Top 1st-Quarter Buys of First Pacific Advisors

First Pacific Advisors (Trades, Portfolio) recently released its portfolio updates for the first quarter of 2020, which ended on March 31.

The Los Angeles-based investing management firm emphasizes a research-based, low-risk value investing strategy that seeks to increase capital in the long term while avoiding a high chance of loss. With 88 employees and 31 investment professionals led by Chief Financial Officer J. Richard Atwood, First Pacific invests through several funds, including the FPA Capital Fund (Trades, Portfolio), the FPA Crescent Fund, the FPA International Value Fund and the FPA Paramount Fund.

Based on its investing criteria, the firm’s biggest buys for the first quarter of 2020 were Booking Holdings Inc. (NASDAQ:BKNG), Westinghouse Air Brake Technologies Corp. (NYSE:WAB), DuPont de Nemours Inc. (NYSE:DD) and NXP Semiconductors NV (NASDAQ:NXPI).

Booking Holdings

First Pacific Advisors (Trades, Portfolio) added 129,939 shares to its position in Booking Holdings, increasing it by 5187.19% to a total of 132,444 shares and impacting the equity portfolio by 2.48%. During the quarter, shares traded for an average price of $1,767.55.

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Based in Norwalk, Connecticut, Booking Holdings is a world leader in online travel services, providing booking services for everything from flights and cars to hotels and vacation packages. The company’s focus is mainly on the more fragmented European and Asian hotel markets rather than the U.S. market.

On May 8, shares of Booking Holdings traded around $1,405.16 for a market cap of $57.59 billion and a price-earnings ratio of 12.5. The Peter Lynch chart suggests that the company is trading below its intrinsic value.

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GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rating of 10 out of 10 and a business predictability rating of 3.5 out of five stars.

The cash-debt ratio of 0.8 and current ratio of 1.83 are in line with industry averages, while the interest coverage ratio of 20.09 and the Altman Z-Score of 5.73 indicate that the company is safe from bankruptcy.

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The operating margin of 35.48% is higher than 96.10% of competitors. As per the chart below, the return on invested capital is four times higher than the weighted average cost of capital, indicating high profitability.

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Westinghouse Air Brake Technologies

The firm established a new stake of 2,619,631 shares in Westinghouse Air Brake Technologies after selling out of its previous (much smaller) holding in the company in the fourth quarter of 2015. The trade had a 1.79% impact on the equity portfolio. Shares traded for an average price of $69.10 during the quarter.

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The Pittsburgh-based company is a leading global supplier of components, locomotives, services, signaling and logistics systems to the rail industry. Ever since merging with MotivePower Industries in 1999, Westinghouse has done business under the name Wabtec Corp.

On May 8, shares of Westinghouse traded around $57.03 for a market cap of $10.85 billion and a price-earnings ratio of 24.58. According to the Peter Lynch chart, the stock may be overvalued.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rating of 8 out of 10 and a business predictability rating of one out of five stars.

The Altman Z-Score of 1.38, interest coverage ratio of 3.57 and cash-debt ratio of 0.13 suggest that the company could be in danger of bankruptcy. However, the current ratio of 1.42 and debt-to-equity ratio of 0.48 indicate that it has enough liquidity to stay afloat.

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The company’s revenue and net income have steadily increased throughout its history, with the outsized top-line boost in fiscal year 2019 coming from the company’s merger with GE Transportation, a former division of General Electric Co. (GE).

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DuPont de Nemours

The firm also invested in 3,662,992 shares of DuPont de Nemours after selling out if its previous (much smaller) holding in the company in the first quarter of 2019. The trade impacted the equity portfolio by 1.77%. During the quarter, shares traded for an average price of $49.25.

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Dupont de Nemours is an American chemicals company that was formed from the 2017 merger of Dow Chemical and Dupont and the subsequent spinoffs of Dow Inc. (DOW) and Corteva Inc. (CTVA). The company makes a variety of chemicals, pharmaceuticals, synthetic fibers, petroleum-based fuels, building materials, cosmetic chemicals, packaging and agricultural chemicals.

On May 8, DuPont’s shares traded around $46.83 for a market cap of $34.29 billion. According to Morningstar analyst estimates, the forward price-earnings ratio is 15.73, though the company turned a net loss of $616 million in its last reported quarter.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rating of 6 out of 10 and a business predictability rating of one out of five stars.

The cash-debt ratio of 0.09 is lower than 88.12% of competitors, while the Altman Z-Score of 0.85 indicates that the company could be in danger of bankruptcy. The operating margin of 12.04% is above the industry median of 7.15%, but the ROIC is below the WACC, indicating that the company’s recent operations were not profitable overall.

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NXP Semiconductors

The firm established a new position of 952,639 shares in NXP Semiconductors, impacting the equity portfolio by 1.12%. Shares traded for an average price of $117.93 during the quarter.

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NXP Semiconductors is a Dutch-American semiconductor manufacturing company with dual headquarters in Austin, Texas and Eindhoven, Netherlands. The company specializes in products for the automotive, security and internet of things (IoT) industries.

On May 8, shares of NXP Semiconductors traded around $103.95 for a market cap of $29.02 billion and a price-earnings ratio of 123.83. According to the Peter Lynch chart, the stock is trading above what recent earnings are worth.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rating of 8 out of 10 and a business predictability rating of 3.5 out of five stars.

The cash-debt ratio of 0.15, interest coverage ratio of 1.79 and debt-to-equity ratio 0f 0.82 suggest barely enough liquidity to cover short-term debt, though the Altman Z-Score of 2.12 and Piotroski F-Score of 7 out of 9 suggest that the company is unlikely to go bankrupt.

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In terms of profitability, the ROIC of 3.32% is lower than the WACC of 8.38%. However, revenue and net income have shown strong growth in recent years, and the operating margin of 7.22% is higher than the industry median of 5.6%.

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Portfolio overview

As of the quarter’s end, the firm held 129 common stock positions valued at a total of $7.05 billion and managed approximately $23 billion in total assets.

Its top holdings were Comcast Corp. (NASDAQ:CMCSA) with 6.03% of the equity portfolio, Broadcom Inc. (NASDAQ:AVGO) with 5.37% and Alphabet Inc. (NASDAQ:GOOG) with 5.31%. In terms of sector weighting, the firm was most invested in communication services, financial services and technology.

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.

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