Three Buys From the Baker Ellis Portfolio

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

Baker Ellis Asset Management LLC, the fee-based investment advisory firm, invests mainly in Exchange Traded Funds and in the consumer goods sector. Both make up about ~43.5% of the funds’ total portfolio. In the last quarter ending December 2012, Baker Ellis’s performance was better than S&P 500 as the fund gave a return of ~1.36%, compared to S&P's return of ~0.38%. Looking at its current holdings, I have chosen three stocks from their portfolio that provide an exciting investing opportunity. They are Alexander & Baldwin Incorporated (NYSE: ALEX), Baxter International Incorporated (NYSE: BAX) and Google Incorporated (NASDAQ: GOOG). All these stocks have their long term growth intact and will give returns to the income investors on a constant basis. Let’s discuss each of them in detail.

Alexander & Baldwin

With the recovery in the US housing market, the Hawaii residential market is gaining strength. The average price for homes on Oahu has recovered significantly and is nearly back to the pre-recession level. This has helped Alexander in the sale of its properties. Recently, the company announced that it had pre-sold nearly 80% of its 341 units in the Kewalo Development project under 259 contracts, which has helped the company bring down the ~$120 million in construction financing. The project is a joint venture of Alexander with BSC Waihonua and Armstrong Homes at Waihonua, Kewalo. It is estimated that the units are selling at an average rate of ~$725 per square foot, and will be delivered in early 2015. I believe that the project will continue to see a positive trend and the remaining units will be cleared soon enough. Additionally, Alexander's One Ala Moana Tower, an ultra-luxury tower, was a success. All the units of the project were sold within 24 hours from the commencement of bids in December, 2012, with an average rate of ~$1200/sf.

Apart from this, Alexander is also diversifying its portfolio; it recently entered into an agreement with the local utility on Kauai to put in a six megawatt solar farm.  The total cost of the project is estimated to be ~$23.5 million and the company will sell the power generated for the next 20 years. Because of the tax credits and tax savings incentives, ~70% of the project's costs should be recovered by the end of 2013. This project will add ~$1 million of operating profit to the agribusiness segment of the company and ~$2 million in its operating cash flow. 

Baxter International

Recently, Baxter International declared befitting results for 4Q 2012. The quarterly sales was up ~4% year-over-year (y/y) and adjusted EPS was up ~8% y/y. Analyzing the 2013 guidance declared by the company, I feel that the main focus of the year will be on the R&D milestones. Most prominent of them being Phase III 18 month IVIg Alzheimer's data, which it will declare by 2Q 2013. The company expects more than a 20% success rate in the futility analysis, which began in January 2012. The probability for achieving statistical significance in the tests includes either one or both of its primary endpoints. Along with that, it has many products in the pipeline waiting for regulatory approval such as HyQ, for which the approval from the European Union is pending. The decision will come by the end of 1H13, and Baxter has also confirmed a meeting with the FDA in 2Q13. The outcome of the meeting will determine the future regulatory path of the product. 

Apart from this, the company estimates a growth of ~10% in revenue in 2013, mainly driven by the company's acquisition of Gambro, a Swedish medical-equipment manufacturer. This was the biggest acquisition ever made by the company to date. It paid ~$4 billion for the Swedish giant, and it is estimated that the deal will create a cost synergy of ~$300 million. Along with this it is expected that by the second half of the next year Gambro will contribute ~$830 million to Baxter's total revenue. Nevertheless, this acquisition will also lead the company to some short-term headwinds.

Google

Google grew ~7% after the declaration of its 4Q 2012 results. It was a solid quarter for the company as the gross revenue increased ~36% on a year-over-year basis. Google ended with over $51 billion in its annual gross revenue, which is a significant milestone for the tech giant. Additionally, what helped increase revenue is that its top 25 advertisers on an average spent ~$150 million/per year. Results also show that YouTube is proving to be a useful asset to Google, as its top 100 advertisers have increased their spending on YouTube ads by 50% in 2012. This was driven by “TrueView” which contributes ~70% of all in-stream ads and the site redesign focused on its channels. With a growing video view time of ~4 billion hours/month and development of more professional programming initiatives, YouTube's revenue generation for future is intact.

Another aspect of the results was the reallocation of Motorola Mobility's House business unit. In mid-December, 2012 Google sold Motorola House Business to the Arris Group for ~$2.35 billion. I see the sale of the Home unit as part of the company’s ongoing efforts to streamline the Motorola segment as the unit had a loss of ~$21 million in the fourth quarter itself. Also, the division was facing a potential liability via lawsuit against TiVo incorporated for violating its patents, most of which will have to be met by Google. The sale was the right move by Google, as the same will help it to reduce the over-all legal liability. In addition to this, the management of Motorola has taken an active role in rationalizing the cost and is working on a new smartphone to compete with the iPhone.

The Bottom Line

The recovering housing market of Hawaii and diversification in portfolio will help Alexander's stock to grow in the future. For Baxter, I expect that R&D initiatives, products in the pipeline, and the recent acquisition of Gambro will give growth to the business. Although the increased expenses of the acquisition will reduce the EPS, in the long run the stock seems to be strong. Last but not least, Google's ad revenue will be driven by the increasing reach and preference for YouTube. I will advise a buy for all three companies.


ShwetaDubey has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. 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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