Lewis Kaufman, Managing Director at Artisan Partners Limited Partnership, says HDFC Bank Limited (ADR) (NYSE:HDB), one of the largest private banks in India, has a business model that is resilient during adverse periods.
HDFC Bank is a unique company. They have a very distinctive — and I would characterize it as wholesome and simplistic — approach to the banking business. They’re not looking necessarily to be the most aggressive to service the widest range of products. I think what they are really looking to do is stick to their core niche in retail banking.
ICICI Bank ran into a little bit of difficulty with the global financial crisis and had to re-tranche on its branch expansion during that period. HDFC Bank continued to invest in branches, and when the economy recovered in 2010 to 2011, it was able to grow at a very favorable rate.”
Kaufman says HDFC Bank has continued to invest in two areas in particular: its branch footprint and digital banking.
Those are two really important things to do when you are talking about a country of a billion people where those investments can bring the next couple of 100 million people into the banking sector for the first time.
So what we’ve seen is, as the economy has stabilized a little bit in India, those investments for HDFC Bank again have begun to bear fruit…in recent quarters [HDFC] has put up between 25% and 30% growth in its retail lending portfolio in a relatively high-quality way.
We like HDFC Bank because it’s the essence of what we would describe as a business value compounder. It’s a company that has the business-model resilience to continue to invest during adverse periods in the business cycle and emerge from those periods stronger than its competitors.
Founder and Managing Director Daniel Lysik of Pratt Capital, LLC, is recommending both Bank of America Corp (NYSE:BAC) and Citigroup Inc (NYSE:C) as attractive long-term investment opportunities today.
Bank of America has the largest domestic branch network serving one in every two U.S. households…. both companies have taken significant positive action steps over the past couple of years and have resumed a long-term growth trajectory. Both companies have undertaken significant cost-reduction programs, are showing operating efficiency improvements, have significant excess capital to manage any near-term pressures and are still operating well-below their normalized earnings power.
Bank of America’s tangible book value is greater than $15. Outside of excessive investor fear, there is no logical reason why the market price should be at $12, a 20% discount to its liquidation value, especially given that systematic risk has been significantly reduced in the U.S. financial system over the past couple of years.
As the company further moves toward 1% normalized operating efficiency, their earnings power will eventually become greater than $2 per share and their ROE will continue to expand to be greater than 10%. Historically, Bank of America’s price to book has averaged greater than 1.5 times, which would be supportive of a stock price more than two times its current levels.
Citigroup and Bank of America are two of our top-five holdings, and we have been adding to our positions during the recent share-price weakness.
Robert Simmons, Portfolio Manager at Valara Capital Management, says that Baker Hughes Incorporated (NYSE:BHI) should benefit whether or not the Halliburton merger goes through.
Baker Hughes is a very interesting situation. It’s currently in the middle of a merger process with Halliburton. The deal is under heavy scrutiny by the antitrust authorities, both in the United States and in Europe. And as a result, the discount to the deal value has opened up to over 20%, expressing a high degree of skepticism on whether that deal will actually get done.
We think Halliburton stock is very cheap, and the company is well-managed. We still would lean to the idea that the deal will get final approval, and if that happens, you get a total value of more than $50 at current market prices. With Baker Hughes trading at $40, you get the immediate 25% appreciation of the discount closing, but we also think that you would get — you’re getting cheap Halliburton stock, so we think that the total value is $65 to $70 for relatively fantastic return.
In the event that the deal does not close, in particular because of regulatory issues, the breakup fee that Halliburton is required to pay Baker Hughes is $3.5 billion, which is 20% of Baker Hughes’ current market cap. So at the current price, we think Baker Hughes is undervalued and worth probably 30% more than its current price, and with the breakup, you would get an additional 20%. On this basis, Baker would be worth as much as $60 per share, so that’s a roughly 50% upside from here as well.
And we think Baker is well-positioned for the current downturn. It’s got the best balance sheet out there. And so if we ended up with Baker, we’d still be very happy. We think, at the current price, it’s kind of a win-win situation.
International Business Machines Corp.
Senior Vice President Peter Siphron of Siphron Capital Management says investors should still be looking at International Business Machines Corp. (NYSE:IBM), a company that continues to generate consistent profits and return money to shareholders.
Over the last two decades, IBM has been able to virtually every year buy back shares to the point of reducing the share count, which essentially benefits the existing shareholders by increasing their relative ownership.
Keep in mind that this is a seasoned technology company that has worked on switching from legacy hardware to newer software and services. That transition period is going to be bumpy. And it may not be the same exciting story that you might have with Amazon drones delivering products to your doorstep or Tesla’s Model X having doors that open above your head in a technologically innovative way, but IBM is a tried-and-true technology company that understands how to squeeze consistent profit out of relatively modest sales growth.
Siphron adds that Watson will provide possibilities for IBM’s growth and innovation in the future, as will the company’s cloud services.
Artificial intelligence is going to be part of our future, and IBM’s Watson certainly is one of the leading efforts in that field. And like Amazon, they have seen the benefit of providing cloud services. IBM has started spending considerable resources on that front to develop some good products and packages that will compete with the likes of Amazon and Microsoft, and others in the cloud-based service sector.
Peter Siphron, Senior Vice President at Siphron Capital Management, says Tesla Motors Inc (TSLA) may finally see profits from its lower-priced Model 3 car. As such, he says there are many ways in which Tesla distinguishes itself from other automobile companies.
The first distinction that comes to mind is how Tesla doesn’t want physical dealerships across the 50 states. They would like to have an on-demand sales model… ultimately, they want to make their cars to order and not have the overhead or the cost structure that typical dealerships representing the Nissans and Fords and Chryslers do.
Their entire fleet is electric. They sell only zero-emissions cars and don’t have any of the legacy issues associated with traditional, internal-combustion automobiles. Just look at the Gigafactory that they have established in Nevada, which is going to provide the battery packs, or engines, for their electric vehicles. So this is being done on an unprecedented scale in the electric-vehicle market. And even before they get that Gigafactory up to capacity, they are already siting out a second one that probably will end up being in Europe or Asia somewhere.
We know they have plans for the Model 3, or the lower-priced version of their electric vehicle, coming out within the next 18 to 24 months, but they have been historically a little optimistic about the delivery dates. But regardless of when the Model 3 comes off the production line, you will have a dramatically lower price per vehicle at presumably a much higher volume. It all boils down to whether or not Tesla makes money on their cars.
Here we get to the three key metrics that generate profits: volume, cost and price. So Tesla’s ability to balance the cost of the production of all those vehicles with the volume they can sell and the differential between price and cost is what’s going to potentially generate profits.
Peter Siphron, Senior Vice President at Siphron Capital Mangement, looks at Wal-Mart Stores, Inc. (WMT) as a mirror image, from a brick-and-mortar aspect, of Amazon.com.
Starting with the brand-name recognition, you have an established business that is known very well to its customer base. And those loyal customers have been very comfortable going into the Wal-Mart stores. They know the layout, they know the name, they know what they should expect, and they know they are getting a good deal.
They’ve not only survived the Internet boom/bust, but the financial recession we had recently. And that is because they are the go-to retailer that people do trust.
Siphron says there are also contrasts between the two companies.
[Wal-mart has] built out over 1 billion square feet of retail space, largely company-owned, but they have managed that sales growth in a very consistent and profitable fashion. You can just look at the last completed fiscal year for Wal-Mart versus Amazon over the last decade, and in the last year, Wal-Mart earned more in profit, almost 3.5 times more than Amazon’s total profit over the past decade.
Peter Siphron, CFA, Senior Vice President at Siphron Capital Management, says Amazon.com, Inc. (NASDAQ:AMZN) has many characteristics that would benefit an investor’s portfolio.
If you look at the names in the news, Amazon certainly comes to the forefront as one of the more intriguing names for a variety of reasons…The brand strength is certainly key, and the fact that when people go shopping, especially online, it’s pretty much the first place they go to for comparison shopping. So you can have potentially a captive consumer base, and that brand strength is something that one should look for in any equity investment.
Siphron says Amazon can be looked at as either a technology or a consumer discretionary retail stock, or both, but he sees the technology side continuing to develop.
They certainly have relied upon technology for their foundation business, which is online retailing. But…that use of technology will evolve, and they try to stay at the leading edge of it. And you see that most prominently in Amazon Web Services, where they have levered off of their technological expertise and actually offer a Web service product and suite of packages for all potential clients.
For any product or service, customers are looking for something that gives them some comfort, something they can trust. So if it’s a food, a beverage, a service, a company, a retail outlet, that name does matter. And you can see that in Amazon’s efforts to promote their brand. For example, Amazon Prime is often placed on the cardboard boxes they ship out to customers. And we would imagine that when they get their fleet of trucks and planes and drones out there, you will see Amazon prominently displayed on all of those transports.
Dan Hanson, Portfolio Manager at Jarislowsky Fraser Global Investment Management, says PepsiCo, Inc. (NYSE:PEP) is being proactive in diversifying its portfolio of products to stay in line with the health interests of consumers.
Pepsi…is a business we own where they likewise have some exposure to this negative CSD volume trend, but we think management is very mindful of those issues, and so they have very proactively expanded their portfolio of beverages to include capabilities that are much more in synch with the health and wellness interests of the consumer.
And then, at the same time, they have a much more diversified portfolio relative to Coca-Cola. In Frito-Lay, they’ve got a world-class snacking business, which is really a gem of a business that we think is underappreciated. And that, in my mind, is an example of how, regardless of whether you wear the label of sustainability as an investor, having an understanding of those issues can be very helpful in illuminating both risks and opportunities.
Dan Hanson, Portfolio Manager at Jarislowsky Fraser Global Investment Management, says that in the context of the online retail world taking over, TJX Companies Inc (NYSE:TJX) has a business model that has proved very resolute.
In the case of TJX, they’ve got a unique ability to deliver a treasure-hunt shopping experience to customers who come back. And you see it in the traffic, which has been remarkably resilient through economic cycles and through the increase of online shopping activity.
TJX has really built a unique supply chain and purchasing organization. It’s a capability at scale that has proven to be responsive to consumers’ and shoppers’ needs, and will uniquely continue to deliver value to customers.
Hanson says retailing has become even more competitive today with instant information, social media and online competition. Therefore, his firm looks for an underlying source of value.
Value to the consumer is in the DNA of the company. When they started out, the department stores had much stronger pricing power. That power has eroded the department store, but TJX has continued to add value to customers.
Senior Vice President William Rowe of First Financial Trust and Asset Management says that right now there are buying opportunities in the energy sector, and Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) are the strongest in the space.
Oil names have really taken it on the chin here. As you go down the food chain, a lot of the energy credits are now trading at the distressed levels. And going up to maybe the strongest two credits in that space, which would be Exxon and Chevron. Those prices have come down, and those spreads have widened pretty substantially because of everything that’s going on. And when times get rough, that typically provides some very good buying opportunities.
Rowe says that when it comes to balance sheets, Chevron and Exxon’s are excellent.
At this point in time in the market, it’s all about balance sheet. How strong are you? Do you have the ability to weather the storm? And without a doubt, those two companies do.
There’s going to be a lot of companies that don’t make it out of this. That’s the beauty of this also is that because there is so much stress in the market, it really doesn’t matter if you’re Exxon or Chevron, or if you’re a lower-tier company. The pricing is getting very negative. So moving into the top credits within that space provides very attractive entry points.
