Pzena Investment Management has $20 billion in its U.S. common stock equity portfolio based on its latest filings with the SEC, which include 13F filings as well as Form 4 and other insider trading statements. Founder and chief investment officer Richard Pzena (Trades, Portfolio) focuses on buying good businesses which are selling cheap. The investment firm accomplishes its analysis through a review of a company's earnings power relative to its share price historically. Of course, if the share price of a stock suddenly plummets but its earnings remain strong, then usually this is for a reason. Pzena aims to determine if the reasons for a decline in price are temporary noise or the issues permanently impact the fundamentals of the business.
According to GuruFocus real-time picks, a Premium feature, Pzena made quite a few trades on Dec. 31, 2022. Thus, in this article, I will be going over two of Pzena's recent picks that I believe fit the growth at a reasonable price (GARP) bill; let's dive in.
1. Newell Brands
Newell Brands Inc. (NWL, Financial) is a U.S. consumer goods company that sells a plethora of household and commercial products. Its brands include Krazy Glue, Sharpie, Parker Pens and Papermate. In addition, its home fragrance brands include the popular Yankee Candle. In the home appliances segment, its brands include Crockpot, Mr. Coffee and Sunbeam.
The business sells its product through a variety of large retail outlets, online and even specific product focused stalls. For example, in the UK, its pen and glue products are sold in the large stationary chain Rymans, while its Yankee Candle products have a variety of mini stores all over the world.
Newell’s management focuses on a variety of strategic acquisitions of popular home brands, which makes its business model fairly diverse.
Mixed financials
Newell Brands reported mixed financial results for the third quarter of 2022. The company reported revenue of $2.25 billion, which beat analyst estimates by $3.14 million, despite declining by 19% year-over-year.
Its earnings per share was $0.53, which beat analyst estimates by $0.06. To reduce its costs, Newell Brands has recently reported it has slashed 13% of its office jobs. However, it is worth putting into perspective that Newell employs ~31,000 people, and thus 13% is a minor adjustment and not a substantial reduction in workforce.
The company has $636 million in cash and short term investments on its balance sheet. However, the company has total debt of $6.515 billion, which is fairly substantial. The positive is that the majority of its debt is long-term ($4.785 billion).
Valuation and guru investors
Newell brands trades at a price-earnings ratio of 11, which is 22% cheaper than the consumer discretionary sector average. In addition, the company trades at a price-sales ratio of 0.63, which is 30% cheaper than its five-year average.
The GF Value chart indicates a fair value of $19.70 and rates the stock as “modestly undervalued” at the time of writing.
Pzena Investment Management increased its position in the stock by 10% on Dec. 31, 2022 through the purchase of 4.6 million shares. On the day of the trade, shares changed hands for an average price of $13 per share, which is slightly cheaper than the ~$15 per share price at the time of writing.
2. Lear Corp
Lear Corp. (LEA, Financial) is a manufacturing company which specializes in automotive seating and electrical systems. Automotive manufacturers tend to source the most reliable and cost effective parts from a variety of manufacturers. In this case, Lear Corp. seats have been installed in over 80 different car models globally. Throughout the company’s history it has had two primary customers, General Motors (GM, Financial) and Ford (F, Financial). These businesses account for two thirds of its revenue and thus when they do well, so does Lear Corp.
Its business has over 170,000 employees globally and thus is a substantial size, despite most people not being familiar with it. I believe Lear Corp. will benefit massively from the increased electrification of vehicles as both political and consumer incentives are now more deeply aligned.
The global electric vehicle industry was valued at $163 billion in 2020 and is forecast to grow at a rapid 18.2% compounded annual growth rate (CAGR) up until 2030, according to Allied Market data.
GM has four EV models, which include the GMC Hummer EV, Cadillac LYRIQ. Chevy Bolt EV and EUV. In 2023, the company has planned to launch the Silverado EV and is currently act an inflection point in terms of converting its traditional internal combustion engine manufacturing to EVs.
Another one of Lear’s customers, Ford, also has solid potential in the EV market. Ford manufactures the F-150 pickup truck, which has been the most popular vehicle sold in the U.S. for many years. Recently the company has released an electric version of the F-150 called the F-150 Lightning.
Growing financials
Lear Corp. reported solid financial results for the third quarter of 2022. The company reported revenue of $5.24 billion, which beat analyst estimates by $95.13 million and increased by a rapid 22.8% year-over-year.
The company also reported solid profitability, with earnings per share (EPS) of $2.33, which beat analyst estimates by $0.20 on a non-GAAP basis.
Lear Corp. has $845.6 million in cash and equivalents on its balance sheet. However, it does have a fairly high total debt of $3.29 billion.
Valuation and guru investors
Lear Corp. trades at a price-earnings ratio of 34.95, which is much higher than its 10-year median of 10.41. Its price-sales ratio is 0.4, which is 15% cheaper than its five-year average.
The GF Value chart indicates a fair value of $155 per share, making the stock "modestly undervalued” at the time of writing.
Pzena Investment Management added to its position in Lear Corp. on Dec. 31, 2022, at an average price of $124 per share, which is slightly cheaper than where the stock trades at the time of writing. Pzena Investment Management owns a total of 6.87 million shares in the stock.
Jeremy Grantham (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also invested into the stock in the third quarter of 2022, during which shares traded for an average price of $138.
Final thoughts
Newell Brands and Lear Corp. are two very different companies, but both have distinct advantages. Newell Brands has the advantage of a strong portfolio of brands which are embedded into the psyche of the average person. Warren Buffett (Trades, Portfolio) likes to call this a “share of mind,” and his investments into Coca-Cola (KO, Financial) and See’s Candy were partially driven by a strong brand. Lear Corp. is more a niche technology/manufacturing player, and it has strong automotive industry giants as customers. I personally lean slightly more towards Lear Corp. because I feel the company will face less competition moving forward. For example, even if an alternative supplier offers GM slightly cheaper seating, the company would be unlikely to switch, as manufacturing is about trust and reliability, which is built over time.
