In the last 12 months, returns have fallen short of the benchmark as the managers increased their cash reserve and had only marginal exposure to the roaring Japanese market. As they explained in their second quarter letter:
“Unfortunately, the volatility in June did not last long enough to produce much in the way of bargain priced stocks. As we have mentioned in other updates, we believe that much if not most of the value in many publicly traded companies has now been recognized by markets and is reflected in their stock prices. While this is a welcome occurrence, it means that finding significant new mispricings in our markets is a much more difficult proposition today. This dearth of new opportunity coupled with positive fund flows has caused cash reserves to build at the margin in all four of our Funds.”
They mentioned two of the opportunities they did find in their second quarter letter: Banco Santander Brasil (NYSE:BSBR) and National Oilwell Varco (NYSE:NOV).
Banco Santander Brasil (NYSE:BSBR)
Based in Madrid, Spain, Banco Santander is the largest bank in the eurozone and among the largest in the world based on its 63 billion euro market cap. The bank focuses primarily on retail banking products serving more than 100 million customers through the largest global network in the international banking sector, with 14,400 million branches.
Year to date, Banco Santander Brasil shares traded down 11.8% to $6.42 per share in afternoon trading.
In the first quarter, Banco Santander Brasil reported a year-over-year increase in revenue to $4.84 billion from $4.81 billion, and net income interest slid to $3.27 billion from $3.45 billion. Net income also declined to $698 million from $767 million.
Net interest income at Banco Santander Spain also fell for the fourth consecutive quarter to 6.65 billion euros, which the bank attributed to macroeconomic deceleration, low interest rates and high provisions and preference for capital and liquidity.
Tweedy Browne commented on Banco Santander in its second quarter letter:
“Although Banco Santander Spain (NYSE:SAN) is a significant shareholder of Banco Santander Brasil, the Brazilian bank is an independently listed subsidiary with its own management team, board of directors, and capital base. At purchase, Banco Santander Brasil was trading at a discount from book value, below 10 times 2013 estimated earnings, and had a dividend yield of approximately 5%. It has a strong capital position (underleveraged), high net interest margins, and among its three local competitors, it has the highest consumer exposure to the rapidly growing middle class in Brazil. While the company has traded down since our initial purchase, we think largely due to the general sell-off in the emerging markets and the demonstrations in Brazil, we are very positive about the longer term prospects for the company.”
National Oilwell Varco (NYSE:NOV)
In its second quarter letter, Tweedy, Browne said of National Oilwell Varco:
“The other new holding is National Oilwell Varco, a leading global manufacturer of drilling rig equipment and consumables to the energy industry. It has a 2nd Quarter 2013 leading market position in the segments of the oil & gas industry that are generating the most growth, deepwater drilling and shale drilling. The company has historically generated high returns on capital, has what we believe to be a conservative balance sheet with minimal debt, and at purchase was trading at a significant discount to our estimate of the company's intrinsic value.”
National Oilwell Varco has a $30.92 billion market cap, and its shares have gained almost 6% year to date. In the past five years shares have declined 8%. The stock is priced at $72.37 per share on Wednesday.
The company’s return on capital, mentioned in Tweedy, Browne’s commentary, was 29.2% in the first quarter, down from 50.8% a year previously. Return on equity also declined to 9.6% from 13.2%, and return on assets to 6% from 9.2%. See its long-term return history below:
The “conservative balance sheet” mentioned reflects around $8.1 billion in cash, with $7.5 billion in long-term liabilities and debt.
The company’s long-term price, revenue, earnings and P/E history:
The Peter Lynch chart indicates that National Oilwell is undervalued:
See more Tweedy, Browne stock picks in its portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Tweedy Browne.
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