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Top Holdings from Westport Asset Management

Mara Kohn

Mara Kohn

4 followers
Westport Asset Management is an investment management firm that deals with investments in small to mid-sized capitalization companies. It is chaired by Andrew Knuth and Edmund Nicklin.

The firm operates through two funds: the Westport Fund (WPFRX), and the Westport Select Cap Fund (WPSRX). The former invests primarily in undervalued common stocks of mid-capitalization companies. And the latter prefers to operate with small capitalization companies having a market cap less then $2 billion.

The firm's investment philosophy mainly focuses on a bottom-up value investing combining classic value investments with forward-looking business analysis. This approach introduces low valuation, a value attribute with improving earnings and cash flow and a growth attribute. This variation of value investing may reduce downside risk and offer capital appreciation. Companies selling at a substantial discount to their intrinsic value are the target of the company. Westport Fund primarily invests in undervalued common stocks of mid-capitalization companies, which are those having a market value between $2 and $10 billion.

Here are Westport's top holdings.

Precision Castparts Corp. (PCP): Complex metal components for aerospace, power generation and other industrial applications are Precision Castparts’s main services and products.

Areas such as jet engine and gas turbine, aircraft wing structures, seamless pipes, aircraft brakes and the like represent PCP’s main field of business, since it manufactures metal castings, forged products and fastener systems among other products pertinent to the aerospace market.

The company is a leading supplier in its industry, given its emphasis on low-cost, high quality products with timely delivery.

By end market, aerospace constituted 57% of PCP's sales, power generation was 22%, and other general industrial markets was 21%.

PCP’s future revenue is likely to increase since Boeing and Airbus combined with new platforms like 787 and A380 recently suffered an important rise in its production rates. Apart from being one of only a few metal casting manufacturers, the firm is continuously acquiring value-added actions thus boosting future revenue. This portrays PCP as an interesting investment candidate.

Precision Castparts has a strategy for profitable growth. This includes the search for further innovation for its current casting technology. This investment casting technology has started to be applied to medical prosthesis, satellite launch vehicle and industrial markets through products including artificial hips and knees, impellers for pumps and compressors, among others.

Willis Group Holdings LTD (WSH): Willis Group is a global insurance broker. Specialized risk management, advisory, and other with particular expertise in the construction, aerospace, marine and energy industries are the firm’s main area of business.

Organic growth in commissions and fees, which forms the major component of Willis revenue, has been the highest in the market. In the third quarter, it grew 4%. Strong new business growth partially offset by declining premium rates has been one important factor for the firm’s recent growth.

PCP constitutes an important investment candidate since it was able to produce an operating margin of 22% between 2006 and 2010 although the U.S. economic status was not the best one. In 2010 the operating margin was 23%. This has enabled the company to control cost and enable business growth. In addition, the company has recently obtained positive cash flow, thus paying dividends and aiming at paying off debts.

In 2008, WSH launched a cost saving initiative to reduce operating expenses. The initiative accrued $34 million on net benefits in 2008 and $150 million by the end of 2010. The company realized cost savings of $488 million, of which $24 was realized in the third quarter. Willis expects cost savings of approximately $75 million in 2011, reaching annualized savings of approximately $115 million to $125 million beginning in 2012.

Synopsys (SNPS): Tools to design digital chips are this electronic design automation company’s main products. The firm's products also help designers simulate and verify its designs in new products. It also offers licenses services for its customer. Intel is one of its major customers yielding its 10% of annual revenue.

Financially speaking, Synopsys has a strong balance sheet and has more flexibility than its peers. Ninety percent of its sales are booked in prior years. This license model protects the company from short-term movements in revenue.

Now, Synopsys has strong product offerings and has carried out acquisitions that will bring better revenue streams. High switching costs and product differentiation make it difficult for customers to completely switch to alternative EDA tools. These industry dynamics allow Synopsys to have a narrow moat.

Darden Restaurants Inc (DRI): Darden Restaurants is among the leading casual dining restaurant companies in North America. It has an important chain of restaurants such as Olive Garden (710 units) and Red Lobster (692) and the emerging Bahama Breeze (24) and Seasons 52 (9).

Darden's portfolio is consistently growing since DRI keeps acquiring other companies. Today its portfolio harbors almost 1,800 locations. Darden enjoys a unique position driven by its strong value proposition, menu improvements, excellent unit-level execution with differentiated brands and a balanced portfolio, which provides greater diversification in sales and cost synergies, as well as market gain.

The company is well known for constantly increasing its shareholder value by using its cash flow.

It is able to pay dividends every quarter due to its ongoing repurchasing of shares since its payback program was implemented. Darden has repurchased more than $3 billion worth of shares.

DeVry Inc. (DV): DV operates several for-profit higher education institutions, including Advanced Academics, Becker Professional Education, Carrington Colleges Group, among many others.

From a valuation standpoint, DeVry looks like a good pick. It is trading at 4.2x EV/EBITDA and based on free cash flow, the stock could be worth $42-$50. TTM FCF of $252M is 25% higher than its annual average since 2007.

Many factors would help DV become a preferred investment candidate: Stability, revenue diversification and cash flow can be boosted by the firm’s exposure to long-term secular growth disciplines like the medical and healthcare ones. Also, the firm can benefit from the different domestic and international programs and thus giving battle to possible downturns. Another advantageous factor is that the company is implementing a new co-location strategy. This gives the possibility of running multiple programs in one building, thus reducing significant costs.

Rating: 3.0/5 (6 votes)

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