Two of Lou Simpson's Profitable and Growing Stocks

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Lou Simpson had a quite successful investing career with GEICO Insurance, where he managed to deliver a 20% annual return for around 30 years. In the fourth quarter of 2012, his fund, SQ Advisor, has increased its positions in Oracle (NYSE: ORCL) and Charles Schwab (NYSE: SCHW). With those purchases, both Oracle and Charles Schwab have become two of Lou Simpson’s top five holdings.

A Profitable Technology Giant
Simpson increased his position in Oracle by 44.5%, to more than 3 million shares. As of December 2012, the value of his Oracle’s position was more than $102 million, accounting for 8.5% of his total portfolio.

Oracle is considered the largest global provider of enterprise software and computer hardware products and services, with three main segments: software, hardware systems and services. The majority of its revenue, $26.17 billion, or 70.3%, was generated from the software business. Hardware ranked second with $6.3 billion in revenue in 2012, while the revenue of the service business was $4.7 billion.

As you might know, the software business is known for its high margins. In 2012, Oracle’s software business generated nearly $20 billion in operating profit, or a 77% margin, while the operating profit of the hardware systems was only $2.43 billion, or a 38.3% margin.

An Overvalued Acquisition

Recently, Oracle spent $1.7 billion to acquire Acme Packet (NASDAQ: APKT), a provider of session delivery network solutions used by over 1,600 customers in more than 100 countries. It could be considered Oracle’s expansion into the networking equipment market to compete with Cisco Systems

Acme Packet, with a 40% market share, has been a leader in the session border controller (SBC) market, thanks to strong demand from both enterprise and service provider customers. In terms of the purchase price, I personally think Oracle has overpaid in this deal. With a $274.5 million in revenue and only $8.57 million in EBITDA, the deal has valued Acme Packet at a whopping 3.9 times sales and 190 times EV/EBITDA. However, the deal is quite small compared to Oracle’s enterprise value of $150.9 billion. At the current trading price of $35.40 per share, Oracle is valued at 8.72 times EV/EBITDA.

A Growing Financial and Brokerage Firm

In the fourth quarter of 2012, Simpson increased his Charles Schwab position by 1.76%. As of December 2012, he owned more than 6.5 million shares in the company, accounting for 7.8% of his total portfolio.

For the last three years, Charles Schwab has gradually grown its market share and its client assets, from $1.42 trillion in 2009 to $1.95 trillion in 2012. Merrill Lynch is still the leader in the brokerage space, with $2.16 trillion in total client assets -- but that figure has fallen from $2.27 trillion in 2009.

In 2013, Charles Schwab expected to improve its revenue in all three of its main categories: net interest revenue, asset management fees, and trading revenue.  In addition, Charles Schwab’s clients are getting more loyal to the firm. Its Client Promoter Score has risen significantly since 2004. The client attrition rate has declined around 38% since 2004. Interestingly, around 40% of the company’s new clients were from referrals. 

Source: Charles Schwab’s presentation

Charles Schwab is currently trading at $17.10 per share, with the total market cap of $21.8 billion. The market is valuing the company at 21.2 times forward earnings and 2.5 times P/B. The firm is currently paying a 1.4% dividend yield.

Foolish Bottom Line
Both Oracle and Charles Schwab are the two growing and profitable businesses. They could be long-term investments for value investors. However, I prefer Oracle to Charles Schwab due to its high operating margins and a reasonable valuation.


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Acme Packet. The Motley Fool owns shares of Oracle.. 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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