Mr. Hillman is considered an architect of the proprietary investment process. His strategy involves investing in companies with high qualitative competitive advantages but which have had certain short-term problems and whose value is well known or not. Before making investments, Hillman analyzes the companies, especially their cash flow, dividends, sales, earnings, book value and projected growth rates.
The firm carries out a thorough analysis of the companies it wants to invest in. The management team takes into consideration whether the company dominates the market niche where it operates, its purchasing and pricing power, the products and services it renders, customers´ loyalty and financial flexibility.
Mark Hillman generally chooses those companies that are best for the firm's portfolio.
Here are some of his undervalued stocks:
Transocean Ltd. (RIG): Transocean is an offshore drilling company. Its fleet includes drill ships, semisubmersibles and jackups. It operates in Brazil, Nigeria and the North Sea.
Hillman definitely chose the company because of its strong backlog of $24 billion which provides stability.
The company's fleet is one of the largest among competitors and Transocean is a leader with a dominant market share. RIG is permanently taking initiatives to expand and is uniquely positioned. Last but not least, the net asset value of its rig fleet is $21.5 billion or $61 per share.
Furthermore, the company is shareholder friendly. Management decided to return $15 billion to shareholders to improve their value.
Amgen Inc. (AMGN): Amgen is a leader in biotechnology-based human therapeutics, with historical expertise in renal disease and cancer supportive care products.
The main drugs it trades include red blood cell boosters Epogen and Aranesp, immune system boosters Neupogen and Neulasta, and Enbrel for inflammatory diseases.
Amgen has set an important footprint across the world. The commercialization of some drugs such as denosumab in Europe, Australia, New Zealand and Mexico has opened new doors to growth. The company is expecting to report sales of $1 billion in new and existing markets by 2015. Asia and Latin America should significantly contribute to this initiative.
Amgen is financially healthy. Now it expects to earn $7.25-$8.60 on revenues in 2015. The improvement in earnings can be attributed to the company's ability to control costs. The company indeed has undertaken cost cutting initiatives which involve staff reduction, manufacturing facilities' rationalization, among others. Share buybacks should also contribute. Most importantly, Amgen expects to return cash to shareholders. It expects to return more than 60% of adjusted income in the form of dividends and buybacks through 2015.
Regarding the products it trades, in 2010, Amgen gained approval to trade Prolia/Xgeva (denosumab). The product was approved for the treatment of osteoporosis in women. The FDA also approved the use of the product for increasing bone mass in women at high risk of fracture. Management believes that this product is a candidate to capture a major share in the market, thus bringing an excellent business opportunity. Xgeva, a drug used to prevent bone metastases in cancer patients, holds more potential. The approval was granted in mid 2011. It will probably become a blockbuster. Amgen launched Prolia in nine countries and now is planning to launch it in many others. These two products, Prolia/Xgeva, will contribute to improve revenue through a franchise that expects to increase sales to $3 to $4 billion by 2015.
Amgen has filed for U.S. approval of the prostate cancer bone metastases indication and expects a response by April 26, 2012. It also intends to present Xgeva for cell tumor of bone. Today, it is under study for breast cancer bone metastases prevention. The company has plans to submit denosumab for a phase III study as regards osteoporosis.
It is clearly shown that Amgen has a strong pipeline. Apart from launching denosumab, the pipeline includes other compounds in different development stages. Amgen is also studying the marketing of Sensipar, Vectibix and Aranesp for additional indications. The most promising candidates are AMG 479, to treat pancreatic cancer; AMG 386, to treat ovarian cancer; AMG 827, to treat psoriasis and AMG 785, for post menopausal osteoporosis. Each of them will be submitted to phase III in 2013.
There is no doubt Hillman picked up this stock because of the ample room it has to expand and the countless initiatives it is permanently undertaking to gain market share. It is financially solid and most importantly, it is committed to return value to shareholders.
Honeywell International Inc. (HON): HON is the world leader in avionics systems for commercial aircraft. Honeywell makes small engines for regional and business jets as well as for military vehicles.
Honeywell is financially solid. It has increased flight hours to boost earnings and management has launched a long-term growth initiative to increase revenue and earnings by 2014. The company is willing to achieve revenue CAGR between 6 and 8 percent. It will definitely achieve its long-term goals even when projections involve risks, particularly related to the recession in Europe and the general economic environment.
Hillman decided to invest in this stock not only because its long-term growth projections have increased Honeywell's position in the market but because its shares currently trade around the average of the 52-week range. They are trading at a premium vis-à-vis competitors and they are 15 times earnings and 12 times forward earnings.
Their yield sits at 2.8%. HON also returns 34% of cash to shareholders in the form of dividends. The dividend rate has been raised at an annual rate of 8%.
Most importantly, the PEG ratio is 0.85 and earnings have been growing at an annual 7% rate. The company also benefits from the increase in revenue from other segments. Furthermore Hillman is a patient investor who can wait till HON shares reach even higher targets.
Regarding acquisitions, HON purchased UOP, a supplier of catalysts and chemicals to petroleum industries to boost margins to double digits. Furthermore, HON is uniquely positioned in the market to greatly benefit from the increasing demand in the commercial aircraft industry.
Walmart Stores Inc. (WMT): Walmart is the supermarket giant with presence across the globe. The company is characterized for providing low-cost products and merchandise. The company leads the market thanks to its low retail price in food and general merchandise. It can aggressively compete. It is perfectly positioned to capture returns on capital.
Internationally speaking, WMT is profiting from increasing margins and ROIC. Most importantly, WMT has recently launched “Walmart Express” stores to capture the urban and small rural markets. Furthermore, it operates in 14 countries and is willing to enlarge its position. As regards sales, the international segment reported $100,107 million in 2010 with a 20% increase in the third quarter. There is no doubt why Hillman decided to invest in WMT.
Financially speaking, WMT has reported an excellent performance. Its strong balance sheet includes cash and cash equivalents of $7,907 million and a debt-to-total capitalization ratio of 36.9%, which involved a decrease vis-à-vis the prior year. This reduction in debt level can be attributed to a reduction in short-term borrowings. Most importantly Wal-Mart generated a free cash flow of $14.1 billion and also returned $2.7 billion to its shareholders through dividends and share repurchases.
Johnson & Johnson (JNJ): Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. The company is divided into three segments: consumer, pharmaceutical and professional.
In the last years, JNJ has closed several deals with important companies, which should boost earnings. One of the deals is that closed with Synthes to strengthen its medical portfolio. JNJ plans to combine this business with DePuy segment (dealing with orthopedics, spinal care, sports medicine and neuroscience). Synthes is a global developer and manufacturer of orthopedic devices. The idea is that both complement each other. With this deal, JNJ expects an increase of 7% in the trauma market and to expand its presence in the U.S., Europe and China.
Another deal is the acquisition of Cougar Biotechnology. The purpose of the acquisition was to strengthen the oncology portfolio, particularly in prostate cancer, breast cancer and multiple myeloma. A third deal is the agreement with Elan, for the treatment of Alzheimer's through the Immunotherapy Program. The AD market is the third largest market across the world and represents significant opportunities. This agreement also gives the chance to JNJ to work with Pfizer in the introduction of an Alzheimer drug to the market. At the beginning of 2011, JNJ acquired Crucell, a Dutch biopharmaceutical company to strengthen its portfolio and enable it to have access to the vaccine market given Crucell´s experience in the commercialization of vaccines. Finally, the company entered into an agreement with Gilead for the development of a once-daily antiretroviral HIV pill, Complera, the second complete treatment available in pills.
Regarding already-known drugs, Remicade continues to be the flagship drug for JNJ as it accounts for 20.6% of the pharmaceutical revenues and generated $4.6 billion in sales. The demand for Remicade is driven by the increase of the rheumatoid arthritis market as well as the unmet demand in the Crohn's disease market. Most importantly, the FDA approved the use of Remicade in the treatment of ulcerative colitis in pediatric patients. Undoubtedly, Remicade will continue boosting revenues.
Apart from the existing products, there are other candidates that are really promising. One of them is bapineuzumab, for the treatment of the Alzheimer's disease. Other products include Prezista, Velcade and Invega and Simponi and Stelara.
Mr. Hillman decided to invest in JNJ because it is a very well-known brand in the manufacture and sale of health care products and holds a strong pipeline that will enable the company to continue leading the market. In addition, JNJ is looking to expand its footprint in emerging markets. It has set up new manufacturing centers in Brazil, China and India, where sales grew 14% in 2010.