Donald Yacktman (Trades, Portfolio)’s fourth quarter portfolio, recently released, revealed that his Yacktkman Funds (YACKX) team opted to stick with two companies whose stock prices have pulled back in recent months. Their fourth-quarter letter, released today, provide insight into why the holdings still represent good values.
Avon Products (AVP)
The Yacktman Fund (Trades, Portfolio)s acquired a holding of 18,943,112 shares through multiple purchases occurring from third quarter 2011 through second quarter 2013. Their average price: $19.71 per share. Shares are now trading 25% lower than Yacktman’s average, at $14.77 a share. This holding has a 1.7% portfolio weight.
Yactkman’s largest purchases, in the second half of 2011, were made after a steep drop off in the company’s stock price:
Avon’s stock has tumbled in recent years, having lost almost 28% over five years and almost 12% in the past 12 months. Yacktman gave a synopsis of the state of the company in the fourth-quarter letter:
“Avon Products Inc. (AVP) shares declined due to poor quarterly results and increased market concerns about fines related to the Foreign Corrupt Practices Act (FCPA) investigation. Turnarounds generally take time, and we continue to have confidence that the new management team is taking the correct steps to improve the business. We believe the concerns about the potential magnitude of FCPA fines are overstated given the practices that Avon Products Inc. is being investigated for as well as previous FCPA fines levied on other firms. The shares remain inexpensive based on our assessment of normalized earnings and the potential value to a strategic buyer.”
Avon, a beauty company and one of the world’s largest direct sellers, has faced weakness in its business of late. On Oct. 31, the company reported its ninth consecutive quarter of year-over-year earnings declines, at a net loss of $6 million, compared to net earnings of $32 million in 2012’s third quarter. Revenue also fell 7%, to $2.3 billion.
The company’s management attributed the weak results to headwinds in its North America and Asia Pacific businesses, as its overall number of sales representatives decreased by 3% and unit sales decreased by 7%, with declines seen in all categories. Meanwhile, in North America, revenues declined 19%, as active representatives left the company.
The company doesn’t expect North American sales to revive any time soon, attributing the slide to “disruption from implementing the One Simple Sales Model in 2011 and 2012, and the overall consumer proposition,” and adding, “We are focused on restoring field health, improving our brochure and creating a sustainable cost base which may include additional restricting actions.”
In the Asia Pacific segment, revenue fell 22%, including a 67% drop in China sales, as unit sales plunged. “We continue to have ongoing operational challenges in China and expect continued,” the company said.
The “turnaround” and “correct steps to improve the business” Yacktman references in his letter are primarily related to the 2012 $400 million cost savings initiative the company implemented to stabilize the company and return it to sustainable growth. The initiative includes restructuring actions and other cost-saving strategies, including layoffs and closing out of under-performing markets, such as South Korea, Vietnam and Ireland.
The plan is designed to reduce operating expenses, and attain an operating margin in the low double digits by 2016. Avon’s operating margin has been in long-term decline, most recently at 2.9% as of the third quarter, down from 4.4% the same quarter of 2012:
As of Thursday, Avon is trading at a near 10-year low stock price, and at about 6 times book value, with a P/S of 0.65.
Cisco Systems Inc. (CSCO)
Yacktman also held onto his Cisco Systems shares as the stock’s price declined 14% over the past six months. His firm acquired a stake in the company from fourth quarter 2010 through third quarter 2012, owning 50,273,165 shares after selling 2,617,526 shares in third quarter 2013. The holding has a 5.3% portfolio weight.
The firm in their fourth-quarter letter commented on Cisco:
“Cisco Systems Inc. (CSCO) shares fell after the company reported disappointing results and issued poor forward guidance, largely due to weakness in emerging markets. We think the shares continue to represent extremely good value given the strong balance sheet and earnings power of the business.”
Shares of Cisco, the IP-based networking company, dropped 10% in one day in November when it released its first-quarter business results. Cisco’s revenue increased 2% year over year to $12.1 billion, which was lower than expected. Net income was down to $2.0 billion from $2.9 billion the previous year.
Cisco’s 10-year revenue and earnings history:
The main factors impacting Cisco’s results were weakness in Europe, lower public sector spending, conservative IT spending by clients and weakness in emerging markets such as China, India, Russia, Brazil and Mexico. Cisco expects the challenges in product orders from emerging markets to continue for several future quarters at least, and projected a decline in both earnings and revenues on a year-over-year basis in the second quarter of fiscal 2014.
The company continues to hold substantial cash, with $48.2 billion appear on its balance sheet, down slightly from $50.6 billion the previous quarter. Its debt load is $16.0 billion, as of Oct. 26, 2013. Over the past three years, Cisco has issued $957 million in debt.
Cisco is also trading around 12 times earnings, almost a one-year low, and with a P/B ratio of 2.02, also close to a one-year low.