Thursday, August 15, 2013

Wallace Weitz Buys Avon and Oracle

Wallace Weitz is portfolio manager of the Weitz Value Fund, Weitz Hickory Fund and Weitz Partners Value Fund, which he founded in 1983. Wallace Weitz views a company's business value as the amount of cash it will generate for its owners over the next 10-20 years, and stock price as a function of investor attitudes, expectations and competing alternatives for capital. Markets continue to be affected by the European debt crisis, a slowdown in the Chinese economy and a feeble U.S. economy. While these factors may slow economic growth for a year or two (or longer), he believes the companies' stock prices are "cheap enough relatives to their business values" that they "feel good about being 75-85% invested," he said in his fourth quarter letter. Their 15-25% cash reserves may be used to take advantage of temporary market dips.

He added two stocks in the fourth quarter: Avon Products Inc. (AVP) and Oracle Corp. (ORCL).

Avon Products Inc. (AVP)

Avon, a global beauty company, is the world's largest direct seller, with a presence in more than 100 countries through approximately 6.5 million representatives. Avon Products Inc. has a market cap of $7.84 billion; its shares were traded at around $18.16 with a P/E ratio of 10 and P/S ratio of 0.7. The dividend yield of Avon Products Inc. stocks is 5.1%. Avon Products Inc. had an annual average earnings growth of 3.2% over the past 10 years. GuruFocus rated Avon Products Inc. the business predictability rank of 3-star.

Over 2011, Avon's stock price fell considerably, moving in a 52-week range of $16.09-$31.60. Weitz was able to purchase 243,500 shares at an average price of about $19 per share in the fourth quarter of 2011. He bought 117,400 shares previously in the first quarter of 2009 when it was near the same price, $20, and sold them in the second quarter of 2009 at $24.

Avon had a better first nine months of 2011 than the same period of 2010 in most respects. Net sales increased to $8.1 billion from $7.6 b! illion, and earnings increased to $517.5 million from $380 million. They also ended the nine months with $988.2 million cash on its balance sheet, compared to $841.5 the previous year. Its gross margin shrunk 40 basis points in the third quarter, primarily due to higher product costs, and its gross margin for the first nine months of 2011 increased 80 basis points, primarily due to the negative impact of special items.

Results in North America for the third quarter were disappointing, however. Revenues from that segment declined to $493 million from $521 million the previous third quarter. Sales in its other regional segments all improved, with Latin America being the largest, reporting $1.3 billion in revenue. For the first nine months of 2011, North American revenues declined to $1.513 billion from $1.599 billion, and Asia Pacific revenues declined to $687.5 million from $711.2 million, with all other segments improving.

Moving to lower-cost countries was part of Avon's 2005 Restructuring Program. It expects to save approximately $415 million annually once all of its initiatives are fully implemented by 2011-2012.

When Weitz bought the stock, it was at all-time low P/E:

AVP pe,ps,pb Interactive Chart

Oracle (ORCL)

Oracle Corporation is the world's largest enterprise software company and a leading provider of computer hardware products and services. Oracle Corp. has a market cap of $145.5 billion; its shares were traded at around $28.85 with a P/E ratio of 13.1 and P/S ratio of 4.1. The dividend yield of Oracle Corp. stocks is 0.8%. Oracle Corp. had an annual average earnings growth of 19.3% over the past 10 years. GuruFocus rated Oracle Corp. the business predictability rank of 3.5-star.

Oracle's stock price fluctuated between $24.72 and $36.50 in the last 52 weeks. Weitz bought the stock for an average price of $31 in the fourth quarter of 2011, and bought 7,989 shares. In the last five years, Oracle's stock increased 73%.

Oracle�! �s derive! s its revenue from software (including software licenses and license update sand product support), hardware systems and services. Revenue jumped from $9.9 billion in 2010 to $16.2 billion in fiscal 2011 with the acquisition of Sun Microsystems in fiscal 2010 and Phase Forward Incorporated and ATG in fiscal 2011. Increases in its software business revenues also contributed to the jump.

Over the last 10 years, Oracle's revenue per share grew at an annual rate of 17.5%, and free cash flow grew at 17.8%.

The company is poised to increase growth going forward, as it added 1,700 sales professionals in the first half of 2012. It will also benefit from the launch of new product lines and more cloud computing and services, such as its Fusion Cloud ERP and Cloud CRM. Oracle also acquired Taleo (TLEO), a leading cloud-based human resources software business, for $1.9 billion on February 9. The goal for the acquisition is to create a comprehensive cloud offering for organizations to manage their human resources operations.

"Human capital management has become a strategic initiative for organizations," said Thomas Kurian, executive vice president, Oracle Development. "Taleo's industry leading talent management cloud is an important addition to the Oracle Public Cloud."

In its cloud service, Oracle Public Cloud, Oracle is aiming to differentiate itself from its competitors, such as Salesforce (CRM) by offering full interoperability so that users will not be locked into Oracle software.

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