Wallace Weitz Buys Discovery Communications, Sells Apple in Q3

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Nov 14, 2014
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Wallace Weitz (Trades, Portfolio) entered the investing world at the age of 12 when he purchased his first stock. Since then, he’s made a career in what he’s called his hobby — he spent 10 years as an analyst and portfolio manager at Chiles, Heider & Co. before founding the Omaha, Nebraska-based Weitz Investment Management in 1983.

Weitz manages four of the 10 funds at the firm and follows the value investing model. There are plenty of similarities between Weitz and his Omaha neighbor Warren Buffett (Trades, Portfolio), but Weitz has sometimes struggled to outperform the S&P 500 at a rate that justified his fees.

The chart below shows the returns for the Weitz Partners Fund.

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During the third quarter, Weitz purchased five new stocks, sold out of three companies. He also added to his positions in 13 companies, notably Liberty Global (LBTYK, Financial), Avon Products (AVP, Financial), and Valeant Pharmaceuticals (VRX, Financial), which is the top holding in the Value Fund.

The annual turnover rate for the Value Fund was 19% for the year ended March 31, 2014. The five-year average annual turnover is 27%.

New buys

Weitz purchased 127,535 shares of Precision Castparts (PCP, Financial) at an average price of $243 per share.

The company manufactures complex metal components and products, as well as castings, forgings, and fastener systems for critical aerospace and power applications.

In his shareholder letter for the quarter, Weitz said that concerns about the new commercial aircraft cycle allowed the fund to establish a position at an attractive discount. He also praised CEO Mark Donegan’s leadership.

“We have been heartened by management’s more recent decisions to repurchase stock and look forward to the prospect of additional value-accretive M&A in the future,” Weitz wrote.

Precision Castparts currently trades at $226.71, and the DCF model projects a margin of safety of 36%.

Diluted earnings per share was $12.12 in FY 2014, which has grown consistently since FY 2010.

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Weitz also added Discovery Communications (DISCK, Financial) to the portfolio with 629,100 shares at an average price of $40.51 per share. Weitz had previously sold out of the holding in the third quarter of 2011.

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Discovery reaches 2.7 billion viewers in more than 220 countries with programming across its networks such as the Discovery Channel, Animal Planet, TLC, Investigation Discovery and Science, as well as a joint venture with the Oprah Winfrey Network.

The stock has declined 22% year-to-date, and may be undervalued when compared to the Peter Lynch earnings line.

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In the shareholder letter, Weitz pointed out that Discovery often owns the full rights to its content, providing bargaining power.

“We project per-share cash flow growth in the high teens over the next several years, fueled by the international business,” he wrote. “From today’s price, we think the stock’s return potential is adequate-to-exceptional with solid downside protection.”

Discovery’s operating margin is a comfortable 36.1%, which has remained relatively steady since FY 2009.

Weitz also purchased new holdings in Liberty TripAdvisor Holdings (LTRPA, Financial), Post Holdings (POST, Financial), and Monmouth Real Estate Investments (MNR, Financial).

Sold out

Weitz sold 255,093 shares in Target (TGT, Financial) at an average price of $60.57 per share.

Target is the second largest general merchandise retailer in the country, and operates 1,801 stores in the U.S. and 133 stores in Canada.

The current stock price is $67.50, and is highly overvalued according to the DCF model which projects a margin of safety of -154%.

The current P/E ratio is 28.4.

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A cause for concern is Target’s operating margin has been declining since FY 2011 and was 5.83% in FY 2014.

Weitz also sold out of 15,000 shares in U.S. Bancorp (USB, Financial) and 4,200 shares in Apple (AAPL).

U.S. Bancorp provides a variety of financial services mainly in the Midwest and West regions. Its P/E ratio for the trailing 12 months is 14.4, which is comparable to the industry median of 14.8.

The fund had held shares in Apple since the second quarter of 2012, and Weitz sold out this past quarter when the average price per share jumped to $98.21.

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