Richard Pzena's Top Growth Stocks - ACE, TSM, APOL, JAH, LLL
Pzena's strategy is based on ranking companies from the cheapest to the most expensive based on the current share price to normal earnings power. He tries to purchase stock that is trading at a low price. Of course, he is conscious that these opportunities are not permanently available without carrying problems that cause stock to drop in price. To clearly know whether the stock is a good choice or not, Pzena analyses whether the problem that has caused the price to fall is either a permanent or temporary problem.
Here are Pzena’s top growth stocks.
ACE Limited (ACE): ACE is a global insurance and reinsurance organization, serving the needs of commercial and individual customers in more than 170 countries. It tries to meet property and casualty (P&C) insurance and reinsurance needs of businesses and it also provides specialized insurance products, such as personal accident, supplemental health, and life insurance to individuals in select countries. ACE operates in four business segments: Insurance-North American, Insurance-Overseas General, Global Reinsurance, and Life.
Between 2010 and 2011, ACE closed several acquisitions. At the end of 2010, it acquired Rain and Hail Insurance Service, Inc. and 100% of Jerneh Insurance Berhad, a general insurance company. At the beginning of 2011, ACE acquired New York Life's Korea operations while by the end of that same year, it acquired Rio Guayas Compania de Seguros y Reaseguros, a general insurance company in Ecuador.
Pzena decided to invest in ACE because it has been showing remarkable results in the last fiscal year. Actually, an important issue for Pzena is that ACE increased its quarterly dividend by 34%, thus positioning it at $0.47 per share. The yield based on the new payout is 2.7%. The current book value per share is 71.36 and revenue year over year has amounted to $16.01 billion in 2010 as against $15.08 billion in 2009. The bottom line has also increased vis-à-vis the prior fiscal year. While in 2010 it was reported at $3.11 billion, in 2009 it stood at $2.55 billion. Earnings before income and taxes are rising with EBIT year over year of 3.67 billion. In 2009, they were at $3.08 billion.
At $62.45, the price is currently below the 200 day moving average of 63.80, and below the 60 day moving average of 64.17. In addition, the stock price has increased 8.16%. Most importantly, price performances are 1.13% in respect to S&P 500 price. ACE Limited has a dividend yield of 2.1% and a price-to-book-value ratio of 0.9x. UBS expects the price-to-earnings ratio to be 8.9x in 2012. The company has earnings per share of $5.4.
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM): TSM is principally engaged in the research, development, manufacture and distribution of integrated circuit (IC) related products. The company is also engaged in the provision of production management, customer services and design services.
According to analysts, TSM is in the center of the electronic evolution. Some of them call it the best of the breed. Its products are technically superior to competitors' and most importantly, investors trust the company. All this positions TSM in the right track and makes it an interesting bet for investors like Pzena who were attracted by its performance and results.
In terms of future expectations, Wall Street analysts consider that sales will increase 7.20% and 7.50% in the two coming years. Although estimates as to earnings are not favorable, earnings are expected to fall 13.10% this year, while for the next five-year period, analysts expect to see a rise of 8.60%. TSM is considered a strong buy and it is widely recommended. TSM stocks payout ratio ranges between 50% and 60% and the dividend is higher than the markets dividend rate: 3.40% and 2.30%, respectively. Last but not least, the P/E ratio of 11.95 is lower than the 14.00 P/E ratio of the market. As regards products, the launch of more sophisticated ones means the future is bright.
If sales and earnings projections are met and the P/E ratio falls in line with the market, investors today could see an annual return in the 21% to 25% range over the next five years.
Apollo Group Inc. (APOL): APOL is a private education provider. The company offers educational programs and services both online and on-campus at the undergraduate, graduate and doctoral levels through its wholly-owned subsidiaries The University of Phoenix Inc. (University of Phoenix), Western International University Inc. (Western International University), Institute for Professional Development (IPD), The College for Financial Planning Institutes Corporation (CFFP) and Meritus University Inc. (Meritus).
Apollo Group has agreed to buy math tutoring provider Carnegie Learning Plc. Of the $96.5 million sale price, $75 million is already paid in cash, with the rest to be paid over the coming 10 years.
Financially speaking, APOL is in good health. Revenue is increasing and the higher promotional costs and instructional expenses only reflect more admissions. However, interest income has declined to $3 million in 2010, while in 2009 it stood at $12.6 million. It seems that it has been falling steadily since 2007. Apparently, Apollo can't get proper returns on education investments.
Zacks Consensus Estimate as to earnings is $1.34 a share and revenue is $1,202.0 million. In 2011, net revenue was in the range of $4.65–$4.75 billion and operating income in a $1.15–$1.20 billion band. For the future, the company expects net revenue to be in the range of $4 billion to $4.25 billion and operating income to come in between $675 million and $800 million. Post-secondary enrollments are expected to grow given the increase in population.
Jarden Corporation (JAH): Jarden Corporation (Jarden) is a global consumer products company. The Company operates in four business segments: Outdoor Solutions, Consumer Solutions, Branded Consumables and Process Solutions. The company's international operations are mainly based in Asia, Canada, Europe and Latin America.
Analysts rate Jarden as a strong buy. CPG stagnation will be offset by improvements to margins, potential SG&A reductions, product introduction, and possible value-creating acquisitions. The stock is currently trading at 11.8x and 7.7x past and earnings, respectively, with a 1.2% dividend yield. EPS is expected to grow by 16.2% to $3.37, and then by 11.3% and 1.6% in the following years. This figures and analysts rating of the company are definitely elements Pzena looked at when investing in it.
As regards operations, the company has certain key segments. The household products segment poses concerns. According to analysts, these products will result in more sales volatility than what investors hope. Branded Consumables are expected to gain a strong double digit growth in the years to come and Consumer Solutions will only experience a 3.3% growth in that same period. Now management is considering carrying out acquisitions with enterprise prices valued around 7 times EBITDA to distribute costs and increase margins.
For the future, revenue is expected to grow by 11.4% to $6.7billion and then by 3.7%. Six percent of this growth will be driven by an increase in scale and demand. Analysts also expect that Hurricane Irene will benefit revenue due to emergency purchases.
Jarden is well positioned to outperform the market. Its stock price has dropped 22% turning it into an interesting bet. As most of the revenue comes from the U.S., investors can expect high-adjusted returns if Jarden profits from opportunities.
L-3 Communications Holdings Inc. (LLL): LLL is a prime contractor in Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) systems, aircraft modernization and maintenance, and government services. The company's customers include several government departments, allied foreign governments and other federal, state and local agencies. The company operates in four segments: C3ISR, Government Services, Aircraft Modernization and Maintenance (AM&M) and Electronic Systems.
For Pzena, LLL is a very good opportunity. In the last decade it has increased sales by more than 568% from $2.3 billion to $15.6 billion, while its net profit has gone up from $115 million to $955 million. Most importantly, the Buffett indicator (a.k.a. book value) rose from $15.46 to $62.27 at a rate of 14.45% annually. Those who purchased stock in 2000 and held it until today would have made 200% on their money with dividends and the appreciation of shares.
In terms of quarter results, L-3 has been able to generate strong operating cash flows. Although $1.461 billion came in 2010 and during 2011, only $984 million were generated, these two amounts have allowed the company to carry out several share repurchases, thus increasing the stock value. Stock price is, indeed, at $68. With respect to other companies, such as Honeywell, Lockheed Martin, and Raytheon, L-3 has the lowest P/E and P/S ratios and it also profits from the best operating margin.
In terms of acquisitions, L-3 is acquiring Danaher's Kollmorgen Electro-Optical unit to help the naval business.