Tweedy Browne's Top Stocks (Part I)

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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. 

<table> <tbody> <tr> <td> <p><strong><em>Segments</em></strong></p> </td> <td> <p><strong>Pre-tax Operating Margin</strong></p> </td> </tr> <tr> <td> <p><strong>Consumer</strong></p> </td> <td> <p>11.76%</p> </td> </tr> <tr> <td> <p><strong>Pharmaceutical</strong></p> </td> <td> <p>23.70%</p> </td> </tr> <tr> <td> <p><strong>Medical Devices</strong></p> </td> <td> <p>26.20%</p> </td> </tr> </tbody> </table>

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. 

<img src="/media/images/user_14219/screen-shot-2013-02-28-at-62203-pm_large.png" />

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.


hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. 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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