Bill Nygren’s Oak Mark Fund increased just over 1% for the quarter ended June 30 and 7% for the six months ended June 30. His firm’s portfolio has 57 stocks with an equity value of $4.06 billion. He has a classic value investing strategy – cheap, high-value companies, companies with strong cash flow and prudent reinvestment of capital, high manager ownership, and the view that a stock certificate represents a piece of a business.
In the second quarter he bought just one stock – Google (GOOG, Financial). His largest additions were Walt Disney (DIS, Financial), EnCana Corp. (ECA, Financial), Baxter International (BAX, Financial).
Google (GOOG)
Nygren bought an approximately $31,636,800 stake in Google – 60,000 shares at an average price of $527.28.
He details his analysis of the company in his second-quarter letter:
Google (GOOG — $506) Google is the world's dominant Internet search engine. In 2007, its stock price hit an all-time high of $747. The company then earned just over $13 per share for a P/E of 56 times. At that point, the business was selling for $702, net of $45 per share in cash. That was still about 56 times earnings, net of interest income. Google is expected to earn $35 per share in 2012, and to end the year with $146 of cash per share. Therefore, net of that cash and its interest income, Google (GOOG) sells at $360—less than 11 times projected earnings. The S&P 500 trades at about 12 times expected 2012 earnings. That means the market is now valuing Google as a below-average business, yet Google's 2011 revenues and earnings are expected to be more than double their 2007 levels. Cash per share is expected to increase $100 over the five years ending next year. Clearly Google has been growing faster and generating more cash than the average business. And we expect Internet usage and search activity to continue growing. Google continues to improve its targeting algorithms, which makes Internet advertising—the source of virtually all of the company's profits—more valuable to its clients. Today Google's share of global search advertising revenue is approximately 80%, which is as high as it has ever been. Despite these positives, the stock, net of cash, has fallen by nearly half. We believe that paying less than a market multiple to buy a global leader in an above-average growth industry—especially when that company's free cash flow approximates reported earnings—is usually a very good investment.
On August 15, Google announced plans to acquire Motorola Mobility for $40 per share in cash, or a total of $12.5 billion, a 63% premium to the company’s closing price. Google says it wants Motorola in order to “supercharge the Android ecosystem” and make it more competitive in the mobile computing space.
Google acquired Android Inc. in August 2005 and published the entire source code under an Apache License in 2008. Device manufacturers still have to get approval from Google to use its Android trademark and ensure that their devices meet certain requirements. Motorola is an Android licensee, and now Google will own a mobile hardware manufacturer to go along with its Android operating system.
Though it was originally thought that Google wanted Motorola for its patent portfolio, Google Chairman Eric Schmidt said recently at the Salesforce.com Dreamforce conference that the company wants the hardware as well:
We did it for more than just patents. We actually believe that the Motorola team has some amazing products coming....We're excited to have the product line, to use the Motorola brand, the product architecture, the engineers. These guys invented the RAZR. We know them well because they're Google Apps users....[We like] having at least one area where we can do integrated hardware and software.
Last year Motorola made $19 billion in revenue, after four previous years of decline beginning in 2006. Earnings per share was $1.89, up from a loss per share each year since 2007. Google’s revenue was $29 billion in 2010, capping off 10 straight years of growth. Google’s stock price fell 12% the week they announced the deal.
Google Inc. has a market cap of $171.94 billion; its shares were traded at around $532.5 with a P/E ratio of 18.2 and P/S ratio of 5.8. Google Inc. had an annual average earnings growth of 58.4% over the past 10 years.
Walt Disney (DIS)
Nygren has been whittling down his stake in Disney as the stock has increased since the second quarter of 2009. By the third quarter of 2010, he sold 900,000 shares at $33.65 a share, and ended the quarter with 850,000 shares. In the second quarter of 2011, he bought 600,000 more at $40.78 a share.
Disney theme parks and resorts have the highest attendance of all theme parks in the world, and the number of visitors has increased over the last three years to about 120 million in 2010. Its next closest competition, Merlin Entertainments Group, had about 41 million visitors.
Disney’s free cash flow also increased in 2010 to $4.5 billion from $3.3 million in 2009. In the second quarter the company had decreased cash flows of $1.1 billion, down 20% year over year. The results caused the stock to become significantly cheaper in early August. Disney’s capital expenditures rose significantly in the nine months ended July 2, 2011 from the prior-year period due in large part to the final payment of its new cruise ship, the Disney Dream, and expansions to its resorts and theme parks, as well as new guest offerings at several of its parks and resorts. Disney’s poorest performing segments were interactive media and studio entertainment, down 32% and 60% respectively.
The company placed a bid for Hulu this month, according to the International Business Times. Nygren discussed acquisitions in his recent investor letter: “During most of my career, when a company announced an acquisition, its share price would fall by nearly as much as the premium it paid to the acquired company. For example, if a company offered $5 billion to purchase a publicly traded company that the market was valuing at $4 billion, the acquirer’s stock would typically fall by about $1 billion. But in today’s market, acquisitions have boosted both the seller’s and the buyer’s share prices… Given today’s modest valuation of cash, most of the time when managements put that cash to work - whether as a dividend, share repurchase or acquisition - it is viewed as good news.”
Walt Disney has a market cap of $63.09 billion; its shares were traded at around $33.38 with a P/E ratio of 13.9 and P/S ratio of 1.6. The dividend yield of Walt Disney stocks is 1.2%. Walt Disney had an annual average earnings growth of 12.5% over the past 10 years. GuruFocus rated Walt Disney the business predictability rank of 3.5-star.
EnCana Corp. (ECA)
Nygren added 550,000 shares of EnCana in the second quarter at an average price of $32.44. As of June 30, he owns 1,890,000 shares.
EnCana is a pure-play natural gas company focused on growing its high-potential resource plays across North America. It owns 11.7 million net acres of land and 14.3 trillion cubic feet equivalent of proved reserves. It currently produces approximately 3.3 billion cubic feet equivalent of natural gas per day.
On August 25, EnCana put its Barnett Shale natural gas assets in North Texas for sale. The company says it wants to divest $1-$2 billion in assets for 2011 to supplement cash flow generation and strengthen its balance sheet as natural gas prices have fallen significantly over the summer.
EnCana’s stock price fell precipitously at the year end of 2008 and 2009. In 2009, it traded for over $60, and is at just $24.92 on Friday. The company’s stock dropped in 2009 even though its free cash flow grew much stronger – to $3 billion from $601 million in 2008. Revenues, however, fell from $30 billion in 2008, to $11 billion in 2009 and $8.9 billion in 2010. Free cash flow reversed again in 2010, to a loss of $2.4 billion.
Encana Corp. has a market cap of $18.82 billion; its shares were traded at around $25.56 with a P/E ratio of 32.8 and P/S ratio of 2. The dividend yield of Encana Corp. stocks is 3.1%. Encana Corp. had an annual average earnings growth of 15.2% over the past 10 years.
Baxter International (BAX)
Baxter International manufactures blood products and intravenous drugs. Nygren bought 750,000 shares of the company in the second quarter of 2010 at $46.62 a share, and added 250,000 shares in the second quarter of 2011 at $57.64 a share.
Baxter has a strong balance sheet, with steadily increasing revenues, reaching $12.8 billion in 2010, and growing free cash flows as well – $2 billion in 2010, up from $1.9 billion in 2009. The company plans to use its strong capital position to buy privately held medical devices company Baxa Corporation for $380 million in cash. As Nygren noted in his recent letter he is looking for companies with strong balance sheets that are either investing the money, repurchasing shares or making acquisitions.
According to Zacks, the company is able to generate consistent cash flows and revenues due to its focus on chronic diseases. The company expects revenue growth between 3% to 4% and adjusted earnings per share from $4.27 to $4.32, as well as cash flow from operations of approximately $2.8 billion.
Baxter International Inc. has a market cap of $31.58 billion; its shares were traded at around $55.37 with a P/E ratio of 13.3 and P/S ratio of 2.5. The dividend yield of Baxter International Inc. stocks is 2.2%. Baxter International Inc. had an annual average earnings growth of 6.3% over the past 10 years. GuruFocus rated Baxter International Inc. the business predictability rank of 1-star.
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In the second quarter he bought just one stock – Google (GOOG, Financial). His largest additions were Walt Disney (DIS, Financial), EnCana Corp. (ECA, Financial), Baxter International (BAX, Financial).
Google (GOOG)
Nygren bought an approximately $31,636,800 stake in Google – 60,000 shares at an average price of $527.28.
He details his analysis of the company in his second-quarter letter:
Google (GOOG — $506) Google is the world's dominant Internet search engine. In 2007, its stock price hit an all-time high of $747. The company then earned just over $13 per share for a P/E of 56 times. At that point, the business was selling for $702, net of $45 per share in cash. That was still about 56 times earnings, net of interest income. Google is expected to earn $35 per share in 2012, and to end the year with $146 of cash per share. Therefore, net of that cash and its interest income, Google (GOOG) sells at $360—less than 11 times projected earnings. The S&P 500 trades at about 12 times expected 2012 earnings. That means the market is now valuing Google as a below-average business, yet Google's 2011 revenues and earnings are expected to be more than double their 2007 levels. Cash per share is expected to increase $100 over the five years ending next year. Clearly Google has been growing faster and generating more cash than the average business. And we expect Internet usage and search activity to continue growing. Google continues to improve its targeting algorithms, which makes Internet advertising—the source of virtually all of the company's profits—more valuable to its clients. Today Google's share of global search advertising revenue is approximately 80%, which is as high as it has ever been. Despite these positives, the stock, net of cash, has fallen by nearly half. We believe that paying less than a market multiple to buy a global leader in an above-average growth industry—especially when that company's free cash flow approximates reported earnings—is usually a very good investment.
On August 15, Google announced plans to acquire Motorola Mobility for $40 per share in cash, or a total of $12.5 billion, a 63% premium to the company’s closing price. Google says it wants Motorola in order to “supercharge the Android ecosystem” and make it more competitive in the mobile computing space.
Google acquired Android Inc. in August 2005 and published the entire source code under an Apache License in 2008. Device manufacturers still have to get approval from Google to use its Android trademark and ensure that their devices meet certain requirements. Motorola is an Android licensee, and now Google will own a mobile hardware manufacturer to go along with its Android operating system.
Though it was originally thought that Google wanted Motorola for its patent portfolio, Google Chairman Eric Schmidt said recently at the Salesforce.com Dreamforce conference that the company wants the hardware as well:
We did it for more than just patents. We actually believe that the Motorola team has some amazing products coming....We're excited to have the product line, to use the Motorola brand, the product architecture, the engineers. These guys invented the RAZR. We know them well because they're Google Apps users....[We like] having at least one area where we can do integrated hardware and software.
Last year Motorola made $19 billion in revenue, after four previous years of decline beginning in 2006. Earnings per share was $1.89, up from a loss per share each year since 2007. Google’s revenue was $29 billion in 2010, capping off 10 straight years of growth. Google’s stock price fell 12% the week they announced the deal.
Google Inc. has a market cap of $171.94 billion; its shares were traded at around $532.5 with a P/E ratio of 18.2 and P/S ratio of 5.8. Google Inc. had an annual average earnings growth of 58.4% over the past 10 years.
Walt Disney (DIS)
Nygren has been whittling down his stake in Disney as the stock has increased since the second quarter of 2009. By the third quarter of 2010, he sold 900,000 shares at $33.65 a share, and ended the quarter with 850,000 shares. In the second quarter of 2011, he bought 600,000 more at $40.78 a share.
Disney theme parks and resorts have the highest attendance of all theme parks in the world, and the number of visitors has increased over the last three years to about 120 million in 2010. Its next closest competition, Merlin Entertainments Group, had about 41 million visitors.
Disney’s free cash flow also increased in 2010 to $4.5 billion from $3.3 million in 2009. In the second quarter the company had decreased cash flows of $1.1 billion, down 20% year over year. The results caused the stock to become significantly cheaper in early August. Disney’s capital expenditures rose significantly in the nine months ended July 2, 2011 from the prior-year period due in large part to the final payment of its new cruise ship, the Disney Dream, and expansions to its resorts and theme parks, as well as new guest offerings at several of its parks and resorts. Disney’s poorest performing segments were interactive media and studio entertainment, down 32% and 60% respectively.
The company placed a bid for Hulu this month, according to the International Business Times. Nygren discussed acquisitions in his recent investor letter: “During most of my career, when a company announced an acquisition, its share price would fall by nearly as much as the premium it paid to the acquired company. For example, if a company offered $5 billion to purchase a publicly traded company that the market was valuing at $4 billion, the acquirer’s stock would typically fall by about $1 billion. But in today’s market, acquisitions have boosted both the seller’s and the buyer’s share prices… Given today’s modest valuation of cash, most of the time when managements put that cash to work - whether as a dividend, share repurchase or acquisition - it is viewed as good news.”
Walt Disney has a market cap of $63.09 billion; its shares were traded at around $33.38 with a P/E ratio of 13.9 and P/S ratio of 1.6. The dividend yield of Walt Disney stocks is 1.2%. Walt Disney had an annual average earnings growth of 12.5% over the past 10 years. GuruFocus rated Walt Disney the business predictability rank of 3.5-star.
EnCana Corp. (ECA)
Nygren added 550,000 shares of EnCana in the second quarter at an average price of $32.44. As of June 30, he owns 1,890,000 shares.
EnCana is a pure-play natural gas company focused on growing its high-potential resource plays across North America. It owns 11.7 million net acres of land and 14.3 trillion cubic feet equivalent of proved reserves. It currently produces approximately 3.3 billion cubic feet equivalent of natural gas per day.
On August 25, EnCana put its Barnett Shale natural gas assets in North Texas for sale. The company says it wants to divest $1-$2 billion in assets for 2011 to supplement cash flow generation and strengthen its balance sheet as natural gas prices have fallen significantly over the summer.
EnCana’s stock price fell precipitously at the year end of 2008 and 2009. In 2009, it traded for over $60, and is at just $24.92 on Friday. The company’s stock dropped in 2009 even though its free cash flow grew much stronger – to $3 billion from $601 million in 2008. Revenues, however, fell from $30 billion in 2008, to $11 billion in 2009 and $8.9 billion in 2010. Free cash flow reversed again in 2010, to a loss of $2.4 billion.
Encana Corp. has a market cap of $18.82 billion; its shares were traded at around $25.56 with a P/E ratio of 32.8 and P/S ratio of 2. The dividend yield of Encana Corp. stocks is 3.1%. Encana Corp. had an annual average earnings growth of 15.2% over the past 10 years.
Baxter International (BAX)
Baxter International manufactures blood products and intravenous drugs. Nygren bought 750,000 shares of the company in the second quarter of 2010 at $46.62 a share, and added 250,000 shares in the second quarter of 2011 at $57.64 a share.
Baxter has a strong balance sheet, with steadily increasing revenues, reaching $12.8 billion in 2010, and growing free cash flows as well – $2 billion in 2010, up from $1.9 billion in 2009. The company plans to use its strong capital position to buy privately held medical devices company Baxa Corporation for $380 million in cash. As Nygren noted in his recent letter he is looking for companies with strong balance sheets that are either investing the money, repurchasing shares or making acquisitions.
According to Zacks, the company is able to generate consistent cash flows and revenues due to its focus on chronic diseases. The company expects revenue growth between 3% to 4% and adjusted earnings per share from $4.27 to $4.32, as well as cash flow from operations of approximately $2.8 billion.
Baxter International Inc. has a market cap of $31.58 billion; its shares were traded at around $55.37 with a P/E ratio of 13.3 and P/S ratio of 2.5. The dividend yield of Baxter International Inc. stocks is 2.2%. Baxter International Inc. had an annual average earnings growth of 6.3% over the past 10 years. GuruFocus rated Baxter International Inc. the business predictability rank of 1-star.
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