Microsoft (NASDAQ:MSFT) is seriously late to the mobile phone game but gets brownie points for giving it all it’s got by throwing a massive marketing budget at the Windows Phone. Apple’s iOS and Google‘s Android currently dominate that space, and MSFT has not been successful in getting app developers to develop for its or producing sales. In Q2, MSFT’s smartphone market share dropped to a low of 1.9%. But the company isn’t giving up yet. It has been launching a bunch of marketing campaigns and is alleged to be developing an app migration service to help you move app data from another phone to the Windows Phone. But enough on the failure in mobile, next week MSFT will be shipping the Windows 8 preview, with release to manufacturing (RTM) scheduled for August and general availability (GA) by the fall. At just ~8.5x 2012 earnings, we think MSFT is cheap in light of all the catalysts ahead including the company’s entertainment platform and Halo/Call of Duty releases. Microsoft is the third most popular stock among hedge funds (see 10 most popular stocks).
Also a Tiger Global pick, Liberty Global (NYSE: LBTYA) is an Eagle Capital holding. With its disposal of Austar, LBTYA has emerged as a relatively pure European cable investment. The primary non-European asset is Chile; compare this to 2009 when close to 25% of the company’s enterprise value was derived outside of Europe. LBTYA is currently on track to generate 4% revenue CAGR and a 6% operating cash flow CAGR over the next few years, which are strong numbers relative to its peers in the European telecom market. As demand increases for faster broadband speed and data consumption grows, we are very positive on LBTYA’s ability to take market share and scale its presence in the region. According to management, there is a place for mobile in the company’s product portfolio, but it seems there is limited interest in cable operators developing the kind of infrastructure that mobile network operators currently have. We think that if LBTYA can maintain its advantage in broadband, it could trade up to 8.0x 2012 EV/EBITDA and generate an attractive 5.7% FCF yield.
Wal-Mart’s (NYSE: WMT) share price has been teetering in the high $60s range. The stock has performed well in spite of bribery allegations in Mexico and the issues surrounding that. Q1 earnings were strong, with 2.6% SSS growth in the US, and if Q2 beats consensus estimates, we think WMT is on-track to trend higher. However, with lower income shoppers spending less, we are not sure next quarter will be able to post similar same store sales (SSS) growth. With share repurchases, dividend increases, and our excitement in the prospects for Wal-Mart Express, a neighborhood market concept, we, like Tom Gayner, Ken Fisher, and Warren Buffett, are fans of WMT.
AON (NYSE: AON) caught our attention by becoming the first company listed in the S&P 500 to redomicile to the UK, namely for the lower effective tax rate. We felt that investors should have responded more positively to the change, which could result in over $50 million in annual savings by 2013. Moreover, the UK corporate tax rate will be lowered from 24% to 22% this year—it is already down from 26% last year. With the expected tax benefits, providing a tailwind to after tax earnings, we are incrementally more positive on the stock. Insurance pricing should continue to hold up, so there is room for upside. However, even with the tax benefit and scheduled share repurchases, we still prefer other insurers like Allstate. We also don’t like that last quarter, AON decided to take out amortization from its definition of operating earnings (other competitors include it). When adjusting the P/E multiple to include amortization expenses, you end up with 13.3x vs. 10.8x, a massive difference. Accounting shenanigans are not cool.
Comcast (NASDAQ: CMCSA) is in a strong position amidst a consolidating industry. We identify a number of consolidation opportunities for existing operators of significant scale i.e, CMCSA. Scale is key and with new challenges in middle-mile broadband traffic costs, smaller companies are finding it increasingly difficult to compete. Additionally with CMCSA has been turning up the fires of innovation with a slew of new products and features like streampix, X-1, home security, etc. smaller companies are being left in the dust. This too, will spur consolidation. Shifting to the topic of data plans, the consensus seems to be that cable companies are all for tiered data plans based on monthly usage. If the company structures the tiering and corresponding prices appropriately, this should serve as a hedge on internet video. And lastly, we want to touch on the increasingly important role that distribution is playing in content negotiations. Hence, we like that CMCSA has TV Everywhere rights with numerous content partners. Overall we find that CMCSA provides the best consumer value proposition and will be able to leverage its scale to diversify its user base and product offerings.
