Donald Yacktman is a legendary investor and the portfolio manager of the Yacktman Fund (Trades, Portfolio), a fund that is part of Yacktman Asset Management (Trades, Portfolio). As of the end of its fiscal fourth quarter, the fund had approximately $7 billion in its portfolio according to the quarterly update on its website.
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.
Yacktman’s strategy focuses on value stocks with growth potential. This can best be categorized by the classic phrase of growth at a reasonable price (GARP). Similar to Warren Buffett (Trades, Portfolio), Yacktman also looks for shareholder-orientated management that does what is best for the business.
Thus, in this article, we will break down two of stocks Yacktman was buying in the fourth quarter of 2022 according to this fund's latest quarly update; let’s dive in.
1. Warner Bros. Discovery
Warner Bros. Discovery (WBD, Financial) is an iconic media conglomerate that was created after AT&T (T, Financial) sold off WarnerMedia and this company then merged with Discovery Inc. Today, the company owns some of the most popular streaming services in the world. This includes HBO Max, which has ~78 million subscribers, and Discovery+, which has ~25 million subscribers. To put things into perspective, Netflix (NFLX, Financial) has approximately 220 million subscribers, and thus Warner Bros. Discovery is rapidly approaching around half of this figure. Disney+ (DIS, Financial) has approximately 164 million subscribers, while Warner Bros. Discovery is approximately in third place in streaming.
The beautiful thing about Warner Bros. Discovery is the company also owns a series of classic TV channels such as CNN, TNT, the Food Network and many more. In addition, its HBO service owns popular series such as Game of Thrones, which has recently launched a new season that had nearly 10 million views at its premiere. Its TNT channel is now home to the NBA and the company reported a 29% increase in viewership year-over-year.
In addition, the company owns Warner Brothers Pictures, which has a range of legendary movie franchises from Harry Potter to Batman and The Matrix. These franchises act as a competitive advantage and can ensure recurring revenue in the decades to come.
Evolving financials
In the third quarter of 2022, Warner Bros. Discovery reported revenue of $9.82 billion, which missed analyst estimates by ~$500, but still increased by a staggering 152% year-over-year, which I suspect was driven by merger revenue.
The company also reported adjusted earnings per share of $0.76, which missed analyst estimates by $0.21. The merged company reported a net loss of $567 million on a GAAP basis. This may look terrible, but Warner Bros. Discovery is still experiencing merger problems. It expects its revenue and profitability to improve over time. Management is expecting to achieve $2 billion in synergies in 2023. In addition, the company is expecting to generate $1 billion of Ebitda for its streaming business by 2025.
The company has a long way to go to achieve this, but management seems focused on success, and a new leadership team is now in place.
Warner Bros. Discovery has a solid balance sheet with $2.4 billion in cash and short-term investments compared to debt of $48.6 billion, $1.2 billion of which is current debt and thus manageable.
Guru investors and valuation
The Yacktman Fund (Trades, Portfolio) purchased 1.5 million shares of Warner Bros. Discovery in the fourth quarter, which increased its stake by nearly 52% to 4.4 million. The stock traded for an average price of $11.29 per share in the quarter, which is ~11% cheaper than its five-year average. The stock is also in the third-quarter 13F report of Seth Klarman (Trades, Portfolio)'s Baupost group, which has not yet released its fourth-quarter portfolio.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
The GF Value chart indicates a fair value of $24.58 per share, making the stock undervalued at the time of writing. However, the GuruFocus system does warn of a possible “value trap” due to the declining fundamentals. However, I believe this is unfairly skewed due to the merger.
The stock trades at a price-sales ratio of 0.71, which is 52% cheaper than its historical average.
2. Charles Schwab Corp
Charles Schwab Corp. (SCHW, Financial) was founded in 1971 and pioneered the concept of “discount brokerage” accounts. The original company used the founder's face in commercials and in newspaper advertisements that promised a “75% discount on fees," which was fairly revolutionary at the time. The fact the company showed the founder and team in ads helped to create a sense of trust that there were real people behind the brand, rather than being a faceless organization.
Schwab also pioneered selling mutual funds through a brokerage account as opposed to with a salesperson. Today, the business focuses on enabling individual investors and financial advisors. It has expanded to become a full financial services conglomerate and holds over $7 trillion in client assets.
Over the recent years, Charles Schwab has made five acquisitions and seven investments into entities. One of its most notable acquisitions was the $26 billion acquisition of key competitor TD Ameritrade, which offers very similar services to Charles Schwab.
Solid financials
Charles Schwab recently reported solid financial results for the fourth quarter of 2022. Its revenue was $5.5 billion, which increased by 17% year-over-year. This was a positive sign given we are currently going through tough market conditions, which has impacted many brokers.
Its core assets were a huge $428 billion and increased by a solid 5% year-over-year. Total client assets surpassed a staggering $7 trillion. Schwab added 4 million new brokerage accounts over the year, with 34 million in total reported.
Surprisingly the company also reported strong inflows in its retail channel, and its advisor services business continued to grow. Schwab reported earnings per share of $0.97, which rose by a 28% year-over-year.
Management put the success down to its “Through Clients’ Eyes” strategy, which helps to create greater empathy with its customers.
Guru investors and valuation
In the fourth quarter of 2022, the Yacktman Fund (Trades, Portfolio) purchased 550,000 shares of Charles Schwab, which increased the fund's total position to 2.375 million shares. During the quarter, shares traded for an average price of $77.61 per share, which is close to the ~$81 per share price at the time of writing.
Charles Schwab trades at a price-earnings ratio of 23, which is 13% cheaper than its five-year average.
The GF Value chart indicates a value of $77 per share, which means the stock is fairly valued at the time of writing.
Final thoughts
Both WarnerBros. Discovery and Charles Schwab are two very different companies with unique advantages. WarnerBros. Discovery has a unique intellectual property offering due to its brand rights to many franchises. In addition, the company is poised to benefit from the growth in streaming. Charles Schwab benefits from its solid brand and high stickiness with customers, as once someone adds their funds and purchases stocks, they are unlikely to move accounts.
