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Holly LaFon
Holly LaFon
Articles (7910) 

Bill Nygren Thinks Financials Are an ‘Unusual Opportunity,’ His Favorites and a New Buy

November 30, 2012 | About:
Bill Nygren is the bottom-up value-oriented portfolio manager of the Oak Mark Fund. He buys well-managed, growing businesses at cheap prices and waits for the price to meet intrinsic value. The only way for a macro analysis to add value to a portfolio, he said in his third quarter letter, is for it to be non-consensus (otherwise it will already be discounted in stock prices), and to be correct. Since making correct, non-consensus forecasts on the economy is too difficult, he buys valuable companies the market has overlooked instead.

This reasoning plays into his current strategy with financials. Increased regulation may hamper profitability, he believes, but that their attractive valuations far outweigh it. Even without top-line growth, the cheap stock prices will enable them to buy up their shares and increase per-share growth rates.

“Many of the financials that we own are priced at large discounts to book value and at mid-single digit P/Es on 2014 earnings estimates. If they were instead priced like the average utility, many would sell for more than two times their current price. We’d gladly take that outcome. And as an aside, a company that sells at half of book, earns 8-10% on equity, doesn’t grow and uses all its earnings for share repurchase can reduce its share base by 15 to 20% annually. We’re not claiming that financial services businesses are the highest quality businesses out there. Instead, we’re arguing that their current low multiples of earnings and book value are creating an unusual opportunity.”

Nygren has found seven financial services companies that meet his criteria, including one new buy reported today. The largest are: Capital One Financial (NYSE:COF), Franklin Resources Inc. (NYSE:BEN), and the new one, Principal Financial Group (NYSE:PFG).

Here’s how these stocks meet his above stated criteria.

Capital One Financial (NYSE:COF)

Capital One is one of the top largest banks based on deposits in the U.S., and services customers primarily in New York, New Jersey, Louisiana, Texas, Virginia, Maryland and the District of Columbia, Canada and the UK.

Nygren has owned the stock since before 2009, selling from the first quarter of 2010 to the second of 2012, and reducing 99,800 shares in the third quarter of 2012 at $56 each on average, higher than any of his buy prices. It was a top contributor to his fund in the first quarter, returning 32%.

He commented on it in his shareholder letter that quarter: “Capital One completed the acquisition of ING Direct and received approval to purchase HSBC (HBC)'s U.S. credit card business during the first quarter. Together, these two acquisitions are expected to add approximately $1.50 in per-share value and should propel Capital One’s cash earnings per share to nearly $8.00 in 2013. These acquisitions, along with a strong balance sheet and a projected Basel III Tier 1 common ratio over 10% at the end of 2012, should allow management to start returning capital to shareholders in 2013. At 8x 2013 cash earnings per share, Capital One is, in our view, an attractive investment.”

Book Value: Even including its 44% increase over the last year, Capital One’s stock price of $57.60 on Friday is still less than book value of $68.28.

P/E: Its P/E ratio at 9.57 is in the single digits and has remained in the single digits most of the time since July 2010.

Return on Equity: Its return on equity is 11.9% and has been increasing for the last three years.

Share Repurchases: Capital One’s share count has been increasing over the last ten years. Regarding share buybacks, Richard Fairbank, Capital One’s chairman and CEO said in the third quarter, “We’re focused on delivering that value, including distributing capital to shareholders through a meaningful dividend and opportunistic share buybacks, consistent with our long-standing commitment to maintaining a strong and resilient capital base.”

Franklin Resources (NYSE:BEN)

Franklin Resources is an investment company known as Franklin Templeton Investments, with a global network of offices in 30 countries and clients in more than 150. Recognized emerging markets investor Mark Mobius, Ph.D., heads its Singapore Emerging Markets Group.

Nygren bought 535,000 shares of the company in the first quarter of 2012 when its price was $114 on overage, and increased his holding to 1.1 million shares over the next two quarters.

Book Value: Franklin Resources is not one of Nygren’s stocks trading at a discount to book value; rather, it trades at $132 per share, more than three times its book value per share of $46.

P/E: Its P/E ratio is 14.9 also has not been in the single digits all year.

Return on Equity: The company has a return on equity of 20.2% in the third quarter, a year-over-year increase from 18.3% in the third quarter of 2012 and on a continuously upward trend.

Share Repurchases: Templeton Investments has been engaged in significant share repurchases annually since 2002. It has reduced its share count by about 18.5% over that period. Most recently, in the third quarter, it repurchased approximately 0.8 million shares for a total cost of $98.6 million.

Principal Financial Group (NYSE:PFG)

Principal Financial is a global investment company whose products and services include retirement solutions, wellness programs, insurance and investment and banking through a family of companies and financial professionals across the country.

Nygren bought 2.5 million shares of the company for $27 each on average, according to this third quarter portfolio reported today.

Book Value: Nygren’s buy price and the stock’s Friday price of $27.15 is below its book value of $33.36. Book value has been on an increasing trend for the past four years.

P/E: It has a single-digit P/E – 9.57 – and fell into the single digits in the third quarter.


PFG data by GuruFocus.com

Return on Equity: The company’s return on equity of 7.3% is close to the 8% to 10% Nygren mentioned in his third quarter letter.

Share Repurchases: Though it has fluctuated, Principal’s total shares outstanding overall decreased in the last decade.

In the third quarter, it repurchased 2.7 million shares at an average price of $25.72, bringing its total shares repurchased for the year to 9.9 million. Further share repurchases are projected for 2013. In the company’s outlook for the year, published Nov. 27, it said it had already earmarked $400 to $600 million in total capital for its dividend, strategic acquisitions and opportunistic share repurchases.

See Bill Nygren’s portfolio updated on Friday for the third quarter here. Also check out the undervalued stocks, top growth companies and high yield stocks of Bill Nygren.

Rating: 3.6/5 (15 votes)


Value II
Value II - 4 years ago    Report SPAM

He purchased a lot of WAMU before it dissolved didn't he?

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