Earlier this week, Ron Baron (Trades, Portfolio)’s Baron Funds disclosed its portfolio update for the third quarter of 2019. The fund’s largest new buys of the quarter were Fidelity National Information Services Inc. (FIS, Financial), Azul SA (AZUL, Financial) and Advanced Drainage Systems Inc. (WMS, Financial), and its largest sellouts were Oaktree Capital Group LLC (OAK, Financial) and YPF SA (YPF, Financial). It also reduced its position in Align Technology Inc. (ALGN, Financial) and increased its stake in Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial).
Baron Funds is a long-term asset management firm that places heavy emphasis on researching its investments, with the view that people are the key drivers of a successful business and that successful business growth relies on open-ended opportunities and competitive advantages. Its CEO is Ron Baron (Trades, Portfolio), who founded the firm in 1982. The firm is currently valued at $24.31 billion and has a low turnover rate of 4%.
As of the quarter’s end, Baron Funds’ top holdings were CoStar Group Inc. (CSGP) at 5.85%, Vail Resorts Inc. (MTN) at 4.51% and IDEXX Laboratories Inc. at 4.37%. In terms of sector weighting, the firm is most heavily invested in technology (21.18%), consumer cyclical (20.22%) and real estate (13.42%).
Fidelity National Information Services acquires Worldpay
On July 31, Fidelity National Information Services (not to be confused with Fidelity Investments) acquired Worldpay Inc. (WP, Financial) for $34 billion in stock. As a result, Baron’s 1,098,836 shares of Worldpay became 1,042,005 shares of Fidelity National, impacting the equity portfolio by 0.57%. Shares were trading at an average price of $132.74 during the quarter.
Fidelity National is a financial services company that sells financial technology and services to business and communities. Headquartered in Jacksonville, Florida, the company has more than 55,000 employees in more than 50 countries and offers 450-plus solutions products around the world. The company’s acquisition of payment processing giant Worldpay has analysts hailing the birth of a new global payments giant. As of Nov. 15, Fidelity National has a market cap of $83.54 billion.
The Worldpay acquisition saw the company’s revenue soar to $2.8 billion during the quarter, though its net income remained constant at $154 million. Diluted earnings per share came in at 29 cents versus 47 cents in the previous quarter. According to the Peter Lynch chart, the stock is currently trading at a high price compared to earnings, but if the revenue increase from Worldpay can translate to higher net income in the next quarter, continued shareholder optimism will likely push the price higher.
GuruFocus has assigned Fidelity National a financial strength score of 4 out of 10 and a profitability score of 8 out of 10. It has a price-earnings ratio of 63.79, a price-book ratio of 1.45, an operating margin of 15.31%, a cash-debt ratio of 0.07 and an Altman Z-score of 1.66.
Fidelity National pays a quarterly dividend, with a 12-month trailing dividend yield of 1.01% and a payout ratio of 0.67. On Dec. 27, FIS will pay a dividend of 35 cents per common share to shareholders of record as of Dec. 13.
Azul SA
The firm also established a new holding of 1,067,108 shares in Azul, impacting the equity portfolio by 0.16%. During the quarter, shares traded at an average of $37.33 per share.
Azul is the largest airline in Brazil, with 820 daily departures to 113 destinations along 223 non-stop routes. It is the sole airline on 70% of the routes it flies, giving it a virtual monopoly over these areas. As of Nov. 15, Azul has a market cap of $4.15 billion.
The airline was founded in 2008 and became publicly traded in 2017, making it a fairly young company. As the airline with the largest reach in Brazil, the company holds high potential for future growth. Its revenue for the recent third quarter came in at $735.72 million, though it suffered a net loss of $106.32 million largely due to unfavorable foreign exchange rates and increased operating expenses due to expansion.
GuruFocus has assigned Azul a financial strength score of 3 out of 10 and a profitability score of 4 out of 10. The company has a three-year revenue growth rate of 12.2%, an operating margin of 9.88% and a cash-debt ratio of 0.13.
Advanced Drainage Systems
Baron Funds bought 825,000 shares of Advanced Drainage Systems after selling out of its previous shares of the company in the first quarter of 2011. The trade had a 0.11% impact on the equity portfolio. Shares were trading at an average price of $32.47 throughout the quarter.
Advanced Drainage Systems is an Ohio-based producer of drainage products such as plastic corrugated pipes and stormwater management systems. Founded in 1966, the company now operates 60 manufacturing plants and over 30 distribution centers throughout the world. As the original creator of the corrugated plastic pipe, the company has been an industry leader for more than 50 years. As of Nov. 15, it has a market cap of $2.55 billion.
The drainage systems company has seen its share price rise after posting strong third-quarter revenue and net income. Although the end of the third quarter marks the high point of the company’s yearly revenue cycle, Advanced Drainage has a three-year annual growth rate of 0.9% and a three-year Ebitda growth rate of 9.2%.
Additionally, market researchers predict that the global stormwater management market will increase in value to approximately $18.3 billion by 2023 on a compound annual growth rate of 8.8%. An increase in need for its products could propel Advanced Drainage Systems into a stage of renewed revenue growth.
Disclosure: Author holds no shares in any of the stocks mentioned.
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