T. Rowe Price manager's top new buys

Brian Rogers picks out some low-PE, high-dividend industry leaders.

By MSN Money Partner Apr 24, 2012 10:32AM

By GuruFocus

Brian Rogers, the chairman and chief investment officer overseeing $500 billion at T. Rowe Price, found six new opportunities in the first quarter that met his investing criteria. Price has a positive outlook for the markets right now, seeing healthy corporate earnings, eurozone risk receding and low price-to-earnings multiples with room for expansion.

As always, regardless of his broad view of economic conditions, his first priority is seeking "established companies exhibiting attractive stock valuations and reasonable dividend yield," as he says in his first-quarter letter.

Last year, Rogers' fund returned 4.51%, and has returned 4.71% annually over a ten-year period.

The largest new buy in Rogers' portfolio is Consol Energy (CNX), his only new buy in the basic resources industry. He acquired 5,250,000 shares of the company at an average price of $35 a share. Rogers made money on this stock before -- he bought 1.5 million shares in the fourth quarter of 2008 at roughly $29 per share and gradually sold out as the price soared to about $50 per share at his last sell in the first quarter of 2010.

Consol Energy, headquartered in the Appalachian Basin, is the largest producer of high-BTU bituminous coal and the largest underground coal mining company in the U.S. The company had a fourth-quarter full of records. It achieved record sales revenue of $5.7 billion, a 14% quarter-over-quarter increase, along with record overseas sales which jumped 68%.

Natural gas is a potentially lucrative asset for the company as well. It reached record gas production after a 20% quarter-over-quarter increase, though weakened gas proceeds offset the contribution this could have made the fourth-quarter results. Two partnerships that could generate proceeds and carry of nearly $3.3 billion in coming years are its strategic alliance with Noble Energy Inc. to jointly develop Marcellus Shale and another partnership with Jess Corporation to explore for and develop oil, liquids and gas on 200,000 acres of Utica Shale in Ohio.

Record cash flow from operations in 2011 of $1.5 billion and an improved financial position prompted management to increase its regularly quarterly dividend by 25%, with an annual dividend set at $0.50 per share.

Consol Energy's stock price has declined 35% in the last year to open at $32.56, and it has a price-to-earnings ratio of 12.07.

Rogers bought 3.25 million shares of his next largest purchase, Carnival Corp. (CCL), at an average price of $31.50 per share. Carnival shares have declined more than 16% in the last year.

Carnival is another low-price-to-earnings ratio (14.0) stock with solid 3.2% dividend yield that is also a leader in its industry, as the largest company in the cruise industry. The company has also seen 10-year revenue growth of 13.5% annually and 10-year EBITDA growth of 10.4% annually. In 2011, it produced $1.1 billion in free cash flow, its third-highest level of the last 10 years.

After one of its ships, the Costa Concordia, sunk off the coast of Italy in January, Carnival issued a statement saying it expects the financial loss from the incapacitated ship to be roughly $85 to $95 million for the fiscal year ending November 30, 2012. It couldn't determine other costs to business at the time. In the first quarter, the company totaled related expenses at $29 million, including a $10 million deductible. It also recorded an insurance recoverable of $515 million to offset the write off of the value of the Costa Concordia, which is beyond repair.

Bookings have also been affected by the accident. "At this time, cumulative advance bookings, excluding Costa, for the remainder of 2012 are approximately 3 occupancy points behind the prior year with prices slightly higher than last year's levels (constant dollars). Since the date of the Costa Concordia incident in mid-January through February 26, fleetwide booking volumes, excluding Costa, have shown improving trends but are still running high single digits behind the prior year at slightly lower prices," the company said in a statement.

Rogers could have purchased shares of the company around the time of the shipwreck, when the price slumped almost 16%.

Rogers bought 4.5 million shares of United Continental Holdings (UAL) in his third-largest new purchase of the quarter. He paid an average of $21 per share for the stock whose price has increased almost 10% over the last year. United Continental Holdings is an airline holding company and the largest U.S. carrier to China.

In the last three years, United Continental's revenues have jumped from $16.2 billion to $37.1 billion. It is currently in the process of merging with Continental Airlines, and received a single operating certificate from the Federal Aviation Administration in 2011 to allow all its activities to be considered as "United." The merger is expected to save the companies $1 billion to $1.2 billion per year and generate between $800 million and $900 million in annual revenue synergies.

In 2010, the company made a $253 million profit after two years of losses stemming from the financial crisis. Net income rose to $840 million in 2011, and free cash flow has increased for the last three years, reaching $1.8 billion in 2011. United Continental pays no dividend and trades for a price-to-earnings ratio of 10.1, compared to the industry average of 18.3.

Rogers' fourth largest new purchase was 2.35 million shares of Hasbro Inc. (HAS) at an average of $35 per share. Hasbro is one of the largest toy makers in the world, and its stock has declined 6.3% over the last year to open at $35.49.

After a slight dip in revenue from 2009 to 2010, it increased from $4 billion in 2010 to $4.3 billion in 2011. Overall 10-year revenue has increased at a rate of 8.3% annually and EBITDA at a 10-year rate of 6.3%. The company has produced strong cash flow of over $100 million in the last ten years and has a dividend yield of 3.3%.

In the first quarter of 2012, the company's net revenues slipped year-over-year to $649.9 million from $672 million. It reported a net loss of $2.6 million compared to net earnings of $17.2 million in the first quarter of 2011. The company expects sales to pick up in the latter half of the year and that it will grow revenue and earnings per share for the full year, absent the impact of foreign exchange. The company will also receive revenues from several films it is producing products for, such as "The Avengers" and "Battleship."

Sales results varied strongly by region. U.S. and Canada sales fell 16%, as sales in Latin America increased 23% and Europe and Asia Pacific each saw sales increase 13%.

Rogers' fifth-largest new buy was Nokia Corp. (NOK). In 2007, he sold out of a large holding in this stock at approximately $38 per share. In the first quarter, he was able to buy it for just $5, and acquired 7.5 million shares. The company's stock price has tumbled almost 58% over the last year to $3.63, a near 52-week low.

Nokia, the mobile phone maker that is struggling from intense competition from Google (GOOG) and Apple (AAPL), has seen its revenue diminish 0.4% over the last five years and 4.5% in the last year. EBITDA has fallen at a rate of 30.9% over the last five years. A consistent cash flow generator historically, the company produced just $819 million in 2011 compared to $5.5 billion in 2010. The dividend yield remains high, at 11.1%.

In the first quarter of 2012, Nokia's net sales dropped 29% year over year to $7.4 billion from $10.4 billion due to "greater than expected competitive challenges and seasonality," it said in a statement. It also incurred losses from restructuring.

Nokia has launched its new Lumia devices ahead of schedule in the first quarter, though sales results have been mixed. Sales in the U.S. exceeded expectations, while certain markets including the UK proved more challenging. Devices and services net sales dropped the most in greater China, at 70%, due to increasing competition in the industry. The glimmer of light was that on a sequential basis, sales increased in North America, at 75%, driven by the introduction of the Nokia Lumia 710 with T-Mobile.

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