Sony Is Relatively Cheap, and Opportunistic

Famous hedge fund manager Dan Loeb has come to Japan, targeting one of the biggest Japanese corporations, Sony (NYSE: SNE). Dan Loeb revealed that his firm, Third Point LLC, with 64 million shares, including both direct share ownership and cash-settled swaps, was the largest owner of Sony. Dan Loeb has laid out several steps to unlock the hidden shareholder value, believing that the company has as much as a 60% potential upside.

Two steps to unlock Sony’s value

In the recent letter to Mr. Kazuo Hirai, the President and CEO of Sony, Dan Loeb mentioned that Sony could maximize the company’s shareholder value by two steps: first was to take a part of Sony Entertainment listed, and the second was to focus on industry-leading businesses for the future growth of Sony Electronics.

Indeed, Sony’s business was divided into several segments including Consumer Products & Services, Professional, Device & Solutions, Pictures, Music, Financial Services and Sony Mobile. While the two biggest revenue contributors were the Consumer Products & Services segment and the Professional, Device & Solutions segment, those two segments generated operating losses in 2012. The Financial Services segment was actually the most profitable segment, with ¥131 ($1.31) billion in operating income in 2012. The Pictures, Music and Sony Mobile have also generated consistent positive operating income, with The Pictures, Music and Sony Mobile have also generated consistent positive operating income of ¥34.1 billion ($341 million), ¥36.9 billion ($369 million) and ¥31.7 billion ($317 million), respectively.

Dan Loeb stated that Sony should take around a 15% to 20% stake in Sony Entertainment public so that the public could realize its high profitability with the great asset in television and motion picture production. Moreover, its management could have an incentive to grow the business they control. Sony was advised not to have a standard IPO, dividend or spinoff but rather a subscription right to current shareholders, to ensure the economic interests of Sony’s current shareholders. Third Point was ready to “backstop” the IPO up to $1.5 to $2 billion. According to Dan Loeb, if Sony Entertainment could have the similar margin to its U.S. peers, its EBITDA might rise up to 50%. With a EBITDA multiple of 9, Sony might realize an additional market valuation of ¥625 ($6.25) billion, or ¥540 per share, or 25% of the current trading price.

Sony Electronics and its Japanese peers

Its other business, Sony Electronics, has been producing sluggish returns and losses in the past ten years. However, the company was still undervalued on the market. Sony Electronics was worth around $8 billion, valued at 8 times FY13 EBIT guidance of around $1 billion. Dan Loeb wrote: “When considering Sony’s strong operating profit recovery, favorable product cycles, export orientation, and relative balance sheet strength, we see a strong re-rating potential to multiples of consumer electronics peers like Sharp (NASDAQOTH: SHCAY.PK) and Panasonic(NASDAQOTH: PCRFY).”

Panasonic was also the big Japanese electronics corporation. Most of its revenue, 17% of the total revenue, were generated from the AVC Networks. Appliances and Eco Solutions both ranked second, each accounting for 15% of the total revenue while Industrial Devices was the third biggest revenue contributor, representing 14% of the total revenue. The business keeps innovating new electronics products. Several days ago, Panasonic announced its new Breakfast Collection, including different kitchen appliances including a Coffee Maker, a Kettle and a Toaster. The NT-ZP1 Toaster has different slots for different bread slices. The NC-ZF1 Coffee Maker, with Aroma Selector could let users adjust the water flow for milder or stronger coffee, whereas the NC-ZK1 Kettle let users boil water quite quickly.

Panasonic seems to employ high leverage for its operations. As of Dec. 2012, it had ¥1.34 trillion ($13.4 billion) in equity, ¥515 ($5.15) billion in cash and as much as ¥1.56 trillion ($15.6 billion) in total debt. Panasonic is trading at $8.60 per share on the market, with the total market cap of $19.90 billion. It has quite a low EV multiple of only 4.1 on the market. The P/B stayed at 1.14.

Sharp has been expanding its business into TVs and mobile handsets as well as LCD related business for the past 13 years. The company has just laid out five main strategies for recovering and growing the business. The five main plans included business portfolio restructuring, LCD business profitability improvement, ASEAN market focus, fixed costs reduction and financial position improvement. The company also pushed for strategic partnership with companies from different industries. Recently, it just signed a basic agreement with Makita Corporation, to broaden the business areas including homes (house/rooftop) to premises (grounds). Sharp also announced that it was seeking further collaboration in the robotics business. Sharp was expected to generate around generate around ¥216.8 ($2.16) billion in EBITDA in 2014. With ¥946.9 ($9.46) billion in debt, its 2014 EV/EBITDA was 7.12.

The lowest valuation with an additional value of ¥725 per share

Interestingly, Sony has the lowest valuation among the three. Sony is trading at $20.80 per share, with a total market cap of $21 billion. The market values Sony at only 3.62 times EV/EBITDA. Dan Loeb suggested that there were over ¥525 per share of hidden value that the market had not reflected in Sony’s share price. He also expected that there were over ¥525 per share of hidden value that the market had not reflected in Sony’s share price. He also expected another ¥200 due to “the movement in the EUR/JPY relationship to be reflected in analyst estimates.”

My Foolish take

Dan Loeb has pointed out what the greatest asset that Sony has, Sony Entertainment. Sony considered the entertainment business was indeed the important source for the company’s growth and it was not for sale. However, Sony’s spokeswoman said that the company “look forward to continuing constructive dialogue with the shareholders as it pursues its strategy.” Sony looks quite interesting with its low valuation compared to its electronics peers, it could also be considered an opportunistic pick upon Dan Loeb’s activism.

Unlock the Hidden Value in This Stock

JANA Partners, lead by the famous activist investor Barry Rosenstein, has become active again. In the middle of April, JANA accumulated as much as more than 5 million shares (including options to purchase 824,600 shares) of Oil States International (NYSE: OIS), which was equal a 9.1% stake in the company.

In its recent 13D filing, JANA reported that the aggregate cost of its Oil States’ stake was around $340 million. Since the beginning of the year, Oil States has gained more than 7%. Should investors follow Barry Rosenstein into Oil States? Let’s find out.

Accommodations could be a REIT

Oil States is the leader in supplying specialty products and services to major oil, gas, and coal producing companies around the world. The business is operating in four main business segments: Accommodations, Offshore Products, Well Site Services, and Tubular Services.

The majority of its revenue, $1.78 billion, or 40.3% of total 2012 revenue, was generated from the Tubular Services segment. Accommodations ranked second with $1.11 billion in revenue, while Well Site Services generated the least revenue out of the four segments contributing only $713.6 million in 2012. Interestingly, Accommodations and Well Site Services are the two biggest income contributors, with $364.6 million and $156.8 million, respectively, in operating income. Tubular Services had a very thin margin of only 4.2%, contributing only $75 million in operating income.

According to the 13D filing, JANA seems to push for corporate changes in Oil States. The two parties have had discussions to separate Oil States’ “Well Site Services segment from its Accommodations segment and the formation of a REIT for Accommodations.” As I take a closer look at Oil States’ recent 10-K filing, I estimated that the Accommodations segment has around 1,470 acres, which is equivalent to more than 64 million square feet.

Valued cheaply compared to Simon Property

Compared to the largest mall REIT in the world, Simon Property (NYSE: SPG), the real estate of the Accommodations segment (both lease and owned) is around 26.4% of Simon Property’s total real estate size. Simon Property currently owns or has interests in around 325 retail real estate properties, with around 242 million square feet in total.

Furthermore, Simon Property had a 29 % stake in Klépierre, a REIT operating 260 shopping centers in 13 countries in Europe. At $176 per share, Simon Property is worth around $55.23 billion on the market. Thus, a rough approximation would relatively value Oil States’ Accommodations segment at more than $14 billion, more than three times higher than Oil States’ current market cap of only $4.2 billion.

The market values Simon Property at more than 37 times its trailing earnings and 9.5 times its book value. In terms of earnings valuation, as the Accommodations segment of Oil States generated $364.6 million in operating income, the equivalent earnings valuation would place Oil States’ Accommodations segment at nearly $11 billion.

J.C. Penney’s hidden real estate value is also huge

Simon Property has shown no interest in the sale-leaseback option of J.C. Penney’s(NYSE: JCP) 111 stores in Simon malls in the U.S., because the occupancy rate has been on the rise. J.C. Penney, after experiencing a significant drop of more than 53% in the past twelve months, has been trying to turn itself around.

As of January 2013, it had $3.17 billion in equity, only $930 million in cash, and as much as nearly $3 billion in long-term debt. The company has been trying different alternatives to divest several real estate holdings for more cash. J.C. Penney and its advisers have been thinking of several options, including real estate spin-off and sale-leaseback.

Cantor Fitzgerald LP expected that the company could raise $1.5 billion by spinning off its real estate into a new company, and use this company to issue senior notes, backed by unsecured guarantees. J.C. Penney currently has nearly 112 million square feet of real estate in total. Indeed, if J.C. Penney operated as a REIT, it would be worth half of Simon Property, or more than $20 billion. At $17 per share, J.C. Penney is worth only $3.7 billion on the market.

My Foolish take

As J.C. Penney operates as a retail operator, not a real estate player, it would take a lot of time to unlock its huge potential real estate value. However, Oil States’ Accommodations segment is not about retail, it is about lodged properties. As the Accommodations segment has been generating decent operating income, it seems to be much easier and take less time to unlock its hidden asset value. Indeed, I personally think that Oil States could be considered an opportunistic stock.

American Tower is a Long-Term Buy

According to Charlie Munger, in order to be successful in investing, investors just need to find a few great companies and hold on to them. Indeed, there were several stocks that kept appreciating for the last 10 years. One of them is American Tower (NYSE: AMT), a wireless and broadcast communications infrastructure company. Since 2003, American Tower has risen by more than 1,400%, from around $5 per share in 2003 to $77 per share. Should investors consider American Tower a buy after its 10-year significant rise in its stock price? Let’s find out.

Business snapshot

American Tower is a leading independent owner and operator of more than 54,600 wireless and broadcast communication properties for lease to radio, television broadcast companies, and wireless data providers. The company operates in three main business segments: domestic rental and management, international rental and management, and network development services. The majority of the revenue, $1.94 billion or 67.8% of total revenue, was generated from the domestic rental and management segment. The second biggest revenue contributor was international rental and management, with $862.8 million in revenue in 2012.

Constant, predictable and growing cash flow

Since the beginning of 2012, American Tower has been restructured to become a REIT. As a REIT, American Tower must distribute to its shareholders at least 90% of its taxable income. In 2012, the company distributed more than $355 million in regular cash distribution to shareholders. Over the past several years, American Tower’s Adjusted Funds from Operations (AFFO) and AFFO per share have been growing consistently. AFFO increased from $642 million in 2007 to $1.2 billion in 2012, while the AFFO per share rose from $1.51 to $3 in the same period.

What makes me interested in the company is its business model that generates the growing and predictable stream of cash flow. Normally, the lease contract would last from five to ten years, with multiple five-year renewal terms. American Tower reported that about 79% of its current lease would last for at least 5 years more. In 2012, AT&T Mobility was the largest tenant, accounting for 18% of its revenue. Sprint Nextel ranked second, accounting for 14% of total revenue, while Verizon Wireless and T-Mobile USA represented 11% and 8%, respectively.

Chuck Akre loves this stock

Chuck Akre, a famous investment manager, has been bullish about American Tower for several years. As of December 2012, he held nearly 1.7 million shares of the company, accounting for 9.3% of his total portfolio. What he likes about American Tower is theincremental returns on capital are “off the charts.” Over the years, the company has spent a part of its cash flow to acquire existing towers and build new ones. Then the balance of the cash flow would be used to pay off debt, and repurchase shares. 

The best stock among peers

At the current price of around $77 per share, American Tower is worth nearly $30.5 billion on the market. It has a quite expensive valuation, at 20.6 times EV/EBITDA. However, compared to its peers, including Crown Castle International (NYSE: CCI) and SBA Communications(NASDAQ: SBAC), American Tower has the cheapest valuation.

Crown Castle International is trading at around $72 per share, with a total market cap of nearly $20.9 billion. The market is valuing Crown Castle at more than 21 times EV multiple. SBA, the smallest company among the three, is worth nearly $9.4 billion on the market. With its share price of around $73, it is the most expensive at 24.84 times EV/EBITDA.

American Tower seems to be the most profitable company. Over the past 12 months, American Tower had the highest operating margin at 42%. SBA generated the lowest operating margin at 20%, while the operating margin of Crown Castle stayed at 36%. Interestingly, American Tower employed the least amount of leverage compared to the other two companies. While its debt-to-equity ratio was only 2.1, the debt-to-equity ratios of SBAand Crown Castle were much higher, at 3.7 and 10.8, respectively.

Foolish bottom line

With the lowest valuation, the lowest leverage, and the highest operating margin, I personally think that American Tower is definitely a long-term stock for long-term investors. 

It's Time to Follow Carlos Slim into his Company

Carlos Slim, the world’s richest billionaire, has lost around $5.8 billion off his net worth since the middle of February, due to a significant drop in the market price of his company, America Movil (NYSE: AMX). Since Feb. 1, America Movil has decreased by nearly 34.5%, from $25.55 per share to only $19 per share. The significant decline in America Movil’s shares is due to a bill proposed by Mexican president Enrique Pena Nieto to break up the company’s monopoly in Mexico. Should investors consider a significant drop in America Movil an investment opportunity? Let’s find out.

Mexico and Brazil are big markets

America Movil is considered the biggest wireless communications services provider and a major fixed-line operator in 18 countries in Latin America. The company reported that it had the largest market share in Mexico, Colombia, and Ecuador and the third largest market share in Brazil. The majority of its revenue, $705.5 billion pesos (USD $57.32 billion), or 91% of its total 2012 revenue, were generated from service revenue. Equipment revenue was $69.5 billion pesos (USD $5.63 billion). The biggest market for America Movil is Mexico, with 70.4 million wireless subscribers and 22.67 million revenue generating units (RGUs) in 2012. Brazil is its second largest market with 65.2 million wireless subscribers and 28.6 million RGUs.

In the Mexican market, the majority of its revenue, $177.2 billion pesos (USD $14.36 billion) are generated from wireless subscribers. Interestingly, out of 70.4 billion wireless subscribers, nearly 61.8 million subscribers were prepaid customers. In the fourth quarter of 2012, its average revenue per user (ARPU) increased to $172 pesos (USD $13.94) with an overturn rate of 3.6%. In Brazil, America Movil also generated significant revenue, R$12.76 billion (USD $6.42 billion) from wireless services. Out of 65.2 million wireless subscribers, 52.2 million of them were prepaid customers. The ARPU in Brazilian market was R$16 (USD $8.05) with an overturn rate of 3.7%.

The cheapest telecom player

Like other telecommunication companies including Telefonica (NYSE: TEF) and Verizon Communications (NYSE: VZ), America Movil employs high leverage in its operations. As of December 2012, it had $312.2 billion pesos (USD $25.3 billion) in total stockholders’ equity, $45.5 billion pesos (USD $3.7 billion) in cash and nearly $418 billion pesos (USD $33.87 billion) in both long- and short-term debt. Thus, its debt-to-equity ratio is 1.3. Verizon had a bit higher debt-to-equity ratio of 1.4, while Telefonica seems to have the most leverage with a debt-to-equity ratio of 2.8.

At $19 per share, America Movil is worth around USD $72 billion on the market. The market values America Movil at around 4.9 times EV/EBITDA. Telefonica, at nearly $15 per share, has a total market cap of around USD $66.5 billion. Telefonica is valued a bit higher at 5.21 times EV/EBITDA. Verizon Communication is the biggest company among the three, with nearly USD $139 billion in total market cap. At around $49 per share, Verizon is the most expensive, at 6.2 times EV/EBITDA. Among the three, America Movil is the most profitable company with the highest operating margin at around 20%. Telefonica ranked second with a 16% operating margin while the operating margin of Verizon was only 12%.

Highest potential total yield

Among the three, Telefonica pays shareholders the highest dividend yield: 4.5%. The dividend yields of Verizon and America Movil are 4.2% and 1.6%, respectively. Interestingly, as shares kept sliding, the company intended to pay a dividend of 22 centavos (USD $.018 dollar cents) per share and increase its share buyback plan by $40 billion pesos (USD $3.24 billion). The share buyback creates another 4.5% yield for shareholders. Thus, the total yield for America Movil’s shareholders is 6.1%.

The Mexican telecoms regulation bill, if was passed, would definitely affect the long-term performance of America Movil. However, America Movil seems to be quite cheap now, with the lowest EV multiple among its telecommunication peers. In addition, the potential future total yield of 6.1% is quite juicy for investors. With its current market-leading positions in several Latin American markets, America Movil is a buy at its current price.

Tweedy Browne's Top Stocks (Last Part)

Tweedy Browne, one of the most respected value investment funds in the world, was featured in the article “The Superinvestors of Graham-and-Doddsville,” written by Warren Buffett in 1984. As its investment philosophy derives from Benjamin Graham, value investors should follow Tweedy Browne’s moves closely.

In two previous articles, I have talked about its four biggest holdings: Johnson & Johnson,Cisco Systems, Devon Energy and ConocoPhillips. In this article, I will uncover two more stocks, each accounted for more than 5% of Tweedy Browne’s total portfolio. One is Baxter International (NYSE: BAX), a diversified healthcare company, and the other is Phillip Morris International (NYSE: PM), the fastest growing global tobacco maker.

Baxter’s Business Snapshot

Baxter International is the manufacturer of products for patients with immune disorders, infectious diseases, kidney diseases and trauma, with two main business segments: BioScience and Medical Products. The company sells its products in more than 100 countries through independent distributors and drug wholesalers. In 2012, the majority of Baxter’s revenue, more than $7.95 billion, or 56% of its total revenue, was generated from the Medical Products segment, while the BioScience segment generated nearly $6.24 billion in revenue. However, the BioScience segment contributed $2.3 billion in pre-tax income, much higher than the pre-tax income of $1.6 billion of the Medical Products segment.

A Cash Cow with Good Growth

I am quite impressed with Baxter's operating performance in the past five years. Since 2008, Baxter has consistently generated increasing revenue, profits and cash flow. The revenue increased from $12.35 billion in 2008 to $14.19 billion in 2012, while the EPS grew from $3.16 to $4.18 in the same period. Its dividend followed the same trend, rising from $0.91 per share to $1.57 per share. In addition, the company operates with a strong balance sheet. As of December 2012, it had $6.94 billion in total stockholders’ equity, $3.27 billion in cash, and only $350 million in short-term debt and capital leases. The biggest liability item was pensions and other benefits--nearly $2.43 billion. Since 2008, it has invested nearly $3.7 billion to buy back its stocks from the market. The treasury stock has reached $7.6 billion as of December 2012. 

Tweedy Browne owned more than 2.6 million shares in the company, with a total value of $173.6 million, representing 5.1% of its total portfolio at the end of 2012. The company is trading at $67.60 per share, with the total market cap of $37.15 billion. Baxter is valued at nearly 10 times EV/EBITDA.

The Biggest Fast Growth Global Tobacco Company

Philip Morris International is the sixth largest holding in Tweedy Browne’s portfolio. It owned more than 2 million shares in the company, with a total value of more than $170 million. Philip Morris accounted for 5% of the fund’s portfolio. Philip Morris, spun off from Altria Group, is the largest global cigarettes and other tobacco products manufacturer in the US, and operates in more than 180 markets outside the US. Philip Morris is well known for its Malboro brand, the world’s best selling international cigarette, which accounted for around 33% of its total shipment volume in 2012. The majority of its revenue, 36.7%, was generated from Asia. Europe ranked second, accounting for 29.6% of the total revenue. Indeed, Philip Morris is expected to keep growing in the future, as it derives the majority of its revenue from emerging markets, where tobacco regulations haven’t been so strict yet. Altria, its ex-parent, doesn’t have such a wide moat as Philip Morris as it is operating solely in the struggling US tobacco industry, with strict regulatory control.

Philip Morris really is a cash cow, generating consistently increasing free cash flow. Since 2003, its free cash flow increased from $4 billion in 2003 to nearly $8.4 billion in 2012. At first glance, investors might be scared of the company’s negative equity and huge debt. As of December 2012, it had -$3.5 billion in total stockholders’ equity, $3 billion in cash, and nearly $22.85 billion in short and long-term debt. The reason for negative equity is that Philip Morris financed its significant share buybacks with debt. Since 2008, the treasury stock skyrocketed from $2.28 billion to nearly $26.3 billion.

With the current trading price of $91.75 per share, Philip Morris’ total market cap is nearly $153.3 billion. The market is valuing the company at 11.5 times EV/EBITDA. Altria is a much smaller company, with $67.2 billion in total market cap. With a current trading price of $33.55 per share, Altria is valued at 10.53 times EV/EBITDA.

Foolish Bottom Line

Between the two tobacco companies, I strongly prefer Philip Morris due to its dominating global market position, potential huge growth and reasonable valuation. Indeed, investors might invest in Baxter and Philip Morris and hold them for a long run. As Baxter and Philip Morris are paying dividend yields of 2.3% and 3.5%, respectively, those two stocks fit well in investors’ income portfolios. 

Tweedy Browne's Top Stocks (Part II)

In my previous article, I wrote about Tweedy Browne’s two largest positions: Johnson & Johnson and Cisco Systems. Those two stocks seem to be qualified for investors to hold for the long run. In this article, I will cover two oil/gas stocks that Tweedy Browne is bullish about. One is Devon Energy Corp (NYSE: DVN) and the other is ConocoPhillips (NYSE: COP). Those two stocks combined accounted for 10.8% of its portfolio. Let’s look closely to see whether or not we should buy those two stocks for our own portfolios.

Devon- The Cheapest and The Most Profitable

Devon Energy is one of the leading energy company in the US with the operations in different North America onshore areas in the US and Canada. The majority of its revenue, $7.15 billion, or 75.3% of the total revenue, was generated from the sale of oil, gas and natural gas liquids (NGL). The second biggest revenue source was the marketing and midstream segment, with nearly $1.66 billion in revenue in 2012. Devon Energy generated a loss of $206 million in 2012 as it incurred more than $2 billion in asset impairments. In December 2012, Devon had estimated proved reserves of around 3 billion BOE.

Devon didn’t employ huge amounts of debt in its operation. As of December 2012, it had $21.3 billion in total stockholders’ equity, $7 billion in cash and short-term investments, and nearly $11.65 billion in both long and short-term debt. The company generated around $5.2 billion in EBITDA, thus the Debt/EBITDA ratio stayed at around 2.24x. At the current trading price of $54.15 per share, Devon’s total market capitalization is nearly $22 billion. The market is valuing Devon at around 5.13 times EV/EBITDA. The company is paying investors a dividend yield of 1.5%. 

Compared to its peers Encana Corporation (NYSE: ECA) and EOG Resources (NYSE:EOG), Devon has the cheapest valuation. Encana, with a trading price of $18.23 per share, is worth $13.42 billion on the market. The market is valuing Encana at 7.86 times EV/EBITDA. Among the three, EOG is the largest company with nearly $34.5 billion in total market cap. At the current price of $126.90 per share, the market is valuing EOG at 8.96 times EV/EBITDA. What makes me interested is that although Devon is valued the cheapest, it also the most profitable company among the three. It enjoyed 26% operating margin, while the operating margins of Encana and EOG were only 5% and 12%, respectively.

As of December 2012, Tweedy Brown owned nearly 3.74 million shares, with the total value of about $194.5 million, representing 5.7% of its total portfolio. Devon was the third largest position in Tweedy Brown’s portfolio.

The Largest Independent Oil & Gas Company

The fourth largest position was ConocoPhillips. It had nearly 3 million shares in the company, with a total market value of more than $173.2 million, accounting for 5.1% of its total portfolio. ConocoPhillips is considered the largest global independent exploration and production company, with worldwide operations. As of December 2012, it had 8.6 billion BOE in proved reserves. ConocoPhillips also had a quite conservative balance sheet as well. It had nearly $48 billion in total stockholders’ equity, more than $27 billion in cash and investments, and nearly $21 billion in debt. With the current trading price of $58.20 per share, ConocoPhillips is worth more than $71 billion on the market. It is valued quite cheaply, at only 4.24 times EV/EBITDA. ConocoPhillips is paying to investors a decent dividend yield of 4.6%.

Foolish Bottom Line

Indeed, both Devon and ConocoPhillips are worth holding for the long run as they are quite profitable, valued quite cheaply on the market, and employed reasonable amount of leverage. In addition, both of them might fit well with the portfolios of income investors, as both are paying sustainable and increasing dividends over time. 

Tweedy Browne's Top Stocks (Part I)

Tweedy Browne is one of the successful investment partnerships that was featured in Warren Buffett’s Graham-Doddsville Superinvestors article. As of December 2012, the fund concentrated a lot of its money in its top six holdings, including Johnson & Johnson (NYSE:JNJ), Cisco Systems (NASDAQ: CSCO), Devon Energy, ConocoPhillips, Baxter International and Philip Morris International. In this article, we will dig deeper into both Johnson & Johnson and Cisco Systems to see whether or not investors should follow Tweedy Browne into these stocks.

A Global Leading Healthcare Company

Johnson & Johnson is one of the biggest global companies involved in the research, development, manufacture, and sale of health care products. It has around 275 operating companies in 60 countries, with three main business segments: Consumer, Pharmaceutical and Medical Devices. The majority of its revenue, $27.4 billion, or 40.7% of the total sales, was generated from the Medical Devices segment. The Pharmaceutical segment ranked second with $25.35 billion in sales, while the Consumer segment generated nearly $14.45 billion in revenue in 2012. 

Segments	Pre-tax Operating Margin
Consumer	11.76%
Pharmaceutical	23.70%
Medical Devices	26.20%

Among the three, the Medical Devices segment is the most profitable with 26.2% pre-tax operating margin, while the least profitable segment was Consumer, with only 11.76% operating margin.

Johnson & Johnson has quite a sustainable operating performance record. In the past 10 years, while the revenue has increased from $41.86 billion in 2003 to $67.2 billion in 2012, the EPS rose from $2.40 per share to $3.86 per share in the same period. The dividend is also on the rise, from $0.93 per share to $2.40 per share. Interestingly, the company has a quite conservative balance sheet. As of September 2012, it booked $64.28 billion in total stockholders’ equity, more than $21 billion in cash, and only $16 billion in both short and long term debt.

As of December 2012, Tweedy Browne owned more than 4.36 million shares in the company, with a total value of $306 million, accounting for 8.9% of its total portfolio. With the current trading price of $76.32 per share, Johnson & Johnson is worth more than $213 billion on the market. It is valued at nearly 9.9 times EV/EBITDA.

A Global Leader in Networking and IT Industry

The second largest position in Tweedy Browne’s portfolio was Cisco. The company is the designer and manufacturer of Internet Protocol based networking and other communications and information technology products. Cisco has a diverse customer base, as no single customer represented about 10% or more of its net sales. The majority of its revenue, $14.5 billion, or 40% of total sales, was generated from the sales of switching product category. NGN Routing product category ranked second, with $8.43 billion in total sales in 2012. According to IDC, Cisco was the global leader in the Ethernet Switch market, with more than 62% market share. Hewlett-Packard (NYSE: HPQ) ranked second, with only 9.3% of the total market. 

Source: IDC 

As of December 2012, Tweedy Browne held more than 10 million shares of Cisco, with a total value of nearly $200 million, accounting for 5.8% of its total portfolio. With a trading price of $20.90 per share, Cisco is worth nearly $111.4 billion on the market. The market is valuing Cisco at only 6 times EV/EBITDA. HP is trading at nearly $19.80 per share, with a total market cap of $38.6 billion. HP is valued at nearly 3.8 times EV/EBITDA. In late 2012, HP was hit quite hard, as it had to write down one of its biggest acquisitions, Autonomy, with around $8.8 billion in charges. After the write-down, HP remained quite a risky stock for investors, as it still had around $35.5 billion in goodwill and intangible assets that was quite vulnerable to future impairment.

Foolish Bottom Line

With the consistent operating performance, leading market positions and reasonable valuations, I personally think both Johnson & Johnson and Cisco are excellent stocks to hold for long-term investors.