Westport Asset Management is an investment firm founded by Andrew J. Knuth and Managing Director Edmund H. Nicklin Jr. The firm's investment philosophy is a modified form of bottom-up value investing that combines classic value investment with forward-looking business analysis. This variation of value investing may reduce downside risk while offering the potential for capital appreciation as a stock gains favor among other investors as its price increases.
The firm's investment focus is on companies selling at a substantial discount to their intrinsic value. These companies are considered out of favor in respect to Wall Street given different problems.
Westport Fund usually invests in undervalued common stocks of mid-capitalization companies. These companies are considered mid-capitalization firms because they have a market value between $2 and $10 billion.
The Westport Fund considers several factors as part of its analysis for determining value, primarily the potential for capital appreciation and secondarily the potential for current income. Furthermore, it invests by first identifying the changes in a company’s products, operations and management. In mid-capitalization companies, the fund’s target, these changes tend to be significant and may create confusion in the marketplace, thus reducing the value of the stock. Once the change has been identified, the portfolio managers study the company. They analyze what the market is willing to pay for the stock of similar companies or what would it be paid for the entire company. The idea is to try to identify stocks that have more growth potential than risk over an 18 to 24-month period.
Sometimes the portfolio managers decide to sell a security. This usually takes place when there has been a negative change in the company’s fundamentals or when a stock reaches a pre-determined price objective.
Here are some of the fund’s top dividend stocks:
Entergy Corp. (ETR): Entergy is an integrated energy company with two primary businesses: regulated utility and wholesale commodity segments. The company operates in the Southeast through six utilities and is the second-largest nuclear operator in the U.S.
The company’s fleet is the most outstanding in merchant-generation crop. ETR saw its profits increase thanks to the increase in power prices in the Northeast and the increase of natural gas prices driven by the storms affecting Entergy's Gulf Coast utilities.
Last but not least, the improvement in regulatory returns and a recovery in industrial demand are increasing earnings.
In terms of quarter results, Entergy reported earnings of about $0.86 per share and operational earnings of approximately $0.93 per share.
Darden Restaurants Inc (DRI): Darden Restaurants is among the leading casual dining restaurant companies in North America. Its flagship brands include Olive Garden and Red Lobster but there are other emerging brands, Bahama Breeze and Seasons 52, which will certainly increase profits. Most importantly, in 2007, the company acquired RARE Hospitality, thus adding LongHorn Steakhouse and The Capital Grille to its portfolio.
The success of its flagship brands and the fact that they have outperformed competitors within the industry are attributed to brand loyalty and the emphasis on everyday value offerings. In addition, Darden is uniquely position. This enables it to enlarge market share through smaller chains and casual dining restaurants. Undoubtedly, these are elements Westport considered at the moment of investing.
Season 52, which specializes in low-calories meals, has reported solid returns and growth prospects. Financially speaking Darden has been recognized for using cash flow to increase value to shareholders. Actually, the company has purchased $3billion worth of shares since the creation of the buyback program in 1995. It pays a quarterly dividend.
Dr. Pepper Snapple Group Inc. (DPS): Dr. Pepper Snapple is a partially vertically integrated brand owner, bottler, and distributor of nonalcoholic beverages in North America. Sales in the U.S. represent 93% and the leading brands include Dr. Pepper, 7UP, Sunkist and A&W.
The brands through which DPS operates are deemed number-one or number-two in their categories and they represent 75% of total sales. This provides cash flow stability and an economic moat. Dr. Pepper Snapple has also acquired several bottlers that, although they have reduced the company’s profitability, they produce double-digit operating margins and returns on invested capital.
Furthermore, Dr. Pepper’s bottling operations generate a supply chain in some regions giving the firm a direct relationship with customers. Most importantly, the company’s warehouses are located near the bottling plants. This situation enables the company to align its operations with customers, reduce transportation cost and control and manage new product launches.
Financially speaking, despite the difficult economic environment and the continuous inflation, Dr. Pepper has reported earnings of $0.71 per share. In addition, sales increased about 5%.
For the future, Dr. Pepper expects to receive earnings per share between $2.70 and $2.78. Furthermore, the company has launched a Rapid Continuous Improvement program with which it expects to produce cash of about $150.0 million.
Abbott Laboratories (ABT): Abbott manufactures and markets pharmaceuticals, medical devices, blood glucose monitoring kits, and nutritional health-care products. Products include prescription drugs, coronary and carotid stents, and nutritional liquids for infants and adults.
The company has engaged in aggressive cost-cutting plans with which it should obtain quick bottom-line growth. Internationally speaking, Humira should increase sales. Recently, ABT has acquired Piramal´s drug unit to increase exposure and grow in the Indian market.
Last but not least, the company is deciding whether it will split into two to increase transparency of each business unit. This separation could help investors see the operations' value.
American Eagle Outfitters (AEO): American Eagle is one of the leading specialty retailers of fashionable and stylish apparels and accessories in the U.S. and Canada. The company has a strong portfolio of well-established brands.
American Eagle has launched cost sourcing initiatives to reduce throughput costs and improve inventory. This should enable the company compete with other companies. ROICs have exceeded capital costs, thus generating more economic profit. This increase in economic profit will certainly remain in the years to come. These initiatives together with its idea of opening stores in the Middle East and develop in India and China will definitely increase its position.
American Eagle has decided to expand its brand to generate near-term growth. The new CEO, Robert Hanson is expected to continue with this strategic plan. The company is being very successful in the sale of denim and has started selling improved merchandise in the women´s business segment, which will likely improve its top line and bring better gross margins. Westport considered all these elements at the moment of investing.
Last but not least, American Eagle's balance sheet is healthy with cash and cash equivalents of $380.3 million and no debt. This situation provides the company flexibility to drive growth in the future.