Diamond Hill Capital Management Inc. has been providing investment advice since 2000. It is listed on NASDAQ and included in the Russell 2000 Index.
Diamond Hill manages traditional and alternative equity strategies as well as a fixed income strategy, which can be found in individual accounts, mutual funds and private investment funds. Institutions, financial intermediaries and also individuals constitute some of their customers. It has been managing $8.7 billion assets since Dec. 31, 2011
What about the company's business model?
Every share of stock has an intrinsic value, regardless of its current stock market price. Such market price can be above, below or be even equal to the intrinsic value at a given moment. When there is a severe difference between them, investment opportunities arise. The Valuator provides the due framework so as to estimate the intrinsic value of a common stock which constitutes the present value of all future cash flows for a certain time horizon. With a five-year horizon, the cash flows consist of any dividends paid and the proceeds of a sale of the stock at the end of year five. Factors to determine the value: normalized earnings and growth rate, payout ratio and dividends, terminal earnings multiple and required rate of return.
Here are Diamond Hill's top buys:
American Express (AXP, Financial): Amex is aU.S. card services, international card and global commercial services, and global network and merchant services provider. Its former financial adviser segment, American Express Financial Advisors, was spun off to shareholders in 2005 and is now known as Ameriprise.
American Express (AXP) is currently working on its own internal digital commerce initiatives such as Serve which consists of payment options into a single account that can be made through bank accounts, debit and credit cards. It has also created partnerships with Foursquare, Facebook and Zynga regarding the payment space field. Today the company is expecting to launch a $100 million fund to invest in start-ups and companies in digital commerce. This e-commerce initiative will involve investments in different areas including loyalty, reward, mobile and online payment management, security, among others. Amex purpose is to actively participate in the payment and commerce innovations taking place outside the company's boundaries. The access to the e-commerce arena gives Amex the opportunity to know about the technological breakthrough in payments.
DJIA component American Express reported a market cap of $56 billion and is trading at just under 12 times the expected 2011 net earnings. Net income is expected to grow by just 2 percent to $4.17 per share in 2012.
Nike (NKE, Financial): NKE is the largest designer and wholesaler of athletic footwear and apparel. Nike is present in more than 170 countries around the world and sells its products to more than 50,000 retail accounts through company-owned stores and independent distributors and licensees. For 2012, NKE's market is expected to represent 36% of revenue in North America in the first place. Western Europe comes second with 18% of revenue. Emerging markets and China come next with 14% and 10% of revenue respectively. Other businesses, including Cole Haan, Converse, Umbro and Hurley, should represent 13% of revenue.
In 2007 and 2008, Nike decided to divest Starter Line and Bauer Hockey brand to optimize its brand portfolio. Today this portfolio has gained clear competitive advantages in basketball, running and golf. Umbro’s acquisition in 2008 also positioned Nike among the elite players in the $10 billion global soccer market. Today, Nike is competing with Adidas in global soccer apparel and footwear sales with the addition of the French and Brazilian soccer teams, and many World Cup´s teams. The development of its products, its marketing and supply capabilities can be translated into meaningful growth over the coming years.
Diamond Hill must have invested in Nike given Nike’s primary goal to expand internationally. It can take considerable advantage from expanding into China where the brand is already the leading player with more than $2.3 billion in annual sales projected in fiscal year 2012 and $2.5 billion in fiscal year 2013. Nike also expects to successfully expand Umbro’s reach in places such as Europe, South America, and Africa.
The company’s current yield is 1.49%. The 5-year dividend growth rate is 13.8%, while last year's dividend growth rate was 10.7%. The current P/E is 20.64. The projected earnings per share growth for next year are 5.57%, while for the next 5 years it is projected to be 11%. Nike´s stock is also growing. For 213 it is expected to climb 17% with earnings projected at $5.80.
CB: Chubb began in marine insurance but over the years it became a property and casualty insurer thus becoming the 12th-largest property-casualty insurer in the United States. Chubb mainly operates in the United States with revenue of 75%, however its international transactions are expanding. Its largest unit is commercial insurance, followed by personal and specialty.
Diamond Hill surely decided to invest in CB given the fact that in the quarter CB repurchased shares at a rate of $480 million due to the stock's discount to the fair value estimate and given the fact that management expects to complete such repurchase plan by January 2012. Most importantly, CB has a market capitalization of $19.4 billion, and a P/E of 11.2. It pays a quarterly dividend of $0.39 per share, for an annual yield of 2.2%. Chubb has raised its dividend for 47 years in a row.
Its balance sheet is solid with debt just 20% of capital, and its dividend are steadily rising. This may attract conservative investors.
Juniper Networks (JNPR, Financial): JNPR designs and sells network infrastructure for private- and public-access networks, network hardware, software, security, and optimization tools are some of Juniper Networks’ main services and products. Juniper sells directly and through resellers to network services providers.
Although the company experienced some lows in service providers’ demands and had to lower its prospects, it is expecting non-GAAP earnings of 26 cents to 28 cents a share in the quarter on revenue ranging from $1.11 billion to $1.12 billion.
Juniper’s near-term challenges are expected to continue in the first semester of 2012 since it operates in a difficult carrier spending environment and also facing a competitive pressure from CISCO. However, the firm is believed to be well-positioned to maintain its share and it represents a solid investment. I think Diamond Hill felt attracted to Juniper given the fact that, although Cisco is the best in the environment, Juniper is a solid investment with a long-time horizon.
Fluor (FLR, Financial): Fluor globally provides engineering, procurement, construction, and maintenance services to a wide range of customers including the United States federal government. Fluor has successfully expanded into mining, power, industrial and infrastructure markets in recent years.
FLR experienced some issues lately. Its share price dropped due to Q3 report issuance. Furthermore, although the company reported EPS of $0.78 cents per share, revenue of $6 billion, representing an increase of 10% vis-a-vis 2010, it missed consensus expectations of 85 cents. This drop can be attributed to the $38 million charge for the construction related to the Greater Gabbard Offshore Wind Project. This construction issue was caused by the bankruptcy of a “critical subcontractor”. Of course this brought a delay in the construction. Nevertheless, Fluor expects the wind farm to be completed by 2012.
Unfortunately, quarter results were not as expected. The company narrowed its guidance to EPS of $3.20-$3.40 for 2011 and set it at $3.40-$3.80 for 2012. This was not well seen, particularly in the environment where FLR operates. Most importantly, shares fell 6.3%. Now, what did Diamond Hill take into consideration upon investing? I think that it considered that despite these headwinds, there are factors that make the stock still be a compelling buy.
Mattel (MAT, Financial): Mattel produces toys under several brands names, such as Barbie, Hot Wheels, Fisher Price, and American Girl and under exclusive entertainment licenses as well. Mass retailers and specialty toy stores constitute its main customers. MAT's products are locally (United States) and internationally traded.
MAT recorded sound results and they are expected to rise during holiday time when large proportions of its net revenues are generated. MAT’s main goals are top-line growth, building new franchises, optimizing entertainment partnerships, expanding international footprint, among others. These elements surely encouraged Diamond Hill to invest in it.
It has an indicated yield of 3.3%. The company's 2011 dividend payout ratio is expected to be 41%. The company's revenues continue to grow steadily, showing a year-on-year growth of 9% in the last quarter. Mattel also enjoys of a healthy balance sheet with over 2x in current ratio and a debt-to-equity ratio of less than 50%. The stock is trading at a forward price to earnings ratio of 12x.
Diamond Hill manages traditional and alternative equity strategies as well as a fixed income strategy, which can be found in individual accounts, mutual funds and private investment funds. Institutions, financial intermediaries and also individuals constitute some of their customers. It has been managing $8.7 billion assets since Dec. 31, 2011
What about the company's business model?
Every share of stock has an intrinsic value, regardless of its current stock market price. Such market price can be above, below or be even equal to the intrinsic value at a given moment. When there is a severe difference between them, investment opportunities arise. The Valuator provides the due framework so as to estimate the intrinsic value of a common stock which constitutes the present value of all future cash flows for a certain time horizon. With a five-year horizon, the cash flows consist of any dividends paid and the proceeds of a sale of the stock at the end of year five. Factors to determine the value: normalized earnings and growth rate, payout ratio and dividends, terminal earnings multiple and required rate of return.
Here are Diamond Hill's top buys:
American Express (AXP, Financial): Amex is aU.S. card services, international card and global commercial services, and global network and merchant services provider. Its former financial adviser segment, American Express Financial Advisors, was spun off to shareholders in 2005 and is now known as Ameriprise.
American Express (AXP) is currently working on its own internal digital commerce initiatives such as Serve which consists of payment options into a single account that can be made through bank accounts, debit and credit cards. It has also created partnerships with Foursquare, Facebook and Zynga regarding the payment space field. Today the company is expecting to launch a $100 million fund to invest in start-ups and companies in digital commerce. This e-commerce initiative will involve investments in different areas including loyalty, reward, mobile and online payment management, security, among others. Amex purpose is to actively participate in the payment and commerce innovations taking place outside the company's boundaries. The access to the e-commerce arena gives Amex the opportunity to know about the technological breakthrough in payments.
DJIA component American Express reported a market cap of $56 billion and is trading at just under 12 times the expected 2011 net earnings. Net income is expected to grow by just 2 percent to $4.17 per share in 2012.
Nike (NKE, Financial): NKE is the largest designer and wholesaler of athletic footwear and apparel. Nike is present in more than 170 countries around the world and sells its products to more than 50,000 retail accounts through company-owned stores and independent distributors and licensees. For 2012, NKE's market is expected to represent 36% of revenue in North America in the first place. Western Europe comes second with 18% of revenue. Emerging markets and China come next with 14% and 10% of revenue respectively. Other businesses, including Cole Haan, Converse, Umbro and Hurley, should represent 13% of revenue.
In 2007 and 2008, Nike decided to divest Starter Line and Bauer Hockey brand to optimize its brand portfolio. Today this portfolio has gained clear competitive advantages in basketball, running and golf. Umbro’s acquisition in 2008 also positioned Nike among the elite players in the $10 billion global soccer market. Today, Nike is competing with Adidas in global soccer apparel and footwear sales with the addition of the French and Brazilian soccer teams, and many World Cup´s teams. The development of its products, its marketing and supply capabilities can be translated into meaningful growth over the coming years.
Diamond Hill must have invested in Nike given Nike’s primary goal to expand internationally. It can take considerable advantage from expanding into China where the brand is already the leading player with more than $2.3 billion in annual sales projected in fiscal year 2012 and $2.5 billion in fiscal year 2013. Nike also expects to successfully expand Umbro’s reach in places such as Europe, South America, and Africa.
The company’s current yield is 1.49%. The 5-year dividend growth rate is 13.8%, while last year's dividend growth rate was 10.7%. The current P/E is 20.64. The projected earnings per share growth for next year are 5.57%, while for the next 5 years it is projected to be 11%. Nike´s stock is also growing. For 213 it is expected to climb 17% with earnings projected at $5.80.
CB: Chubb began in marine insurance but over the years it became a property and casualty insurer thus becoming the 12th-largest property-casualty insurer in the United States. Chubb mainly operates in the United States with revenue of 75%, however its international transactions are expanding. Its largest unit is commercial insurance, followed by personal and specialty.
Diamond Hill surely decided to invest in CB given the fact that in the quarter CB repurchased shares at a rate of $480 million due to the stock's discount to the fair value estimate and given the fact that management expects to complete such repurchase plan by January 2012. Most importantly, CB has a market capitalization of $19.4 billion, and a P/E of 11.2. It pays a quarterly dividend of $0.39 per share, for an annual yield of 2.2%. Chubb has raised its dividend for 47 years in a row.
Its balance sheet is solid with debt just 20% of capital, and its dividend are steadily rising. This may attract conservative investors.
Juniper Networks (JNPR, Financial): JNPR designs and sells network infrastructure for private- and public-access networks, network hardware, software, security, and optimization tools are some of Juniper Networks’ main services and products. Juniper sells directly and through resellers to network services providers.
Although the company experienced some lows in service providers’ demands and had to lower its prospects, it is expecting non-GAAP earnings of 26 cents to 28 cents a share in the quarter on revenue ranging from $1.11 billion to $1.12 billion.
Juniper’s near-term challenges are expected to continue in the first semester of 2012 since it operates in a difficult carrier spending environment and also facing a competitive pressure from CISCO. However, the firm is believed to be well-positioned to maintain its share and it represents a solid investment. I think Diamond Hill felt attracted to Juniper given the fact that, although Cisco is the best in the environment, Juniper is a solid investment with a long-time horizon.
Fluor (FLR, Financial): Fluor globally provides engineering, procurement, construction, and maintenance services to a wide range of customers including the United States federal government. Fluor has successfully expanded into mining, power, industrial and infrastructure markets in recent years.
FLR experienced some issues lately. Its share price dropped due to Q3 report issuance. Furthermore, although the company reported EPS of $0.78 cents per share, revenue of $6 billion, representing an increase of 10% vis-a-vis 2010, it missed consensus expectations of 85 cents. This drop can be attributed to the $38 million charge for the construction related to the Greater Gabbard Offshore Wind Project. This construction issue was caused by the bankruptcy of a “critical subcontractor”. Of course this brought a delay in the construction. Nevertheless, Fluor expects the wind farm to be completed by 2012.
Unfortunately, quarter results were not as expected. The company narrowed its guidance to EPS of $3.20-$3.40 for 2011 and set it at $3.40-$3.80 for 2012. This was not well seen, particularly in the environment where FLR operates. Most importantly, shares fell 6.3%. Now, what did Diamond Hill take into consideration upon investing? I think that it considered that despite these headwinds, there are factors that make the stock still be a compelling buy.
Mattel (MAT, Financial): Mattel produces toys under several brands names, such as Barbie, Hot Wheels, Fisher Price, and American Girl and under exclusive entertainment licenses as well. Mass retailers and specialty toy stores constitute its main customers. MAT's products are locally (United States) and internationally traded.
MAT recorded sound results and they are expected to rise during holiday time when large proportions of its net revenues are generated. MAT’s main goals are top-line growth, building new franchises, optimizing entertainment partnerships, expanding international footprint, among others. These elements surely encouraged Diamond Hill to invest in it.
It has an indicated yield of 3.3%. The company's 2011 dividend payout ratio is expected to be 41%. The company's revenues continue to grow steadily, showing a year-on-year growth of 9% in the last quarter. Mattel also enjoys of a healthy balance sheet with over 2x in current ratio and a debt-to-equity ratio of less than 50%. The stock is trading at a forward price to earnings ratio of 12x.
