It is known that the company does not perform well in bear markets because it focuses on companies in transition and is always willing to hold positions in firms with large debts. Fortunately after such an event it was able to recover and is starting to rank near the top again.
David Williams tends to invest in deep value and growth stocks. He generally invests when their stocks are at the right price and may benefit from a significant corporate change. Williams usually picks undervalued securities.
To make these investments, the fund carries out Wall Street research. Williams and his team do not mind owning positions in companies with large debt loads, provided they generate important cash flows. Sometimes Williams decides to sell a position too. Selling takes place when a stock he holds has significantly increased in price.
What he considers paramount is the performance of a deep analysis of the company.
Here are his top holdings:
Lorillard Inc. (LO): LO is a cigarette manufacture in the United States. The company primarily sells its products to wholesale distributors, who in turn, provide them to retail outlets, chain store organizations and government agencies.
Lorillard's flagship brand is Newport, which holds a 13% share in the cigarette industry and a 36% share of the menthol category. This last percentage has been increasing sequentially since 2002, when it was only of 26%. Newport has been growing steadily in the last years. It is the brand through which Lorillard generates high operating margins. Now, the company has launched the Newport Non-Menthol, which has already shown improvements.
Newport Menthol is benefiting from its geographic expansion and the non-menthol category holds 1% share. This percentage is low, if the 20% price increase is taken into consideration. Such increase in price has brought higher profitability on the new brand. Anyway, the menthol category is still generating double digits in the market. It seems that David Williams was drawn by its expansion initiatives.
Financially speaking, Lorillard is in good shape. It generates strong earnings, has significant cash flows and has a flexible and strong balance sheet given customers' loyalty and price elasticity. In the third quarter of 2011, Lorillard increased its market share in 1.3 points to 14.2%. Newport's domestic retail market share reached 11.9% during the third quarter of 2011, an increase of 1.1 share points compared to the third quarter of 2010. Lorillard also repurchased almost 4 million shares at a cost of $438 million. Most importantly, as of September 2011, management had $553 million of the new $750 million program.
Union Pacific Corp (NYSE:UNP): Union Pacific is the largest public railroad in North America. In 2010, it generated $16 billion in revenue through the transport of coal, industrial products, intermodal containers, agriculture goods, chemicals, among others. Furthermore, UNP owns part of Ferromex, a Mexican railroad.
In general the railroad industry sets high barriers to entry. It is not easy to lay rail tracks and start shipments. Indeed, large amounts of money are needed to meet capital expenditures and thus keep safeguards and improve techniques. In North America, Union Pacific and Burlington Northern Santa Fe control the Western part, while CSX Corp. and Norfolk Southern control the eastern part.
In terms of quarterly results, the company has benefited from the increases in freight revenues. Furthermore, the company saw and improvement in yields and higher fuel surcharges. The company had a very good performance despite the headwinds it faced. Revenue increased 16% year over year and core pricing improved 4.5%. This improvement in pricing has been driven by an increase in energy, industrial and intermodal segment pricing. Management expects to achieve an operating ratio between 65% and 67% by 2015. The Quarterly Consumer Satisfaction Index was 91% compared with 90% in the year-ago quarter.
David Williams definitely looked at the EPS of $1.85 and total revenue, which amounted to $5.1 billion. The company has high liquidity levels and important business visibility thanks to an increase in the dividend payout rate and the share repurchase program. In this sense, management has decided to increase the dividend rate to $0.60 per share from $0.475 cents. This is the second time in 2011 that management has raised its dividend rate.
Finally, Union Pacific is has a good S&P rating of BBB+. Its financial outlook has been upgraded from Positive to Stable.
International Business Machines Corp (NYSE:IBM): IBM is the largest technology services company across the globe. Recently, earnings have increased from $4.25 to $4.71 per share surpassing Wall Street estimates. As regards revenue, the company reported it at about $29.5 billion which was below consensus expectations, but above the $29 billion in sales generated during the same quarter in 2010. IBM also increased its 2012 earnings forecast to at least $14.85 per share.
Internationally speaking, IBM has also seen improvements. In the Americas revenue increased 3%, in Europe 1% and in the Middle East and Africa 1%. Its backlog grew $141 billion and it has entered into agreements for services for $20.4 billion in the fourth quarter. In addition, Warren Buffett announced that he will increase his holdings in the company. IBM could soon become Berkshire's largest equity holding. I think David Williams decided to follow Buffett's steps.
IBM CEO, Virgina “Ginni” Rometty said of the quarter's results, “IBM had a strong fourth-quarter performance, capping a year of record earnings per share, revenue, profit and free cash flow. The company is well on track toward our long-term roadmap for operating earnings per share of at least $20 in 2015."
IBM has significantly grown this last quarter and the same is expected for the years to come. Indeed, its share is expected to remain at $194.40.
ACE Ltd. (NYSE:ACE): ACE is an important insurance company that has recently benefited from the expansion in customers demand. Furthermore, its network has placed a barrier on the entrance of new competitors.
In 2010, ACE Ltd. has carried out several acquisitions. To start with, ESIS Inc., the risk management services segment of ACE USA acquired majority shares of ProClaim America and formed a unit under the name of ESIS ProClaim. The company also purchased Rain and Hail Insurance Service Inc., New York Life's Hong Kong and Korea life insurance operations and 100% of Jerneh Insurance Berhad in Malaysia. This acquisition jointly with the acquisition of ACE Synergy Insurance Berhad in Malaysia strengthened the company's presence. At the end of the year, ACE Ltd. acquired Penn Millers Holding Corporation to enhance product offering in the agricultural market. All these acquisitions have enabled the company to deliver better results and grow both organically and inorganically.
In terms of results, debt-to-capital ratio increased from 14.2% to 17%. At the end of the third quarter, this percentage dropped to 16.3%. This reduction provides more flexibility to the company to manage its operations and continue investing. The company also has a strong capital position that enables it to enhance shareholder value. In this sense, management expects to boost dividends by 33%. If such increase is approved, ACE will be paying a quarterly dividend of $0.47 per share. The company has also engaged in share buybacks. In the last year, it has repurchased 1.6 million shares.
Last but not least, its issuer credit ratings and senior debt ratings have been upgraded to A-. The ICRs of its subsidiaries have also been increased. These changes are driven by a solid capitalization, international exposure, more profitability and cash flow jointly with a strong balance sheet.
America Movil, S.A.B. de C.V. (NYSE:AMOV): America Movil is the largest telecom provider in Latin America and serves millions of customers across 18 countries. It also provides fixed-line services. In Mexico, the company leads the wireless market with more than 70% share. It operates through a subsidiary, which has reported the most profitable wireless operations across the globe.
Financially speaking, the company generates positive cash flow and thanks to its international presence, it can fund its growth. Cash flow generated beyond what is needed is used to increase dividend, repurchase stock and continue making acquisitions.
Last but not least, America Movil introduced the first prepaid phone system which has enabled it to expand its wireless service in many markets.