Farallon, a multi-strategy firm that bases its bets on the fundamental, bottom-up analysis, recently filed its 13F disclosure with the SEC. Based on its portfolio of holdings at the end of the fourth quarter 2012, Farallon’s largest positions included Hudson Pacific Properties, Inc. (HPP), an office property REIT, and Nexen Inc., which, in the meantime, was acquired by CNOOC Ltd. (CEO). In the quarter, the $18.6 billion firm also initiated several new positions, including stakes in a few dividend-paying stocks. Here is a closer look at Farallon’s five bullish positions yielding above 2.0%. These picks represent either growth or value plays that boast some upside potential.
Rockwell Collins, Inc. (NYSE:COL), a communications and aviation electronics company serving both commercial and government customers, has a dividend yield of 2.0%, payout ratio of 26%, and five-year annualized dividend growth of 9.9%. Given its exposure to the defense sector, from which it derives half of its revenues, the company has been bracing for the adverse impact of the sequestration on sales. Still, as a testament to its resilience in the face of adversity, the company raised its full-year 2013 guidance in early January, after topping analyst estimates of first-quarter EPS. Seeing 2013 as a “year of transition,” the company projects lower 2013 revenues and higher EPS (see the latest projections here). The strength of the high-end of the business jet market and the firm’s international government systems will support the overall growth. U.S. government systems revenue will fall 10% this year. ROC expects to return to top line growth in 2014-2015 and to accelerate its expansion in the subsequent years. Analysts see ROC’s long-term EPS CAGR at 7.2%. In terms of valuation, ROC is trading at 12.8x forward earnings, below the aerospace industry’s multiple of 14.0x. However, the firm’s price-to-book is more than double the industry average. Last quarter, Farallon hiked its position in COL by 21% to $134 million.
Fidelity National Information Services (NYSE:FIS), the world’s largest provider of banking and payments technology, was another Farallon’s bullish bet at the end of 2012. The company has a dividend yield of 2.3%, payout ratio of 28%, and five-year annualized dividend growth of 21.9%. We recently wrote about this stock as one of the high-growth and value plays of billionaire Chase Coleman from Tiger Global Management. Fidelity National Information Services (NYSE:FIS) is attractive given its leading position in a stable industry with high barriers to entry. A substantial portion of its revenues is recurring, derived from stable, long-term contracts. Given the company’s dominant role in its sector, in particular in emerging markets—e.g. it is the largest payments processor in Russia and China—FIS looks well positioned to deliver on its objective of growing organic revenues by 4%-to-7% annually and adjusted EPS by 12%-to-15% annually through 2015. The company generates high free cash flow, with a conversion rate of 1.6 times. Given its growth prospects, Fidelity National Information Services (NYSE:FIS) is undervalued trading at 13.4x forward earnings and 1.7 times its book value, both multiples below industry metrics. Last quarter, Farallon boosted its FIS stake by 47% to nearly $129 million.
