Oakmark Small Cap International (OAKEX, Financial) is managed by David Herro (Trades, Portfolio) and has $2.4 billion in assets. The fund has averaged 8.92% a year since its founding 21 years ago. We are going to take a look at four of these international small caps in the portfolio.
The first company is Incitec Pivot (INCZY, Financial). Incitec is an Australian manufacturer of agricultural chemicals and explosives. Like most agricultural and mining companies, Incitec has lagged with lower grain prices and decreased mining. Revenues grew for quite some time, but were 3.9 billion Australian dollars in 2011 and were AU$3.6 billion in 2015. Operating margins are usually in the mid-teens. Return on equity is in the mid-teens until the last few years—single digits.
According to Morningstar, Incitec has a market cap of AU$3.5 billion, a 3.72% dividend yield and trades at a price to sales of 1.1. Its debt is BBB rated by S&P. The valuation seems decent. You can see that Oakmark is trying to play a rebound in mining and ag by buying picks and shovels and fertilizers, not the actual miners and farmers.
Atea ASA (ATAZF, Financial) is a Norwegian IT provider with a presence in Scandinavia and the Baltics. The company has a market cap of 8.26 billion Norwegian krone. Growth has been outstanding. Sales grew from 20.2 billion krone in 2011 to 27.9 billion krone in 2015. Operating margins are in the low single digits. Management could improve upon that metric. Prior to the financial crisis in 2008/2009, Atea was much more profitable. Margins were higher, costs lower, and earnings per share higher. The dividend yield is almost 4%.
Management attributes Atea’s growth to its participation in SAP Software’s Ariba. Atea distributes Ariba software, which has been growing at 30% a year for the last few years. You can see why Herro owns Atea—high growth, stable country (Norway) and an almost 4% dividend yield.
The next company is Element Financial (ELEEF, Financial). Element is a Canadian fleet management and equipment financier. On Sept. 20, shareholders will vote to separate the Company to two publicly traded entities – Element Fleet Management Corp. (Element Fleet) and ECN Capital Corp. (ECN Capital). Fleet Management will pursue a higher credit rating after its separation from the financing division.
Fleet manages rail and other operations for North America. The Commercial Asset Management division funds rail and aviation companies. The Asset Management Division will manage 3.6 billion Canadian dollars in aircraft, CA$2.8 billion in rail, and CA$3 billion in equipment. The Fleet Management division will be the largest publicly traded fleet manager in the world with CA$19.5 billion in assets.
So what’s the investment thesis? Oakmark sees breakup value. The company currently has a market cap of CA$5.8 billion.
ALS Limited (ALSYY, Financial) is an Australian company that provides testing for minerals, metallurgy, life sciences and energy. The company has a market cap of 2.8 billion Australian dollars. Sales have been flat since 2011 when revenues were AU$1.4 billion to AU$1.365 billion in the latest year. ALS has put up losses over the last two years. Net margins and return on equity are in the mid-teens in good times.
Like other Oakmark picks, ALS is a way to buy into commodities without all of the debt and less cyclicality. The stock trades at a price to sales ratio of 1.9 and has a 2.8% dividend yield. Bain and Advent Capital have attempted a hostile takeover of ALS. Management of ALS rejected an offer of AU$5.25 Ă‚ per share back in June. Currently, the stock trades at AU$5.53.
So what are Oakmark’s intentions? You can see that management is looking for companies that have investment grade ratings, growing revenues and high profit margins. As value managers, they are trying to find companies that are in industries that are out of favor, buy-outs, spin-offs and other special situations. The fund is an interesting place to look for ideas.
Disclosure: We do not own shares.
Start a free 7-day trial of Premium Membership to GuruFocus.
