Mairs and Power: Top 4th-Quarter Trades
Mairs and Power (Trades, Portfolio) recently disclosed its portfolio updates for the fourth quarter of 2019.
Minnesota-based Mairs and Power (Trades, Portfolio) is an investment firm that was founded in 1931. Its funds are built from a portfolio of companies that have quality growth potential and are trading at what the portfolio managers believe to be reasonable valuations. When determining growth potential, the firm aims to utilize a consistent, disciplined long-term assessment strategy based on past above-average growth, strong returns on invested capital and durable competitive advantages.
Based on the above criteria, the firm chose to reduce its holdings in Abbott Laboratories (NYSE:ABT) and Schlumberger Ltd. (NYSE:SLB) and increase its positions in Motorola Solutions Inc. (NYSE:MSI) and Eli Lilly and Co. (NYSE:LLY).
Abbott Laboratories
Mairs and Power (Trades, Portfolio) reduced its stake in Abbott Laboratories by 382,866 shares, or 16.4%. The trade had a -0.39% impact on the equity portfolio. Shares traded around an average of $83.86 for the quarter.
Abbott Laboratories is a health care and medical device company based in Chicago. Its most popular brands include FreeStyle (handheld blood glucose monitors), Ensure (nutrition drinks) and Similac (nutritional products for infants).
On Feb. 21, shares of Abbott traded around $87.28 for a market cap of $154.46 billion and a price-earnings ratio of 42.4. According to the Peter Lynch chart, the stock is trading above its fair value.
GuruFocus has assigned Abbott a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The equity-to-asset ratio of 0.46 and interest coverage of 7.03% are ranked lower than 66.61% of competitors, while the return on capital of 47.19% is beating 87.58% of competitors. Over the past three years, both revenue and net income have grown significantly.
Abbott continues to benefit from the aging population in the world (especially in the U.S.). During the 2019 fourth quarter, sales of its diabetes care products increased 30.5%, while the devices in its heart failure segment saw double-digit sales growth as well.
Schlumberger
The firm sold 649,318 shares of Schlumberger, reducing the position by 50.42%. The trade impacted the equity portfolio by -0.27%. During the quarter, shares traded at an average price of $35.85 apiece.
Based in Houston, Schlumberger is a major international oilfield services company. It specializes in providing services and equipment to oil companies, including platforms, drilling solutions and asset consulting.
On Feb. 21, Schlumberger shares traded around $33.42 for a market cap of $46.26 billion. According to the Peter Lynch chart, shares are trading around their fair value.
Schlumberger has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The Altman Z-score of 1.4 means that the company is in the financial distress zone, though the equity-to-asset ratio of 0.42 is average for the industry. Revenue and net income have increased slightly over the past several years, though 2019 net income took a $10.7 billion goodwill hit after writing down the value of two previously acquired assets.
As a pick-and-shovel type business, Schlumberger has not suffered as much from the oil and natural gas oversupply that resulted from the U.S.'s bid to become the world's largest fossil fuel producer. However, oil oversupply has resulted in lessening demand and lower prices, and the most likely operations to go bust in this scenario are the more complicated shale plays.
Motorola Solutions
Mairs and Power (Trades, Portfolio) increased its holding in Motorola Solutions by 128,363 shares, or 42.3%, impacting the equity portfolio by 0.23%. Shares traded at an average price of $164.64 during the quarter.
Motorola Solutions is a telecommunications and data communications equipment provider based in Chicago. It is one of the successor companies to Motorola Inc., which split in 2011 due to financial difficulties.
On Feb. 21, shares of Motorola traded around $185.27 for a market cap of $31.6 billion and a price-earnings ratio of 37.52. According to the Peter Lynch chart, the stock is trading above its intrinsic value.
Motorola has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.17 and interest coverage of 7.18% are on the low end, but the Altman Z-score of 3.05 indicates that the company is currently able to meet its debt obligations. The operating margin of 21.67% is outperforming 94.78% of competitors, and both revenue and net income have grown in recent years.
In recent years, software and services have been the main drivers for revenue growth, especially in the U.S. Although revenue was down slightly for the Middle East and Asia-Pacific regions in 2019, these regions have grown to account for about a third of the company's profits over the past decade, as its focus on the mission-critical communication space has a larger addressable market outside the U.S.
Eli Lilly and Co.
The firm added 131,851 shares, or 18.25%, to its holding in Eli Lilly, impacting the equity portfolio by 0.20%. Shares of the stock traded around $116.25 on average for the quarter.
Eli Lilly is a pharmaceutical company headquartered in Indianapolis. Founded in 1876, the company now sells its products in more than 125 countries. It is perhaps best known for its neuroscience products, though it also offers products in the areas of diabetes, oncology, cardiovascular and critical care.
On Feb. 21, shares of Eli Lilly traded around $142.04 for a market cap of $135.83 billion and a price-earnings ratio of 16.35. The Peter Lynch chart indicates that the stock is trading slightly above its intrinsic value.
Eli Lilly has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. The equity-to-asset ratio of 0.09 is lower than 93.93% of competitors, but the Altman Z-score of 3.71 and interest coverage of 15.35% indicate financial stability. The operating margin of 26.65% is beating 91.81% of competitors. Although revenue was down in 2019, net revenue increased (both partially due to the company spinning off its animal health business, Elanco (ELAN)).
Key drivers for growth include Emgality (a preventative treatment for migraines) and Truclicity (a type 2 diabetes medication). Overall, Eli Lilly expects to benefit from the aging population and subsequent expansion for product demand. It also has a strong pipeline of new products, with 12 regulatory submissions in 2019.
Portfolio overview
As of the quarter's end, the equity portfolio of Mairs and Power (Trades, Portfolio) consisted of 220 stocks valued at a total of $8.8 billion.
The firm's top holdings were in Alphabet Inc. (NASDAQ:GOOG) with 4.5% of the equity portfolio, U.S. Bancorp (NYSE:USB) with 4.4% and 3M Co. (NYSE:MMM) with 3.85%. In terms of sector weighting, the firm is most heavily invested in industrials, health care and financial services.
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. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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This article first appeared on GuruFocus.
