The Yacktman Focused Fund (Trades, Portfolio), which is part of Yacktman Asset Management (Trades, Portfolio), aims for capital appreciation through focused investments into a variety of stocks. Its primary focus is on quality companies thar are mispriced by the market. Therefore, being a contrarian is an essential part of the fund's investment thesis.
The fund also tends to have a fairly low turnover ratio (1%), which indicates many of its bets are long term by nature, with the preservation of capital being a key strategy.
During the second quarter, filings reveal the fund entered a position in one stock and curbed its holding of another.
Investors should be aware that portfolio updates for mutual funds do not necessarily provide a complete picture of a guru’s holdings. The data is sourced from the quarterly updates on the website of the fund(s) in question. This usually consists of long equity positions in U.S. and foreign stocks. All numbers are as of the quarter’s end only; it is possible the guru may have already made changes to the positions after the quarter ended. However, even this limited data can provide valuable information.
Olin
The Focused Fund purchased 995,000 shares of Olin Corp. (OLN, Financial), a global manufacturer and distributor of chemical products, at an average price of $53 per share, which is close to where the stock traded at the time of writing.
The company operates across three main business segments.
The first is chlor-alkali products and vinyls. This segment includes the production and sale of chlorine and caustic soda, of which the company is one of the largest suppliers in North America. These substances are used to manufacture a variety of plastic-based products such as PVC resins, vinyl chloride and other chlorine-based products.
Chlorine and caustic soda are also used in the treatment of water, as it kills bacteria and viruses, thus it is commonly used in public swimming pools.
Its second product segment is epoxy, which is used in a variety of applications, from glues to coatings and electrical-based laminates.
Olin’s third product segment falls under a brand called Winchester. This is a leading brand in the ammunition industry that encompasses sport-focused bullets and various related components for small caliber arms.
A key competitive advantage for Olin as a whole is its vertically integrated business segments. This enables the business to control various parts of the supply chain, which can lead to great cost efficiencies and margin improvement solutions.
Mixed financials
Olin reported mixed financial results for the first quarter of 2023. Its revenue of $1.84 billion beat analyst forecasts by $204 million despite declining by 24% year over year. This decline looks to be cyclical as during the earnings call, management discussed the decrease in the prices of caustic, which has also been impacted by China exports.
The business also took a $60 million hit after announcing the planned closures of its facilities in Korea and Brazil. However, management believes this will restructure and “recession proof” the epoxy business.
The company also announced the planned closure of its BPA facility in Stade, Germany.
Moving onto profitability, the company reported operating income of $297 million, which declined nearly 47% year over year due to similar issues and the special weakness in its epoxy segment (which it is currently winding down).
A positive is the company has a huge backlog of orders with $1.7 billion in free cash flow generated during the fiscal year. This was driven by regulatory approval on projects and its Blue Water Alliance joint venture with Mitsui.
Its balance sheet has $176 million in cash and short-term investments. In addition, the company reported total debt of $3.19 billion, which is expected for a legacy manufacturing company, though not ideal.
Valuation
Olin trades with a price-earnings ratio of 7, which is 30% cheaper than its five-year average.
Its price-to-free cash flow ratio of 4.4 is also lower than its average for the same period.
The GF Value Line indicates a fair value of $53 per share. Based on its historical ratios, past financial performance and analysts' future earnings projections, the stock is fairly valued at the time of writing.
Booking Holdings
The fund slashed its position in Booking Holdings Inc. (BKNG, Financial) by 25%, selling 8,000 shares. The stock traded for an average price of $2,641.83 per share during the quarter, which is well below its current price.
Booking Holdings is most famous for owning one of the worlds most popular travel booking websites, Booking.com. This platform connects hotels and accommodation providers with guests for a seamless booking experience.
Before platforms such as Booking.com were introduced, consumers would have to book hotels directly or through travel agencies, which can charge hefty commissions.
Ironically, platforms such as Airbnb (ABNB, Financial) are known for offering the best prices on accommodations due to their vast array of inventory offered by part-time landlords. However, in my personal experience, I have often found better prices on Booking.com, which is surprising.
Unlike Airbnb, Booking Holdings has also vertically integrated its primary accommodation booking platform with other services guests may require. This includes flight bookings and car rentals, which are part of its connected trip vision. Of course, the company will get an affiliate commission through its referrals to these services.
The company has also scaled out its own robust affiliate program, which looks to be more widely adopted than Airbnb’s.
Strong financials
Booking reported strong financial results for the first quarter of 2023. Its revenue of $3.78 billion beat analyst forecasts by $32 million and rose 40% year over year on what has been a strong travel season.
The company reported room nights and gross bookings topped prior expectations. Its flight booking option has also been its fastest growing with blistering growth of 73% year over year.
Booking has also made a series of solid acquisitions over the years, which included Kayak, OpenTable, Agoda and many more.
Moving onto earnings, Booking reported non-GAAP earnings per share of $11.60 and $114 million in operating income, which increased by a blistering 115% year over year.
The company also has a solid balance sheet with $14 billion in cash and short-term investments. Total debt stood at $12.6 billion, of which the majority is long term.
Valuation
Booking Holdings trades with a price-earnings ratio of 28, which is 78% cheaper than its five-year average.
The GF Value Line also indicates a fair value of $3,755 per share. Thus, the stock is modestly undervalued at the time of writing.
Final thoughts
Olin and Booking Holdings are very different companies.
For the Focused Fund, Olin looks to be a contrarian bet on the business restructuring and market rebalance. Booking Holdings has produced solid financial results and thus, I believe the 25% reduction was part of a portfolio rebalancing.
