Tweedy, Browne Buys Illinois Tool Works and Jefferies
Illinois Tool Works Inc. (ITW)
Illinois Tool Works Inc., which makes specialized products and systems for clients, was founded in 1912 and employs nearly 60,000 people in 52 countries. It also has 825 businesses and operates on a decentralized business model that allows it to put its businesses close to its customers and helps reduce risk as weaknesses in one market can be made up for by strength in another market.
Illinois Tool Works Inc. has a market cap of $26.96 billion; its shares were traded at around $55.79 with a P/E ratio of 14.8 and P/S ratio of 1.5. The dividend yield of Illinois Tool Works Inc. stocks is 2.6%. Illinois Tool Works Inc. had an annual average earnings growth of 8.5% over the past 10 years. GuruFocus rated Illinois Tool Works Inc. the business predictability rank of 2-star.
Tweedy Brown bought Illinois Tool Works at a relatively low price; it had a 52-week range of $39.12 to $59.27, reaching its low in the fourth quarter. The firm bought 353,243 shares at an average price of $46.
The company’s results for the year have been good. Operating revenues for the nine months ended Sept. 30, 2011 were $13.9 billion, up from $11.5 billion in 2010 primarily due to higher base revenues, revenues from acquisitions and the favorable effect of currency translation. North American base revenues increased 9.1% and international base revenues increased 6.7%. Base revenues in Europe increased 3.8%, and the strongest growth was seen in China, at 16.2%.
Illinois Tool Works also excels at acquiring businesses and growing sale simultaneously. “ITW has low capital intensity,” writes GuruFocus author Chandan Dubey. “Its capital expenditure has been in the range of 17-32% of total income in the last decade. This shows that ITW has consistently found good ways to grow organically and by acquiring new business. ITW acquired 24 companies representing $530 million of annualized revenues in 2010 — up from just under $300 million in annualized acquired revenues in 2009. We also note that with the capital expenditure ratio we see that ITW has never spent too much on acquisition in a particular year and has been steadily buying new companies and increasing sales.”
Illinois Tool Works said on Jan. 13, 2011 that it would allow the co-founder of Relational Investors LLC, a well-known activist firm, to have a seat on its board of directors in exchange for refraining from launching a proxy battle. Relational owns 2.1% of ITW stock, and has agreed to keep its ownership under 10% of the company. They have not announced their particular goals for the company, although there is speculation that they might want to break up some of its 800 businesses, as they are also pushing to divide L-3 Communications Holdings Inc. (LLL).
Jefferies Group, Inc. is a holding company whose affiliated companies, including its principal operating subsidiary, Jefferies & Company Inc. Jefferies Group Inc. has a market cap of $3.29 billion; its shares were traded at around $15.97 with a P/E ratio of 14.8 and P/S ratio of 0.9. The dividend yield of Jefferies Group Inc. stocks is 1.8%.
Tweedy Browne bought Jefferies before in the second quarter of 2008 when the financial crisis sent it share price down to an average of $17.50, roughly half of their price the previous year. They eventually sold out of the stock in the first quarter of 2011, avoiding a large loss, as the stock lost approximately 50% that year. In the fourth quarter they bought 462,735 shares at an average price of $12.
The stock also dropped to near historical low P/E, P/S and P/B ratios in the quarter:
Much of Jefferies’ stock price drop had to do with questions about its exposure to MF Global and its exposure to the sovereign debt of Portugal, Italy, Ireland, Greece and Spain in. The firm announced in October that its exposure to MF Global was less than $9 million in market-to-market positions. On November 3, Jefferies announced that it had no meaningful exposure to European sovereign debt. Then, on November 7, it announced that it reduced its gross holdings in sovereign securities of the nations of Portugal, Italy, Ireland, Greece and Spain by 49.5%. That left its net exposure to the countries at $59 million, or 1.7% of shareholder equity.
“We undertook this reduction in our holdings solely to demonstrate the liquid nature of this market-making trading book,” said Richard Handler, Chairman and CEO, and Brian Friedman, Chairman of the Executive Committee of Jefferies, in a joint statement.
Later in November, Rich Handler, the CEO of Jefferies, issued a letter repudiating what he called “half-truths, false rumors and lies” he believed short-sellers were spreading about the company. By the end of November, the share price had begun to climb.
At the time of the CEO’s writing, the company had $2.2 billion in cash and had recently and over time repurchased $50 million of its 2012 bonds as part of its 20 million share-buyback program, with about 5 million shares in the open market.
Jefferies’ revenue increased each year from 2009 to 2011. The 17% from 2010 to 2011 was primarily due to strong investment banking results, revenues from the Global Commodities Group business it acquired in July 2011, and a related bargain purchase gain of $52.5 billion, and a gain on debt extinguishment of $21.2 million.
The composition of Jefferies’ revenues varies over time depending on financial markets and its operations. In the last three years, the company has been deriving less from equities and fixed income trading (76% in 2009 versus 51% in 2011) and more from investment banking (22% in 2009 to 44% in 2011). From 2009 to 2010, fixed income revenue declined 38% and asset management revenue declined 53%, but was offset by an 88% gain in investment banking revenue and 19% gain in equities sales and trading revenue.
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