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Early Movers for Thursday Feb. 14, 2013

U.S. equity markets continue to look for a clear direction as earnings season continues and economic and political leaders get ready for the G20 summit in Saint Petersburg, Russia. Markets are overvalued at current levels with the market trading at a Shiller P/E of 23 compared to its historical mean of 16.5. But don’t count on markets correcting just for the sake of correcting — M&A activity seems to be picking up with the latest buyout coming from none other than Warren Buffett.

This morning it was announced that H.J. Heinz (HNZ) agreed to be acquired by Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) and 3G Capital Management for $28 billion or $72.50 per share. The purchase price represents a 20% premium to Wednesday’s close and has already been unanimously approved by Heinz’s board.

Berkshire Hathaway and 3G will each put up $4.4 billion in equity for the deal, along with debt financing from J.P. Morgan Chase (JPM) and Wells Fargo (WFC). Berkshire is also buying $8 billion of preferred stock that pays 9 percent.

Reports from various media outlets note that 3G approached Buffett in December about a possible deal for the food products manufacturer. From there, Buffett and 3G approached Heinz’s chairman and CEO William (Bill) Johnson about the deal, and the first offer was made in mid-January. While Berkshire will help in the financing of the deal, 3G will handle the operational side as Buffett was quoted during an interview with CNBC, "Heinz will be 3G's baby."







Surprisingly, there has not much activity from Gurus in purchasing Heinz with Tweedy Browne being the last to purchase shares in the fourth quarter of 2012. But the purchase doesn’t have much significance as Heinz represents 0.1% (less than 1%) of the Tweedy Browne portfolio.

Earnings

Pepsi Co.(PEP), another food and beverage giant, reported EPS of $1.09 per share versus analyst estimates of $1.05. Revenues were strong and were aided by higher prices and higher volume. The company also announced a $10 billion stock buyback program that will begin in July 2013 and increased its dividend 5.6% to $2.27 annually. At current levels, that would represent a dividend yield greater than 3%.

Gurus who have been bullish on Pepsi (PEP) include Charles Brandes and Donald Yacktman. Both positions are significant, but Yacktman has been very bullish on Pepsi (PEP) as he has been purchasing shares for the various Yacktman Funds and each time Pepsi is a significant stake in the portfolio. For example, in the Yacktman Focused Fund (YAFFX), Pepsi represents almost 10% of the portfolio.

Auto manufacturer General Motors (GM) reported EPS of $0.48 versus analyst estimates of $0.52 per share. The miss is partially due to a larger than expected loss in Europe but the company did beat on the top line. The company expects to return to profitability in Europe by mid-decade. Growth continues to come from emerging markets such as China. GM now continues to sell more cars in China than in the U.S. but still trails Toyota Motors (TM) as the No. 1 sales title that it had long held.

Gurus were bullish on General Motors (GM) last year but the stock has since risen significantly with some Gurus recently selling out. Gurus who purchased shares last year include:

Cisco Systems (CSCO) reported fourth quarter EPS of $0.51 per share versus analyst estimates of $0.48 per share. Revenues also topped analyst estimates as the networking company sees improvements in its European business. CEO John Chambers has been known to give a good indication of the business and economic, both home and abroad and this time was no different.

“In my recent conversations with global business and government leaders, the tone is cautious optimism,” CEO John Chambers said on the call. “I am not suggesting the optimism will translate into immediate GDP growth, but I believe we can move to a world driven by opportunity, not scarcity, and that technology will play a very large role in that opportunity.” (source)

After purchasing shares at depressed levels, Gurus have been reducing shares in the networking company. The only Guru who has been bullish on Cisco (CSCO) is Tweedy Browne which added to its existing stake. Cisco now represents 5.8% of the Tweedy Browne portfolio and is the second largest position behind Johnson & Johnson (JNJ).


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