Ariel Funds commented three positions in their funds: DeVry Inc., Hewitt Associates, and Mohawk Industries. This is the summary.
Ariel Funds was founded by John Rogers. Rogers has concentrated his investment selection on small and medium-sized companies whose share prices are undervalued. He believes that patience, independent thinking, and a long-term outlook are essential to achieving good returns. His fund seeks to purchase companies whose prospects include high barriers to entry, sustainable competitive advantages, and predictable fundamentals that allow for double digit cash earnings growth. Rogers purchases companies when they are trading at a low valuation relative to potential earnings (p/e less than 13x forward cash earnings) and/or a low valuation relative to intrinsic worth (40% discount to private market value - PMV).
Ariel Fund had a tough year in 2008, losing 48%, and gained 63% in 2009. The fund has a decent return of 5.06% year to date, considering the market is still down for the year.
DeVry Inc.DeVry Inc. owns and operates DeVry Institutes of Technology, DenverTechnical College, Keller Graduate School of Management and Becker Conviser CPA Review. Devry Inc. has a market cap of $4.11 billion; its shares were traded at around $57.7 with a P/E ratio of 16.8 and P/S ratio of 2.8. The dividend yield of Devry Inc. stocks is 0.4%. Devry Inc. had an annual average earning growth of 6.6% over the past 10 years. GuruFocus rated Devry Inc. the business predictability rank of 2.5-star.
These are the comment of Ariel Funds on DeVry Inc.,
“Adults return to DeVry during economic downturns to boost their skills. The Great Recession has been no exception; DeVry’s revenue is growing six to seven times faster than the overall economy. Meanwhile, the company is now benefitting from management’s past strategic moves. After the educational downturn in 2003, the company grew brick and mortar capacity, diversified by acquiring institutions with different specialties, and invested in online curriculums.”
“Currently more than 18 million students attend colleges and universities—one in three of them at community colleges. With most states suffering from declining revenues and increased operating expenses, it seems very likely that state legislatures will have to cut budgets broadly—and possibly deeply—at these schools. DeVry is a natural competitor to community colleges, and thus a probable beneficiary from this unfortunate situation.”
“With its shares trading at 13x 2011 earnings estimates, our confidence that the market had become overly pessimistic regarding regulatory changes made us ready to pounce. As of March 31, 2010, shares traded at $65.20, a 23% discount to our private market value of $84.76.”
Apparently John Rogers owned DeVry a few years back. He sold his positions in 2007. The price of the stock went more than tripled, and Ariel Fund is getting in again. This is the holding history of Ariel Funds with DeVry:
Hewitt Associates is a global provider of human resources outsourcing and consulting services. Hewitt Associates Inc. has a market cap of $3.51 billion; its shares were traded at around $37.3 with a P/E ratio of 13.2 and P/S ratio of 1.1.
“Hewitt continues to put up solid results in a difficult environment and is gaining increasing attention from the investment community now that the HR Business Process Outsourcing (BPO) segment has been stabilized. Hewitt is one of the rare turnarounds that actually ‘turned’ and is demonstrating earnings growth and strong financial health in this toughest of periods.”
“Hewitt is now focused on HR BPO contracts that involve processes that offer one-to-many capabilities which drive scale in geographies the company knows well and require limited customization. What is most encouraging to us, however, is that while market opinion is focused on when the business achieves sustainable profitability, we believe investors are overlooking the potential for HR BPO to evolve into a growing, attractively profitable niche for Hewitt going forward.”
“As of March 31, 2010, shares traded at $39.78, a 29% discount to our steadily growing private market value of $56.28.”
Ariel has been a long term owner of Hewitt Associates. The fund make quite good profit with the company. This is the holding history:
Mohawk Industries, Inc. is one of the producers of woven and tufted broadloom carpet and rugs for principally residential applications. Mohawk Industries Inc. has a market cap of $3.73 billion; its shares were traded at around $54.4 with a P/E ratio of 23.3 and P/S ratio of 0.7.
“Mohawk maintains strong competitive advantages through an extensive distribution network of 300 locations, its own trucking fleet, low-cost manufacturing and brand recognition. Furthermore, the company has a strong commitment to its dealer relationships and premium service levels—both of which are critical in filling orders, ensuring prompt delivery, and achieving customer satisfaction.”
“During the Great Recession, the floorcovering industry did not face a recession—it faced a severe depression. This was the longest and deepest downturn lasting about three-and-a-half years and declining approximately 35%. In addition to the collapse of the housing market, the recession also slashed cash outlays for the residential replacement floorcovering business. Exacerbating this further was the capital freeze among corporate America on the commercial floorcovering business. We believe there is a shining silver lining for the floorcovering marketplace. Given the pullback in the market, we believe there is a huge amount of pent-up demand for floorcovering products. As existing home sales stabilize and improve, those neglected and foreclosed houses will require new floorcoverings. The typical homebuyer today is not as stretched for cash given the strict requirements by banks to have high credit scores, along with solid down payments. The purchasers today are in better shape financially than homebuyers during the bubble peak. Mohawk has a strong recurring replacement floor covering business which is more profitable than bulk purchases from home builders for new residences.”
“As of March 31, 2010, Mohawk shares traded at $54.38, a 40% discount to our private market value of $89.98. We believe Wall Street does not fully appreciate the underlying pent-up demand within the floorcovering market and the operating margin expansion the company will exhibit as volumes increase.”
This is the holding history of Ariel Funds with MHK: