Oct 21
Flowserve, McCormick Emerge as Buffett Targets
Posted by News in Financial, Harry Rady, Investment, Stock Market on 10 21st, 2011| | Comments Off

10/04/2011
By Rita Nazareth

While Warren Buffett’s new favorite investment is Berkshire Hathaway Inc., his almost $50 billion pile of cash may be better spent buying companies from Flowserve Corp. (FLS) to McCormick & Co.

Berkshire is generating more than $1 billion in free cash flow a month, pushing reserves to a record, even as Buffett invests more in equities than at any other time this year. With near zero percent interest rates limiting returns in fixed- income markets, Flowserve, the biggest maker of valves, pumps and seals, McCormick, the largest U.S. spice seller, and 29 other companies are cheaper than Berkshire based on its discount to net assets and meet the takeover criteria in Buffett’s annual letter, according to data compiled by Bloomberg.

The 81-year-old chairman of Omaha, Nebraska-based Berkshire said last week he would repurchase stock for the first time in four decades as long as it sold for less than 1.1 times book value, 29 percent less than its decade-long average. While Oscar Gruss & Son Inc. says the plan may have signaled the world’s most successful investor is finding fewer takeover opportunities after agreeing to spend $9 billion on Lubrizol Corp. in March, the global stock selloff is now making it cheaper for Buffett to find deals, according to Highmark Capital Management Inc.

“His gun is loaded,” Todd Lowenstein, who helps oversee $17.2 billion at Highmark, said in a telephone interview from Los Angeles. Flowserve and McCormick are “extremely well positioned. He would be attracted to their competitive positioning and market share. So this is the time when I’d expect him to put money to work,” he said.

Buyback Plan

Buffett didn’t respond to a request for comment e-mailed to his assistant, Carrie Kizer.

Berkshire has preferred to use its profits to buy companies and securities issued by others. Since Buffett took control of the failing textile manufacturer in 1965, “not a dime of cash” has been spent on buybacks or dividends, the billionaire told investors in his annual letter published in February.

While Buffett began buying his own stock and plowing $4 billion into common shares of other companies last quarter, Berkshire may still need acquisitions to help reduce the record $47.9 billion in cash it held at the end of June, according to Mark Bronzo, who helps manage $26 billion at Security Global Investors in Irvington, New York.

“It definitely makes sense to expect a firm like Berkshire to make acquisitions,” he said in a telephone interview.

Buffett Criteria

Buffett prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power and “good” returns on equity while employing little or no debt, according to his report. He has shifted his takeover strategy as Berkshire has grown to focus on “capital intensive businesses,” such as power producers and railroads, which require consistent investment in infrastructure and equipment.

There are 31 companies in developed and emerging markets with equity values from $3 billion to $20 billion that trade at a discount of more than 30 percent to their 10-year average price-book ratios; averaged a return on invested capital in the past five years that exceeds 10 percent; had capital expenses accounting for at least 10 percent of their net fixed assets; generated profit growth in the past five years that ranked in the top 50 percent; and sold for a lower price-earnings ratio over that span than the MSCI World (MXWO) Index or MSCI Emerging Markets Index median, data compiled by Bloomberg show.

So-called value investors such as Buffett also purchase companies when their stock prices are low by historical standards when compared with earnings.

Empire Building

Berkshire, which has a market value of $174 billion, fell to $100,000 a share for the first time in almost two years on Sept. 22. Four days later, it announced the buyback.

The company, which employs more than 250,000 people, owns insurers including Geico and General Re, as well as more than 60 other companies ranging from food distributor McLane Co. and clothing-maker Fruit of the Loom to toolmaker Iscar Metalworking Cos. and utility MidAmerican Energy Holdings Co.

Last month, Berkshire also completed its purchase of Lubrizol, the company’s second-largest since 2006. Wickliffe, Ohio-based Lubrizol, the world’s largest producer of lubricant additives, was one of the American companies that met the acquisition criteria when its takeover was announced, according to data compiled by Bloomberg.

This time around, U.S. companies accounted for almost half the total that passed, data compiled by Bloomberg show.
Flowserve of Irving, Texas, is valued at 1.66 times its assets minus liabilities, versus its average multiple of 2.64 times its book value in the past decade.

Valves, Pumps and Seals

Net income has climbed 87 percent in the past five years and analysts estimate earnings will jump to a record next year, the data show. The stock has slumped 41 percent this year, leaving it with a market value of less than $4 billion.

While Flowserve faces competition from other makers of valves, pumps and seals, the company has an advantage because it’s the only one that produces all three, said Hamzah Mazari, a New York-based analyst for Credit Suisse Group AG. He estimates Flowserve’s stock will more than double to $150 within a year.

Demand for water and petroleum-related products is unlikely to diminish over time, which also benefits Flowserve because it specializes in pumping and filtration services, according to Harry Rady, chief executive officer of Rady Asset Management LLC, a La Jolla, California-based hedge fund firm.

“It’s definitely a Buffett-type of stock,” Rady, who oversees $260 million, said in a telephone interview. “Buffett’s looking for long-term secular trends in a business that’s got a defensible position. Anything related to water has long-term secular trends at its back basically forever.”

Allspice to Tumeric 

Steve Boone, a spokesman at Flowserve, didn’t immediately respond to telephone or e-mail messages seeking comment.

McCormick, which sells everything from allspice to marjoram leaves and turmeric, is the largest seller of spices in the U.S., according to data compiled by Bloomberg.

The company, which has boosted per-share earnings for nine straight years and beaten analysts’ estimates in the past six, has a “dominant brand” of spices that is more appealing to chefs than those of its store-brand competitors, according to Tim Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group LLC in Bedford Hills, New York.

Annual sales at Sparks, Maryland-based McCormick, which currently trades at a 36 percent discount to its average price- book ratio over the past decade, have only declined twice since 1988, according to data compiled by Bloomberg.

‘High Barriers’

“Buffett loves market leaders and often somewhat simple businesses,” Ghriskey said in a telephone interview. McCormick has a “high barrier to entry. The stock is particularly inexpensive. It would certainly, at least on the surface, seem to make a lot of sense for Buffett,” he said.

Lori Robinson, a spokeswoman for McCormick, said it doesn’t comment on takeover speculation.

Joy Global Inc. (JOYG) is another industrial company that Buffett may find attractive as he bets that the U.S. economy will skirt a recession, according to Dan Veru, chief investment officer at Fort Lee, New Jersey-based Palisade Capital Management LLC, which manages $3.4 billion.

Milwaukee-based Joy Global, which has slumped 30 percent this year as concern over a global slowdown pushed the Standard & Poor’s 500 Index to within 1 percent of a so-called bear market, now trades at 11.2 times earnings. That’s 24 percent lower than its five-year average of 14.8 times.

The company, which competes mainly with Caterpillar Inc. (CAT) for sales in mining equipment, makes sense for Buffett because he usually favors industries with only two or three major competitors, according to Highmark’s Lowenstein.

Buying Opportunity

As one of the largest independent makers of underground mining equipment, Joy Global had an average return on invested capital approaching 50 percent over the past five years, data compiled by Bloomberg show. That’s the highest among companies in the industrialized world that met Buffett’s criteria.

Sandy McKenzie of Joy Global’s investor relations department said no one was immediately available to comment.

“He’s really playing on a global recovery and certainly Joy Global would be one of the names that would fit,” Palisade Capital’s Veru said in a telephone interview. “Buffett likes to be opportunistic. A guy like Buffett is going to take advantage of that fear” of a slowdown in economic growth, he said.

Originally posted on - http://www.bloomberg.com/news/2011-10-04/flowserve-converges-with-mccormick-as-targets-using-buffett-math-real-m-a.html?cmpid=msnmoney&industry=IND_ENERGY&isub=

Oct 21

October 10, 2011 4:01 AM
By Craig Trudell

Oct. 10 (Bloomberg) — Automotive companies, sold short by more U.S. investors than any industry except services, are too cheap when weighed against record vehicle sales and provide opportunities for bets against a financial collapse.

Short interest, a measure of bets that stock prices will fall, in automakers and parts suppliers increased by 50 percent in September to 1.7 percent of total shares, according to researcher Data Explorers. The ratio of long to short interest deteriorated to the lowest this year at the end of last month.

Global auto sales are on pace to reach a record 74.6 million this year, J.D. Power & Associates says. Deliveries in the U.S. accelerated in September to the fastest pace since April, and sales in China may rise to 17.7 million, the most in any country ever. At the same time, the 28-member Bloomberg World Auto Manufacturers Index lost 21 percent through Oct. 7.

“These stocks have gotten hammered and are starting to represent good value,” Harry Rady, who oversees $260 million as chief executive officer of hedge fund Rady Asset Management LLC. “Obviously it hinges on which way the economy goes, but if anything even a little better than a very dire scenario materializes, these stocks could rock.”

Global monetary-policy makers, including the Federal Reserve and European Central Bank, are expanding efforts to support their economies as the euro region’s sovereign-debt crisis roils markets. Morgan Stanley, which rates the U.S. auto sector “attractive,” said in a report last week that “trading auto stocks in this macro environment is like playing ping-pong in a hurricane.”

‘Real Fears’

“You can’t have this much fear about sovereign risk, and mentioning U.S. economy and depression so frequently, without creating real fears for the real economy, and that hits auto sales, mix and pricing,” Adam Jonas, Morgan Stanley’s New York- based analyst, said in a phone interview. “It’s confusing investors because the bottom-up data does look pretty good.”

General Motors Co. may earn $7.83 billion in net income this year, a 27 percent gain from 2010, according to four analysts surveyed by Bloomberg. Ford Motor Co.’s profit may rise 16 percent from a year earlier to $7.56 billion, the average of six estimates. Shares of Detroit-based GM have plunged 40 percent this year, while Dearborn, Michigan-based Ford lost 36 percent.

“There are a lot of metrics in this sector that your value investor would look at and say ‘Wow, that’s pretty cheap,’” said Dennis Wassung, who helps oversee about $500 million at Cabot Money Management Inc. in Salem, Massachusetts.

GM Shorts

Short interest in GM climbed to 2.5 percent of total shares, about one-fifth of lendable supply, London-based Data Explorers said last week in a report. Ford’s short interest was 3 percent of total shares, the researcher said.

GM’s pension liabilities “no question” became investors’ biggest concern about the Detroit-based company during the past quarter, Morgan Stanley’s Jonas said.

The company’s U.S. pension fund, which faced a $12.4 billion shortfall at the end of 2010, may finish the year underfunded by $18.5 billion, he estimates. The liability will rise even as GM makes an estimated $6.1 billion in cash and $1.4 billion in stock contributions this year, Morgan Stanley estimates.

“That’s a huge offset to the very cash-rich balance sheet they have,” Jonas said. The pension liability “competes with what was until recently hopes of a cash-return story from GM. That’s being put to bed.”

Ford’s U.S. pension shortfall may climb to $11.6 billion this year, from $6.7 billion at the end of 2010, Jonas said. Morgan Stanley estimates the Dearborn, Michigan-based company may contribute $1.5 billion to its U.S. plans this year. Investors also are concerned about GM and other rivals closing a gap in product quality and “freshness” to Ford, Jonas said.

Ford’s Product

“The competition is going to catch up over the next two years,” he said. “It won’t be as much of an advantage. GM is replacing more product over the next two years.”

September U.S. auto sales gains exceeded analysts’ estimates, rising to a seasonally adjusted annualized rate of 13.1 million, according to Autodata Corp. The pace is the highest since April’s 13.2 million, when lost output caused by Japan’s tsunami started crimping supply of parts and cars.

The U.S. averaged annual sales of 16.8 million vehicles from 2000 to 2007, according to Woodcliff Lake, New Jersey-based Autodata.

Annual U.S. deliveries peaked at 17.4 million in 2000. China may pass that total for the first time, with sales increasing about 3 percent to 17.7 million in 2011, according to Westlake Village, California-based J.D. Power. China’s auto market may exceed 25 million annual light-vehicle sales by 2015, J.D. Power predicts.

China’s Growth

Regulators have moved to curb growth for China’s auto market this year by measures such as Beijing’s limits to the number of license plates available. Zhejiang Geely Holding Group Co. short interest peaked at 7.6 percent of total shares in August, almost all of the lendable supply, Data Explorers says.

“There’s a 10-year history there of substantial growth” in China’s auto market, said Cabot’s Wassung, whose fund holds shares of automaker Dongfeng Motor Co. “It’s not done. This year’s going to be a bit of a pause, but it’s likely that this trend of an emerging middle class that adds hundreds of millions of new consumers to the market is not over.”

Carlos Ghosn, chief executive officer of Renault SA and Nissan Motor Co., which has a Chinese venture with Dongfeng, said in an interview that investors are uncertain about the global economy and that moves in the share prices of his companies have been “extreme.”

“I am not particularly pessimistic, even though I don’t think we’re going to go through this very quickly,” Ghosn said in an Oct. 6 interview from Rio de Janeiro, where Nissan announced a new $1.4 billion auto plant in Brazil.

–With assistance from Alan Ohnsman in Los Angeles. Editors: Jamie Butters, Bill Koenig