Dear Edgar! I Beg to Differ This Time

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

Value investor Edgar Wachenheim, owner of Greenhaven Associates Inc., is one of the value investors I look to for stock ideas. First, he is very choosy in picking up an addition to his portfolio, and secondly, his portfolio is very concentrated. As per the last 13F filings, this Greenhaven had position in only 26 stocks, with a market value of $3.28 billion. Also, its top 10 holdings represented 84% of the firm’s portfolio.

This fund in the last quarter disclosed its new position on Boeing (NYSE: BA). Wachenheim bought 1.03 million shares, which I think is a solid move given the long-term growth of this company. However, when I had a deeper look at his portfolio, I circled down two stocks which I think can prove to be a very bad move for this fund.

The stocks are Union Pacific (NYSE: UNP) and Lowe's (NYSE: LOW)

<table> <tbody> <tr> <td> <p><strong>Stock</strong></p> </td> <td> <p><strong>% of Portfolio</strong></p> </td> <td> <p><strong>Rank in portfolio (out of 26)</strong></p> </td> </tr> <tr> <td> <p>Lowe's Companies</p> </td> <td> <p>12.99</p> </td> <td> <p>1</p> </td> </tr> <tr> <td> <p>Boeing</p> </td> <td> <p>2.38</p> </td> <td> <p>12</p> </td> </tr> <tr> <td> <p>Union Pacific</p> </td> <td> <p>0.01</p> </td> <td> <p>25</p> </td> </tr> </tbody> </table>


Let’s discuss each of them in detail. 

Union Pacific

Union Pacific's 4Q12 earnings were a mixed bag of satisfaction and future concerns. Its quarterly results were decent, as revenue and EPS of the company were up. Its EPS was $2.19 which surpassed the consensus estimate of $2.16. But despite this growth in revenue the overall sales volumes were down by ~2.4%. This decline was caused by the decreased volumes of the agriculture and coal segments.

The major part of the weakness in volume of the agriculture segment came from grain which was down due to a weaker than expected harvesting and limited supply of corn. Moreover, the upside in EPS was driven by bottom line items, i.e., interest expense, other income, and tax expenses, and not because of operations. All these factors do not give me strong future guidance for this company. 

Going forward, weakness in the Coal Segment will continue by the high coal stockpiles and low natural gas prices in 2013. The company also expects the coal volumes to be down in the mid-teens in 1Q13, with a slight decline in volume for the full year. Another factor for a weaker coal segment will be the recent loss of a contract which accounted for ~10 million tons of coal/year. The loss quantifies to ~$70 million in revenue in 2013. 

On the positive side, the automotive, chemical, and intermodal segments of the company are doing better. In 4Q12 the growth in Petroleum products was driven primarily by a ~160% increase in crude shipments. While the pace of growth will ease slightly in 2013, it is expected to remain strong. Union’s diversified portfolio will surely give it a competitive edge over other players in the eastern region, but I don’t think it will be able to offset the sluggish coal and agriculture segments. I would not advise investors to make an entry in this stock for now.


If we screen the home improvement industry, Lowe's won't be my first choice. I would prefer a more consistent stock like Home Depot rather than Lowe's. Though the company is trying to improve its operations, but I think its results cannot be expected in upcoming quarters. However, the turnaround in the housing market will help the company's merchandising initiatives.

Lowe is working on an Operations Restructuring Program to improve the overall profitability through reinvesting in space for its high-volume products and a simpler pricing policy. It expects to complete the line reviews for ~90% of its 400 products line, and will complete the resetting of stores by mid-2013. But, this process has annoyed and confused many of its vendors, as many are forced to shift categories and institute a more aggressive pricing policy. 

Additionally, Lowe's also plans to spend ~$1.3 billion annually in capex in the next two years.  Spending on IT infrastructure is expected to be ~40% of the total capex, which includes the investment in and other mobility functions. But the fact is that only ~1% of the total revenue is generated from sales through e-commerce.

Basically, the company plans to invest the entire revenue generated from e-commerce to capex. I think the home improvement categories are not well suited to the online channel; hence the growth in this segment will not match up to the amount of investment. Looking at the price at which Lowe's is currently trading and considering the above facts I feel that it is the time to exit from this stock.

Boeing's 4Q12 result was better than expected. Its EPS was ~$1.28 against the estimate of ~$1.19 and the free cash flow was ~$3.7 billion against estimated ~$2 billion. EPS was driven by better commercial sales and margins which were fueled by higher delivery volume and lower R&D expenses. Free cash flow was driven by higher deliveries and better working capital management. This will further help the company to exercise its cash deployment strategy, which includes higher dividends and a restart of share repurchases. 

Along with the result, came the initial guidance for 2013 and to be honest it seems a bit weak. According to the guidance, the free cash flow comes to ~$4 billion after adjusting for ~$1.5 billion for voluntary pension contribution. The reduced cash flow represents the revised schedule of deliveries of aircraft under the Boeing commercial aircraft segment.

According to the revised guidelines the number of aircraft is revised to ~635. The number of 787 Dreamliners in FY13 is expected to be ~60.

However, it is no secret that the 787 has been grounded recently because of regulatory authorities objections. In mid-Jan 2013, there were battery failures on two different 787 aircraft that caused fire in one and forced the other to make an emergency landing. Boeing has employed the necessary resources to bring the issue to a close. But recently it has announced that there may be a delay in delivery of the aircraft to a few airlines.

The long-term position of Boeing is strong and the stock is a buy because of the massive backlog of 4,373 aircraft. However, the very near-term position of the stock could remain volatile until a solution is found for the recent 787 challenges. 


Weak agriculture and coal segment for Union Pacific will remain the reason that the company will face headwinds in the coming year. On the other hand, it is the right time to exit Lowe's because of its unprofitable expenditure in e-commerce, and the late return expected from its line reviews and store resetting. And as for Boeing, there is no doubt that the company has strong backlogs. Conservatively speaking, most of its platforms are booked up to 2016. But the recent problems with the batteries of 787 Dreamliners that may result in a delay in deliveries of aircraft in 2013 has made the stock volatile in the short run.

ShwetaDubey has no position in any stocks mentioned. The Motley Fool recommends Lowe's. 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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