Hillman Capital Management recently disclosed its portfolio updates for the reported first quarter of 2020, which ended on March 31.
Mark Hillman (Trades, Portfolio) is the president, CEO and chief investment officer of the firm, which he founded in 1998. The firm’s strategy is to invest in companies with distinct competitive advantages that have fallen temporarily out of favor with investors due to short-term, non-recurring issues. Hillman considers factors such as cash flow, dividends, sales, earnings, book value and projected growth rates when valuing a business.
As of the quarter’s end, the fund held shares of 36 stocks valued at $104 million. The top holdings were Amazon.com (AMZN) with 5.05% of the equity portfolio, Biogen Inc. (BIIB) with 4.96% and Microsoft Corp. (MSFT) with 4.74%. In terms of sector weighting, the firm was most invested in the health care, consumer cyclical and consumer defensive spaces.
Using the criteria above, the firm established new positions in Becton, Dickinson and Co. (BDX, Financial), Raytheon Co. (RTN, Financial) (now Raytheon Technologies (RTX, Financial)) and Plains All American Pipeline LP (PAA, Financial) during the first quarter of 2020.
Becton, Dickinson and Co.
The firm established a new holding of 13,166 shares in Becton, Dickenson after selling out of its previous position in the company in the first quarter of 2013. The traded had an impact of 2.90% on the equity portfolio. Shares traded for an average price of $253.86 apiece during the quarter.
Becton, Dickinson is a medical device and instrumentation company based in Franklin Lakes, New Jersey. It manufactures medical devices, reagents and instrument systems in a wide variety of fields, including microbiology, biopsy, diabetes care, sharps disposal and surgical instrumentation.
On April 30, shares of Becton, Dickinson traded around $257.03 for a market cap of $69.68 billion and a price-earnings ratio of 94.45. The Peter Lynch chart indicates that the stock could be overvalued compared to recent earnings.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rating of 9 out of 10 and a business predictability rating of three out of five stars.
The cash-debt ratio of 0.03 is lower than 97.76% of competitors, and the current ratio of 0.96 indicates a weak liquidity position. However, the Alman Z-Score of 2.13 indicates that the company is likely safe from bankruptcy in the next two years.
In terms of profitability, the operating margin of 10.64% and return on capital of 19.43% are higher than the industry averages. Revenue and net income have shown strong upward trends in recent years.
The firm also invested in 21,900 shares of Raytheon after selling out of its previous stake in the fourth quarter of 2019. The trade impacted the equity portfolio by 2.75%. During the quarter, shares traded for an average price of $199.29 apiece.
On April 3, defense companies Raytheon Co. and United Technologies (UTX) successfully closed their merger, creating a defense behemoth that generated a combined $74 billion in revenue during 2019. The new company began trading under the name Raytheon Technologies and the stock symbol RTX on April 3. Prior to the merger, United Technologies spun off its HVAC division Carrier (CARR) and its elevator division Otis (OTIS) into separate companies, both of which have been added to the S&P 500. Raytheon agreed to divest its military airborne radio business, while United Technologies agreed to divest its GPS and space optical businesses, the sales of which “are all expected to be completed following the merger.”
On April 30, shares of Raytheon Technologies traded around $64.96 for a market cap of $98.56 billion and a price-earnings ratio of 10.1. According to the Peter Lynch chart, the stock is trading below its intrinsic value.
The company has a GuruFocus financial strength rating of 4 out of 10, a profitability rating of 8 out of 10 and a business predictability rating of three out of five stars.
The cash-debt ratio of 0.16 and interest coverage of 5.06 times are on the low end of the spectrum, but the Altman Z-Score of 2.08 and current ratio of 1.08 indicate that the company is able to cover its short-term debt obligations.
The return on capital of 63.38% is higher than 92.59% of competitors, while the operating margin of 11.64% also shows strong profitability. The return on invested capital is in line with the weighted average cost of capital after a decline in margins leading up to the merger.
Plains All American Pipeline
Hillman also purchased 204,749 shares of Plains All American Pipeline, impacting the equity portfolio by 1.04%. Shares traded for an average price of $13.91 during the quarter.
Plains All American Pipeline is a master limited partnership that provides marketing, storage and pipeline transportation of natural gas services across the U.S. and Canada. The company handles approximately four million barrels of crude oil and natural gas liquids per day.
On April 30, shares of Plains traded around $8.91 for a market cap of $6.42 billion and a price-earnings ratio of 3.35. The Peter Lynch chart indicates that the stock may be undervalued compared to previous earnings.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rating of 6 out of 10 and a business predictability rating of one out of five stars.
The equity-to-asset ratio of 0.46 and interest coverage of 4.73 times are in line with industry averages, but the cash-debt ratio of less than 0.01 and Altman Z-Score of 1.72 indicate that the company could be in danger of bankruptcy in the next two years.
The operating margin of 5.99% is in line with the industry average, but the return on capital of 17.16% is higher than 80.34% of competitors. Revenue has been highly cyclical in the past, but net income has steadily improved over the last several years.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.
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