markets.
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