Dear Edgar! I Beg to Differ This Time: The Boeing Company (BA) and More

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Value investor Edgar Wachenheim, owner of Greenhaven Associates Inc., is one of the value investors I look to for stock ideas. First, he is very choosy in picking up an addition to his portfolio, and secondly, his portfolio is very concentrated. As per the last 13F filings, this Greenhaven had position in only 26 stocks, with a market value of $3.28 billion. Also, its top 10 holdings represented 84% of the firm’s portfolio.

The Boeing Company (NYSE:BA)This fund in the last quarter disclosed its new position on The Boeing Company (NYSE:BA). Wachenheim bought 1.03 million shares, which I think is a solid move given the long-term growth of this company. However, when I had a deeper look at his portfolio, I circled down two stocks which I think can prove to be a very bad move for this fund.

The stocks are Union Pacific Corporation (NYSE:UNP) and Lowe’s Companies, Inc. (NYSE:LOW).

Stock % of Portfolio Rank in portfolio (out of 26)
Lowe’s Companies 12.99 1
Boeing 2.38 12
Union Pacific 0.01 25

Source: whalewisdom.com

Let’s discuss each of them in detail.

Union Pacific Corporation (NYSE:UNP)

Union Pacific’s 4Q12 earnings were a mixed bag of satisfaction and future concerns. Its quarterly results were decent, as revenue and EPS of the company were up. Its EPS was $2.19 which surpassed the consensus estimate of $2.16. But despite this growth in revenue the overall sales volumes were down by ~2.4%. This decline was caused by the decreased volumes of the agriculture and coal segments.

The major part of the weakness in volume of the agriculture segment came from grain which was down due to a weaker than expected harvesting and limited supply of corn. Moreover, the upside in EPS was driven by bottom line items, i.e., interest expense, other income, and tax expenses, and not because of operations. All these factors do not give me strong future guidance for this company.

Going forward, weakness in the Coal Segment will continue by the high coal stockpiles and low natural gas prices in 2013. The company also expects the coal volumes to be down in the mid-teens in 1Q13, with a slight decline in volume for the full year. Another factor for a weaker coal segment will be the recent loss of a contract which accounted for ~10 million tons of coal/year. The loss quantifies to ~$70 million in revenue in 2013.

On the positive side, the automotive, chemical, and intermodal segments of the company are doing better. In 4Q12 the growth in Petroleum products was driven primarily by a ~160% increase in crude shipments. While the pace of growth will ease slightly in 2013, it is expected to remain strong. Union’s diversified portfolio will surely give it a competitive edge over other players in the eastern region, but I don’t think it will be able to offset the sluggish coal and agriculture segments. I would not advise investors to make an entry in this stock for now.

Lowe’s Companies, Inc. (NYSE:LOW)

If we screen the home improvement industry, Lowe’s won’t be my first choice. I would prefer a more consistent stock like The Home Depot, Inc. (NYSE:HD) rather than Lowe’s. Though the company is trying to improve its operations, but I think its results cannot be expected in upcoming quarters. However, the turnaround in the housing market will help the company’s merchandising initiatives.

Lowe is working on an Operations Restructuring Program to improve the overall profitability through reinvesting in space for its high-volume products and a simpler pricing policy. It expects to complete the line reviews for ~90% of its 400 products line, and will complete the resetting of stores by mid-2013. But, this process has annoyed and confused many of its vendors, as many are forced to shift categories and institute a more aggressive pricing policy.

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