20 Apr 2011 Tweedy Browne - Q1 2011 Commentary ( Portfolio )
British American Tobacco (BATS LN) is the 3rd largest tobacco company in the world. It operates in 180 markets and has 250 brands. It also has a 42% position in Reynolds American (RAI), the 2nd leading US tobacco manufacturer, and a 31% stake in ITC Ltd (ITC IN), the leading cigarette manufacturer in India. BAT is a high-return-on-capital recession-resistant company that at purchase was trading at a discount from our estimates of intrinsic value. The following characteristics made it appealing: consistent earnings pattern even during recession years; high free cash flow; a dividend yield of approximately 4.5%; a history of dividend increases every year since 1999; a history of buying back its own shares; growing volume in key global brands; brand loyalty; and a wide competitive moat.

Cisco Systems (CSCO US) provides routing, data and networking products for the internet. The company’s clients include corporations, public institutions and telecommunications companies worldwide. Cisco is financially strong and we think statistically cheap. It has a dominant market position and has been growing within a category that we believe still has a lot of room for future growth. Perceived competitive threats and concerns about possible slower rates of growth have put pressure on Cisco’s stock price, which has allowed us an entry point in the stock that we believe is at roughly a one third discount from a conservative estimate of the company’s intrinsic value.

Global equity markets have indeed come a long way very fast from the Spring lows of 2009. Economic recovery has begun to accelerate, and while businesses have adjusted well to the new economic realities, governments both in the U.S. and abroad continue to struggle with the difficult choices that need to be made in order to get their fiscal houses in order. Equity valuations are up and bargains in the stock market are much harder to come by. However, we believe that the valuation levels of our portfolios are certainly not at worrisome levels. The top 25 holdings in our Funds’ portfolios were trading on average at approximately 12 to 13x 2011 estimates of earnings, or at a marginal discount from market P/Es.

It is encouraging that the markets continue to climb a considerable wall of worry, and that a mountain of cash remains on the sidelines available for equity investment. We feel our portfolios are well-positioned, and are cautiously optimistic for their prospects going forward.