When identifying investments, Hussman looks for favorable valuation (defined by quantity of future cash flows), favorable market action (trends advancing across a wide range of market internals) and market climate, with an emphasis on discipline.
Agilent Tech (A)
Agilent is the world’s premier measurement company. In the last five years its stock has gained almost 24%, and has rallied almost 23% year to date to open at $42.70. In the first quarter, John Hussman bought 1 million shares of the company at an average price of $42.90.
Agilent’s customers are engineers, scientists, manufacturers, businesses, researchers and government agencies and it focuses exclusively on measurement. In 2011, the company reported its best operational performance in its 11-year history. Its revenues grew 22 percent year over year, the second year of more than 20% growth, helped by the integration of Varian, its largest acquisition ever, as it presses to become a market leader in the competitive measurements market. It also increased its manufacturing capacity and grew its footprint in emerging economies including China, India and Brazil, and made more inroads into its largest growth opportunity, the life sciences market.
Free cash flow, an important factor to Hussman, grew to the extent – $1.1 billion in 2011 – that the company instated its first quarterly cash dividend.
In the first quarter the stock’s valuation became more attractive as its P/E dropped significantly, as demonstrated in the chart below:
Hershey Co. (HSY)
The Hershey Company (HSY) is a chocolate and sugar confectionary products producer with operating segments in the U.S., the Americas, and Asia, Europe, the Middle East and Africa. Over the last five years, the Hershey Company’s stock increased almost 30% and year to date it increased almost 8.5%, including a sharp 9.5% jump in April to its 52-week high of $67.39. In the first quarter, Huntsman bought 339,000 shares of the company at an average price near $61.
Hershey’s stock performed so well in April due to earnings that beat analysts’ estimates and raised fiscal year 2012 guidance. The company’s first-quarter net income rose 24.1% to $198.7 million, and revenue rose 10.7% to $1.73 billion. The increases were a result of disciplined investment in core brands in both the U.S. and international markets. The net sales increase of 10.7% was broken down to: net price realization of 10.9 points, 0.7 point from its 2012 acquisition of Brookside, with volume off 0.5 point and foreign exchange rate providing a 0.4 point headwind.
Now Hershey’s expects full-year adjusted earnings per share-diluted growth of 10% to 12%, greater than its previous estimate of a 9% to 11% increase, and full-year net sales growth of about 7% to 9%, including the impact of foreign currency exchange rates, greater than our previous estimate of a 6.5% 8.5% increases, including net sales from its Brookside acquisition.
Hershey’s has grown revenue for 10 straight years at a rate of 6% annually and produced $257 million in free cash flow in 2011, compared to $724 million the previous year. Free cash flow in the first quarter was such that Hershey’s could repurchase $125 million of its shares against a $250 million repurchase authorization announced the previous year.
Herhsey’s P/E also came down to more attractive levels in the first quarter:
International Paper (IP)
International Paper is a leader in the paper and packaging industry, with operations, including pulp and paper mills and converting and packaging plants in North America, Europe, Latin America, Russia, Asia and North Africa, and printing, packaging, graphic arts, maintenance and industrial products through its North American distribution business, xpedx. Over the last five years, International Paper stock declined 11.5%, and rallied 12.6% year to date, to open at $33 per share. In the first quarter, Hussman bought 519,000 shares of the company at an average price of $33 per share.
Over the last ten years, International Paper’s revenue has grown 1.1%, EBITDA 3.3%, and free cash flow 2.6%. Free cash flow has historically been strong, and increased from $856 million in 2010 to $1.5 billion in 2011. The company cut its dividend to $0.32 in 2009 but has since increased to $0.98 in 2011, near its pre-recession level of $1 per share. However, in the last three quarters, the company’s net margin and operating margins have shrunk, to 6.7% and 2.8%, respectively.
In February, International Paper completed its acquisition of Temple-Inland for approximately $4.5 million. “The combination of International Paper and Temple-Inland strengthens our North American packaging business and enhances our ability to generate cash flow while maintaining our strong balance sheet,” International Paper Chairman and CEO John Faraci said.
The company’s first-quarter results were released April 27. Earnings per share of $0.57 cents represented a 26% drop from the prior-year quarter, but its second-best first quarter since 2000, while cost of goods sold increased 8% to $5 billion and operating income decreased 21% to $462 million.
IP’s net sales increased slightly to $6.65 billion, compared to $6.39 billion the previous year, with the largest decline seen in its consumer packaging segment, which fell 10% due to higher volume and favorable manufacturing operations being offset by higher costs.
The company has cash and cash equivalents at the end of the quarter of $1.29 billion, compared to $4 billion at year-end 2011.
The PE of International Paper also dropped dramatically in the first quarter: