Why Does First Eagle Love These Stocks?
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Jean-Marie Eveillard, the senior adviser at First Eagle Investment Management, has been with First Eagle since 1968, when he started with SoGen International Fund. First Eagle focuses on a long-term, global perspective. First Eagle doesn’t recommend or endorse any of the stocks or analysis in this article, and we have no relationship with the fund, but based on SEC filings these are our opinions of what they are thinking. Read on to see the fund’s largest reported positions at the end of the second quarter, according to the firm’s 13F.
First Eagle made only modest increases in their top five holdings during 2Q 2012, but did increase their largest holding, Cisco Systems Inc. (NASDAQ: CSCO), by 11%. First Eagle has owned the most shares in Cisco of any firm we track since the second quarter of 2011, currently at 46 million. The communication equipment company provides products and connects and manages communications across local and wide area networks. As more companies increase their bandwidth usage, this will prove positive for Cisco, as it is a total solution provider.
Cisco does trade at a significant discount when compared to key peers, such as Juniper Networks, which is a tenth the size of Cisco. Juniper trades at a 40 P/E and Cisco at a 13. However, Cisco’s forward P/E is 9. We believe that Cisco trades at a discount to most of its smaller, more growth focused peers because Cisco has plateaued on being able to obtain market share and are still in the early stages of developing new products.
The IDC puts Cisco’s Ethernet switching market share, which is 32% of product sales, at 60%. As well, the company is also a leader in routers, at 51% of the market. Routers are 18% of Cisco’s revenue. Cisco pays a fairly safe dividend that yields 3.0%. The company boasted $49 billion in cash as of the end of 2Q, while only having debt of $16 billion.
Making up almost 3% of First Eagle’s 2Q 13F portfolio is Microsoft Corp. (NASDAQ: MSFT). A “computer” company is just what it they want competitors to think it is; Microsoft has quietly reinvigorated itself, with strides in becoming more engaging with its customers. Including improvements in the upcoming interactivity that will be programmed into its latest XBOX, as well as what it is doing with its own social network. Microsoft is trading at a trailing P/E of 16 and a forward P/E of 10.
Other key firms invested in Microsoft are Ken Fisher of Fisher Asset Management and Boykin Curry with Eagle Capital Management. These three firms together, First Eagle, Fisher Asset Management and Eagle Capital have been the top three owners of Microsoft all the firms we track since at least the first quarter of 2011. Although the fund has traded in a range that puts it around the $30 mark for a while, the anticipated new gaming system, a new operating system and a new tablet may break Microsoft out of this funk. For the wait, Microsoft pays a 3% dividend yield.
Comcast Corporation (NASDAQ: CMCSA) and the NBC Universal combination of 2011 should help advance Comcast’s 2012 revenues by 8.4% to $62.5 billion. The company will now be able to penetrate across various facets, including bundled video, data and voice. The combo will also allow Comcast margin expansion in 2012. The company has seen a run up in shares, up over 50% year to date, and now trades at a 20 P/E, while DIRECTV (see Why Buffet is a DIRECTV subscriber?) trades at 14 and Time Warner Cable at 17. Insider sales have been robust amongst the run up.
SYSCO Corporation (NYSE: SYY), a food distributing company, makes up 2.7% of First Eagle’s 2Q 13F portfolio. SYSCO has had mixed performance and mixed share price performance. Given most of SYSCO’s sales are to restaurants, 62% of 2011 sales, the extended high levels of unemployment may continue to hamper the stock performance. The industry tends to be ripe with competition for food distributors, but SYSCO maintains about 18% of the market. Estimates show about 9% of growth in next year EPS and the company pays a dividend yielding 3.5%.
Cintas Corporation (NASDAQ: CTAS), the uniform rental company, has built a large business on providing uniform rentals to businesses. Uniform rentals made up 70% of the company’s 2011 revenues, but the company has been expanding services. Now more than 50% of the company’s customers purchase services other than uniforms, such as restroom supplies and cleaning, first aid and safety and fire protection. First Eagle is alone at the top in Cintas, with respect to shares owned, by firms we track. While Chuck Royce and Jim Simons are both owners of Cintas, they down 540,400 and 359,668 shares, respectively. First Eagle owns 16.7 million.
First Eagle made little changes, only increasing a few positions modestly, and keeping the top five holdings the same from the first quarter of 2012. Two tech companies dominated the top positions of First Eagle’s 13F portfolio—Cisco and Microsoft—both of which are "low-growth" tech companies that are working on reinvigorating themselves. Also, both of these tech companies pay a 3% dividend for the wait. We believe that First Eagle has made a couple interesting bets on less followed companies—SYSCO and Cintas—that could excel with a positive turnaround in the economy, meaning First Eagle may be more bullish on the economy going forward.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.
