Value Manager Jeff Auxier’s Top Five Holdings

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Yacktman’s Jeff Auxier manages the Auxier Focus Fund, which was up 5.6% in 2011, outperforming the S&P by more than 3 percentage points, but has underperformed the S&P 500 YTD. His portfolio is heavily weighted in the consumer goods, healthcare, and consumer services sectors; the three sectors comprise 62.9% of his portfolio. Below, we take a look at Auxier’s Top 5 holdings:

Philip Morris International (NYSE: PM) is Auxier’s largest holding at 4.5% of the portfolio. We are a longtime fan of PM as a buy and hold type of investment. However, there has been recent scrutiny over its rocky performance in the Japanese tobacco market. For a number of years, the Japanese tobacco market has experienced flat pricing and volume declines. Moreover, the 20¥ a pack increase that PM tried to lift in response to the October 2010 excise tax increase was unsuccessful and subsequently withdrawn. Things are looking up though: post-earthquake, PM has gained an estimated ~300 bps of market share and Japan Tobacco has finally announced a price increase to account for the excise tax hike. This should improve PM’s pricing; it may not be as high as 20¥ per pack but we’ll take any net increase in price. More good news is that Japanese cigarette market trends have been improving, and despite isolated regional struggles, we are confident in the company’s long-term potential. In Q1, PM reported market share in its top 30 markets by income of 37.3%. For year-end 2011, that figure came in at 36.6%. We believe that PM will continue to gain substantial global value market share and long term free cash flow growth—current FCF yield is ~3%, which we expect to be returned directly back to shareholders through stock buybacks and dividends.

Pepisco (NYSE: PEP) comprises 4.0% of the portfolio and is also held by Seth Klarman, Chris Hohn, and John Armitage. PEP’s Q1 results were on track with sales up 4% y-o-y on the back of a favorable pricing mix, but an EPS decline of 7% y-o-y due to rising commodity costs. Management reiterated its strategic initiatives, which hold a lot of potential but will require significant cost outlays. We expect the sizable investments to reap rewards starting in 2014. We are also optimistic from a growth perspective on the international business, which is growing very fast in the emerging markets—13% growth in Brazil, 21% growth in India, and 33% growth in Saudi Arabia. Recently, PEP struck a strategic alliance with Tingyi-Asahi Beverages, which will further expand its footprint in Asia. We continue to share Auxier's  enthusiasm for PEP as a long-term investment and expect the company to return $6 billion to shareholders in 2012, including share repurchases of $3 billion and dividends of $3.3 billion. We view valuation as reasonable and with a 4% dividend yield, we see future income growth potential.

Microsoft (NASDAQ: MSFT) is the fund’s third largest position comprising 2.6%. New information since last we wrote about the company is that Office 15 will be included on Windows 8 ARM tablets (ARM stands for Advanced RISC Microprocessor). Not to get too technical but we view the RISC (Reduced Instruction Set Computing) implantation to be far superior to CISC (Complex Instruction Set Computing ). Both are CPU architecture strategies but RISC architecture style is faster and distinguished by simple instructions from the CPU. From a more qualitative standpoint, as we understand it, Office 15 will be installed and licensed on all Windows 8 ARM tablets. This should reduce piracy of Office 15, which is a significant problem for the company with an estimated 50+% of Office being pirated. The Office franchise is very much a core part of MSFT, comprising 64% of the business division’s revenue, so it is only logical that MSFT will not be giving it away for free. We think MSFT can trade up to $40 a share in light of the company’s huge cash position, forthcoming Windows 8 launch, and generous shareholder capital return policies.

Merck & Co (NYSE: MRK) comprises 2.2% of the portfolio. MRK had a quiet Q1 with a slight EPS beat ($0.99 versus consensus estimates of $0.98) and made no changes to its FY 2012 guidance. Evaluating the remainder of the year, we believe that the market is still focused on pipeline visibility. Management did not release any pipeline updates but noted that the Zetia and Vytorin patents were upheld removing any overhang in the stock surrounding that legal issue. This ruling allows Vytorin to rake in revenues free of generic competition until April 2017, when the patent expires and protects Zetia until December 2016. Hepatitis C trial results (Improve-It, Reveal, and HPS2-Thrive) will heavily influence stock price as it will affect Victrelis’ ability to take additional market share. Recent results suggest that Victrelis has been doing well again Johnson & Johnson’s (JNJ) Incivek, but MRK needs to quickly develop oral combos, which is the direction that competitors have already moved in. We think a partnership would be beneficial since MK-5172 seems promising. Furthermore, we are keen on seeing the results of the odanacatib phase 3 outcomes trial (MK-0822-018 AM4 EXT) for osteoporosis, though this will probably occur in the later part of the year. We like MRK from a valuation standpoint at 9.9x 2012 EPS versus peers of at 12.5x 2012 EPS and an attractive dividend yield of 4.4% (read more on the Best High Dividend Pharma Stocks and more on competitor Pfizer).

Wal-Mart (NYSE: WMT) is top holding number five at 2.2% of the portfolio. It would seem that WMT just can’t get a break on the public relations front. In a major setback to its efforts to improve its reputation, a NY Times article exposed alleged bribes in its Mexico operations. Whether or not this results in management losses and/or slower footprint expansion in the region remains to be seen, but if either of the scenarios are realized, it would reflect negatively in the stock price. WMT’s Mexico and Central America operations contribute 7% to 8% to consolidated WMT results, playing a core part of earnings and unit growth. The US business has been a different story, a turnaround one that is on track with positive SSS for the past two quarters. The company has introduced several initiatives in grocery, entertainment, apparel, health, and wellness, which we view favorably. We expect WMT to continue to pursue a balanced approach toward increasing shareholder value by pursuing and executing its sustainable long term growth in its proven business model. We view valuation of ~12.2x 2012 EPS 90 and 11.1x 2013 EPS as offering potential upside when coupled with the planned share repurchases and dividends (WMT returned $11.3 billion in 2011).


Fool blogger Meena Krishnamsetty has long positions in PM and MSFT.

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