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By Ryan Leggio | 07-20-2010 10:50 AM

Hartch: US Bancorp, Baxter Look Cheap

Despite regulatory uncertainty, BBH Core Select's Tim Hartch likes US Bancorp and Baxter at current valuations.

Leggio: This high quality businesses that you prefer are probably the cheapest areas of the U.S. equity market right now, that these values are kind of hiding in plain sight and one holding that you have Microsoft trades at close to 10% free cash flow to enterprise value yield. Yes, there is not a lot of growth there, but there is a dividend and certainly there is some growth, any explanation why these fantastic businesses, which will do well in inflationary and deflationary environments are so attractively priced right now?

Timothy Hartch: I don't want to speculate too much for why the market values particular companies at a low multiple, but I just think it's a great opportunity. We're very pleased to have Microsoft in the portfolio, trading at as you say, close to 10% free cash flow yield. We have other companies in the portfolio– in the 29 businesses, a number of them, which are low teens free cash flow yields. So, Waste Management, Baxter, which we've added, Walgreen, which we had trimmed, when it went up and now it come all the way back to under 30, also trading at very high free cash flow yield.

So, I think it's instead of speculating on why exactly in the negative sentiment that maybe surrounded individual companies, I just see it as an opportunity for our shareholders to own great businesses over a long time that are trading with a real significant discount. And I think in the case of Microsoft, there is so much speculation and people worried about certain changes, but the fact of the matter is, its still a dominant company and they have a lot of great technology, and we think it's a business that will certainly sustain it's current level of free cash flow and probably, as you say, grow it over time.

Leggio: And one name you recently picked up Baxter, can you talk a little bit about what attracted you to the company, where valuations stands and why you think at current valuations you really can protect shareholder capital?

Hartch: Well, Baxter is a good fit with our criteria, its recognized I believe generally as a very high quality business, but when you look at our specific criteria that we tried it for selecting our 29 businesses. We try to invest in companies that provide essential product and service and have a loyal customer base, and Baxter is a good example of that. The products it provides to treat hemophilia, and immune deficiency, as well as products in the renal area like dialysis. Those are have to have products that the patients rely on every day.

So, it's a very good fit from a qualitative perspective, management is excellent. Dave has done a good job over many years in terms of building the business and that's what we like. We like to have a business that we can participate in the growth of the business over many years. So, qualitatively, it's a very good fit, very high-quality business.

And then from a discount to intrinsic value, which is what drives our downside protection, as well as the upside opportunity. Its trading today at a low teens free cash flow multiple, which we view is very attractive, and it's also when we do a discount on intrinsic value. We would value it somewhere between 60 and 80 probably close to 70, and currently we are able to buy it in the low 40s. So, I think it's a perfect example of one of the 29 companies that we want to own.

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