Ray Dalio Loves This Defense Stock
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In the wide world of hedge funds, there are thousands of money managers, but only a select few that the average investor can emulate with confidence. Ray Dalio is one such role model. Dalio’s Bridgewater Associates has grown into one of the largest hedge funds in the world (here’s our Top 10 if you’re curious), currently sitting on more than $77 billion in assets under management. Primarily using a macroeconomic event-driven strategy, in which Bridgewater trades off of its analysts’ forecasts, the fund has returned an average of 18 percent a year since its 1975 inception.
Looking at Dalio’s last 13F filings yields some interesting findings, most notably on his sentiment toward Rockwell Collins (NYSE: COL), a $7.4 billion defense company. Originally founded in the 30s to develop shortwave radio equipment, Rockwell has blossomed into a diversified organization that produces navigation systems, computerized flight control, communications equipment, heads-up displays, simulators, and even information management systems. Last year, the company made over $4.8 billion in top line revenues, doling out earnings of $4.06 a share. Regarding the latter, year-over-year EPS jumped by 15.4 percent, up from the $3.52 it reported in 2010. By the end of 2012, analysts are expecting Rockwell to report an EPS of $4.40 a share, with that total eclipsing $4.80 by 2013.
Despite this strong forecast, the markets are undervaluing Rockwell’s earnings, as COL is trading at a PE ratio (12.3X) below the industry average (13.0X), and its own 5-year average (15.0X). The stock’s historical discount of nearly 20 percent is cheaper than competitors like General Dynamics (NYSE: GD), which is at a 16.5% discount; Northrop Grumman (NYSE: NOC), which is at a 29% premium; Raytheon (NYSE: RTN), which is at a 12.8% premium; and Garmin (NASDAQ: GRMN), which is at a 10.1% premium.
When looking at Rockwell’s earnings yield, a similar story is told, at least in comparison to historical values. Traditionally loved by Warren Buffett (as seen here), this metric displays the earnings of company as a percentage of its share price. At its current price of around $50 a share, COL has an earnings yield of 8.2 percent, which is greater than its 5-year average (6.7%) and GRMN (7.1%), but below GD (10.4%), NOC (12.0%), and RTN (9.8%). Thus is the predicament surrounding COL. For the diehard value investor, the stock looks like a clear buy, as it paying more than historical levels. There are, however, higher earnings yields that can be found within the defense industry.
From an income standpoint, COL pays a decent dividend yield of 2.45 percent, though this has been under pressure from wilting operating (-7.6%) and free (-15.8%) cash flows over the past year. With operating (16.4%) and net (13.2%) margins above industry averages, the company has been more efficient than its peers, though it must improve its cash position going forward.
The macroeconomic picture surrounding Rockwell is cloudy, to say the least. Long-term demand for commercial jets is generally bullish; global air traffic increased by nearly 7 percent in 2011 and similar gains are predicted this year. From a political perspective, though, lower defense budgets may stomp out any private sector growth. It remains to be seen exactly how much austerity we’ll have, but communications products produced by COL are considered to be mostly price inelastic, so cuts may be felt elsewhere in the industry.
While investors would be wise to wait and see how this situation shakes out, its clear that Dalio is bullish on the defense company. He increased his holdings of COL by 231 percent last quarter; Bridgewater now holds more than $19 million in the stock. WealthLift’s Sentiment Index does rate Rockwell as a hold, as the community’s users are split on what the future will bring. The company reports its third quarter earnings next week; check back at WealthLift INSIDER for an update.
Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool owns shares of General Dynamics, Northrop Grumman, and Raytheon Company. 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.