Steven Romick (Trades, Portfolio) recently released the second quarter 2020 portfolio update for the FPA Crescent Fund. The quarter ended on June 30.
The FPA Crescent Fund operates under First Pacific Advisors (Trades, Portfolio) and is managed by Steven Romick (Trades, Portfolio), Brian A. Selmo and Mark Landecker. The fund’s objective is to seek returns with less risk than the market while avoiding permanent loss of capital. Its strategy combines deep research with a focus on strong fundamentals, attractive risk/reward and diversification across geographies, market caps, sectors and capital structure.
The fund was a net seller of common stocks during the quarter. Its biggest sells were Raytheon Technologies Corp. (RTX, Financial), DuPont de Nemours Inc. (DD, Financial) and JD.com Inc. (JD, Financial), and its only new common stock acquisition for the quarter was Otis Worldwide Corp. (OTIS, Financial).
Raytheon Technologies Corp
The FPA Crescent Fund sold out of its 1,740,539-share stake in Raytheon Technologies Corp. The trade had a -2.51% impact on the equity portfolio. During the quarter, shares traded for an average of $62.35.
Raytheon Technologies is a global defense company that was recently formed from the merger of Raytheon Co. and United Technologies in April. Sharpening its focus on aerospace and defense, the company spun off some of its other businesses before the merger, including the elevators division (Otis Worldwide Corp.) and the HVAC division (Carrier Global Corp. (CARR)).
On July 22, shares of Raytheon Technologies traded around $62.20 for a market cap of $94.24 billion and a price-earnings ratio of 13.09. According to the Peter Lynch chart, the stock is trading near its intrinsic value.
GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. The cash-debt rating of 0.17 is below 76.33% of competitors, but the Altman Z-Score of 2.02 indicates that the company is not in immediate danger of bankruptcy. The revenue and net income of the combined company have been growing steadily in recent years.
Otis Worldwide Corp
The fund acquired 870,269 shares of Otis. The equity portfolio was impacted by 0.72%. Shares traded for an average price of $51.55 during the quarter.
Otis Worldwide Corp. is one of the leading global names in the elevators business. With a 160-year history and a position as the #1 name in elevator safety brakes, the parent company expects Otis to perform better as an independent company that it could as part of a larger conglomerate.
On July 22, shares of Otis traded around $58.55 for a market cap of $25.36 billion and a price-earnings ratio of 25.84. The stock price has gained 29% since its spinoff.
GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 2.58 is higher than 66.96% of competitors, while the interest coverage ratio of 47.36 indicates that the company has plenty of existing funds to pay the interest on its debt, though the current ratio of 1.05 indicates that short-term liquidity could be in a crunch. The operating margin of 14.08% is outperforming 84.14% of competitors.
DuPont de Nemours Inc.
The fund sold all 3,249,578 of its shares in DuPont de Nemours, impacting the equity portfolio by -1.70%. During the quarter, share traded for an average price of $46.28.
DuPont de Nemours is a global specialty chemicals company formed from the 2017 merger of Dow Chemical and E. I. du Pont de Nemours and Company and the subsequent spinoffs of Dow Inc. (DOW) and Corteva (CTVA). It produces products for a wide variety of industries, including agriculture, aerospace, automotive, consumer goods, detergents, electrical equipment and energy.
On July 22, shares of DuPont de Nemours traded around $53.69 for a market cap of $39.46 billion. EPS plunged into the negatives for the recent quarter, but analysts estimate that earnings will be positive in the near future, with a forward price-earnings ratio of 18.98.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 5 out of 10. The cash-debt ratio of 0.09 is lower than 87.85% of competitors, while the Altman Z-Score of 0.99 indicates that the company could be in danger of bankruptcy if it cannot raise additional liquidity. The WACC (weighted average cost of capital) is higher than the ROIC (return on invested capital), indicating that the company’s operations are not profitable.
JD.com Inc.
The FPA Crescent Fund also exited its 2,505,937-share holding in JD.com, which had a -1.55% impact on the equity portfolio. Share traded for an average price of $50.34 during the quarter.
JD.com, aka Jingdong and formerly called 360buy, is one of the two largest B2C e-commerce companies in China in terms of transaction volume and revenue, the other being Alibaba’s (BABA) Tmall. The majority of its revenue is derived from online direct sales.
On July 22, shares of JD.com traded around $62.13 for a market cap of $96.62 billion and a price-earnings ratio of 111.64. According to the Peter Lynch chart, the stock is trading above its intrinsic value.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 2.12, current ratio of 1.06 and Altman Z-Score of 2.39 indicate that the company is financially stable. JD.com’s revenue growth has been outstanding, though its low operating margin (approximately 1.41% currently) has caused its overall profitability to suffer slow growth.
Portfolio overview
As of the quarter’s end, the fund consisted of 53 common stock positions valued at $6.91 billion. The top holdings were Comcast Corp. (CMCSA) with 4.77%, Broadcom Inc. (AVGO) with 4.47% and American International Group Inc. (AIG) with 4.4%.
In terms of sector weighting, the fund was most invested in communication services, financial services and technology.
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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