Akre manages approximately $1.6 billion according to a three-pronged value approach which says companies he buys must have:
- Enduring high returns on capital and pricing power in excess of input costs (Business Model)
- Managers who operate in the best interest of all shareholders (People Model)
- Extensive reinvestment opportunities and reinvestment discipline (Reinvestment Model)
- And finally, when identified, investments are purchased at reasonable valuations
New Buy: Jefferies Group (JEF)
Akre bought 246,914 shares of Jefferies for $16 per share in the fourth quarter. The stock has since gained 32% from his average purchase price and trades for $21.04 on Wednesday afternoon.
Jefferies Group is a global investment banking firm that has had an eventful recent past. Its stock had what Leucadia (NYSE:LUK) called “a brush with death” in 2011, seeing around $10 per share in November. This precipitated Ian Cumming, its largest shareholder through his company, Berkshire Hathaway-like Leucadia, to buy the company outright in a $3.6 billion deal.
Leucadia announced on Nov. 12 that it would distribute 0.81 shares of Leucadia stock for each share of Jefferies stock that investors hold, in a deal slated to close in the first quarter of 2013. The merger will make Jefferies the largest business held by Leucadia.
Though the company will officially become a subsidiary of Leucadia, it will still report financial results to the Securities and Exchange Commission (SEC).
For most of the fourth quarter, Jefferies traded for less than its 2012 book value of $15.91, which had been growing at a rate of 7.5% for the past five years. The company also generated $126 million in free cash flow last year, its first year of positive cash flow since 2008, on revenue of $2.96 billion, a company record. For half of the last decade, Jefferies has produced double-digit returns on equity, though it slipped to between 8% and 9% in recent years.
Bruce Berkowitz, an avid player in post-housing crisis financial stocks, also holds a significant stake in the company amounting to almost 1% of his portfolio, which he reduced by roughly 37% in the third quarter. Whitney Tilson sold out and Chuck Royce nearly sold out their positions in the company amidst the fourth quarter’s rally.
Jefferies has a P/E of 16.9, P/B of 1.3 and P/S of 1.6.
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JEF data by GuruFocus.com
New Buy: TransDigm Group Inc. (NYSE:TDG)
Chuck Akre bought 10,000 shares of his second-largest new holding, TransDigm Group (NYSE:TDG), for $137 per share on average. It represents an infinitesimal 0.096% of his portfolio.
TransDigm Group makes aircraft components, systems and subsystems and generates approximately 55% of its revenues from aftermarket sales, as its parts are usable in aircraft throughout their average 30-year lifespan.
The company’s stock over the past year is up 22.25% and over the past five years is up 260% to trade for $144.55 on Wednesday.
It has grown its business generously over the past five years, with revenue increasing on average 20.5% annually and EBITDA increasing 19.7%. In 2012 its revenue reached a company peak of $1.7 billion and net income reached $325 million, while free cash flow was $389 million.
Baron Funds commented recently on the company, which it owns a great deal of, saying in its third quarter letter:
“The company reported stellar results highlighted by 15% organic growth.The company is digesting recent acquisitions,which along with the strength in the OEM markets are slightly depressing margins, yet deal integration and business trends are on track. TransDigm now trades at a full multiple of 12 times cash flow, but we believe cash flow will continue to grow double-digits and free cash flow will reduce debt or fund additional accretive acquisitions, so we still like the stock very much.”
Last year, it made three accretive acquisitions, consisting of Harco, AmSafe and Aero-Instruments, which pushed net sales up 22.1% in its fiscal third quarter ended Dec. 29, 2012 to $430.4 million, as net income rose 13.9% to $74.2 million. In October, it already announced that it would make another acquisition, this time of the pump and engine control systems business of Goodrich, in a $236 million deal scheduled to close in early 2013.
TransDigm has a P/E of 26.2, P/B of 13 and P/S of 4.4.
TDG data by GuruFocus.com
See more of Chuck Akre’s fourth quarter portfolio updates in his portfolio here.
Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Chuck Akre.