Markel Corp. MKL co-CEO Tom Gayner (Trades, Portfolio) disclosed last week that he closed his positions in General Electric Co. GE and Capital One Financial Corp. COF in exchange for three new positions during the third quarter: Crown Holdings Inc. CCK, NXP Semiconductors Inc. NXPI and Mohawk Industries Inc. MHK.
Gayner invests in companies using a value-oriented approach: he believes the company’s stock is part of a business, which in turn is worth the present value of the future cash flows. Gayner said Markel “operates with a margin of safety in the investment portfolio” and can earn “the best returns” by concentrating his focus and portfolio in areas where he has the highest understanding and knowledge. Gayner’s top three sectors in terms of portfolio weight are financial services, consumer cyclical and industrials.
General Electric
Gayner sold his 95,000 shares of GE, a major diversified industrials company. Shares averaged $12.86 during the quarter.
Boston-based GE reported on Oct. 30 a third-quarter adjusted loss of 14 cents per share, down 33% from third-quarter 2017. New CEO Lawrence Culp Jr. said although GE, a “fundamentally-strong company,” has a talented team and great technology, the earnings results far underperform its full potential.
GE announced two initiatives to strengthen its balance sheet and “position the business to win”: a dividend cut from 12 cents to 1 cent per share and the consolidation of the Power business into two segments: a unified gas business combining the company’s gas product and services groups and a second business containing GE Power’s other assets. The dividend cut allows GE to retain approximately $3.9 billion in cash per year compared to the prior payout level.
GuruFocus ranks GE’s financial strength 4 out of 10 on several weak indicators, which include a debt-to-equity ratio of 3.66 and an Altman Z-score that suggests financial bankruptcy within two years.
Capital One
Gayner sold his 75,000 shares of Capital One, a major diversified financial services company. Shares averaged $97.27 during the quarter.
The McLean, Virginia-based company provides a wide range of banking and non-banking services to consumers and small businesses. GuruFocus ranks the company’s financial strength 3 out of 10 on several red flags, which include increasing long-term debt and high leverage: Capital One’s equity-to-asset ratio of 0.14 underperforms 86% of global competitors.
Crown Holdings
Gayner invested in 11,000 shares of Crown Holdings, a major metal-packaging company. Shares averaged $44.43 during the quarter.
Yardley, Pennsylvania-based Crown Holdings manufactures beverage cans, metal food cans and aerosol cans. GuruFocus ranks the company’s profitability 7 out of 10 on several positive investing signs, including profit margins that have increased approximately 5.80% per year over the past five years and are outperforming 82% of global competitors. Additionally, Crown Holdings’ business predictability ranks 3.5 stars out of five on consistent revenue and earnings growth over the past 10 years.
NXP Semiconductors
Gayner invested in 28,000 shares of NXP Semiconductors, a global semiconductor company based in the Netherlands. Shares averaged $96.04 during the quarter.
NXP Semiconductors CEO Richard Clemmer said last week that third-quarter revenues of $2.45 billion were up 7% year over year and $20 million higher than the midpoint of management’s guidance. Clemmer highlighted strong growth in NXP’s business segments, which include Automotive; Secure Connected Devices; Secure Interface and Infrastructure; and Secure Identification Solutions. The strong revenue growth in each of the company’s business segments contributed to a five-year revenue growth rate of 9.80%.
GuruFocus ranks NXP’s profitability 8 out of 10 primarily due to a strong Piotroski F-score of 8, a net profit margin near a 10-year high of 28.38% and a three-year EBITDA growth rate that outperforms 81% of global competitors.
Mohawk Industries
Gayner invested in 30,000 shares of Mohawk Industries, a major furniture manufacturer. Shares averaged $196.12 during the quarter.
The Calhoun, Georgia-based company manufactures a wide range of flooring products, which include carpets, rugs, ceramic tile, laminate, wood, luxury vinyl tile and vinyl flooring. GuruFocus ranks the company’s financial strength 6 out of 10: even though the company’s Piotroski F-score ranks a modest 4 out of 10, Mohawk Industries has a strong Altman Z-score of 3 and solid interest coverage of 38.69.
FPA Crescent Fund Chief Investment Officer Steven Romick (Trades, Portfolio) also invested in Mohawk Industries during the quarter.
Disclosure: No positions.
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