3 Long Ideas from Aberdeen Asset Management’s Top Buys

Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Aberdeen Asset Management is an investment and hedge fund management firm. The firm employs a bottom up approach to invest in global equities, with special emphasis on quality management teams and solid business models. I scanned Aberdeen’s top buys from the last quarter for ideas, and the following three stocks looks promising.

Company

P/E ratio (last 12 months)

Industry P/E (last 12 months)

Zimmer Holdings, Inc. (NYSE: ZMH) 

15.21

21.89

Xilinx Inc. (NASDAQ: XLNX)

18.32

19.80

Xerox Corp. (NYSE: XRX)

7.29

13.65

Source: Yahoo! Finance

Each of these stocks is trading below the average P/E of their respective industry. Also, each of them has good long term prospects. Let’s have a look at these companies in detail.

Zimmer Holdings

Zimmer was able to beat consensus EPS estimates again in 3Q 2012 with a reported EPS of $1.15 vs. consensus estimate of $1.12. In the quarter, the European market performed surprisingly well as sales grew by 9% quarter over quarter. Although sales were down in the US market, it was mainly due to the doctors waiting for another new product ‘Persona’ in the knee segment. As the product will be launched completely by 2013 this will have a ready demand in the market, fueling company sales. In addition to Persona, the company has various other products in its pipeline, including Vivacit-E, vitamin E-infused HXLPE liner, and Sidus, all of which are expected to be launched in 2013.

On the other side, we can expect Zimmer benefitting from the recent acquisition of Dornoch Medical Systems, which will add medical fluid management and disposal products to its portfolio. 

Zimmer’s cost saving initiatives have already helped the company to save ~$30 million in 2012.  This initiative is expected to further bring ~$400 million savings by 2016. Coming onto its share buyback program, the company has utilized only $98 million in share buyback in 3Q 2012, and is still left with $1.15 billion.

Keeping in mind the above points, I think entering into this stock at this position will prove beneficial in the long run.

Xilinx

Despite a difficult macro environment and three consecutive quarters without revenue growth, Xilinx was able to beat the EPS estimate in the last 4 quarters. In 2Q 2013, it posted EPS of $0.46 vs. the consensus estimate of $0.41. I think the company will continue to surprise us in the long term, given its strong hold in LTE market, especially because of the growing demand in markets like Asia and North America. Although LTE won’t replace 2G/3G-based infrastructure in the near term, a secular shift to higher end products presents a good opportunity for Xilinx.

Additionally, the company’s 28nm products have also shown a remarkable growth of 100% quarter over, from ~$10 million to ~$20 million.  28nm currently contributes 4% of total revenue, and is expected to contribute ~10% by 2013. I anticipate new product launches, including FPGAs and Zynq-7000, will help it overcome its weakness in the defense sector from the last quarter.

Furthermore, it’s recently announced acquisition of Modesat Communications will also help it target OEM in mobile backhaul platforms. As OEM’s are looking for solutions, including NLOS backhaul and e-band technologies, this acquisition should help it provide a complete portfolio of products to its customers. Also, Xilinx will benefit from the Linux SDK technology, which it got from the acquisition of PetaLogix.

Xilinx has a solid balance sheet, with $3.2 billion in cash and short term instruments. Although the company has reduced its guidance for the current quarter, I think it is well positioned to grow in the long run given its product pipeline.  I rate this company a buy.

Xerox

Xerox has seen its shares decline 21% in last one year from $8.54 in November 2011 to the current level of $6.67. This decline in its share price has concerned many investors; but at this level Xerox now provides us with an entry point for long term investors considering its better services signings. The total new deal signings have increased 24% quarter over quarter, from $2.5 in 2Q 2012 to $3.1 in 3Q 2012. Also, higher renewal rate will lift margins in the future, as this would incur lower upfront cost in comparison to the new contracts.

However, it’s printing business is declining but its steady growth in services segment will continue to offset any negative impact on its total revenue. Its total revenue from services grew 6% year over year in 3Q 2012, reaching $2.85 billion, and is expected to further grow by ~5% year over year in 2013. Additionally, the company has said it will restructure its service division, which will cost ~$100 million in 4Q 2012; this would result in operating expense savings in the coming quarters.

Xerox has a low forward P/E ratio of 5.75 compared to its peer group, as Canon has a P/E of 11.33, while Accenture has a P/E of 14.36. Combining its growth prospects and expected operating cash flow of ~$2 billion in 2012, I see an upside in the share price in the coming time.

References: Fund description was sourced from Thomson Reuters


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Zimmer Holdings. 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.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure