Brian Rogers’ Biggest New Purchases: CSC, ANZBY, CLF
Going into the third quarter, Rogers believed the U.S. economy was growing slowly and steadily, Europe’s debt crisis was heightening caution among investors, and a soft Chinese economy and U.S. fiscal uncertainty were reducing the appeal of risk, he wrote in his second-quarter letter.
Rogers further noted a stabilizing U.S. economy and signs that the Fed would continue its easing policy. Stock valuations appeared attractive following sharp sell-offs in May and June, and he planned to hold to his bottom-up approach instead of divining how markets would react to macroeconomic events.
Computer Sciences Corp. (CSC)
Rogers purchased 5,728,300 shares of Computer Sciences Corp. for an average of $28 per share in the third quarter. A year ago, he sold out of a similarly sized position for an average of $32 per share. Year to date the stock gained almost 27%.
Computer Sciences is an information technology company that offers a wide variety of services and products for companies, ranging from cloud computing to cyber security solutions.
Financially, the company has reported four consecutive years of sales declines, from $16.7 billion in 2009 to $15.9 billion in 2012. Underperformance in fiscal year 2012 was due to “NHS [National Health Service] write-offs and challenges managing our cost structure, aligning our global organization and in executing some of our MSS contracts,” along with market headwinds in its Federal business in Europe, the company’s CEO said. He also said the company is in a “turnaround situation” and taking the first steps on that journey.
For full-year 2012, the company also reported fully diluted earnings per share (EPS) loss of $27.38, a decrease from 2011 EPS of $4.51. The drop was primarily due to $17.21 per share of goodwill impairment charges, a $10.03 per share UK NHS charge, a $1.06 per share U.S. claims settlement, and a $0.88 per share restructuring charge, and several other expenses, offset by a lower tax rate.
CSC has a P/E ratio of 13, P/B ratio of 1.8 and P/S ratio of 1.3:
Computer Sciences’ stock jumped almost 16% on announcement of its most recent third quarter financial results. It had total revenue of $3.96 billion, representing revenue growth of 1% year over year on a constant currency basis and a decline of 2% year over year on a reported basis. Its operating margin of 4.6% increased by 16 basis points year over year and free cash flow improved by $378 million to negative $25 million. At quarter end, it had cash of $1 billion.
The results reflected a first step in the company’s turnaround initiatives, which includes a plan to cut costs by $1 billion over the next 18 months.
Australia and New Zealand Banking (ANZBY)
Rogers purchased 5,851,000 million shares of Australian and New Zealand Banking for an average of $25 per share. The stock has gained 29% year to date.
Australia and New Zealand Banking's principal activities are the provision of general banking services, hire purchase and general finance, life assurance, property development, mortgage lending and other financial services.
Australia and New Zealand’s revenue has been increasing for the last three years, after a significant decline in 2009, as has net income. In its most recent full year, revenue increased to $34.9 billion from $26.9 million in 2010, and net income increased to $5.8 billion in 2011 from $4.1 billion in 2010. ANZBY also has no P/E ratio, a P/B ratio of 1.7 and P/S ratio of 1.8:
In 2011, the bank generated $19 billion of free cash flow, an increase from $2.5 billion in 2010. It has cash of approximately $444 billion in cash on its balance sheet, $86.2 billion in long-term liabilities, and no long-term debt.
ANZBY reported first-half 2012 results on May 2012. For the six months ended March 31, 2012, it had an underlying profit of $2.97 billion, adjusting for non-core items, a 5% increase from the previous half and 6% from the previous period. Results were driven by strong performance in Asia, Pacific, Europe and America, and in Institutional and New Zealand. This was offset by modest results in Australia affected by continued margin pressure.
ANZBY CEO Mike Smith attributed weak results in Australia to declining margins a structural shift since the financial crisis, as well as declining demand for credit in Australian banking.
ANZBY has Tier 1 capital at 11.3% and Common Equity Tier 1 of 8.9%. Its return on equity increased to 15.9% from 15.9%n and it increased its dividend 3% from 2011 to 66 cents.
Cliffs Natural Resources (CLF)
Rogers purchased 2.75 million shares of Cliffs Natural Resources for an average of $42 per share. The company’s stock has declined almost 27% year to date.
Cliffs Natural Resources is a global mining and natural resources company and major producer of iron ore and coal. It has iron ore and coal mines in North America and two iron ore mining complexes in Western Australia, as well as a 45% economic interest in an Australian coal mine and a Canadian chromite project in pre-feasibility stage.
CLF has a five-year annual growth rate of 11.1%, EBITDA growth rate of 25.2 percent and free cash flow growth rate of 39.5 percent. It also has a P/E ratio of 4.7, P/B ratio of 0.8 and P/S ratio of 0.8:
CLF reported second-quarter results for the period ended June 30, 2012 on July 25, 2012. The company’s revenues decreased 10% year over year to $1.6 billion, driven by lower year-over-year pricing for its commodity products. Net income was $258 million, or $1.81 per diluted share, down from $409 million, or $292 per diluted share the previous year, driven by a lower consolidated sales margin, and the previous year’s quarter having a significant foreign currency hedging gain.
The company’s consolidated sales margin decreased 39% to $449 due to lower revenues and increased cost of goods sold from higher costs for labor, mining and maintenance. Iron ore sales volumes increased 13% year over year, driven by its Bloom Lake Mine acquisition and expansion project in the Asia Pacific.
Higher iron ore sales partially offset the sales margin decrease, but U.S. iron ore revenues per ton were down 13% year over year on lower pricing for seaborne iron ore and changes in customer mix. Asia Pacific iron ore sales jumped 39%, while revenue per ton fell 32%; Eastern Canadian Iron Ore sales surged 41%, while revenues per ton declined 28%.
For more of Brian Rogers’ latest buys and sells at T Rowe Price, see his portfolio. Also check out his undervalued stocks, top growth companies and high yield stocks.