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FPA Top Holdings - My fair value analysis

January 14, 2012 | About:

FPA is a leading practitioner of value investing and is focused on generating better returns in the long term together with capital preservation. FPA members consider themselves investors rather than traders and try to foster high ethical standards.

This California-based company is made up of about 20 professionals and 60 employees. It upholds three equity strategies and one fixed income strategy.

Its goal is to provide a consistent, risk-averse and disciplined approach to long-term investing in individual securities with the objective of achieving superior total returns for client portfolios.

In a word, their philosophy includes the following items:

· Small/mid-capitalization focus

· Value oriented

· Research-intensive process

· Capitalize on best ideas with concentrated portfolios

· Limit asset growth to maximize long-term investment returns

I took a look at the 5 top holding stocks in FPA Portfolio and evaluated in FAST Graphs (a tool that yoy can see at a glance which stock is trading abnormally cheap or expensive according to the Company's earnings):

Ensco PLC ADR (NYSE:ESV): Ensco is a company that acquires increasing fleets in the drilling industry to drill for oil and natural gas across the world. Since 1990 it has been doing so and it has achieved an expanded fleet which now includes four semisubmersibles.

Ensco´s new rigs have high day rates despite low price tags. It is considered that it earns one of the highest after-tax returns in the industry.

In terms of future expectations, the fleet´s net asset value is expected to achieve $56 per share.

Ensco is firmly established. I looked at the chart of ESV in my FAST Graphs tool and found that the price (black line) is very close to the fair value price (orange line), telling me that ESV does no present a solid undervaluation opportunity at this moment.


Aon Corp. (NYSE:AON): Aon provides insurance brokerage and related risk and human resources consulting services in more than 100 countries.

In terms of quarter results, revenue grew 51% y/y. This growth was boosted by favorable currency movements and an acquisition that increased profitability levels.

Although prices in insurance have been weak, now they appear to have stabilized. Aon´s revival is boosted by young people willing to see Aon defend itself and improve its competitive position.

Aon's 2008 acquisition of reinsurance broker Benfield improved its overall intermediary value by participating in an important element of the overall insurance market.

Similar to ESV, AON appears fairly valued in relation to its Earnings Justified Valuation line (orange) and its normalized P/E ratio (blue line) of 16x which is similar to its current P/E of 14.


CVS Caremark Corp (NYSE:CVS): CVS is a combination of retail pharmacy chains in the United States and pharmacy benefit managers. It operates thousands of retail pharmacies and hundreds of health clinics.

Lately, CVS has been leading the innovation front. For instance it opened in-store health clinics, it launched ExtraCare rewards programs and consumer-friendly store layout.

CVS Caremark provides clinical services, performs PBM functions, and carries out pharmacy operations to increase the commitment of clients towards it and to create new cost savings sources, as well as better therapy adherence, over-the-counter drug alternatives, among other issues.

CVS is in the right track. It is growing in the health care segment and is making every effort to reduce health-care related costs.

Similar to ESV and AON, CVS do not appear undervalued. It was some quarters ago (exactly when Todd Combs, Warren Buffett's portfolio manager bought the stock) but according to the FAST Graph chart, this undervaluation gap closed and the stock is trading very near to the earnings justified valuation orange line.


Wal-Mart Stores Inc (NYSE:WMT): the largest retailer has gained $400 billion annually and is increasing the number of stores across the globe. The company operates supercenters, wholesale warehouse clubs and currently, it is trying smaller stores in urban areas. While groceries represent half of the sales, the other 50% accounts for general merchandise, including hardlines apparel, health and wellness, entertainment and home goods.

WMT has an important share in the market thanks to the performance of the different segments and the aggressive prices it offers. Internationally, CVS has the capacity to increase margins and the “Wal-Mart Express” stores will surely bring new opportunities in urban and small rural areas.

WMT appear with a small undervaluation gap when I see the stock price (black line) and the orange, earnings justified valuation line. The stock can close that gap if it trades between $60 and $65, not a huge potential upside from current levels. The stock has a current P/E of 13 when the normalized P/E ratio should be in the 18x range.


Covidien, Ltd. (COV): Covidien develops, manufactures, and distributes medical and imaging devices, pharmaceuticals, and other health-care products to medical professionals worldwide. Formerly, it was a health-care unit of Tyco International. Now the company is present in more than 50 countries.

Covidien is a leader in bariatric surgical instruments and this success is boosted by the rise in problems with obesity and by the advance of MIS technology. Expectations in the number of bariatric surgeries for the future talk about 1.5 million. In addition Covidien is about to launch a study to determine the clinical efficiency of bariatric procedures in treating Type 2 diabetes. If this study proves efficient, the patient base can significantly increase.

Although there have been some problems in pharma that have negatively affected growth and profitability, the pharmaceutical segment is now making progress and this should help COV´s valuation.

COV appear similar to WMT, a small undervaluation that can be closed if the stock price (black line) closes the gap with the justified valuation line, a potential 15 to 20% from current price levels.


Rating: 3.4/5 (8 votes)


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