William H. Browne, John D. Spears, Thomas H. Shrager and Robert Q. Wyckoff Jr. are managing directors of Tweedy Browne. Tweedy Browne is an investment partnership operating in the market for more than 90 years. One of its most important clients has been Benjamin Graham who influenced the firm in several ways and soon became one of its prime customers through his investment in Graham-Newman Corp.
In the 1920s, Graham noticed that the brokerage had many securities trading below intrinsic value and turned to Tweedy Browne as his broker. Graham was the means by which the original partners of the firm could set up brokerage relationships with legends in the investment field, including Walter Schloss and Warren Buffett.
Tweedy Browne's approach has been very much dyed by the work of Benjamin Graham which consists of searching for the “intrinsic value” by determining the acquisition value or by estimating the collateral value of its assets and cash flow. The firm uses the “investor’s margin of safety” which consists of making investments at a 40% to 50% discount to intrinsic value.
To determine intrinsic value, Tweedy Browne focuses on balance sheet and income statement analysis as well as corporate mergers, acquisitions and liquidations. The firm's portfolio is made up of diverse assets representing no more than 3% to 5% of the assets and industry groups representing no more than 15% to 20%. The purpose of this diversification is to reduce errors in analysis.
Here are some of the top stocks:
Johnson & Johnson (JNJ, Financial): Johnson & Johnson mainly operates in the health-care field. Its operations are divided into three segments: pharmaceutical (36% of total sales), medical devices and diagnostics and consumer. JNJ is one of the oldest companies that have been trading on the Stock Exchange and one that has provided excellent shareholder returns for decades. Actually, the current dividend yield stands at 3.5%.
JNJ is an interesting investment candidate since almost 70% of all its products rank number one or two in the industry. Besides, its sales are being boosted by the growth of the baby boom generation, which would be translated into a significant increase in health-care needs demands. Some other JNJ’s advantages such as the diversification of its health-care segments and the holding of best pipelines in the industry help the firm develop a prosperous profile. The company manufactures from Listerine Whitening Strips to Acuvue Oasys contacts. It has many products that enable to protect the company from a drop in sales. Now, a new psoriasis drug, Stelara, is posting a very strong launch and should develop into a blockbuster by 2013, which should help reinvigorate growth for the company's drug division.
Financially speaking, JNJ holds $31 billion in cash with only $18 billion in debt. It is a very attractive company. Its cash enables it to carry out research and development, invest in advertising and perform buybacks.
I think Tweedy Browne invested in JNJ because it is a low risk investment. It has reported a beta score of just 0.55 and does not have many violent swings. It is a perfect stock for a company like Tweedy, which likes stability in such a turbulent market. Most importantly, JNJ has become the perfect play now that the press has released negative opinions on it. This turns it into a buying opportunity.
ConocoPhillips (COP, Financial): ConocoPhillips’ main area of operation is the energy field. One of its main products is natural gas and it is in an advantageous position since newly environmental concerns favor natural gas.
Apart from natural environmental concerns, COP’s income has a steady and even path since the firm has significant ownership in pipeline and is insulated from variations in commodity prices.
COP has presence in many parts of the world: United States, Canada, Norway and the United Kingdom from where it primarily produced 913,000 barrels per day of oil and natural gas liquids and 4.6 billion cubic feet a day of natural gas in 2010. Proven reserves at year-end 2010 stood at 6.7 billion barrels of oil equivalent (plus 2.1 billion for equity affiliates), 44% of which are natural gas. With refining capacity of 2 million barrels of oil a day, it's the second-largest refinery operator in the U.S.
COP outperforms its peers in the production of natural gas. Financially speaking, it holds a budget of $13.5 billion that is significantly higher than the expenditure of $10.7 billion. This is consistent with the company´s program of supporting operations with high-yield returns and strengthening the business profile. Tweedy Browne decided to invest in COP because in Q2 the company reported $8.1 billion in cash and a debt-to-capitalization ratio of 25% and returned $900 million to shareholders as dividends.
In terms of projects, the company is focused on Eagle Ford, Bakken and North Barnett. It aims at increasing production therein. It is also expecting to benefit from projects in Malaysia and Australia.
Now, the company is engaged in a spin-off. The idea of the creation of two companies is based on the benefits it may bring to shareholders and the opportunities that may arise. The company forecasts a restructuring organic production growth target of 23% on an annual basis, the launching of 9 new products that will support such growth percentage in 2012 and another 12 that will support 2011´s performance.
Honda Motor Co. Ltd. (HMC, Financial): Automobiles, motorcycles and power products like boat engines, generators and lawnmowers are Honda's main products. 2011 was a very good year since the firm sold nearly 15 million cars and motorcycles and consolidated sales were JPY 8.9 trillion. 70% of revenue is represented mainly by automobiles, 19% by motorcycles and the remaining percentage by power products and financial services.
In the recent period, Honda did not have a nice performance. Its stock price declined by more than one quarter and it is now trading near its low. Why did Tweedy Browne invest in it? First, despite this recent performance, Honda has always had remarkable results and will certainly improve its market share gains. From 2006 to 2010, Honda has taken sales away from General Motors (GM). Second, the company has been stable despite the appreciation of the yen. It is considered that the decline in international sales will offset the demand for CR-V, Civic and Accord. Emerging economies will also protect the company from stagnating demand in Europe and the United States.
In terms of future expectations, sales are expected to increase from 1.5m in 2011 to 1.8m in 2014 in North America. A similar increase will be experienced in Asia. Europe will present most troubling situation. Honda motorcycles will continue accelerating growth in Asia. The 9.2m in sales for 2011 will increase to 13.1m in 2014. Furthermore, Honda will increase its ROE to 14%.
Quarter results show a stock trading at 13.6x and 7.8x past and forward earnings, respectively. The stock is overvalued vis-à -vis competitors. Forward earnings for Ford, Toyota (TM) and General Motors are 5.3, 14.4 and 4.3, respectively. Consensus estimates for EPS are that it will decline by 38.8% to $2.11 in 2012 and then nearly double the next year. Analysts expect to see a decline in revenue by 3.9% and then increasing by 9.1% and 5.2% over the time period. Honda also has a beta of 0.82 and a company's enterprise value at 7.1x EBITDA. Honda is largely considered a “buy.”
Devon Energy Corp (DVN, Financial): Devon Energy’s main field of operation includes conventional and unconventional oil and natural gas properties and an important network of midstream assets. It is considered one of the largest independent E&P companies in North America.
Natural gas, reserves and midstream and marketing operations constitute DVN’s main sources of production. These operations accounted for 68%, 60% and 19% of revenue in 2010, respectively. At year-end 2010, Devon's proven reserves totaled 17.2 Tcfe, with net production of 3.7 Bcfe/d. As of September 30, 2011, the company had $6.8 billion of cash and short-term investments.
The firm’s portfolio is diversified into a mix of oil and gas assets, unconventional resources and near-term and longer-dated projects which makes it very attractive for investors and, at the same time, supports considerable future growth.
Devon has been able to retain financial flexibility and liquidity by prudently managing its balance sheet. This, together with good performance and the decision of offloading international assets have helped the firm focus on its highest-return opportunities minimizing risks and promising high revenues. As of September 30, 2011, the company had $6.8 billion of cash and short-term investments, while its net debt to adjusted capitalization ratio declined to 10%. Operating cash flow increased 6% y/y reaching $1.9 billion.
As regards its operations, most of them are focused on Canadian Oil Sands. The company has also been authorized to construct the third Jackfish project. The first two are important because the company does not use fresh water in the process. The projects are both efficient and environmentally friendly. Apart from the projects in the Canadian Oil Sands, Devon also owns a 50% interest in the Kirby-Pike oil sands, which are located right next to Devon's existing operations in the region.
In the last period, the company has sold several assets to reposition itself as a high-growth onshore company. Most importantly, it follows a capital discipline to rationally allocate resources to projects that are paramount for its future growth. In addition, Devon used process to repay debt and repurchase shares.
Financially speaking, its net profit margin of 19% significantly surpasses its peers´ of 4%.
The company's trailing twelve month price-to-sales, price-to-tangible book and price-to-cash flow are 2.4, 1.7 and 6.2 respectively compared with peers' numbers of 2.7, 2.2 and 14. Devon's return on equity is nearly 5 times that of its peers and its dividend growth is three times the industry average. Furthermore, the company has beaten analysts' earnings expectations. Devon trades for just 9.6 times S&P's estimate of 2012 earnings.
Bank of New York Mellon (BK, Financial): BNY Mellon carefully guards financial assets in the world. Economies of important scale are easily reached by BNY’s size. Deposits by custody clients have helped the firm increase its balance sheet which at the same time, increases the possibility of more stable funding.
Acquisitions constantly benefit the firm in terms of increased revenue and cross-selling opportunities. BNY Mellon acquired Talon Asset Management´s wealth management business in July 2011 and integrated into its Investment Management business. This deal is expected to boost growth and increase the delivery of products and services.
Financially speaking, the company is in good shape. The company has deployed activities to pay dividends and repurchase shares. BK is well capitalized with capital ratios tier 1 capital of 14%, total capital of 16.1% and leverage of 5.1% well above the regulatory requirements. Most importantly, it has been authorized by the Federal Reserve to increase dividends and buy back shares. The quarterly cash dividend has been raised by 44% to $0.13 per share. Stock is currently trading at $19.5 with a margin of safety of 30%. Furthermore, the bank has also repurchased 31 million shares of common stock and it is the highest rated US bank and one of the highest rated financial institutions in the world with AA- rating from S&P. The bank´s balance sheet shows little net exposure and plenty of cash. In the last 12 months earnings were $2,600 and another $400m can be added due to goodwill amortization. The earnings power is $36.7bn or $30 per share. That is equal to a 12.5% earnings yield.
BNY Mellon considers the possibility of expanding overseas. Asia Pacific region is in the firm’s expanding target since it is considered an area of high growth opportunities. BNY Mellon expects to set up strategic partnerships with foundation clients and achieve opportunistic acquisitions. Over the next few years, the company s non-U.S. revenue will continue to increase as a result of the development of capital markets and modernization of public pension schemes globally.
Tweedy Browne must have invested in the company because now the company is trading below its intrinsic value due to a combination of short/medium term factors which are inherently temporary and unlikely to affect the long term profitability of the franchise.
In the 1920s, Graham noticed that the brokerage had many securities trading below intrinsic value and turned to Tweedy Browne as his broker. Graham was the means by which the original partners of the firm could set up brokerage relationships with legends in the investment field, including Walter Schloss and Warren Buffett.
Tweedy Browne's approach has been very much dyed by the work of Benjamin Graham which consists of searching for the “intrinsic value” by determining the acquisition value or by estimating the collateral value of its assets and cash flow. The firm uses the “investor’s margin of safety” which consists of making investments at a 40% to 50% discount to intrinsic value.
To determine intrinsic value, Tweedy Browne focuses on balance sheet and income statement analysis as well as corporate mergers, acquisitions and liquidations. The firm's portfolio is made up of diverse assets representing no more than 3% to 5% of the assets and industry groups representing no more than 15% to 20%. The purpose of this diversification is to reduce errors in analysis.
Here are some of the top stocks:
Johnson & Johnson (JNJ, Financial): Johnson & Johnson mainly operates in the health-care field. Its operations are divided into three segments: pharmaceutical (36% of total sales), medical devices and diagnostics and consumer. JNJ is one of the oldest companies that have been trading on the Stock Exchange and one that has provided excellent shareholder returns for decades. Actually, the current dividend yield stands at 3.5%.
JNJ is an interesting investment candidate since almost 70% of all its products rank number one or two in the industry. Besides, its sales are being boosted by the growth of the baby boom generation, which would be translated into a significant increase in health-care needs demands. Some other JNJ’s advantages such as the diversification of its health-care segments and the holding of best pipelines in the industry help the firm develop a prosperous profile. The company manufactures from Listerine Whitening Strips to Acuvue Oasys contacts. It has many products that enable to protect the company from a drop in sales. Now, a new psoriasis drug, Stelara, is posting a very strong launch and should develop into a blockbuster by 2013, which should help reinvigorate growth for the company's drug division.
Financially speaking, JNJ holds $31 billion in cash with only $18 billion in debt. It is a very attractive company. Its cash enables it to carry out research and development, invest in advertising and perform buybacks.
I think Tweedy Browne invested in JNJ because it is a low risk investment. It has reported a beta score of just 0.55 and does not have many violent swings. It is a perfect stock for a company like Tweedy, which likes stability in such a turbulent market. Most importantly, JNJ has become the perfect play now that the press has released negative opinions on it. This turns it into a buying opportunity.
ConocoPhillips (COP, Financial): ConocoPhillips’ main area of operation is the energy field. One of its main products is natural gas and it is in an advantageous position since newly environmental concerns favor natural gas.
Apart from natural environmental concerns, COP’s income has a steady and even path since the firm has significant ownership in pipeline and is insulated from variations in commodity prices.
COP has presence in many parts of the world: United States, Canada, Norway and the United Kingdom from where it primarily produced 913,000 barrels per day of oil and natural gas liquids and 4.6 billion cubic feet a day of natural gas in 2010. Proven reserves at year-end 2010 stood at 6.7 billion barrels of oil equivalent (plus 2.1 billion for equity affiliates), 44% of which are natural gas. With refining capacity of 2 million barrels of oil a day, it's the second-largest refinery operator in the U.S.
COP outperforms its peers in the production of natural gas. Financially speaking, it holds a budget of $13.5 billion that is significantly higher than the expenditure of $10.7 billion. This is consistent with the company´s program of supporting operations with high-yield returns and strengthening the business profile. Tweedy Browne decided to invest in COP because in Q2 the company reported $8.1 billion in cash and a debt-to-capitalization ratio of 25% and returned $900 million to shareholders as dividends.
In terms of projects, the company is focused on Eagle Ford, Bakken and North Barnett. It aims at increasing production therein. It is also expecting to benefit from projects in Malaysia and Australia.
Now, the company is engaged in a spin-off. The idea of the creation of two companies is based on the benefits it may bring to shareholders and the opportunities that may arise. The company forecasts a restructuring organic production growth target of 23% on an annual basis, the launching of 9 new products that will support such growth percentage in 2012 and another 12 that will support 2011´s performance.
Honda Motor Co. Ltd. (HMC, Financial): Automobiles, motorcycles and power products like boat engines, generators and lawnmowers are Honda's main products. 2011 was a very good year since the firm sold nearly 15 million cars and motorcycles and consolidated sales were JPY 8.9 trillion. 70% of revenue is represented mainly by automobiles, 19% by motorcycles and the remaining percentage by power products and financial services.
In the recent period, Honda did not have a nice performance. Its stock price declined by more than one quarter and it is now trading near its low. Why did Tweedy Browne invest in it? First, despite this recent performance, Honda has always had remarkable results and will certainly improve its market share gains. From 2006 to 2010, Honda has taken sales away from General Motors (GM). Second, the company has been stable despite the appreciation of the yen. It is considered that the decline in international sales will offset the demand for CR-V, Civic and Accord. Emerging economies will also protect the company from stagnating demand in Europe and the United States.
In terms of future expectations, sales are expected to increase from 1.5m in 2011 to 1.8m in 2014 in North America. A similar increase will be experienced in Asia. Europe will present most troubling situation. Honda motorcycles will continue accelerating growth in Asia. The 9.2m in sales for 2011 will increase to 13.1m in 2014. Furthermore, Honda will increase its ROE to 14%.
Quarter results show a stock trading at 13.6x and 7.8x past and forward earnings, respectively. The stock is overvalued vis-à -vis competitors. Forward earnings for Ford, Toyota (TM) and General Motors are 5.3, 14.4 and 4.3, respectively. Consensus estimates for EPS are that it will decline by 38.8% to $2.11 in 2012 and then nearly double the next year. Analysts expect to see a decline in revenue by 3.9% and then increasing by 9.1% and 5.2% over the time period. Honda also has a beta of 0.82 and a company's enterprise value at 7.1x EBITDA. Honda is largely considered a “buy.”
Devon Energy Corp (DVN, Financial): Devon Energy’s main field of operation includes conventional and unconventional oil and natural gas properties and an important network of midstream assets. It is considered one of the largest independent E&P companies in North America.
Natural gas, reserves and midstream and marketing operations constitute DVN’s main sources of production. These operations accounted for 68%, 60% and 19% of revenue in 2010, respectively. At year-end 2010, Devon's proven reserves totaled 17.2 Tcfe, with net production of 3.7 Bcfe/d. As of September 30, 2011, the company had $6.8 billion of cash and short-term investments.
The firm’s portfolio is diversified into a mix of oil and gas assets, unconventional resources and near-term and longer-dated projects which makes it very attractive for investors and, at the same time, supports considerable future growth.
Devon has been able to retain financial flexibility and liquidity by prudently managing its balance sheet. This, together with good performance and the decision of offloading international assets have helped the firm focus on its highest-return opportunities minimizing risks and promising high revenues. As of September 30, 2011, the company had $6.8 billion of cash and short-term investments, while its net debt to adjusted capitalization ratio declined to 10%. Operating cash flow increased 6% y/y reaching $1.9 billion.
As regards its operations, most of them are focused on Canadian Oil Sands. The company has also been authorized to construct the third Jackfish project. The first two are important because the company does not use fresh water in the process. The projects are both efficient and environmentally friendly. Apart from the projects in the Canadian Oil Sands, Devon also owns a 50% interest in the Kirby-Pike oil sands, which are located right next to Devon's existing operations in the region.
In the last period, the company has sold several assets to reposition itself as a high-growth onshore company. Most importantly, it follows a capital discipline to rationally allocate resources to projects that are paramount for its future growth. In addition, Devon used process to repay debt and repurchase shares.
Financially speaking, its net profit margin of 19% significantly surpasses its peers´ of 4%.
The company's trailing twelve month price-to-sales, price-to-tangible book and price-to-cash flow are 2.4, 1.7 and 6.2 respectively compared with peers' numbers of 2.7, 2.2 and 14. Devon's return on equity is nearly 5 times that of its peers and its dividend growth is three times the industry average. Furthermore, the company has beaten analysts' earnings expectations. Devon trades for just 9.6 times S&P's estimate of 2012 earnings.
Bank of New York Mellon (BK, Financial): BNY Mellon carefully guards financial assets in the world. Economies of important scale are easily reached by BNY’s size. Deposits by custody clients have helped the firm increase its balance sheet which at the same time, increases the possibility of more stable funding.
Acquisitions constantly benefit the firm in terms of increased revenue and cross-selling opportunities. BNY Mellon acquired Talon Asset Management´s wealth management business in July 2011 and integrated into its Investment Management business. This deal is expected to boost growth and increase the delivery of products and services.
Financially speaking, the company is in good shape. The company has deployed activities to pay dividends and repurchase shares. BK is well capitalized with capital ratios tier 1 capital of 14%, total capital of 16.1% and leverage of 5.1% well above the regulatory requirements. Most importantly, it has been authorized by the Federal Reserve to increase dividends and buy back shares. The quarterly cash dividend has been raised by 44% to $0.13 per share. Stock is currently trading at $19.5 with a margin of safety of 30%. Furthermore, the bank has also repurchased 31 million shares of common stock and it is the highest rated US bank and one of the highest rated financial institutions in the world with AA- rating from S&P. The bank´s balance sheet shows little net exposure and plenty of cash. In the last 12 months earnings were $2,600 and another $400m can be added due to goodwill amortization. The earnings power is $36.7bn or $30 per share. That is equal to a 12.5% earnings yield.
BNY Mellon considers the possibility of expanding overseas. Asia Pacific region is in the firm’s expanding target since it is considered an area of high growth opportunities. BNY Mellon expects to set up strategic partnerships with foundation clients and achieve opportunistic acquisitions. Over the next few years, the company s non-U.S. revenue will continue to increase as a result of the development of capital markets and modernization of public pension schemes globally.
Tweedy Browne must have invested in the company because now the company is trading below its intrinsic value due to a combination of short/medium term factors which are inherently temporary and unlikely to affect the long term profitability of the franchise.
