With an annual return of 5.7% since inception, Manning & Napier was the only manager to beat the S&P500 for 10 consecutive years as of January 2009. Last year, the firm missed returns by not emphasizing high dividend-paying stocks, which performed best in 2011. Rather, they selected attractively valued global growth companies that would continue to gain market share despite slow overall U.S. growth and developed countries’ economic activity. The positioning remains the same for the environment going forward.
After trading Juniper Networks (JNPR) shares for several years, Manning & Napier sold out in the third quarter of 2011. They opened a new position with 13,778,802 shares in the first quarter at an average price of $21 per share, making it 1.6% of their portfolio.
Juniper, a network infrastructure company, saw its stock fall almost in half over the last year as its earnings fell in the first three quarters and was below analysts’ expectations. The company faced weaker than expected router demand from service providers in the fourth quarter, particularly in the U.S. and Asia Pacific, due to the weak economy. Revenue from Europe, the Middle East and Africa was up about $40 million.
The company’s bigger-picture financials have been strong. It grew revenue at a rate of 18.3% over the last 10 years, and EBITDA at 8.7% over the last five years. Free cash flow has been positive since 2003, and reached a record $720 million in 2011.
Though Juniper expected a weak first quarter due to the macro environment, its long-term demand fundamentals are intact and they have a new product portfolio which could stimulate growth.
The firm initiated a position in Alcoa Inc. (AA) with 20,485,590 shares at an average price of $10 per share. Over the last year, the stock has tumbled almost 42%, from a 52-weke high of $18.
Alcoa manages and produces aluminum, which is used in aircraft, automobiles, construction, oil and gas, electronics, and many other industries. Its revenue had been falling annually from 2007 to 2009, and increased from $21 billion in 2010 to $25 billion in 2011. EBITDA for the last three years has been near the lowest in the last ten years, as free cash flow turned positive in 2010 and 2011 after five years in the negative range.
The company’s primary challenge was the volatile cost of aluminum. The forward price of aluminum on the London Metal Exchange (LME) dropped dramatically in May from $2,800 to roughly $2,000 per metric ton by December. The company is focused on making money by producing quality products, hoping to capitalize on rising aluminum prices when they rebound.
After closing out its position in Riverbed Tech (RVBD) in the second quarter of 2011 at about $35, Manning & Napier bought 5,162,400 shares of the company when its price fell to about $27 in the first quarter.
Riverbed, which focuses on solutions for the IT industry with a heavy emphasis on the cloud, is another stock the firm bought after its shares fell more than 40% in the last year. Unfortunately, they could have waited slightly longer to get the stock significantly cheaper. Shares plunged 26% on April 20 due to a first-quarter profit decline and lowered sales forecast for 2012.
In the last five years, Riverbed’s revenue grew at a rate of 42% annually, and it generated over $1 million in free cash flow in 2010 and 2011. Earnings and EBITDA have grown annually in the last three years as well.
The firm bought 1,658,390 shares of its fourth-largest new holding, Cameron International (CAM), at an average price of $54. In the last year, it has declined almost 11% to $49.
Cameron International makes products for oil and gas companies worldwide. The company has produced strong financial results in the last ten years, with revenue growing at a rate of 17.5% over the last ten years, and EBITDA growing at 20.5%. Free cash flow has also been positive, but dropped to a negative $160 million for the first time in the last ten years in 2011.
The company had a temporary setback when fourth-quarter earnings fell 39% due to charges from the Deepwater Horizon oil spill disaster. Otherwise, revenues increased 12% for the quarter and 13% for the year, which both represented new highs on record orders. In 2012, the company expects first-quarter earnings of $0.50 to $0.55 per diluted share, increased from $0.40 in the fourth quarter 2011.
See Manning & Napier’s updated first-quarter portfolio here.