Orange Portfolio’s Global View

Most weeks, I’ll use the weekly review to dig into the global stocks and indices that had big moves during the week. But during earnings season, there's so much going on that I feel it’s better to focus on the important global earnings stories and companies in the portfolio that have reported results.

Here’s my take on the results from Precision Drilling (NYSE: PDS  ) , and two earnings stories that could have implications for the Orange Portfolio down the road.

Still going strong

Precision Drilling is easily the most economically sensitive company in the Orange Portfolio, but it’s also very attractively valued, with a 3.5 times operation cash flow multiple.

With such a low multiple, I believe that the consensus opinion is that this is a short-term peak for this cyclical company, and that the next year or two could be much more difficult. I don’t disagree with that assessment, but I do think the shares are too cheap given Precision’s long-term contracts on new rig builds, and because its first debt maturity isn’t until 2019.

Precision’s second quarter earnings aren’t all that meaningful, because it's a seasonally slow period of the year for the company in Canada. So while sales were up 10.6%, the big stories were the five new confirmed rig orders with long-term contracts, and the $99.4 million cut in planned capex spending for 2012. If investors were concerned that Precision was growing too quickly, the more balanced capital spending should allay those fears.

The near-term outlook is still soft, because of what the tough global economic backdrop could mean for oil and gas demand, which ultimately comes back to drilling demand. But, on the whole, I believe Precision Drilling remains on track, and I would consider adding to the position at a discount to my initial purchase. 

The Apple conundrum

In Apple (Nasdaq: AAPL  ) , I have to confront the same conundrum that many fund managers face. I’m measuring the Orange Portfolio against the iShares MSCI ACWI Index, because it’s a global all cap index, and I’m managing the Orange Portfolio as a global portfolio without market cap or country constraints, and Apple is the biggest component in the index.

If Apple does well, and I don’t hold the shares, I’ve already put myself in a hole. Of course, if Apple underperforms, I’ve done myself a favor by avoiding it. Apple’s business is unquestionably strong, and I don’t think this quarter’s results are significant. Yes, the company missed just about every estimate the street publishes, but it's between product cycles on the iPhone, and getting there with the iPad. Taking that into account, and the impressive results from ARM Holdings (Nasdaq: ARMH  ) , I believe the smart phone and tablet market remain quite healthy -- and Apple’s prospects are, too.

For now, I’m content to not own the shares, and search for outperformance elsewhere, mostly because I’m not a big fan of investing in megacap companies with yields below 3%. But if Apple’s shares continue to drift lower, they’ll definitely get my attention.   

Unilever’s amazing results

The results among consumer goods companies have been very mixed. Some are struggling badly with higher raw material costs and competition, while others are gaining momentum. With 11.5% sales growth in the first half of the year, you can place Unilever (NYSE: UL  ) firmly in the second group. Operating profit wasn’t as impressive, with just a 4% gain, but the company spent heavily on advertising and promotions to build its brands, so I’m willing to give it a pass.

Unilever’s growth was driven by a strong performance in emerging markets, and it helps that the company gets 55% of its sales from emerging markets. Faster growing emerging markets are showing signs of economic weakness, too, but I’m inclined to believe Unilever will continue to execute. As much as I’d like a better valuation, I'm considering taking a small position in Unilever and its 3.5% dividend yield.

As a reminder, you can follow along with all my real-money Orange Portfolio trades and updates here.

Nathan Parmelee is a co-advisor of Champion Shares Pro and Share Advisor in the U.K. You can follow his real money Orange Portfolio here and his Twitter feed at @GlobalFools. Nathan owns shares of Precision Drilling. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 28, 2012, at 11:19 AM, anuragupta wrote:

    What has mkt cap to do with investing? Just that it seems unlikely that a 500B company can become $1500B firm? But then isn't $117B cash and > 20% growth and hefty margins unlikely for a $500B company as well?

    In the concept of portfolio building what about the margin on safety based on the company quality alone rather than arbitrary discount metrics?

    Anurag

  • Report this Comment On July 30, 2012, at 10:27 AM, TMFDoraemon wrote:

    @Anuragupta

    It's more likely that a small company can continue growing than a massive one. That's not absolute, but it is a rule that applies far more often than it does not.

    I like the margin of safety to take into account the company quality and the estimate of the valuation. Really because you can't separate the valuation from company quality. The two are intertwined so any margin of safety is by default.

  • Report this Comment On July 30, 2012, at 1:37 PM, anuragupta wrote:

    I think we have a difference of opinion here. I focus on business alone rather than questionable rules. Apple was a blue chip all through its march from $50B to $500B. At $100B it was far from obvious it was enroute to 5 bagger in a few years.

    At a minimum, even if Apple provides 8% appreciation per year for the next 10 years, this is a superior risk adjusted return to anchor a portfolio.

    Anurag

  • Report this Comment On July 31, 2012, at 10:33 AM, TMFDoraemon wrote:

    But at what price will it provide an 8% return?

  • Report this Comment On July 31, 2012, at 11:41 AM, anuragupta wrote:

    At a price corresponding to Fwd P/E of 12, growth (revenues and earnings) at 20%+, Div 2%, margins > 25% and all of this for more than 5 years now. Why for such a company 8% annual returns over next 5 years is unreasonable expectation - regardless of what actually happens?

  • Report this Comment On July 31, 2012, at 12:28 PM, anuragupta wrote:

    Ahh... it seems computer/network ate my last post.

    Well, for a globally well regarded company with consistent 20% + margins and growth that is now trading at Fwd P/E of 12, is 8% annual returns (including the current 1.8% div) over next 5 years an unreasonable expectation - regardless of what happens?

    If not, at what price do you think 8% becomes reasonable?

    If you are making any market cap based exceptions what is the process you deploy for determining the valuation that takes into account the market cap?

    Anurag

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