Investor Tom Gayner reported buying nine new stocks in the third quarter, of which most were basic resources and industrial goods and services companies and none exceeded 1% of the equity portfolio he manages for insurance company Markel Corp. The portfolio consists of $8.8 billion at June 30, with 25% invested in equity securities, up from 21% at year-end 2011.
Gayner outlined his simple stock selection strategy in Markel’s 2011 investor letter: “We continued to follow our historical and unchanging four-point discipline of seeking profitable businesses with good returns on capital, led by honest and talented managers, with reinvestment opportunities and capital discipline, at fair prices.”
Top new stocks he added to the portfolio in the third quarter were: Alliance Holdings GP LP (NASDAQ:AHGP), Peabody Energy Corp (BTU), Mattel Inc. (NASDAQ:MAT), Norfolk Southern Corp (NYSE:NSC) and Procter & Gamble Co. (PG).
Alliance Holdings GP LP (NASDAQ:AHGP)
Gayner bought 81,500 shares of this company for $47 per share on average in the third quarter. The stock has declined 5.6% over the past year.
Alliance Holdings owns and controls Alliance Resource Management GP LLC, the managing general partner of Alliance Resource Partners LP (ARLP), a diversified coal producer and marketer focused on the eastern U.S.
Alliance Holdings has a five-year annual growth rate of 14.1% for its revenue per share, 20.3% for its EBITDA growth rate and 22.3% for its book value. The company also currently trades at three one-year highs: its stock price at $49.07, P/E ratio at 14.4 and P/S ratio of 1.6.
In its second quarter results reported July 27, the company announced a 1.8% year-over-year increase in earnings and earnings per share to $54.4 million and $0.91.
The company also raised its quarterly dividend 19.7% year over year to $0.5825 per unit, based on the distribution it will receive from its interest in Alliance Resource Partners.
Alliance Holdings has a P/E of 14.4, P/B of 4.1 and P/S of 1.6.
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Peabody Energy Corp (BTU)
Gayner purchased 135,000 shares of Peabody Energy Corp for $23 per share on average. The stock declined 21% year to date.
Peabody Energy the world’s largest private-sector coal company with interests in 30 coal mining operations in the U.S. and Australia. In the last five years its growth rate per share for revenue was 9%, for EBITDA was 17.6% and for book value growth was 15.6%.
In the first nine months of 2012, Peabody’s revenue increased year over year to $6.06 billion from $5.67 billion. Net income fell to $427.7 million from $752.4 million. Prices declined in Australia in the third quarter, but were offset by record Australian volumes, aggressive cost control and expanded U.S. margins.
Peabody has a P/E of 8.7, P/B of 1.2 and P/S of 1.
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Mattel Inc. (NASDAQ:MAT)
Gayner purchased 75,000 shares of Mattel for $35 per share on average. The stock has risen 30% year to date.
Mattel is the maker of toys and family products such as Barbie, Hot Wheels, Matchbox, American Girl and Fisher Price, among others. In the past five years, the company has had growth per share rates of 3% for revenue, 8.5% for EBITDA and 4.6% for book value.
In the first nine months of this year, Mattel’s net sales increased 1% year over year to $4.2 billion and net income rose 18% to $470 million.
Mattel declared a fourth quarter cash dividend of $0.31 per share, the fourth of the year, for a total annualized dividend of $1.24, representing a 35% dividend increase from the prior year. The company also spent $5 million repurchasing 139,000 of its shares in the third quarter.
Mattel has a P/E of 15, P/B of 4.3 and P/S of 2.
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Norfolk Southern Corp (NYSE:NSC)
Gayner purchased 21,400 shares of Norfolk Southern Corp for $72 on average. The stock has declined 19% year to date.
Norfolk Southern is the a transportation company that owns subsidiary Norfolk Southern Railway that operates in 22 states and the District of Columbia and serves every major container port in the eastern U.S. It transports coal and other industrial products. In the last five years, it had annual growth rates per share of 4.8% for revenue, 5.5% for EBITDA and 4.5% for book value.
In the third quarter, Norfolk Southern reported that revenues declined 7% year over year to $2.7 billion, primarily due to decreased coal and merchandise volumes and lower fuel surcharge revenue due to a $21 million lag effect. Net income and earnings per share declined 27% year over year to $402 million or $1.24.
Lower results are expected in the third quarter, according to a release the company issued on Sept. 19. Volume declines in certain markets and lower revenues from fuel surcharges pushed earnings per share expectation down to the range of $1.18 to $1.25. Decreased coal and merchandise shipments, offset partially by intermodal volume growth, are responsible for an expected $120 million reduction in revenues.
Norfolk Southern has a dividend yield of 2.95%, close to a three-year high.
Norfolk has a P/E of 11.5, P/B of 2.1 and P/S of 1.9. Its price and P/B ratio are close to two-year lows; its P/S ratio is close to a three-year low.
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Procter & Gamble Co. (PG)
Gayner purchased 19,200 shares of Procter & Gamble for $66 per share on average. Its stock has increased 0.3% year to date.
Procter & Gamble is the owner of 50 well-known leadership brands, 25 of which are billion-dollar brands, and operates in approximately 75 countries. Procter & Gamble’s five year growth rates per share increased 4.1% for revenue, 0.9% for free cash flow and 2% for book value. Its EBITDA declined at an annual rate of 1.1% over the same period.
In its first quarter ended Sept. 31, P&G’s organic sales increased to 2%, with four of five of its segments reporting increased growth. Net earnings per share increased 5% to $1.06. The company also grew market share in its businesses generating over 45% of sales in the quarter.
Share repurchases for the quarter totaled $2.6 billion, and $1.6 billion was returned to shareholders as dividends.
Procter & Gamble has a P/E of 17.8, P/B of 2.9 and P/S of 2.3, close to a 10-year low.