A Look Into Top Lou Simpson's Investments (Part II)

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Following the recent article talking about the top 2 positions of SQ Advisor LCC, which is run by Lou Simpson, this article will unveil two more stocks, which were the third and the fourth biggest positions in his portfolio as of September 2012. One is in the computer hardware industry and the other is a apparel retailer.

A Strong Global Market Leader

The computer hardware company is TE Connectivity (NYSE: TEL). As of September 2012, he owned more than 3.16 million shares in this Swiss company, accounting for 9.2% of his total portfolio. It was previously named Tyco Electronics, the global manufacturer of the 500,000 electronics products to many industries including energy, healthcare, communication and aerospace, with more than 200,000 customer locations in more than 150 countries. The majority of its sales were generated from Transportation Solutions, accounting for 45% of the total revenue in fiscal 2012. The Communication and Industrial Solutions were the second biggest revenue source representing 30% of the total sales. Network Solutions ranked the third, with 25% of the total revenue. TE is known to be the global leader in the connector industry, with the number 1 position in Automotive, Industrial, and Telecom markets. Automotive and Telecom were also the two biggest markets in fiscal 2012, accounting for 39% and 13% of the Company's total revenue respectively. 

Cash Cow but Relatively Expensive

In the last 5 years, TE has consistently generated positive operating cash flow and free cash flow. Trailing twelve months, the operating cash flow was $1.95 billion and more than $1.4 billion in free cash flow. The cash flow has been generated in the strong balance sheet base. As of September 2012, TE had nearly $8 billion in total stockholders’ equity, $1.6 billion in cash and more than $3.7 billion in interest-bearing debts. The return on invested capital was around 10.2% over the last 12 months. At the current trading price, TE is valued at 7.9x EV/EBITDA, higher than the valuations of its peers including Alcatel-Lucent (NYSE: ALU) and Corning (NYSE: GLW). Alcatel is valued at only 4.2x EBITDA multiples whereas Corning is valued at 6.65x EV/EBITDA. TE is paying investors 2.1% dividend yield, whereas Corning is paying 2.5%, and Alcatel doesn’t pay any dividends.

Second Largest Global Home Improvement Retailer

The fourth biggest position of Lou Simpson was the home improvement retailer Lowe’s Companies (NYSE: LOW). Lowe’s is operating around 1,745 stores, with 197 million square feet of retailing space in the US, Canada and Mexico. Lowe’s has diversified its supplier base, with more than 7,000 vendors globally, and no single vendor represented more than 7% of the Company's total purchases. In addition, the retailer owns 14 regional distribution centers in the US, and each distribution center serves approximately 120 stores. In the past decades, Lowe’s has managed to pay sustainable and increasing dividends over time, from $0.04 in 2002 per share to $0.53 per share in 2011. The free cash flow has also been on the rising trend, from $334 million to $2.52 billion in the same period.

At the current trading price of $35.58 per share, Lowe’s is trading at 9x EV/EBITDA, lower than that of its larger peer, Home Depot (NYSE: HD), with 11.27x EV/EBITDA. Over the past 12 months, Lowe’s delivered a 7% operating margin, which was lower than Home Depot’s operating margin of 10%.

Foolish Bottom Line

Investors could consider both Lowe’s and TE to be in their income portfolios with their consistent and growing dividend payments. Out of the two, I prefer TE due to its global market leading positions in several markets it is serving. Even with the relatively expensive valuation, TE would be a safe bet for long-term shareholders. 


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Corning, Lowe's Companies, Inc., and The Home Depot, Inc.. The Motley Fool owns shares of Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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