3 Solid Buys From Egerton Capital's Portfolio

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

The 13F filings exhibit equity positions of prominent investors in the U.S. According to Egerton Capital’s recent filings, this hedge fund had $2.68 billion in assets under management as of Dec. 31, 2012. The top five holdings of the firm include Visa, MasterCard, American Express, Walt Disney, and News Corp, which account for approximately 54% of its total portfolio.

As per its latest filings, the firm increased its position in Visa (NYSE: V) and News Corp. (NASDAQ: NWSA), while it has decreased its holdings in Walt Disney (NYSE: DIS).

Company

% of Egerton Portfolio

News Corporation

16.77%

Visa Inc.

10.57%

Walt Disney Co.

10.37%

Source: Whalewisdom.com

Taking a closer look at how these stocks performed in the first quarter of 2013 – all of them were able to maintain a positive upside and two of them outperformed S&P 500, with News Corp generating around 18% returns for its shareholders, followed by Disney with 15%. Visa was able to maintain returns at par with S&P 500, which stood at around 7%.

Source: Yahoo! Finance

Let's dig deeper into these holdings of Egerton's portfolio.

News Corp. – Spin-off to create investing opportunity

The hedge fund's top pick was News Corp., which was recently in the news for corporate restructuring of its business. With this spin-off, News Corp has remained a preferred choice among the hedge fund managers. This restructuring will split the company’s into media and entertainment businesses and an independent publishing business, which will separate its profit-making entertainment assets from its less profitable publishing business.

The entertainment company will be called the Fox Group and the publishing company will keep the name News Corp. Creating a new company will break down operations and will push all its business segments to growth. The new publishing company will be started with around $2.6 billion in cash and no debt. The strong cash position will provide financial flexibility to the newly-formed company for its further growth.

I am attracted to News Corp's profit-making media and entertainment business portfolio. Currently, its entertainment business drives 28.5% of News Corp's revenue and 60% of its operating income. Investors can benefit from the split. This restructuring will be completed by June 2013. It will create a better value for its shareholders, as the management of the new companies will be able to focus more on to their individual businesses. The management also guided that News Corp remains committed to finishing its $10 billion buyback by the end of June 2013.

Visa - Awaiting more growth

Visa PIN debit network, Interlink, was the market leader in the U.S having 40%-45% market share. But after the recent debit legislation, Visa has lost a meaningful amount of market share in the U.S. Visa Interlink volumes were down 44% Y/Y in the quarter ended Dec. 31, 2012.

Visa has already started with its initiatives to regain some of its lost market share in the coming quarters. The company has modified its pricing structure, which includes a Fixed Acquirer Network Fee (FANF), lower variable pricing, and increased incentives to merchants for the fast routing of volumes.

Visa is also making use of PAVD (PIN Authentication Visa Debit), which will authenticate transactions even if interlink is not enabled on the Visa card. Use of PAVD adequately helps Visa to capture more transactions. Via these initiatives, I feel Visa can regain its lost market share with a higher revenue yield

Additionally, Visa bought back around 9 million shares during the last quarter. Continuing this trend, the company sanctioned a new share repurchase program worth $1.75 billion until 2014. This announcement could further drive the stock price higher. I feel the turnaround strategy of Visa, along with its focus on the continuous buyback programs, will provide a compelling opportunity to investors in 2013 and 2014.

Walt Disney - Booming ESPN/ Disney and theme park

Disney is performing well since the beginning of 2013. The stock has grown around 15% year to date, making it among the best performers of the Dow. The company's diversified revenue segments have always helped it in defeating economic challenges.

Disney's cable networks have a high dominance across the U.S, with around 95% of pay-TV households subscribing to them. ESPN’s multi-year fee contract, its reputation, and command over sports broadcasting makes it the most valuable media asset for Walt Disney. The fee charged by the company for ESPN and Disney is $4.7 and $0.92, respectively, for each subscriber on a monthly basis.

ESPN’s high ad pricing also generates healthy ad revenue for the company. As the companies are willing to pay more fees for advertising, ESPN’s ad pricing will continue to grow at a healthy pace. I estimate the fee per subscriber to also increase from about $4.69 in 2011 to about $5.85 by 2013.

In May 2012, Disney hiked ticket prices for its theme parks. Revenue and operating Income from this segment were up 7% and 4% year over year, respectively, in 1Q13. People travel more when the economy is good and discretionary spending becomes more feasible. Going forward, I expect this number to pick up as the economy improves. I expect domestic park’s margins to expand in 2013.

ESPN’s margin expansion and the improving margins at the theme parks will continue to drive the stock of the company in an upward direction.

Conclusion

To sum up, I believe the top three positions in Egerton's portfolio represent a perfect strategy for investors to earn more returns. Visa can potentially recapture its lost market share with its pricing initiatives at a higher revenue yield, which in turn will benefit investors. Disney's growth will be driven by margin expansion at ESPN, plus the steadily improving margins at the theme parks. Similarly, News Corp’s stock will be favored by the splitting of its profit-making entertainment holdings, which has a very strong growth outlook in the future. I recommend a buy for all the three stocks.


Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Visa and Walt Disney. The Motley Fool owns shares of Walt Disney. 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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