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Valuations Hinder Corporate Moves
Contributed Opinion

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Adrian Day Money manager Adrian Day updates some global equities in his portfolio.

Nestle SA (NESN, Switzerland, Sfr.80.60), responding (in part) to activist pressure, has started another large buy-back program, unfortunately with the stock not so far from records highs. (The stock hit a high of Sfr. 85.65 at the end of June, and has drifted downwards since, though it's still up from the Sfr. 73 level at the beginning of the year.) Nestle has made massive buy-backs in the past, repurchasing $45 billion of shares over the past decade, though usually at lower valuations. A strong balance sheet, strong cash flow, a consistent dividend policy, and a current lack of major acquisition opportunities have led to this buy-back program.

Looking for growth
Nestle is likely to invest more in Africa and Asia, two high-growth areas for the company, and that could include acquisitions. It is also considering the sale of its U.S. confectionery business, a high-margin but slow-growth division.

This is in part in response to activist Dan Loeb's call for significant asset sales and increased shareholder returns, though we do not see the company meaningfully shrinking. Another large shareholder, Pyrford Investments, wants the company to avoid "messing" with its structure, praising it as "the most boring company on the planet." This is precisely why we have Nestle as a core holding. With the current yield meaningfully under 3% (2.85%) and with a price-to-earnings in the high 20s, we are not buying now, but will look for opportunities to add to our position.

Swings and roundabouts
Loews Corp. (L, NY, 47.48) has also undertaken massive buy-back programs in the past, though it is not at the present, out of concern about the possibility of a market correction.

Though relatively concentrated in its holdings, it also is diversified sufficiently, with different holdings doing well at different times. CNA Insurance, a troubled company with low returns when acquired, is now the strongest contributor to the parent company's earnings. Diamond Offshore, on the other hand, has gone from the largest contributor to a weak holding, though still a leader in its industry and with strong leverage to a recovery. Loews' newest acquisition, Consolidated Container, promises fairly steady revenue, though Loews looks for it to serve as a "robust growth platform" for additional acquisitions in the packaging industry.

Notwithstanding concern about a possible market correction, Loews remains undervalued. The market value of its publicly traded entities is just shy of $16 billion, about the same as its market cap. But in addition, Loews holds net cash of $3.2 billion, plus has private units (including Consolidated Container and Loews Hotels) for a conservative discount of 15%. We would be a buyer again on any meaningful pullback, certainly to the mid-$46 area.

Growth and Stagnation in Asia
Kingsmen Creatives Ltd. (KMEN, Singapore, 0.60) had a soft second quarter, though profit for the first-half profit, despite a small slippage in revenue, was up almost 20%. The company is expanding both its geographic reach as well as into new areas. A new U.S. unit, Kingsmen Xperience, for example, seeks to develop the intellectual property for theme parks and lifestyle parks.

The pipeline remains strong and the second-half outlook promising. Trading at a single-digit p/e and yielding over 4% (with a solid balance sheet), Kingsmen is a buy here.

Hutchison Port Holdings (HPHT, Singapore, US$0.45) had a weak first half; although throughput rose 5% and operating profit was flat, the net profit fell almost 20%. Operating costs are under control, though interest costs are rising, and the year has seen the expiration of significant tax holdings.

The increase in throughput may not be sustained absent a rebound in global trade. The company's outlook is for a dividend for the full year in the range of 5.3%–6% (on the current unit price). Following a significant rally on no particular development, the units are trading above fair value. The long-term offers leverage to global trade, and with strong deep-water assets, it is attractive to the new patterns in global trade, but for now, we are not buying.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."

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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Nestle. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Nestle, Loews, Kingsmen Creative and Hutchison Port Holdings. I determined which companies would be included in this article based on my research and understanding of the sector.
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