In the fourth quarter, Larson concentrated the Gates portfolio slightly, selling out of five positions and buying two new ones, TripAdvisor Inc. (NASDAQ:TRIP) and Diamond Foods (NASDAQ:DMND).
Buy: TripAdvisor (NASDAQ:TRIP)
The foundation bought 598,737 shares of TripAdvisor at an average cost of $27.04 in the fourth quarter. TripAdvisor Inc. is an online travel research company with a market cap of $3.78 billion; its shares were traded at around $30.7 with and P/S ratio of 5.93.
TripAdvisor actually spun off of Expedia (EXPE) in December 2011. Investors in Expedia received one share of TripAdvisor stock for every two shares of Expedia common stock they owned. This means that Larson, who held 750,000 shares of Expedia stock in the fourth quarter, received 375,000 shares and bought the remaining 151,263.
Expedia divided into two companies in order to unlock shareholder value. After the spin-off, Expedia, the largest travel company in the world, retains its travel agency brands. It is positioned to become a growth company in a $1 trillion travel market where people are flocking from offline to online trip planning. TripAdvisor will keep the reviews business, which contains 19 travel media and advertising brands.
As a stand-alone company, TripAdvisor reported fourth quarter revenues of $137.8 million, a 30% increase over fourth quarter 2010, and full-year revenues of $637.1 million, a 31% increase over full year 2010. It achieved earnings of $22 million, a 19% increase over fourth quarter 2010, and full-year 2011 net income of $177.7 million, a 28% increase over full-year 2010.
Though results were robust for TripAdvisors’ first period as an independent company, it is susceptible to factors within the numerous markets with which it intersects. In 2012, for instance, higher search engine marketing costs caused it to forecast weak mid-double digit revenue growth, lower than 2011, and virtually flat earnings.
Diamond Foods (NASDAQ:DMND)
Diamond Foods is a branded food company specializing in processing, marketing and distributing culinary, snack, in-shell and ingredient nuts under the Diamond of California and Emerald of California brands. It has a market cap of $540.4 million; its shares were traded at around $24.5 with a P/E ratio of 9.4 and P/S ratio of 0.6. The dividend yield is 0.7%.
Larson bought 351,019 shares of Diamond Foods in the fourth quarter. The fourth quarter was an opportune time to look at Diamond Foods as its share price quickly dropped amid a walnut accounting fiasco. It has a broad 52-week range of $21.41 to $96.13 per share, hitting the lowest point in the fourth quarter.
Essentially, Diamond was forced to restate its financial statements for the fiscal years 2010 and 2010 as an audit committee in February found that it misstated its accounting for several crop payments to walnut growers. A payment of $20 million in August 2010 and a payment of $60 million in September 2011 were not accounted for in the correct periods as a result of what the company called “inadequate controls.” The issue was bad enough that the CEO and CFO were replaced as a result.
The issue also contributed in February 2012 to the termination of the pending $2.35 billion acquisition of Pringles, which was expected to have a major impact on Diamond. Pringles is the world’s largest potato chip brand, with sales in over 140 countries. The acquisition would have more than tripled the size of Diamond’s snack business, creating a snack food company with total revenues of approximately $2.4 billion.
If Diamond had owned Pringles for fiscal year 2011, the company would have had estimated net sales of $2.4 billion, a double-digit accretion to earnings per share, and EBITDA of $398 million to $410 million. Fiscal 2012 total net sales including Pringles were estimated to be approximately $1.8 billion, and EPS would have been in a range from $3 to $3.10 per share. Without the acquisition, in 2011 Diamond had revenue of $966 million and earnings per share of $2.28.
To finance the deal, Diamond was assuming $850 in debt, almost its total revenue for 2011. The company has about $3 million on its balance sheet, with approximately $648 million in long-term liabilities in debt already.
When the cancelation of the deal was announced in February 2012, Diamond’s share price fell a further 38%. If Larson bought the stock to take advantage of the low stock price created by the accounting mishap in the fourth quarter and in anticipation of the Pringles transaction, his potential upside will likely be much smaller now that it has been canceled.
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