Santangel's Review

Commentary

Longleaf Partners Annual Presentation

Longleaf Partners has made the audio from their annual meeting available. Since there are 15 separate MP3 files and it’s a bit tedious to listen to, we’ve summarized key points below:

 

Mason Hawkins

  • Keys to being a good investor: 1) sound philosophy 2) extensive search strategy 3) ability to value businesses and assess management 4) discipline to say no to non-qualifiers 5) patience to wait for the right opportunity 6) courage to make significant investments at “the point of maximum pessimism”
  • Stock price volatility produces opportunity

Lee Harper

  • Factors responsible for Longleaf’s success: 1) strive to avoid businesses that could put their capital at risk and look to partner with proven management teams whose objective is to grow value per share 2) do deep analytical work 3) Patience to buy only when price severely discounts value 4) Skin in the game 5) quality investors in their funds

Various Analysts

  • At first glance Dillards looked like a losing business with a bad management team
  • Thought Dillards had the ability to improve operations and generate more free cash flow when they first invested
  • Thought Dillard’s management team were better than their reputation suggested
  • Dillards has been and will be buying back stock which will grow value per share and free cash flow per share in a low risk way
  • Wishes he wasn’t making the Dillards thesis public so Longleaf could be the only shareholder along with the Dillard family
  • Last quarter, Dillards was buying back stock at a rate of 25% annualized last quarter
  • First bought Vodafone when it was significantly discounted because the market was worried that management was not concerned about value per share and a new management team came in and they saw change happening
  • Flood of data usage from smart phones was filling up bandwidth that was previously only 15% used about 2 years ago
  • They bought Vodafone at a 15% free cash flow yield
  • Met with Vodafone management and confirmed management’s committment to realize value per share
  • Vodafone is buying back stock and paying down debt
  • Expect dividends to flow from Verizon Wireless in 2012 which will be a 50% increase in distributable free cash flow
  • Vodafone trades at a 13% free cash flow yield today
  • Ferrovial – on the surface it looks like a Spanish construction company with a bunch of debt, but in reality only 30% of its business is in Spain and the ex-Spain businesses are a toll road in Canada and Heathrow airport which are arguably two of the most valuable infrastructure assets in the world
  • Bought Ferrovial at a discount to estimate of intrinsic value because of macro fears
  • Most of Ferrovial’s debt is non-recourse and the parent company has $500 million in net cash.
  • Natural disaster has not affected the intrinsic value of its Japanese holdings with the exception of NKSJ (insurer)
  • Olympus suffered very little harm to value (its Fukushima plant is running again)
  • Thinks insurance pricing will rise and insurance brokers will benefit from higher prices at high contribution margins
  • Thinks fear of nuclear power will benefit natural gas producers and in particular Chesapeake Energy

Q&A – (Mostly answered by Mason Hawkins and Staley Cates)

  • Looking to hire contrarians and independent thinkers
  • Do some adjusting in DCF calculations for different countries they invest in
  • Thinks there are more similarities between Autozone and Dillards than there is between Sears and Dillards
  • Dillards can produce a very consistent free cash flow coupon over time but he is not sure about that at Sears
  • Eddie Lampert had already sold off plum real estate when they bought Dillards
  • A lot more needed to go right at Sears to make it look cheap
  • Some of Sears locations are giant mall locations which are more difficult to repurpose
  • Campbell’s Soup is an industry leader -they are losing money in China and Russia and there are many divisions that are a lot more valuable than soup on a per dollar of revenue basis and it’s owned by a group of disparate family members. Should see better pricing and demand in a more normal environment. They are buying back a large number of shares.
  • Paying only a single digit free cash flow multiple for the soup business which has a 60% market share and great ROE
  • Bought deep in the money calls on Dell with long expiration. Used the option to leverage the position up since the company itself is underlevered
  • Dell is very well capitalized and very cheap (it actually has too much cash which is trapped offshore)
  • Likes HRT because they can partner with one of the best geologists in the world
  • HRT lease acreage is second to none in on-shore Brazil