Bill Nygren’s conservative Oakmark Fund isn’t used to as dramatic outperformance during periods of market gains as it experienced this year. The fund gained 27% through the first nine months of 2013, compared to 19% for the S&P 500, led by strong showings in the financials and information technology sectors. “We still find these two sectors to be attractively valued, and they currently represent a combined 47% of our portfolio,” Nygren commented in his third quarter letter to shareholders.
Though he has not yet reported his official third quarter portfolio, Nygren noted in his shareholder letter that he sold out of Boeing (BA) and Northrop Grumman (NOC) after the stocks reached their sell targets. He also added two new positions in Nestle (NSRGY) and (QCOM).
Nestle S.A. (NSRGY)
Oakmark paid $70 a share for Nestle in the third quarter, about 3% more than the company’s Monday share price around $68. Year to date it has appreciated about 4.5%.
Here is Nygren’s commentary on the holding:
Nestle is a global leader in packaged foods with $100 billion of revenue and operations in over 70 countries. The company has more than 25 brands with sales over $1 billion, with leading market share in most of their product categories. With broad exposure to high-growth emerging markets, Nestle has enjoyed strong and consistent revenue growth. Like many of our holdings, Nestle generates more cash than they need to run the business, so the company has used a significant portion of its excess cash to repurchase shares and pay dividends. Over the past four years, Nestle has reduced their share count by over 10%. We think this is a high quality, stable business that deserves to sell at a premium, so we initiated a position when Nestle was priced at a discount to other global consumer products companies due to concerns about Europe.
In regard to the company’s share buyback history Nygren mentions, Nestle has been repurchasing shares at a rate of 3.7% annually, which is higher than 92% of the 1,398 companies in the global packaged foods industry. See the graph of its share buybacks compared to its peers below:
In the first half of 2013, Nestle’s sales increased 5.3% over the same period last year, with acquisitions contributing 2.1% to sales. Net profit rose 3.7% to CHF5.1 billion and earnings per share rose 3.4% to CHF 1.60. Its strongest growth occurred in Asia at 6.3%, and weakest was in Europe at 0.6%. Emerging markets also grew 8.2%, while developed markets grew 1%. The company reiterated that it expects full-year growth of 5%, an improvement in margins and underlying earnings per share in constant currencies, in line with its previous expectations.
Nestle’s 10-year revenue and earnings growth:
Investor Tom Russo of Gardner Russo & Gardner also owns a significant stake in Nestle spanning 10.1% of his portfolio, which he added more than half a million shares to in the third quarter.
Nestle has a P/E of 18.32 and P/B of 3.17, which are both close to their respective one-year low. It has a P/S of 2.1.
Bill Nygren paid $67 per share for a new stake in Qualcomm, close to its $67.75 share price on Monday, which is close to a 10-year high. Shares gained about 9.5% year to date. He commented the following on the new position:
Qualcomm is the global leader in wireless technology licensing and mobile device chipsets. Qualcomm has dominant market share in both businesses, and it uses the strong recurring cash flow from its licensing business to reinvest in its chipset business. The company owns intellectual property that defines many of the standards used for 3G and 4G wireless communication, which allows it to collect royalties from handset providers that license these ubiquitous standards. Qualcomm’s licensing business accounts for only a third of the company’s revenue, and it is often underappreciated. However, its licensing business has unusually high profitability and represents close to two-thirds of Qualcomm’s profits. The majority of the world’s mobile handset users are still using older 2G technology, which is not a focus area for Qualcomm, so when these customers upgrade to 3G and 4G, Qualcomm should be well positioned to enjoy robust incremental revenue. The company is also the leading provider of chipsets, which function as the brains for wireless devices. Qualcomm’s industry-leading product breadth and peer-leading R&D investment should drive the company’s chipset growth. We expect Qualcomm to earn over $4.50 per share in a couple of years, and after adjusting for $20/share of cash, this high-quality business is priced at a forward P/E of just 11x.
Qualcomm has earned $3.78 per share in the trailing 12 months, and EBITDA per share has been increasing at an average rate of 17.1% over the past five years. See its growth in the graph below:
The company has also been building up its balance sheet cash over the past few years to $20.4 billion at the end of the third quarter, while long-term debt remains at zero and long-term liabilities at just over $4 billion for the past five years.
Qualcomm’s revenue was up 35% year over year in the third quarter of 2013 to $6.24 billion, while net income was up 31% to $1.58 billion. The company’s CEO, Dr. Paul E. Jacobs, attributed the strong quarter to Qualcomm Snapdragon solutions as fixtures in a wide array of smartphones with prices for 3G and 4G average selling prices higher than expected.
See Qualcomm’s 10-year revenue and earnings history:
The company also returned the following to shareholders during the quarter: $1.04 billion for 16.7 million in share repurchases, and $604 million, or $0.35 per share, in cash dividends. Its share buyback rate is -0.9, which is lower than 58% of the companies in the global communication equipment industry but much higher than its historical max rate of -15.1.
On Sept. 11, Qualcomm announced a new $5 billion stock repurchase program with no expiration date, which will replace the $5 billion repurchase program effective March 5, 2013. Since 2003, Qualcomm has returned $25 billion to shareholders in the form of repurchases and dividends.
The company has a P/E of 17.9, P/B of 3.1 and P/S of 4.99.
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