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Federico Flom
Federico Flom
Articles (110) 

Superb Ideas from Lee Ainslie: AmBev (ABV) and Wells Fargo (WFC)

Lee Ainslie is the founder and CEO of Maverick Capital, an investment advisor that manages investment funds.

Lee worked for Tiger Management and served KPMG before setting up his company. Now, he works with a team of analysts in six industry sectors. They are experts in different industries: consumer, health care, cyclical, retail, financial, and telecommunications, media, and technology.

Apart from Maverick Capital, Ainslie also serves as vice chairman for Robin Hood Foundation, and on the board of trustees for several organizations such as the Green Vale School.

His philosophy is highly followed as he focuses on the performance of the firm´s bottom-up approach.

From his picks I like WFC and ABV because both are Companies that have solid growth prospects, a proven management team and attractive valuations. I think it is an opportunity to research stocks that passed Maverick research procedures.

I focused in creating a short list of stocks that Lee Ainslie keeps buying in the last quarters

CORNING INC (NYSE:GLW): Ainslie bought GLW at an average price of $17

Corning Incorporated creates leading-edge technologies for the fastest-growing markets of the world's economy. Corning manufactures optical fiber, cable and photonic products for the telecommunications industry; and high-performance displays and components for television and other communications-related industries.

Before turning to technology, Corning was a glass manufacturer. Today, its most famous product is Gorilla Glass, a strong, scratch-resistant thin glass sheet that serves as a protective cover glass for touch screen smart-phones and tablets.

Corning balance sheet is really solid. Debt to equity ratio is 11%, below industry average. Most importantly, the company generates large amounts of cash.

I think that Lee Ainslie got attracted by the fact that Corning is a leading innovator in the glass substrate industry. GLW has been developing innovations that are not only suitable for imparting superior picture quality, but also taking care of their effects on the environment. It is interesting to know that GLW generation 10 substrates will use the proprietary EAGLE XG formulation, which will serve both these purposes. Although most competitors are manufacturing substrates over generation 5, Corning will be the first with the generation 10 capability. A higher generation substrate is a larger-sized substrate, which enables panel makers to reduce manufacturing costs since more panels can be built from each substrate.

Other positive that Lee might have found is that large panel LCD and especially TFT substrates are secular growth markets that are expected to keep growing. Despite the inventory related slowdown in recent times, the LCD TV market continues to benefit from both market expansion and conversion from CRT models. In addition to these first-time buys, iSuppli believes that 2010 marked an important year for the LCD TV industry, since it was the first year to see significant increase in replacement sales. iSuppli expects worldwide LCD TV shipments to double from the 141.7 million units in 2009 to 277.2 million units in 2014. I think this trend works for GLW.

GLW Net Profit margin is 53.65%, currently lower than its 2008-12 average of 88%. Average 2010-12 ROE for GLW is 20.38%, the 20% or higher standard I like in Companies I invest but lower than its average 2008-12 ROE of 45%. So, in terms of profit margins and ROE, GLW business is performing not better than previous years.

GLW has a 3 year revenue growth of 4,21% and 3 year Net Income growth of 18%, not very impressive numbers. Its average 2010-12 revenue growth of 22.93% y/y is higher than the average 1.50% y/y from 2008-12. This shows that sales are accelerating.

GLW has a P/E of 6.9x , P/B of 0.9x and P/S of 2.6x in comparison to Industry averages of 11.3x, 1.6x and 1.4x.

In terms of valuation, Corning shares are currently trading at 6.9X its trailing twelve months P/E, a considerable discount to both the industry and the S&P 500. Moreover, it is also at the lower end of the historical range of 5.0X to 22.1X. One point I found that I do not like about GLW valuation is that the shares are trading at a 41% discount to the peer group based on Zacks forward estimate for 2011 compared to the historical average of 69%. In addition, Corning s expected growth rate over the next 5 years is also a good bit lower than the peer group.


HCA HOLDINGS INC (NYSE:HCA): Maverick bought at an average price of $25.6

HCA Inc. is a non-governmental hospital in the U.S. providing health care and related services. It works through acute care hospitals, outpatient facilities, clinics and other patient care delivery settings.

I think that Ainslee researched the fact that HCA should experience increased admissions thanks to a focus on fast-growing urban markets, an aging population, and growing waistlines. Lee probably thinks that patient volume will recover as unemployment rate lowers and patients chooses for more elective procedures. In the long term, HCA must benefit to have most of its locations in the fast-growing Sun Belt, with about half of its operations in Texas and Florida. Additionally, the 65-and-older population is the fastest-growing demographic in the U.S. Since this segment overwhelmingly dominates hospital admissions, the acute-care industry should see increasing patient volume in the long term. By locating in Florida, HCA does business in one of the largest Medicare markets in the U.S., as the Census Bureau estimates its 65-plus population will approach 30% of the state's total population by 2030.

HCA Net Profit margin is 3.93%, currently lower than its 2008-12 average of 2.37%. So, in terms of profit margins, HCA business is performing not better than previous years.

HCA has a 3 year revenue growth of 4.54% and 3 year Net Income growth of 11.36%, not very impressive numbers. Its average 2010-12 revenue growth of 2,1% y/y is lower than the average 5.42% y/y from 2008-12. This shows that sales are deaccelerating.

HCA has a P/E of 15.3x , P/B of -1.1x and P/S of 0.4x in comparison to Industry averages of 17.5x, 3.5x and 0.6x.


WELLS FARGO & CO NEW (NYSE:WFC): Maverick bought at an average price of $25.75[/b]

Wells Fargo & Company is a diversified financial services company providing banking, insurance, investments, mortgage and consumer finance services through stores, its Internet site and other distribution channels across North America as well as internationally. It is considered a leader in online banking.

One important feature about WFC is its ability to permanently boost profits through cross-selling. In addition, its geographic expansion and diversified portfolio is represented by earnings growth.

2011 has been an extremely solid fiscal year. Credit quality continued to improve and the company was able to reduce loan losses and nonperforming assets.

Wells Fargo is a bank that has carried out several acquisitions. Wachovia was one of the last one and one of the most important. Indeed, the incorporation exceeded expectations in terms of lowering credit losses, increasing revenue synergies and also reducing expenses and other costs.

Recently, the company also acquired substantially all of the US-based operating assets of Foreign Currency Exchange Corporation (FCE), a wholly owned subsidiary of the Bank of Ireland Group,

Wells Fargo is committed to generate high-risk adjusted returns. This philosophy has brought strong capital ratios.

Its absolute and relative liquidity positions it above its peers, and helps it to take advantage of the opportunities arising from the changing market environment.

One important reason to invest in WFC is that the Company Wells Fargo experienced a decline in expenses in the third quarter of 2011 and the Management is committed to keep reducing expenses and improving margins. Wells Fargo has “The Project Compass initiative” which is focused on removing redundant complexity and eliminating duplications. As a result of Project Compass initiatives and the completion of merger integration activities, the company is targeting quarterly noninterest expenses to decline to $11 billion by the fourth quarter of 2012. I think Lee Ainslie saw this and thinks that expenses will come down, making margins to increase.

Wells Fargo shares currently trade at 9.4x Zacks consensus 2012 earnings estimate, a 10% discount to the industry average. On a price-to-book basis, the share currently trades at 1.2x, which is at 33% premium to the industry average. The valuation on a price-to-book basis looks reasonable given a trailing 12-month ROE, which is 36% above the industry average.


COMPANHIA DE BEBIDAS DAS AME (ABV): Maverick bought at an average price of 32.05

ABV is engaged in producing, distributing and selling beer, carbonated soft drinks and other non-alcoholic and non-carbonated products in many countries across the Americas.

The company operates around the globe and is made up of three business units: Latin America North, Latin America South and Canada. Moreover, ABV has entered into an agreement with PepsiCo international Inc. to bottle sell and distribute Pepsi products in Brazil and in other Latin American countries, including Lipton Ice Tea, Gatorade, H2OH!, Propel and Frutzzz.

ABV knows that long-term economic growth in these markets will lead to better income, consumption increases and the use by customers of premium brands.

Management is shareholder oriented. It is required to pay a mandatory dividend of 35% of annual net income. In terms of future forecasts, EBITDA margins are expected to average 47% and ROIC to average 28.7% which are solid numbers.

Lee Ainslie found that ABV is the leader in six markets: Brazil (69% share), Canada (41%), Argentina (76%), Bolivia (97%), Paraguay (96%), and Uruguay (97%). Brazil is the third-largest beer market by volume and by far the company's largest division. This division generated 57% of overall sales in 2010. One key advantage of ABV is its distribution platform. One interesting thing about ABV is that Brazil is one of the highest growth beer market. Per capita consumption in Brazil is 57.7 liters, which is lower than many mature markets such as Canada (69.3 liters), the United States (80.7 liters), and Germany (112.7 liters). As middle class keep growing and the population expands, Lee should expect significant additional volume growth.

In terms of valuation, ABV current trailing P/E is 19.9, compared to 21.4, the industry average and 16.4 for the S&P 500. Over the last five years, ABV s shares have traded in a range of 8.6X to 30.3X trailing 12-month earnings. The stock is trading at a premium to the peer group, based on forward earnings estimates but I think that premium is warranted given ABV high future growthh.

ABV Net Profit margin is 29.97%, currently higher than its 2008-12 average of 24,71%. Average 2010-12 ROE for ABV is 32.61%, higher than the “20% or higher ROE” standard I like in Companies I invest and also higher than its average 2008-12 ROE of 26.8%. So, in terms of profit margins and ROE, ABV business is performing better than previous years.

ABV has a 3 year revenue growth of 8.61% and 3 year Net Income growth of 39%, very impressive numbers. Its average 2010-12 revenue growth of 8,71% y/y is lower than the average 9,1% y/y from 2008-12. This shows that sales are decelerating.

ABV has a P/E of 19.9x , P/B of 8.1x and P/S of 7.7x in comparison to Industry averages of 38x, 7,6x and 7.3x according to Morningstar research.


[b]CITRIX SYSTEMS INC (CTXS): Maverick bought at an average price of $63.79[/b]

Citrix Systems, Inc. is one of the leading suppliers of application delivery and management software and services that enable the effective and efficient enterprise-wide deployment and management of applications.

Citrix mainly focuses on small and medium sized companies and this policy has enabled it to achieve a revenue growth of 30% in the last five-year period.

Most importantly, Citrix is profiting from globalization and virtual office. Virtualization and cloud computing have become one of the most effective tool to reduce costs as enterprises grow in size.

The virtualization market is expected to accelerate in the years to come.

Citrix completed the acquisition of Cloud.com Inc., Cloud is a leading developer of software infrastructure platform for cloud computing service providers. Cloud is a challenge for Amazon software and MSFT Azura. Cloud.com has a solid list of clientele including Tata Communications Ltd. KT Corp., Apple, Nokia, Zynga Inc., GoDaddy.Inc and other big companies. That should be a plus for CTXS for cross-selling services.


About the author:

Federico Flom
Equity Research Analyst

Rating: 2.9/5 (11 votes)


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