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Bruce Berkowitz Cuts Berkshire Stake in Half, Buys Vodafone and AT&T in Q1

May 28, 2014 | About:
Holly LaFon

Holly LaFon

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Bruce Berkowitz (Trades, Portfolio), a fund manager known for consistently correct prescient bets on undervalued assets, has recently piled his Fairholme Fund (Trades, Portfolio) high with shares of Fannie Mae and Freddie Mac, mortgage entities whose fates hang in a legislative balance. He has also been both a fan of Warren Buffett (Trades, Portfolio) and a holder of his company, Berkshire Hathaway (BRK.A)(BRK.B). But in the first quarter, he cut the holding, which had been his tenth largest, in half, and bought stocks of two additional companies: Vodafone Group PLC (VOD) and AT&T Inc. (T).

Berkowitz started his Berkshire B-shares stake in 2009, when the price plunged to as low as an average of $59 per share. By the end of the year, he had accumulated 12,075,350 shares, of the company. He subsequently bought and sold more shares of the company, but he reduced the stake to its smallest yet in the first quarter. The investor cut 421,300 shares, or 59.32% of the holding, keeping just 288,935 shares, and relegating it to 0.36% of his portfolio.

Today’s share price around $126.80 means Berkowitz has an average gain of 80% on the holding, on which he had an average buy price of $71.

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In 2008, Berkowitz commented on the stock position to the Wall Street Journal:

“Just a-little-bit-different assumptions in growth rates make a huge difference over time. Having said that, Berkshire isn't going to be able to do what it's done in the past, owing partly to the law of large numbers and because Warren Buffett (Trades, Portfolio) is getting older.

The company still has the ability to outperform the index. But it's not going to produce the 27%-per-annum return he has achieved for the past 42 years. Buffett is the first one to tell you that's pie in the sky. But at this price, the company is unbelievably well-positioned to have one more good growth spurt from this environment. You can sleep extremely well at night holding this stock.

Sometimes a good bit of the trick to investing is not losing. If you can focus on not losing, the winning takes care of itself. For Berkshire Hathaway, the worse the environment gets, the better it's going to do.”

Because of what?

Buffett wants a tougher environment. When you have $40 billion to $60 billion in cash on your balance sheet, you need a tough environment, as that's the only way you are going to be able to put that money to work. Berkshire isn't what I would call a back-up-the-truck bargain value, but it's reasonably priced.”

Since 2009, Berkshire Hathaway’s stock price has advanced 120%, while its book value grew at an annual rate of 11.9%, reaching $97.36 per share in the first quarter.

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Berkowitz also halved his holding of Berkshire’s A-shares, from six to three, at an average price of $175,515 in the first quarter. He all but eliminated the position back in mid-2012.

Communications Companies

Berkowitz took positions in two new communications companies during the quarter, Vodafone Group Plc (VOD) and AT&T Inc. (T), of about equal size: 0.025% and 0.024%, respectively. He bought 66,000 shares of Vodafone, which had an average share price of $44 in the first quarter, and 68,500 shares of AT&T Inc., which had an average share price of $33 for the quarter.

Year to date, Vodafone’s share price has dropped almost 11%, and is down to around $35.06 per share on Wednesday, near a three-year low. In the past five years, the company has grown its revenue per share at a rate of 3.9% and EBITDA at a rate of 2.3%, while free cash flow declined at 18.5% and book value declined at 0.1% in the same span.

The preliminary results for Vodafone’s first quarter, released May 20, show group revenue down 1.9% from the previous year to £43.6 billion, with EBITDA down 5.4% to £12.8 billion and free cash flow down 21.5% to £4.4 billion. Adjusted earnings per share were 17.54 pence.

A major event during the first quarter for Vodafone was its sale of its 45% stake in Verizon Wireless (VZ) in February, which cut the company’s market value in half. Vodafone returned US$85 billion to its shareholders from the sale. It has embarked on a £19 billion capital investment program to take place over the next two years, which the company expects will begin to reflect in operating results in the next year, while it still faces macroeconomic and regulatory pressures, in Europe and other key markets.

Vodafone ended the quarter with net debt of £13.7 billion and cash totaling £10.1 billion. Management also increased its dividend 8% to 7.47 pence.

Vodafone’s 10-year revenue and earnings history:

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Vodafone’s share price history:

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Vodafone also has a P/E ratio of 129.8, P/B ratio of 0.8 (close to a one-year low) and P/S ratio of 1.24 (close to a three-year low).

AT&T’s share price dipped about half a percentage point so far this year, trading around $35.35 per share on Wednesday, near a five-year high. In the past five years, the company’s per-share revenue grew at a rate of 3.3%, EBITDA at a rate of 3.3% and free cash flow at a rate of 0.8%. Its book value declined 0.3% annually on average.

In the first quarter AT&T reported its best revenue growth in more than two years, driven by growth in wireless and wireline consumer revenues. Quarterly revenue inched inched up 3.6% year over year, to $32.5 billion. Net income remained flat at $3.7 billion, and earnings per diluted share increased to $0.70, from $0.67 in the year-ago quarter. The company also acquired Leap Wireless during the quarter, on March 13, which will require an estimated $1.2 billion in integration costs stretching across the next two years and EPS dilution of $0.05 in 2014.

Due to the strong results and Leap acquisition, AT&T raised its full-year 2014 guidance to include revenue growth of 4% or greater instead of the previously expected 2% to 3% range. It kept its free cash flow projection at $11 billion, reflecting a decline from $13 billion in 2013, and also did not change its earnings per share growth expectation to the mid-single digit range.

AT&T’s 10-year earnings and revenue history:

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AT&T’s share price history:

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The company is trading with a P/E ratio of 10.3, P/B ratio of 2.02 (close to a two-year low) and P/S ratio of 1.44 (close to a three-year low).

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