Fisher
Capital Management Corporate News - Mark Finn knows his way around the
block when it comes to valuing companies. A certified public accountant by
training, the manager of the T. Rowe Price Value Fund (ticker: TRVLX), spent
five years as an auditor at Price Waterhouse before joining the
corporate-finance department at T. Rowe in 1990. And as an analyst at the firm,
he covered fixed income, distressed companies, tobacco, coal, utilities, and
power generation. That broad experience all comes into play at the $12.6
billion fund, which he took over at the beginning of 2010 after co-managing it
for a year.
Over the past three years, Finn's fund has returned an
average of of 27% a year, outperforming the Standard & Poor's 500 by 2.2
percentage points, according to Morningstar, and the value category by 4.4
percentage points. That places the fund in the top 1% of the 1,107 funds in its
category. Lately, the 49-year-old manager has tilted the fund away from some
cyclical stocks, including Harley Davidson (HOG), while adding to his positions
in companies whose stock prices are sensitive to economic growth, including
General Electric (GE). Read on to see why he likes large-cap tech but is
selling IBM (IBM).
Barron's : You've been working in a tough part of the market.
Finn: Yes, growth has been the place to be, and the thing
that makes it even more difficult is that the market is rough. But there are
certain areas where there is still some pretty compelling value, including
large-cap tech, health care, financials and names here and there within certain
subsectors, including refining within energy.
How do you balance cyclical stocks in the portfolio with
more-defensive names?
I try to take what the market gives me. Early in 2011, we had
a real strong market and a lot of my cyclical names ran up. So I began getting
out of cyclical names that no longer represented a compelling value.
Like Harley Davidson?
Harley Davidson is a perfect example. Another is Alpha
Natural Resources (ANR), a coal producer. I sold all of my shares last
summer after they paid up to buy Massey Energy. I concluded that their
capital-allocation practices were questionable after they bought a troubled
company at a time when coal prices were near peak levels. So as 2011
progressed, I was slowly bringing down cyclicality in the portfolio. But that
process got interrupted last summer during the Greek debt crisis. So cyclical
stocks made a comeback, and I added names like LyondellBasell Industries (LYB),
a plastics and chemicals company. At the moment, we are hitting new highs in
some of those cyclical stocks, and we are trimming once again.
What kind of opportunities are you finding?
It is sort of a stockpicker's market. It is giving you
certain financials, which we've been adding to, and it has been giving us
large-cap tech, and certain health-care companies like Thermo Fisher Scientific
(TMO).
What is your view on the importance of dividends?
A high dividend is nice. Dividends are the most transparent
return of capital to shareholders possible. A buyback is usually
euphemistically described as a return of capital to shareholders, but it's a
return of capital to select selling shareholders. Dividends are an actual
return of capital. So we appreciate dividends, but dividend stocks are not the
be-all and end-all. Now is not the appropriate time to buy yield for yield's
sake. That time was two years ago, when the market didn't understand that
interest rates were going to stay low for a prolonged period of time. Right
now, I'm much more of the mind to own MetLife (MET) or Sun Life Financial
(SLF), which are going to benefit from rising interest rates. Those companies
take their premiums and reinvest them, so higher rates help their net interest
margins.
You mentioned tech as an area of opportunity. What are some
holdings in that sector?
Dell (DELL), Oracle (ORCL), which has come in to the
portfolio recently, and Cisco Systems (CSCO). I've been a happy holder of
Microsoft (MSFT). I feel like we've realized our potential with IBM (IBM), and
I've been working my way out of that position.
What do you like about Microsoft?
Large-cap tech has this shadow secular risk to it. What
people have worried about—and what I would highlight about Microsoft—is
earnings growth. Microsoft's price/earnings multiple is compressed, but they've
grown earnings consistently, and now they have Windows 8 coming out. The stock
has finally begun to be a little more appreciated by the market, and it has
gone back up over $30. Plus, they are generating all kinds of free cash flow.
And they're returning more cash to shareholders.
That's right. It currently yields 2.5%. People are finally
starting to understand that the perceived earnings cliff that Microsoft would
have, whenever that was going to come, is perhaps not so imminent. Dell and
Cisco are a little different, and I pair them up because both companies are
dominant players in their respective industries with very strong, charismatic
leaders who have previously led their companies to glory.
Michael Dell and John Chambers.
Both of them know how to win, but both have stumbled, though
for different reasons. Cisco lost its way a bit. They got involved too much in
consumer-related products. They bought [set-top-box maker] Scientific- Atlanta,
and while they were off doing that they let JDS Uniphase (JDSU) and Juniper
Networks (JNPR) come in and eat away at them competitively. One of the
advantages that we have at T. Rowe Price is that our analyst who covers Cisco
also covers Apple (AAPL), JDS Uniphase and Juniper. So when I started working
on Cisco last summer, it had gotten down to around $15. As I mentioned, last
summer offered some opportunities in cyclical names. So our analyst was able to
very clearly articulate the issues that Cisco had with respect to losing its
way and the real competitive threat that Juniper and JDS Uniphase offered.
He actually said to us that Juniper's new products look like
they may stumble a little bit and that gives Cisco an even better opportunity
to recover. So we concluded that Cisco wasn't facing a secular head wind as
much as it was a loss of focus and some competitive challenges, and I think
Chambers is doing a pretty good job getting that one back on track. Dell has a
little more of a transition ahead of it, because they need to move a little
more towards services, and we are seeing that today.
How much upside is there in those stocks?
Cisco can earn a little over $2 a share a year or two out. I
don't see why the stock can't get to the mid-$20s, versus around $20 recently.
Dell can earn around $2.15 to $2.20 next year. The multiple there will probably
be a little more of a commodity multiple. So I you could see the stock at $22
or $23, versus around $17 recently.
Let's move on. Another of your holdings is General Electric,
whose stock has been a big disappointment for a decade. What do you like about
the company?
On March 13, JPMorgan Chase (JPM) announced that, after
undergoing a stress test, it had received permission from the Federal Reserve
to resume buying back shares, in this case up to $15 billion worth over the
next year, and to increase its dividend. So we are seeing the first opportunity
for strong financial institutions to return capital to shareholders. For GE,
the opportunity to return capital to shareholders [from GE Capital] over the
next several years could be very compelling.
GE Capital hasn't paid a dividend to the parent in four
years. And last week Moody's issued a warning on both GE and GE Capital. But
GE's management says it still plans to reinstate GE Capital's dividend this
year. What's your take?
That's exactly the kind of worry that has kept a lid on GE's
stock. But while it may take a few months to sort out the amount and timing of
the dividend with the Fed, the fact that management is focused on restarting
the dividend is encouraging. The primary risk to my thesis is that I misjudge
the severity of the limitation on the size or frequency of the dividend, but GE
is a very well-capitalized company and eventually the cash build at GE Capital
will find its way back to the parent and to shareholders.
What will move the needle at GE? Stronger sales of its
later-cycle power-generation products?
It will be that, and I sincerely hope they continue to return
capital to shareholders. There will be a point at which people just simply
won't ignore that dividend, just like with Pfizer (PFE). [GE yields 3.4%.] If
they raise it again, it will probably be bumping up against 4%. I think [CEO
Jeffrey] Immelt wants to make GE a stock that people will buy because of the
yield, as well as its strong earnings growth. If they continue to return cash
to shareholders and the late-cycle businesses begin to hit on all cylinders,
the stock will be compelling. It's at around $20 now, and I don't see why it
can't get to the mid-$20s in 12 to 18 months.
You also have some big holdings in big-cap pharma. What's to
like there?
The market fixated on patent cliffs, especially at companies
like Merck (MRK) and, in particular, Pfizer, which lost its patent last year on
the cholesterol blockbuster Lipitor. In the meantime, Pfizer and Merck both
went out and addressed their pipeline issues, with the acquisition of Wyeth by
Pfizer and the acquisition of Schering-Plough by Merck. The perception was that
Merck and Pfizer wouldn't be able to plug the hole in their revenue streams
created by the patent cliffs. However, both companies made acquisitions that
strengthened their pipelines, partially mitigating that risk. And both
companies took pretty strong R&D complexes and put them together. And in
the case of Pfizer in particular, they began cutting costs. So Pfizer preserved
its cash flow after making the acquisition.
Then there was a management change. Ian Read [the new CEO] is
in there looking at the business from the standpoint of how do we create and
maximize shareholder value? So now they are selling the nutrition business, and
it looks like the bids are going to come in the $10 billion range. The
shareholders will see about $8.5 billion of proceeds, which I believe will be
targeted to share buybacks. And they are likely to spin off their animal-health
business. The dilution from taking those strategic actions will be minuscule.
Pfizer shares were trading recently at $22, close to their
52-week high. Is there still value there?
There is still value, because the stock is cheap. It has a 4%
dividend yield, and it is trading at nine times earnings. I bought Pfizer in
the mid-teens in 2010, when it had a 5% dividend yield and a 7.5 multiple,
thinking that it would be fully valued when the stock reached $20. Now the
stock is above $20. I look around and say, "Should I sell my Pfizer and
buy Procter & Gamble at 16 times?" To me, Pfizer is still the better
value.
Another holding is St. Joe (JOE). The land-development
company has taken a drubbing, owing in large part to the distressed real-estate
market in Florida. Isn't the outlook for this company bleak?
This has been a difficult stock. But the new CEO, Park Brady,
seems to really have a handle on what he needs to do. He has taken down the
SG&A cost. Throughout the last several years, there has been a cash bleed,
as lot sales and revenue from the timber sales did not cover the SG&A
costs. Brady has winnowed it down to where now they are actually going to
generate a little bit of free cash flow from here on. So they've addressed the
melting ice-cube risk, which to me was the most tenuous issue with respect to that
company. The new CEO has gotten the company to where it is operating within its
means. We have a lot more time. Under the previous management, I was concerned
about how much time we had.
Back in 2008, the company had a lot of big plans for the
Florida Panhandle. But the growth never came. Will it?
They are looking at developing Port St. Joe into an actual
port, and they've got a couple of leases there. So when they widen the Panama
Canal, which should increase ship traffic into the Gulf, there could be some
additional opportunity over time. And they're cutting their losses on their bad
real-estate developments.
So I'm not going to sit here and tell you that this is the
greatest value opportunity since sliced bread. But it does represent very
reasonable value at this point, and this is something that I feel we need to
stick with at $19. I don't see why this stock can't get back to the mid-$20s
over the next 12 to 18 months
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