Managing directors William H. Browne, John D. Spears, Thomas H. Strager and Robert Q. Wyckoff Jr. operate investment partnership Tweedy Browne (Trades, Portfolio), one of Warren Buffett (Trades, Portfolio)’s Graham-Doddsville Superinvestors. The investment partnership invests in companies using a Ben Graham “intrinsic value” approach. Browne and his team invest in companies at a discount of 40% to the company’s intrinsic value and sell the investment when the market price approaches the fair value.
During fourth-quarter 2016, Browne’s partnership closed its positions in Lockheed Martin Corp. (LMT, Financial) and Illinois Tool Works Inc. (ITW, Financial). Additionally, the partnership trimmed stakes in Verizon Communications Inc. (VZ, Financial), Johnson & Johnson (JNJ, Financial) and International Business Machines Corp. (IBM, Financial).
Lockheed Martin
Browne sold 80,175 shares of Lockheed Martin at an average price of $249.91 per share. Based on GuruFocus estimates, the guru realized a gain of about 166% on the stock.
While the company reported strong full-year 2016 earnings and provided a positive outlook for 2017, Lockheed Martin has a modest financial strength rank of 5. The company’s cash-debt ratio of 0.13 underperforms 76% of competitors, and Lockheed Martin’s interest coverage is near a 10-year low of 8.37. Additionally, the company’s Altman Z-score of 2.85 suggests mild financial distress.
Lockheed Martin’s stock price has steadily increased since 2009, crossing above its Peter Lynch earnings line by 2014. The company’s price and price-sales ratio are now near a 10-year high, suggesting Lockheed Martin is significantly overvalued.
As the company has high valuations, First Eagle Investment (Trades, Portfolio) also closed its position in Lockheed Martin, selling 599,955 shares.
Illinois Tool Works
Browne’s partnership sold its remaining 226,655 shares of Illinois Tool Works at an average price of $120.79. The guru realized a gain of roughly 150% based on GuruFocus estimates on the stock.
Like Lockheed Martin, Illinois Tool Works has high valuations despite good long-term profitability. It has five medium warning signs, including a dividend yield near a five-year low and valuations near a 10-year high. The company’s price-book ratio and price-sales ratio rank lower than 96% and 78% of global diversified industrial companies respectively. Additionally, Illinois Tool Works currently trades near its maximum price-sales value.
Verizon Communications
Tweedy Browne axed 55.03% of its stake in Verizon, selling 883,325 shares at an average price of $49.98.
As of Feb. 8, Verizon has moderate financial distress, with a cash-debt ratio of 0.03 and an Altman Z-score of 1.47. Verizon’s cash-debt ratio underperforms 97% of global telecom services companies, and Verizon’s Altman Z-score has generally languished in the distress zone over the past 10 years. These metrics contribute to a financial strength rank of 4, suggesting Verizon has a poor financial outlook for 2017.
Verizon and Yahoo Inc. (YHOO, Financial) entered into a definitive agreement July 25, 2016, under which Verizon will acquire Yahoo’s operating business for about $4.83 billion. Yahoo will continue operating its assets in Alibaba Group Holding Ltd. (BABA, Financial) and Yahoo Japan Corp. (YAHOY, Financial) under the new company name Altaba Inc. The merger was expected to close during first-quarter 2017, but two Yahoo data breaches, one during September 2016 and a second one during December 2016, postponed the closing date to second-quarter 2017.
Verizon reported weaker earnings results for fourth-quarter 2016 compared to fourth-quarter 2015, including a three-cent decrease in adjusted earnings per share. Fourth-quarter 2016 consolidated operating revenues dropped 5.6% from fourth-quarter 2015 operating revenues while full-year 2016 revenues declined 4.3%. These values contributed to a three-year revenue growth rate of -9.8%, which is near a 10-year low and underperforms 81% of Verizon’s competitors. Verizon receives a GuruFocus Business Predictability Rank of a flat one star based on its Predictability Chart.
As the company has a weak profitability outlook, several gurus trimmed positions in Verizon. Barrow, Hanley, Mewhinney & Strauss cut 5.42% of its stake while Ken Fisher (Trades, Portfolio) knocked off 15.51%.
Johnson & Johnson
Browne and his team chopped 19.88% of the partnership’s stake in Johnson & Johnson, selling 592,221 shares at an average price of $115.51. With this transaction, the partnership trimmed 2.21% off the portfolio.
As illustrated in the figure below, Johnson & Johnson has a volatile predictability rank, gradually decreasing from five stars in 2010 to one star in 2013 before rebounding to 3.5 stars by end of 2016. As of Feb. 8, J&J has a 2.5-star predictability rank on watch.
Johnson & Johnson lost a star as its EBITDA per share declined in the past two years.
Although the company has profit margins and Greenblatt returns on capital near a 10-year high, it still has three-year revenue growth near a 10-year low. Furthermore, the company’s return on equity and return on assets are also near a 10-year low despite outperforming over 85% of competitors. As the company has decreasing growth potential, John Hussman (Trades, Portfolio) eliminated his stake in Johnson & Johnson.
International Business Machines
Browne removed 30.47% of its stake in IBM, selling 120,360 shares at an average price of $159.33.
As discussed in a previous article, IBM reported stronger cloud revenues in fourth-quarter 2016. Although this suggests IBM had higher operating revenues, the opposite is true. IBM’s operating margin and per-share revenue have declined 2.7% and 1.3% per year, respectively, for the past five years. As the company has negative three-year revenue, three-year EBITDA and three-year EPS growth rates, IBM’s profitability ranks a poor 3 out of 10.
See also
As the deadline for SEC 13F filings approaches, we will populate the latest guru trades webpage with guru portfolio updates. Premium members have access to portfolio data on over 150 gurus, including all real-time stock picks. Premium Plus members can access portfolio data on over 4,000 institutions that file quarterly 13F filings to the SEC. If you are not a GuruFocus member, we invite you to a free 7-day trial.
Disclosure: The author has no position in the stocks mentioned in this article.
