Steven Romick Buys Analog Devices, Adds to IPG, AIG and ORCL in Third Quarter
Romick’s diversified, risk-averse FPA Crescent Fund gained almost 20% over the 12 months ending June 30, 2012. He continues to employ his bottom-up value strategy of buying cheap, typically out-of-favor assets at discounts that would prevent permanent impairment of capital, which he discusses in his October GuruFocus interview.
“The fact that we feel that we cannot lose money over a period of time is a margin of safety. You can’t just look at margin of safety as being a discount to an asset value,” he said in the interview.
Analog Devices Inc. (ADI)
Romick purchased 3.47 million shares of Analog Devices at an average price of $39. The new holding accounts for 2.2% of his portfolio.
Analog Devices designs, manufactures and analog, mixed-signal and digital signal processing (DSP) integrated circuits (ICs) that measure and convert information such as temperature and light into digital data. Such devices are found in the majority of electronic equipment in the industrial, automotive, communications and consumer markets. Analysts estimate that its converter (44% of its business) market share ranges between 40% and 48.5%, according to Gartner and Databeans.
Analog Devices’ stock has declined 1.33% since it transferred to Nasdaq on April 4. Romick tends to seek stocks in out-of-favor industries, and semiconductor stocks have declined 11% year to date, compared to a 12.7% gain for the S&P 500.
Analog Devices grew EBITDA per share at a 10.6% annual rate over the last five years and free cash flow at 8.2%. Its 2011 free cash flow declined to $778 million from $880 million in 2010. From 2007 to 2011, it has returned more than 100% of its free cash flow to shareholders in the form of share repurchases and dividends.
Analog Devices has an $11.39 billion market cap and traded on Monday for $38.55 with a P/E ratio of 17.7 and P/S ratio of 3.8. The dividend yield of Analog Devices stocks is 3.2%. GuruFocus rated Analog Devices the business predictability rank of 4-star.
Interpublic Group of Companies Inc. (IPG)
Romick purchased 2,658,200 shares of Interpublic Group at an average price of $11, bringing his total holding to 7,080,000 shares.
Interpublic is one of the world’s largest advertising and marketing services conglomerates, operating in over 100 countries. Its stock has gained almost 18% year to date.
Interpublic’s EBITDA grew at a five-year rate of 9.5% and revenue at 0.4%. Free cash flow declined to $133 million in 2011 from $721 million in 2010, and has been positive annually since 2007. In the first half of 2012, the company repurchased 11 million common shares at an average price of $11.
John Rogers, head of Ariel Investments, commented on Interpublic in his second-quarter letter:
“… When confronted with economic challenges, companies can and often do quickly scale back marketing and advertising to save money. And yet, IPG not only grew but was able to show margin expansion over the last four years—a period when tepid economic growth was a headwind. All the while, the company also managed to buy back half a billion dollars of dilutive convertible debt. In so doing, Debt/EBITDA substantially improved from 2.81x to 1.92x, which ultimately provided the company access to more favorable debt markets. This level of debt reduction, along with the company's repurchase of 52 million shares, has cut its diluted share count from 553 million to 438 million shares—a 20% decrease in shares outstanding. It is worth noting that even after this hefty $700 million spend, the company still had the ability to issue its first dividend in nearly a decade.”
Interpublic has a $4.92 billion market cap. Its shares on Monday traded around $11.45 with a P/E ratio of 14.6 and P/S ratio of 0.7. Interpublic’s dividend yield is 2.1%.
American International Group Inc. (AIG)
Romick in the third quarter added 680,500 AIG shares at an average price of $33, raising his total holding, which he initiated last quarter, to 4,320,500 shares. AIG have rallied almost 58% year to date.
AIG is the insurance giant rescued by government bailouts early in the 2008 financial crisis. The insurer that year reported a $99.3 billion loss, though it has increased net income each subsequent year, most recently reporting $16 billion in 2011. After reporting revenue of $11 billion in 2008, revenue fell annually from $96 billion in 2009 to $64 billion in 2011. Free cash flow fell in tandem, from $18 billion in 2009 to $35 million in 2011.
Though some investors leapt on AIG shares close to when they plummeted from the fiscal crisis – such as Bruce Berkowitz who bought in each 2010 quarter and doubled down in the second quarter of 2011 – other Gurus waited for AIG to get more on its feet. Eleven Gurus initiated AIG positions in the first half of 2012, of which six initiated in the second quarter, including Third Point’s Daniel Loeb, who discussed the purchase at length in his third-quarter letter:
“Longer term, we believe the company’s operational turnaround will help AIG realize its intrinsic value, as Chartis, AIG’s property and casualty arm, improves its return on equity to the targeted 10 - 12% by 2015,” Loeb wrote.
AIG on Tuesday trades for $36.65, about two-thirds of its $58.82 second-quarter book value. It has a market cap of $57.8 billion, a P/E ratio of 18.4 and P/S ratio of 1.
Oracle Corp. (ORCL)
Romick bought 695,000 shares of Oracle at an average price of $31, bringing his total holding to 5,155,000 shares. Oracle has a 52-week range of $24.91 to $33.81.
Oracle, an enterprise software and computer hardware products and services company that services every Fortune 100 company, has seen its stock increase 22% year to date. The company has an 18.2% five-year annual EBITDA growth rate, and 18.2% free cash flow rate. It has also achieved 10 straight years of net income growth. In 2011, it generated a decade-high $13.1 billion of free cash flow, increased from $10.9 billion in 2010.
Oracle has been aggressively repurchasing shares. In its first fiscal quarter 2013 (ended Aug. 31, 2012) it bought back 104.2 million shares for $3.1 billion, after spending almost $6 billion on buybacks in the full-year 2012.
In its first fiscal quarter, Oracle’s revenues declined 2% year over year, with 19% declines in hardware systems revenues, and 4% increase in software (including new software licenses, cloud software subscriptions, software license updates and product support) revenues.
Oracle President Mark Hurd expects double engineered system sales and its new cloud business to drive the company’s growth in upcoming years, he said in the first-quarter press release. The company expects double engineered systems sales to exceed $1 billion in the next year, and the cloud business is nearing a $1 billion annual run rate.
Oracle Corporation has a $151.36 billion market cap. Its shares were traded at around $31.29 with a P/E ratio of 13, P/S ratio of 4.1 and dividend yield of 0.8%. GuruFocus rated Oracle the business predictability rank of 5-star.
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