Bill Nygren: Oakmark Fundshttp://www.oakmark.com/opencommentary.asp?commentary_id=322%20&news_from=hPart One: New Purchases in 2004:Wal Mart (WMT) 5 years ago at $70 it was selling at 55 times earnings. Earnings have doubled since 1999, but stock is around $50. Expected earnings are $2.75 a share, or 18 times earnings. Wal-Mart is now priced like an average company. Consistently delivering two to four percent same store increases. Their wholesale club stores, Sam's, have not yet matched profitability levels of their competitors, this is an opportunity. Rapidly gaining share in supermarkets. Great opportunity to expand internationally. They are repurchasing stock. Decent top line growth, margin improvement, fewer shares outstanding, and potential for P/E expansion.Viacom (VIA.B)Cable's dual revenue stream of subscriber fees plus advertising -- combined with share gains from broadcast television -- has made this an above-average growth industry. When valuing any media company, instead of looking at P/E ratios, we estimate the value of all their significant assets, deduct any claims against those assets, such as debt or preferred stock, and then get a per-share value estimate by dividing by the number of shares outstanding. Viacom's cable networks alone are worth close to the price of the stock.Citigroup (C)The strongest global financial services franchise. Five years ago it sold at 22 times earnings. Earnings this year are expected to be almost two-thirds higher than they were in 2000. Despite that, the stock has declined about 20%, making its current P/E ratio only about eleven times, half what it was in 2000. It sells at eleven times earnings, yields nearly 4%. Citigroup is a competitively advantaged financial services company that is being priced like it is only mediocre. Limited Brands (LTD)Victoria's Secret and Bath & Body Works sell products to which consumers have shown below-average price sensitivity, they are unusually well protected from Wal-Mart competition. Victoria's Secret and Bath & Body Works account for over two-thirds of Limited's sales and for nearly all of their operating profit. Sells at sixteen times earnings. No debt. The problem is that Limited also owns two apparel retailers that are struggling -- Express and, their namesake, the Limited chain. Despite management efforts to turnaround these businesses, results are still disappointing with declining same-store sales and non-existent profitability. They might turnaround or close them. In just over a year, Limited has repurchased about 20% of their outstanding shares.Coca-Cola Enterprises (CCE)It is the world's largest soft drink bottler. Coca-Cola Enterprises accounts for about 80% of Coca-Cola's U.S. sales and about 25% of their sales outside the U.S. Sells at 16 times earnings. As the primary vehicle for Coke to sell its concentrate, we think Coca-Cola Enterprises enjoys a competitive advantage deserving of a premium valuation.Raytheon (RTN)The stock peaked six years ago at $75. It now trades at half that price. The construction business they purchased turned out to be worth much less than zero. New management was put in place just under two years ago. Sells at just over 20 times trailing earnings but only 12 times expected 2006 earnings. The business jet division was at a cyclic trough last year, but will be profitable next year. JPMorgan Chase (JPM)Consists of JPMorgan, Chase Manhattan, Chemical, Manufacturers Hanover, Bank One, First Chicago, NBD Bank. Superior management coming in to a previously under-managed business. Trading at ten times next year's earnings. Merging with Bank One. Jamie Dimon from Bank One will infuse his cost-cutting mentality into the JPMorgan side. Jamie Dimon has a proven track record of delivering value to its shareholders. Pulte Homes (PHM)The largest homebuilder in the US. The stock sells at $73. Will earn $9 per share this year, and they see that number growing to between $13 and $14 by 2007. . Earnings over the past decade have grown at nearly 30% per year, and book value has increased almost five-fold. We think that instead of a housing bubble, we are more likely at a several year plateau in prices.Part Two: The 80/20 Rule: When 80% of analyst and media commentary is about problems in business units that account for just 20% of the value.Viacom -- 80% of the news surrounds the problems in the radio division, causing the stock to fall to a sizeable discount to the non-radio assets. Washington Mutual (WM) -- 80% of the news surrounds the mortgage business, ignoring the great retail-banking story.Time Warner -- 80% of the focus is on AOL instead of their highly valuable cable and entertainment assets.Walt Disney -- 80% of the attention goes to the personalities of the executives and to whether or not Desperate Housewives can turnaround the ABC network. Very little attention is paid to their Crown Jewel -- the ESPN cable networks.Limited Brands -- 80% of the attention is devoted to struggling apparel stores and very little is written about continued success in their specialty retail operations, Victoria's Secret and Bath & Body Works.
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