Bill Nygren's Oakmark fund gained 13.62% during the 12 months ened 3/31/2007. Since inception in 1991, the fund has average more than 15% per year. These are some of his comments on the stocks he bought and sold recently, Sprint-Nextel (S, Financial), Gannett (GCI, Financial), Medtronic, Inc (MDC, Financial) and WESTERN UNION (WU, Financial).
Sprint-Nextel (S — $19)
We bought shares of Sprint-Nextel, the country’s third largest wireless telephony provider. Delays in integrating Sprint’s 2004 acquisition of Nextel have led to disappointing operating profits. Sprint’s stock price reflected that, falling from the mid-$20s to a first quarter low of under $17. During that time, other telecommunication stocks increased, resulting in Sprint now being priced at a lower multiple of cash-flow than competitors who get most of their income from the declining wired telephony business. Further, if Sprint’s subscribers were valued similarly to recent wireless acquisitions, Sprint stock would nearly double from its low. As with many of our holdings, we believe management will either improve operations or the company will be acquired.
Newspaper stocks: Gannett (GCI)
We also sold Gannett at a price just above what we paid for it in 2000 when newspapers were being acquired for about 13 times pretax cash flow. At that time, Gannett looked quite attractive to us, selling at only 8 times. Unfortunately, valuation spreads can close in two directions. We have recently seen substantial evidence that newspapers are not as valuable as they once were. Just last quarter the Minneapolis Tribune was sold for about half the price McClatchy paid for it in 1988, and the estimated value of the Boston Globe was written down to about half the price New York Times Company paid to acquire it in 1993. Finally, in our home market of Chicago, the Tribune Company’s search for an acquirer barely produced a premium to the stock price. Though Gannett is definitely an example of a “mistake,” it is also an example of how purchasing at a discount to private value can help protect us from loss.
Medtronic, Inc (MDT - $53)
Medtronic is the world’s largest manufacturer of implantable biomedical devices. In their largest business, cardiac rhythm management (pacemakers and implantable defibrillators), Medtronic has higher sales than all its competitors combined. Both investors and acquirers typically pay very high prices for businesses with dominant share that sell proprietary products into growing markets. In fact, back in 2000, Medtronic traded at $62 per share, over 50 times projected earnings. As expected, earnings have more than doubled since 2000, but despite that, the stock price has declined. Medtronic stock now trades at less than 20 times projected earnings, only a small premium to inferior businesses. Like many of our more recent purchases, we believe Medtronic will continue to achieve superior growth and expect it to again be accorded a superior multiple.
WESTERN UNION (WU)
We believe Western Union is an unusually high quality business. It is the dominant leader in international money transfers. The growing number of people working in countries away from their families has dramatically increased the demand for that service. We believe the stock price does not fully reflect Western Union’s growth prospects. During the quarter we added to our Western Union position and sold our remaining First Data shares.
Sprint-Nextel (S — $19)
We bought shares of Sprint-Nextel, the country’s third largest wireless telephony provider. Delays in integrating Sprint’s 2004 acquisition of Nextel have led to disappointing operating profits. Sprint’s stock price reflected that, falling from the mid-$20s to a first quarter low of under $17. During that time, other telecommunication stocks increased, resulting in Sprint now being priced at a lower multiple of cash-flow than competitors who get most of their income from the declining wired telephony business. Further, if Sprint’s subscribers were valued similarly to recent wireless acquisitions, Sprint stock would nearly double from its low. As with many of our holdings, we believe management will either improve operations or the company will be acquired.
Newspaper stocks: Gannett (GCI)
We also sold Gannett at a price just above what we paid for it in 2000 when newspapers were being acquired for about 13 times pretax cash flow. At that time, Gannett looked quite attractive to us, selling at only 8 times. Unfortunately, valuation spreads can close in two directions. We have recently seen substantial evidence that newspapers are not as valuable as they once were. Just last quarter the Minneapolis Tribune was sold for about half the price McClatchy paid for it in 1988, and the estimated value of the Boston Globe was written down to about half the price New York Times Company paid to acquire it in 1993. Finally, in our home market of Chicago, the Tribune Company’s search for an acquirer barely produced a premium to the stock price. Though Gannett is definitely an example of a “mistake,” it is also an example of how purchasing at a discount to private value can help protect us from loss.
Medtronic, Inc (MDT - $53)
Medtronic is the world’s largest manufacturer of implantable biomedical devices. In their largest business, cardiac rhythm management (pacemakers and implantable defibrillators), Medtronic has higher sales than all its competitors combined. Both investors and acquirers typically pay very high prices for businesses with dominant share that sell proprietary products into growing markets. In fact, back in 2000, Medtronic traded at $62 per share, over 50 times projected earnings. As expected, earnings have more than doubled since 2000, but despite that, the stock price has declined. Medtronic stock now trades at less than 20 times projected earnings, only a small premium to inferior businesses. Like many of our more recent purchases, we believe Medtronic will continue to achieve superior growth and expect it to again be accorded a superior multiple.
WESTERN UNION (WU)
We believe Western Union is an unusually high quality business. It is the dominant leader in international money transfers. The growing number of people working in countries away from their families has dramatically increased the demand for that service. We believe the stock price does not fully reflect Western Union’s growth prospects. During the quarter we added to our Western Union position and sold our remaining First Data shares.
