Bill Nygren is the portfolio manager of the $5.8 billion Oakmark Fund (10–year average 7.26%) and more concentrated $5.9 billion Oakmark Select Fund (10-year average 15.16%). These are his commentaries on Best Buy (BBY), Capital One Financial (COF), Federal Express (FDX), Home Depot (HD).
He is also a classical value investor. He and his team invest in companies that they believe trade at a substantial discount to what they consider to be the true business value. They believe that, over time, the price of a stock will rise to reflect the value of the underlying company. In evaluating potential investments, they focus on the following characteristics: A company's stock price and whether it is a significant discount to their estimate of underlying business value free cash flows & intelligent investment of excess cash.
Bill Nygren likes to run a more concentrated portfolio. His Oakmark Fund usually invests in 50-60 stocks, and Oakmark Select has only 20 stocks. These are his commentaries on Best Buy (BBY), Capital One Financial (COF), Federal Express (FDX), Home Depot (HD).
Best Buy (BBY – $47)Best Buy is the world’s largest retailer of consumer electronics. With over 1100 stores and sales approaching $40 billion, Best Buy has not only the largest market share in the U.S. but has more than twice the share of the number two competitor. And with their market share still under 25%, most of the market remains in the hands of less efficient competitors. Over the past five years, Best Buy has grown per-share sales and earnings at 12% and 18% respectively. We expect the consumer electronics category to continue to grow faster than other retail categories, and we also expect Best Buy’s aggressive expansion to increase their market share. Despite the track record and the long-term opportunity created by their competitive advantages, the stock fell from $60 last year to $44. Subtracting their $6 per share of excess cash (and its related interest income) Best Buy stock now sells at only 14 times expected earnings. The company has been an aggressive acquirer of their own stock so far this year, and it just announced plans to buy back an additional 25% of their outstanding shares. We believe that Best Buy is a superior business and therefore believe that investors will again reward it with a superior multiple.
Capital One Financial (COF – $78)
Capital One is one of the largest credit card companies with one of the most recognized financial brands. In both 1999 and 2000, Capital One sold for $73 per share and had earnings–per-share between $2 and $3. Last quarter, Capital One again sold at $73, this time with over $7 of earnings. Back in 2000, Capital One was a high growth story. The credit card industry was expanding, and monoline credit card companies were taking market share from the banks. Today, growth in credit cards has slowed, and in a move to lower its funding costs, Capital One acquired two banks, which further reduced its expected rate of earnings growth. We believe investors have overreacted, now pricing the stock at a single digit P/E ratio on expected 2008 earnings. Returns in credit cards are still high, and retail financial service companies are actively consolidating. Capital One’s assets—composed of credit card receivables, auto loans, and retail banking deposits—are in high demand. We believe Capital One is worth more than its current price and that if investors don’t accord it a higher value, an acquirer will.
Federal Express (FDX – $111)
“Federal Express ~ when it absolutely, positively has to be there overnight.” We all know the commercials and have used the service. FedEx created the next-day package delivery business and today remains the industry leader. As in other network businesses, as FedEx grows, so too does its competitive advantage. The business clearly has an exceptional history, with sales and earnings-per-share growth over the past decade compounding at 9% and 16% respectively. We believe that the company’s international expansion and e-commerce will sustain its exceptional growth. Though the stock has been a good performer, the increase in FedEx stock has lagged behind the increases in earnings and our estimate of business value. The stock sells at 15 times estimated calendar 2008 earnings, a relatively trivial premium to the average business. We believe FedEx is a great business and, like many of our other great businesses, is now priced as if it were merely mediocre.
Home Depot (HD)
During the quarter we sold our position in Gap Stores to make room for Home Depot. Home Depot announced the sale of their building supply business, which captured a couple billion dollars of profit and also allowed new management to focus 100% on their retail business. In the same press release, Home Depot also announced a massive acceleration of their share repurchase plan – intending to spend $22 billion to repurchase 30% of their share base. With debt available on such attractive terms and with Home Depot stock trading at only 12 times expected earnings, we applaud the aggressive repurchase.