Diamond Hill Capital (Trades, Portfolio) recently disclosed its portfolio updates for the first quarter of 2020, which ended on March 31.
Founded in 2000 and headquartered in Columbus, Ohio, Diamond Hill identifies itself as an independent investment management firm that seeks to align employee interests with investor interests by investing in the same portfolios. Its strategy is to maintain a long-term focus based on fundamental, ground-up analysis of a company’s intrinsic value, as determined by factors such as market position, competition, management, valuation and growth prospects. The funds focus on buying undervalued companies that have a solid and proven foundation for revenue production.
Based on the above criteria, the firm’s biggest new buys for the quarter were Mondelez International Inc. (MDLZ, Financial), Visa Inc. (V, Financial), Kellogg Co. (K, Financial) and VF Corp. (VFC, Financial).
Mondelez International
Diamond Hill Capital (Trades, Portfolio) bought 4,654,954 shares of Mondelez International, impacting the equity portfolio by 1.58%. Shares traded for an average price of $54.28 during the quarter.
Based in Chicago, Mondelez International is one of the world’s largest snack producers, employing more than 80,000 people. Its brands are sold in more than 150 countries and include names such as Oreo, Ritz, Stride and Cadbury.
On May 6, shares of Mondelez International traded around $50.33 for a market cap of $71.9 billion and a price-earnings ratio of 19.67. The Peter Lynch chart suggests that the stock price is in line with its average historical valuation.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rating of 7 out of 10 and a business predictability rating of one out of five stars.
The cash-debt ratio of 0.1 and current ratio of 0.53 indicate a weak cash position, but the interest coverage ratio of 8.16 and Altman Z-Score of 2.18 indicate that the company is likely safe from bankruptcy.
The operating margin of 14.76% is higher than 85.41% of competitors, and the return on invested capital of 8.72% is higher than the weighted average cost of capital of 3.98%. These margins have improved for the company in recent years.
Visa
The firm established a new position of 1,135,127 shares in Visa after selling out of its (much smaller) previous holding in the first quarter of 2019. The trade had a 1.24% impact on the equity portfolio. During the quarter, shares traded for an average price of $188.96.
Visa is a major financial services and electronic payments provider based in San Francisco. The company facilitates funds transfers primarily through credit, debit and prepaid cards.
On May 6, Visa’s shares traded around $178.74 for a market cap of $394.05 billion and a price-earnings ratio of 32.18. According to the Peter Lynch chart, the stock may be overvalued.
GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rating of 10 out of 10 and a business predictability rating of five out of five stars.
Visa’s cash-debt ratio of 0.68 is higher than 65.97% of competitors. While the interest coverage ratio of 33.46 is well below the industry median of 709.17, it is enough for the company to pay its short-term debt obligations.
The operating margin of 66.83% is outperforming 91.08% of competitors, and the ROIC is nearly six times the WACC, indicating high profitability. Revenue and net income have shown steady growth in recent years.
Kellogg
The firm invested in 1,443,286 shares of Kellogg, which had a 0.59% impact on the equity portfolio. Shares traded for an average price of $65.48 during the quarter.
Kellogg, which operates under the brand name Kellogg’s, is a food manufacturing company based in Battle Creek, Michigan. It mainly produces cereals, breakfast pastries and other grain-based products with a long shelf life.
On May 6, shares of Kellogg traded around $64.01 for a market cap of $21.91 billion and a price-earnings ratio of 21.43. The Peter Lynch chart suggests that the stock price overvalued compared to recent earnings.
GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rating of 7 out of 10 and a business predictability rating of one out of five stars.
The cash-debt ratio of 0.11 and equity-to-asset ratio of 0.15 are lower than 93.21% of competitors, and the current ratio of 0.77 also indicates a precarious cash position. However, the Altman Z-Score of 2.44 suggests that the company is not in immediate danger of bankruptcy.
Although the operating margin of 10.32% is higher than 72.78% of competitors, it has contracted over the past couple of decades. The gap between ROIC and WACC has also narrowed, suggesting lower profitability as revenue increased.
VF Corp.
The firm also bought 1,166,650 shares of VF Corp. after selling out of its previous holding in the company in the third quarter of 2019. The trade had an impact of 0.43% on the equity portfolio. During the quarter, shares traded for an average price of $78.61.
Based in Denver, VF is an apparel company with a history of more than 100 years. Its portfolio of more than 30 active-life brands focuses on producing products for outdoor, active and work use.
On May 6, VF’s shares traded around $56.02 for a market cap of $22.11 billion and a price-earnings ratio of 17.53. According to the Peter Lynch chart, the share price has fallen in line with the company’s historical median valuation.
GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rating of 7 out of 10 and a business predictability rating of three out of five stars.
The interest coverage ratio of 16.64, current ratio of 2.12 and Altman Z-Score of 4.12 suggest financial stability, though the cash-debt ratio of 0.18 is lower than 64.87% of competitors.
The company’s profit margins are top tier; the operating margin of 12.11%, net margin of 10.54%, return on equity of 29.41% and return on assets of 12.16% are outperforming more than 83% of competitors.
Portfolio overview
Including the stocks mentioned above, the firm established 11 new holdings, bringing the total number of stocks owned to 147 and the value of the equity portfolio to $14.72 billion.
As of the quarter’s end, Diamond Hill Capital (Trades, Portfolio)’s top holdings were Abbott Laboratories (ABT) with 3.38% of the equity portfolio, Alphabet Inc. (GOOGL) with 3.02% and Berkshire Hathaway Inc. (BRK.B) with 2.93%. In terms of sector weighting, the firm was most invested in financial services, health care and consumer cyclical.
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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