David Rolfe

David Rolfe

Last Update: 08-15-2016

Number of Stocks: 35
Number of New Stocks: 3

Total Value: $4,935 Mil
Q/Q Turnover: 5%

Countries: USA
Details: Top Buys | Top Sales | Top Holdings  Embed:

David Rolfe Watch

  • New: GuruFocus Podcast Interviews John Buckingham and David Rolfe About Apple Stock

    GuruFocus unveils a new podcast today.


    Episode 1 features two well-known investors, John Buckingham (Trades, Portfolio) of Al Frank Asset Management and David Rolfe (Trades, Portfolio) of Wedgewood Partners. They have a conversation with GuruFocus about the state of iPhone maker Apple and answer some bearish questions. Apple is Rolfe's top holding and Buckingham's fourth largest.

      


  • New GuruFocus Podcast: Interview With John Buckingham and David Rolfe About Apple

    GuruFocus is introducing a new podcast today that will link members even closer to gurus, news, and intelligent discussion about investing.


    The first podcast features two well-known investors, John Buckingham (Trades, Portfolio) of Al Frank Asset Management and David Rolfe (Trades, Portfolio) of Wedgewood Partners. They have a conversation with GuruFocus about the state of iPhone maker Apple and answer some bearish questions.

      


  • Ron Baron Buys Under Armour in 2nd Quarter

    Ron Baron (Trades, Portfolio), founder of Baron Asset Management and co-portfolio manager of the Baron Partners Fund, invests in companies using a long-term investing approach.


    The fund seeks capital appreciation through focused research on the company’s management and long-term growth opportunities. During the second quarter, Baron took stakes in Under Armour Inc. (NYSE:UA.C), Red Rock Resorts Inc. (NASDAQ:RRR) and MGM Growth Properties LLC (NYSE:MGP). Additionally, the fund manager increased his position in Gaming and Leisure Properties Inc. (NASDAQ:GLPI).

      


  • David Rolfe Takes 2 in Growing Retail Industry

    David Rolfe (Trades, Portfolio), chief investment officer of Wedgewood Partners Inc., increases value to his shareholders using an “index investing” approach.


    Through strategic stock selection and investment in industries with potential for sustainable growth, the managers of the St. Louis-based mutual fund seek to outperform competing mutual funds and the Standard & Poor’s 500 index. During the second quarter, Rolfe invested in two retail companies: Ross Stores Inc. (NASDAQ:ROST) and TJX Companies Inc. (NYSE:TJX). With these two transactions, Wedgewood's chief investment officer increased his portfolio by 5.1% in the aggregate.

      


  • David Rolfe Comments on Perrigo

    During the quarter, a surprising decline in Perrigo (NYSE:PRGO)’s normally staid generic prescription (Rx) business had the Company reduce full-year guidance by almost 15% in a late-April pre-earnings release. In addition, the Company disclosed further write-downs and organizational changes in their nascent Branded Consumer Health (BCH) segment. Last, the Company announced the abrupt exit of long-time CEO, Joe Papa, who joined embattled Valeant Pharmaceutical. Immediately after this slew of disconcerting data points, we decided it prudent to liquidate our Perrigo stake.


    We think that, at its core, Perrigo’s U.S. private label over-the-counter (OTC) business is intrinsically attractive, with nearly 70% market share and long-tailed revenue streams similar to that of a consumer staple. Private-label OTC was about 50% of the Company’s calendar 2015 revenue, and nearly 40% of consolidated operating profitability.

      


  • David Rolfe Comments on Ross Stores

    We also purchased shares of Ross Stores (NASDAQ:ROST) during the quarter. Ross is the other uniquely profitable off-price retailer, with nearly 1500 locations in 34 US states. Like TJX, we think Ross’s value chain is tailored to deliver a “more for less” value proposition for its customers. However, unlike TJX, Ross skews to a much more moderate income buyer who is looking to find “value” more than fashion. We find evidence that Ross’s catering to this demographic requires substantially different investment and operational activities. For instance, nearly half of Ross’s inventory is “packaway” inventory, which is typically more fashion-oriented merchandise that was purchased from vendors and kept in storage, to be deployed to store floors at a later date (sometimes the following season, but rarely more than a year). In the meantime, the “flow” that makes up most of Ross’s turnover consists of less well-known fashion brands but at price points that still represent great value relative to full-price retailers. In contrast, we do not think TJX has a meaningful packaway strategy, instead tailoring their merchandise flow to be fashion- oriented most, if not all, of the time. Further, Ross operates a very moderate priced concept, DD’s Discount, with average unit retail (i.e., the price of an item at checkout) closer to dollar stores, which is about half the price of our estimate for TJX’s average unit retail.


    We expect Ross to continue investing and expanding its core Ross Stores concepts and DD’s Discount stores across the U.S., as well as eventually enter into international markets, with room to double their existing footprint. Along with a multi-decade history of routinely positive comparable store sales, we expect that Ross’s growing footprint should lead to healthy high-single-digit revenue growth, while margin expansion and buybacks help drive mid-teen EPS growth.

      


  • David Rolfe Comments on Apple

    Apple (NASDAQ:AAPL) has been a significant underperformer not only during the recent second quarter (-11.8%), but also for nearly a year now. The stock has fallen about - 28% on an absolute basis, from its high set back on July 20, 2015. This is the second time that the stock has been put through the wringer since late 2012 on fears of “peak” iPhone growth and the concomitant lack of innovation out of the skunk works in Cupertino. Given the surge of sales of the iPhone 6 in 2015 (pent up demand for a larger iPhone, plus significant demand from China), we are not surprised by the weaker year-over-year earnings comparisons.


    The Apple stock advance-and-decline narrative has been pretty straightforward over the past half-dozen years. Given the consented narrative that Apple is “The iPhone Company” – and nothing but the iPhone – when forward analyst estimates of iPhone sales increase, the stock typically advances. When estimates are being cut, well, the stock typically declines, also. Mr. Market really is that binary on Apple’s stock price movements. We would argue, too, that Mr. Market is quite obtuse when it comes to the totality of Apple. Everything else that a rational investor would consider in accessing Apple as an investment is literally put in a vacuum when it comes to the stock. Valuation seems to matter not a wit. By any traditional valuation measure, both absolute and relative to other technology hardware companies, Apple’s stock, in our view, has long been cheap – but it gets cheaper still on estimate cuts. In fact, we would argue that Apple’s stock is currently valued (6.5X FCF ex-cash)2 as if to assume that the Company’s business prospects are little better than a coal mine in 10-year run-off mode.

      


  • David Rolfe Comments on Stericycle

    Stericycle (NASDAQ:SRCL) was also a top detractor during the second quarter. Stericycle’s early-year bounce reversed itself and then some after management lowered forward earnings expectations for the second time in three quarters. Management noted further weakness in their small (~3% of revenues, we estimate), industrial hazardous waste business, and pushed the timeline of about $20 million of expected synergies from their newly acquired document destruction business into next year. Taken alone, we think the stock’s -21% reaction following the earnings release was an overreaction.


    We think Stericycle’s core business of regulated waste management continues to be very attractive, throwing off strong free cash flow, with historically steady results. The Company has consistently reinvested these cash flows into smaller, regulated waste management acquisitions, as well as entering new verticals. Secure document destruction is a relatively new vertical for the Company, but we think the demand characteristics (driven by regulatory requirements) and hub -and-spoke collection and disposal model should fit well over the long term. While management noted a longer than expected timeline for converting on-site processing into off-site processing (similar to the way that medical waste is handled), we expect the Company will be successful in this conversion. As for the Company’s industrial hazardous waste business, it has proven to be highly cyclical. However, we expect the benefits of the Company’s overall hazardous waste platform (acquired in 2014) to more than outweigh the risks, as we estimate that retail and medical hazardous waste have grown to over 5% of revenues, from close to zero in 2014 – more than offsetting industrial waste declines. So while we understand investors’ concerns over the Company’s near-term earnings disappointments, we continue to be patient because we think Stericycle’s long-term opportunity for double-digit growth is intact as returns on reinvestment take hold.

      


  • David Rolfe Comments on Perrigo

    Perrigo (NYSE:PRGO) detracted –1.04% from the composite's absolute performance. A surprising decline in Perrigo’s normally staid generic prescription (Rx) business had the company reduce full-year guidance by almost 15% in a late April pre-earnings release. In addition, the Company disclosed further write-downs and organizational changes in their nascent Branded Consumer Health (BCH) segment. Last, the Company announced the abrupt exit of long-time CEO, Joe Papa, who joined embattled Valeant Pharmaceutical. Immediately after this slew of data points, we decided it prudent to liquidate our Perrigo stake.

    From David Rolfe (Trades, Portfolio)'s second quarter 2016 Wedgewood Partners Client Letter.   


  • David Rolfe Comments on Schlumberger

    Schlumberger (NYSE:SLB) contributed .42% to composite performance during the quarter. Despite the dramatic decline in exploration and production (E&P) capex budgets during the past 18 months, Schlumberger continues to reinforce its competitive positioning relative to other integrated oil service companies. With one of the largest, most highly-skilled upstream workforces in the private sector, and nearly $7 billion in cumulative research and development spent during the previous up-cycle, we think Schlumberger is poised to take an increased budget share of E&P spending as the Company’s customers outsource more services to improve returns in a “lower-for-longer” oil price environment. We expect Schlumberger’s earnings to significantly rebound in 2017, driven by increased market share as well as the release of over two years of pent-up E&P spending.

    From David Rolfe (Trades, Portfolio)'s second quarter 2016 Wedgewood Partners Client Letter.   


  • David Rolfe Comments on Express Scripts

    Express Scripts (NASDAQ:ESRX) was a top contributor during the quarter. The stock recovered some of the poor performance from the first quarter after Anthem management noted that, despite filing a lawsuit over Express Scripts’s pricing, they believed any ruling on the lawsuit would take several years and were still open to negotiations. Express Scripts is the sole, independent pharmacy benefits manager (PBM), which we think is key for maintaining their alignment with customers. We continue to expect Express Scripts to drive mid-to-high single-digit EBITDA growth using its scale to negotiate better pricing with drug manufacturers and service providers, while increasing patient adherence. We think earnings per share can continue to grow at a double-digit rate as shares are repurchased at what, in our view, are attractive valuations. That said, as shares rallied from their previous lows, we reduced the stock's weighting to better reflect the risk/reward of Express Scripts’s growth and valuation.

    From David Rolfe (Trades, Portfolio)'s second quarter 2016 Wedgewood Partners Client Letter.   


  • David Rolfe Comments on Kraft Heinz Company

    Kraft Heinz Company (NASDAQ:KHC) was a top performer during the quarter. First quarter adjusted EBITDA grew 21% year over year and earnings per share grew 38% year over year, as the Company’s consolidated adjusted EBITDA margins reached 30%, up a staggering 600 basis points from the year ago period. We estimate that these margins are best-in-class for the large-cap food products sub -industry, and nearly twice the median. In our view, the vast majority of large capitalization food product competitors, despite possessing great brands, are improperly incentivized, and are content to generate revenues at the expense of profits and long-term shareholder returns. In contrast, we continue to be impressed by Kraft Heinz’s new management culture, as recently brought to bear by 3G Capital and Berkshire Hathaway, which aggressively aligns management and employee incentives with shareholders. For example, rather than simply cutting overhead costs, the Company is intently focused on eliminating financial promotions for retailers (that frequently resulted in profitless revenues) and then reinvesting the savings into alternative product support, such as new products, form factors, and ad campaigns. We are seeing nascent evidence that this profit-focused strategy can be successfully executed without sacrificing revenue growth, as the Company posted low single-digit constant-currency organic revenue growth. As Kraft Heinz continues its aggressive new approach of reinvestment, we expect organic revenue growth to accelerate, along with continued margin expansion.

    From David Rolfe (Trades, Portfolio)'s second quarter 2016 Wedgewood Partners Client Letter.   


  • David Rolfe's Wedgewood Partners 2nd Quarter 2016 Client Letter

    "I think a lot of the market reaction is less about the financial impact and more about populism and what it means for the liberal economic order. The Brexit vote reflects a deep distrust of the benefits of the global economic system among a wide swath of voters in Europe and the United States, and a broadly held view that government institutions – whether in Washington or Brussels – are calcifying and don't work well. Both of these forces have a lot of wind at their back."

      


  • David Rolfe Nearly Divests Stake in M&T Bank

    Technology and Financial Services are the two most heavily weighted sectors in the portfolio of David Rolfe (Trades, Portfolio) of Wedgewood Partners Inc., and the guru was active in both in the first quarter.


    Rolfe’s largest first-quarter transaction was a near divestiture of his stake in M&T Bank Corp. (NYSE:MTB), a financial services company based in Buffalo, New York. Rolfe sold 3,068,523 shares for an average price of $108.61 per share. The deal had a -6.38% impact on Rolfe’s portfolio.

      


  • Caxton Associates Buys Coca-Cola, Goldman Sachs

    Caxton Associates (Trades, Portfolio) manages a portfolio of $1.42 billion composed of 112 holdings. During the first quarter he bought shares in the following stocks:


    The investor raised its shares in The Kraft Heinz Co. (KHC) by 451.12% with an impact of 14.51% on the portfolio.

      


  • Tom Gayner Sells Out of Coach

    Guru Tom Gayner (Trades, Portfolio), CEO of Markel (NYSE:MKL), sold his 54,000-share stake in Coach Inc. (NYSE:COH) in the first quarter.


    Started in 1941 as a family run workshop in New York City, Coach was a pioneer in leather goods, establishing itself as the original American house of leather during the second half of the 20th century. Its products include women's and men's bags, women's and men's small leather goods, business cases, footwear, wearables including outerwear, watches, weekend and travel accessories, scarves, sunwear, fragrance, jewelry, travel bags and other lifestyle products. Coach operates in two segments, North America and International.

      


  • David Rolfe's Lengthy Analysis of Berkshire Hathaway

    Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)

    "We want to do business in times of pessimism, not because we like pessimism but because we like the prices it produces. It's optimism that’s the enemy of the rational buyer. We do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test is whether their moats (competitive advantages) have widened during the year."

    Warren Buffett (Trades, Portfolio)

    We have owned shares of Berkshire Hathaway nearly continuously since the end of December 1998. (We exited the shares for a brief period after the share price spiked when the stock was added to the S&P 500 Index in early 2010.) Since our initial investment, the stock has meaningfully outperformed the S&P 500 Index by a factor of better than three- fold (+214% vs. +67%), buoyed by the tailwind of significant corporate growth. An aside: alert readers will note, if not recall, the significant underperformance of Berkshire stock during the first quarter of 2000 at the height of the dot-com bubble. Perhaps recalling too, the cover stories in the financial press then that the new new-world investing had laid waste to dinosaurs like Buffett. Well...Berkshire shares bottomed literally within days of the top in the NASDAQ. Since that seminal bottom 16 years ago, Berkshire shares have gained +292% versus a paltry gain of just +34%. (Cisco Systems has declined -65% since March 30, 2000.) Valuation matters.

    Over the course of our decade and a half investment in Berkshire Hathaway, the most common question we have been asked on any stock we have owned – and continue to be asked to this day is – “Is Berkshire Hathaway a “growth" company?" We attempted to answer

    this question back in early 2004 in a Client Letter titled, “Berkshire Hathaway: The Greatest Growth Company Wall Street Never Heard Of” (as excerpted):

    “Even casual students of Buffett have long since learned that Berkshire Hathaway is quite a different entity than it was only ten years ago. Where once Berkshire was not much more than Buffett’s personal investment portfolio, the Company is now a conglomerate of mutually exclusive businesses, dominated by a core of insurance companies. Wall Street is not casual about anything. When it comes to Berkshire and Buffett, Wall Street has finally caught on to the reality that the Company is mainly a conglomerate of businesses. Wall Street does not slavishly follow every Buffett buy and sell as Holy Grail secrets any more.

    “That said, we still think Wall Street once again remains behind Buffett’s learning curve.

    We believe that the Street fails to realize that Buffett has slowly built Berkshire Hathaway into a true growth company. In fact, not only is Berkshire a growth company, but a remarkably rapid one considering the enormous asset base ($180 billion) and equity base ($78 billion). Would anyone believe that a conglomerate could grow operating earnings per-share by 28% compounded over the past five years? The key here is the term per-share. Wall Street worships the mantra of “growth.” Too many corporate executives are compensated far too largely for any type of growth – good growth or bad growth. Make no mistake about it: not every type of growth is good for shareholders.

    “Growth via acquisition and mergers is the most prominent means of growth, and often the most fraught with abuse (Enron, Tyco, WorldCom, etc.). Investors must also be aware of managements’ claims of “record” growth. Buffett reminds us that even a simple passbook savings account generates “record” growth every year.

    “This matter underscores a most underappreciated aspect of Berkshire: non-dilutive growth by acquisition. Buffett has a growing reputation, particularly among large family-owned private businesses, that Berkshire is a terrific home for them since Buffett will not dismantle what these families have built over the years. More to the point, mediocre businesses become good businesses under the Berkshire umbrella. Moreover, good businesses become great businesses. We cannot stress this point enough.

    “The simple but powerful reason for this is that Buffett dramatically changes the reinvestment equation for Berkshire’s wholly-owned companies. Consider the capital reinvestment plight of a good -sized carpet or brick manufacturer. Now such a business may be considered a “good” business by measures such as profitability and market share, but unless the respective CEO can reinvest retained cash earnings accumulated in owner’s equity to earn future high returns, such businesses fail to be true “growth” companies. Of course, the carpet CEO or brick CEO can pay out all net earnings as dividends, but this is unlikely; since most CEOs are paid in part (in too many cases, in large part) on the size of the firm. Then the reinvestment of earnings becomes the paramount job of the CEO. So, what is the CEO to do if reinvestment opportunities back into the business are lackluster? Not much. This “lack of sustainable growth” is the simple reality facing the majority of Corporate America. Most businesses, by economic reality, cannot achieve growth much better than their underlying industry growth, or faster than the overall economy. We have stated for years that true growth companies are rare.

    “Consider the capital reinvestment options if our carpet/brick company is wholly-owned under the conglomerate of Berkshire. Buffett solves the reinvestment conundrum unlike almost any other business we know of. Sure, Buffett can allow CEOs to reinvest in carpets or bricks – but only if the CEO can convince Buffett that these reinvestment opportunities are superior to Buffett’s exceptionally wide canvas of reinvestment opportunities. This is highly unlikely since Buffett can invest in any asset, stock or bond, private or public company, or do nothing and just sit on wads of cash. Rare is the CEO who sits on stacks of idle cash. Too many CEOs view any and all activity as progress.

    “This is why businesses become better as a wholly-owned subsidiary of Berkshire. Buffett solves the ever-present capital reinvestment dilemma: this is the unique essence that too many investors fail to appreciate about Buffett and Berkshire Hathaway.

    “Now back to that pesky matter of “per-share” growth. Berkshire’s growth has been driven in large part by acquisition. However, Buffett – unlike most companies –rarely uses Berkshire stock to fund an acquisition. Therefore, as Buffett reinvests Berkshire’s many billions of cash into seemingly boring, but profitable businesses, revenues grow, earnings grow and cash flow grows. But since outstanding shares do not grow, per-share growth explodes. Per-share earnings have compounded at 28% for the past five years and 24% for the past ten years.

    “So, make no mistake about it –Buffett has masterfully built Berkshire Hathaway into an outstanding growth company.

    We would change little in that Letter. However, we did miss a few key elements. We failed to mention the evolving, solidifying culture of management redundancy and independence at each wholly owned business. Buffett ain’t making chocolates at See’s Candies, and he ain’t driving locomotives at Burlington Northern (though he probably wouldn’t mind such gigs from time to time). We failed to mention too the swiftness and tax efficiency with which billions can move throughout the Company’s conglomerate structure. A huge, and hugely underappreciated, element of Berkshire’s key enduring competitive advantages particularly the durability of the Company’s + $87 billion of insurance float. We would also add, after another decade of Buffett and Munger adding new diverse streams of revenues, earnings, and cash flow in very long-lived assets via acquisitions, plus significant organic growth within the Company’s best-in -class insurance operations, that Berkshire Hathaway has become what capitalism may have never contemplated, a perpetual growing cash flow machine. Notable acquisitions over the past decade ISCAR, PacifiCorp, Burlington Northern, Marmon, Lubrizol, Bank of America, Heinz, and, most recently, Precision Castparts. We do not type such words lightly, but as long as the Company retains all of their earnings (no dividends) for additional future acquisitions, the compounding will continue.

    The 50 - year compounding of Berkshire Hathaway on a per-share basis is without peer in the annals of capitalism. Many have tried to build conglomerate empires over the many years, but few have survived. Fewer still that might have the lights still on are but a shell of their former short-term glory selves. Wall Street has a long history of feeding and promoting faux empire builders who ultimately choke on too much dilutive common stock, too much easy debt, too many accounting schemes, too many lousy businesses acquired – and far too much fraud. Inevitably, the investment bankers stop calling (or returning calls) and the empire-builder CEO now must try to manage their colossus for organic growth and some semblance of true cash flow generation. At best, the colossus has morphed into a colossal mess (envision herding cats). At worst, the jig is up and the lawyers start calling. Berkshire Hathaway is the antithesis of this litany of conglomerate woe.

    The table below outlines the growth of a number of fundamental metrics since we first began investing in Berkshire, as well as more recent growth.

    A couple of observations hopefully stand out in the table above, but first a few notes. Assets, Revenues, Pre-tax Operating Earnings and Insurance Float are in millions. The shares outstanding are A- share equivalents. All per-share figures have been converted to 1/1500 B share equivalents.

    Observations since 1998:

    The 25X increase in pre-tax operating earnings per share illustrates the dramatic transformation of Berkshire from a “closed-end stock fund” into the mighty conglomerate it is today. Over the past 17 years, shares outstanding have only increased 8%.

    Insurance float increased a terrific +285%, but the change in float during 1998 was substantially increased by roughly $15 billion with the acquisition of Gen Re. Growth in float from year-end 1997 was +1,137%. Also of considerable note in June of 1998, Buffett swapped shares of Berkshire for shares in the purchase of Gen Re. At the time when the stock of Coca-Cola was valued at an incredibly rich +40X earnings and the Company’s equity portfolio alone made up 115% of book value, Buffett swapped Berkshire stock valued then at 3.0X book value, which tripled the Company’s float and “sold” stocks and “bought” a very huge fixed income portfolio. One of the greatest tax-free market-timing and asset allocation moves of all time.

    Investments per share “only” grew at a rate of 235%, yet this is far below the other conglomerate-related metrics.

    Observations since 2011:

    In an environment where the GAAP earnings of the S&P 500 Index companies was flat (see graphic below), Berkshire increased their pre-tax operating earnings per share by +63%, as well as reloading Buffett’s elephant gun (investments per share) by +62%.

    Growth in shares outstanding that included the following acquisitions: Bank of America warrants ($5 billion), Heinz ($12 billion), and Precision Castparts ($32 billion)? Zip. Zero.

    While not shown, sourcing the Company’s Statement of Cash Flows, specifically cash flows from investing activities less depreciation has collectively amounted to $101billion since 2011. Post-Precision Castparts, Buffett's annual cash for elephant and gazelle hunting should now exceed $25 billion per annum.

    When we consider the current weak economic environment, and the concomitant weakening environment for corporate earnings, we expect Berkshire’s enduring earnings growth to be a standout among the largest market cap companies. Bloomberg reports that U.S. corporate EPS growth has been falling since the second quarter of 2014 and has been increasingly negative for the past twelve months. In addition, factor in, that, according to Standard & Poor’s, Apple alone has contributed 22% of the S&P 500’s margin expansion. Remember, too, that these earnings per share fiqures are populated with plenty of convenient measures such as “adjusted net income,” “adjusted sales,” and “adjusted EBITDA.” Berkshire is quite unique too within their aforementioned long-lived assets. Utilities, pipelines and railroad assets consume many billons in annual capex expeditures. Accelerated depreciation is in effect a “tax-free loan.” As Berkshire continues to grow Property, Plant and Equipment faster than depreciation, deferred tax liabilites will continue to grow too. Over the past dozen years the Company’s defferred tax liability for PP&E has grown 30X from about $1.2 billion to over $36 billion. Said another way, Berkshire’s GAAP earnings are meaingfully understated. If you want earnings clarity, just follow the money – i.e., cash. The cleanest, most conservative accounting is routinely found in Omaha.

    Over time, this asymmetrical accounting treatment (with which we agree) necessarily widens the gap between intrinsic value and book value. Today, the large – and growing – unrecorded gains at our “winners” make it clear that Berkshire’s intrinsic value far exceeds its book value. That’s why we would be delighted to repurchase our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully increase per-share intrinsic value for Berkshire’s continuing shareholders.

    Warren Buffett (Trades, Portfolio)

    2015 Chairman’s Letter to Shareholders

    We have also put together a table to track the growth in the intrinsic value of Berkshire’s stock since the 9/11 terrorist attacks in 2011; Berkshire recorded over a $2 billion loss that year. Working backwards, the last column is the pre-tax earnings of the Company’s various and numerous non- insurance subsidaries. The second to last column is the pre-tax earnings of Berkshire’s Ft. Knox-like insurance companies. Total Insurance is simply the sum of the prior two columns – Underwriting Profit plus Investment Income. Float and Float Growth are self-explanatory.

    The fun starts with columns 2 through 4. Regular readers of Buffett’s Chairman’s Letter will recognize the variables that Buffett regularly publishes on how he and Charlie Munger (Trades,Portfolio) determine the Company’s intrinsic value (IV). Buffett breaks down the Berkshire conglomerate into just two parts. The first (column 4) is the Pre- Tax Operating Earnings of the Company’s non-insurance businesses. The third column represents the Company’s Investments Per Share. Since most of the Company’s investments reside on the books of the Company’s insurance companies, In vestments Per Share is a very good, but arguably conservative measure if the compostion of the investment portolio is largely made up of higher-quality, growing businesses. However, this measure could be aggressive if the portfolio is excessively valued at any given time.

    The most important element for an investor is to try to fiqure out the most fair multiple to capitalize the non-insurance part of Berkshire. We have chosen a pre- tax multiple of 10X, so the IV math for 2015 looks like this: 10 X $8.38 = $83.80, then add the insurance side + $107 = $190.8. With the stock at $142, the shares seem like a bargin relative to IV of prospectively $191.

    However, IV calculations are inherently imprecise. If we thought a fairer pre-tax multiple was, say, 12X – given what we believe are the Company’s significant and enduring competitive advantages – the IV would be a robust $208 per share. On the other hand, we must also recognize that we should be as conservative as possible in such calculations, so if we capitalize the non-insurance subsidiaries at, say, a 8X multiple, then IV is only $174.

    We do take significant clues from the words of Buffett on this critcal topic to help us determine a conservative – but not too conservative – calculation of fair value. Specifically, Buffett has stated that he would like to buy back billions in Berkshire stock at a minimum price-to-book value of 1.2X. Furthermore, and quite significant, Buffett has noted, without equivocation, the rewards to shareholders of such actions.

    Share buybacks are only advantageous to existing shareholders if they are executed below IV. In classic Benjamin Graham style and discipline, Buffett will only buy back Berkshire stock at a significant margin of safety. Book value at year-end sits at $104 per share. 1.2 X $104 comes to $125, so, $125 is Buffett’s fat pitch. If, say, IV is $174 (8X), then Buffett’s margin of safety is 28%. In our view, this is not fat enough. At $208 (12X) the discount is 40% - maybe on the high side for Buffet, perhaps not. At $191 (10X) the discount is 35% - a minimum margin of safety discount for Buffett in our view.

    Here are a few other observations to consider:

    For the first time, Buffett included insurance underwriting results in the calculation of non-insuranceoperating results. His decision, after 12 years of annual underwriting profits, speaks to his expectation of continued insurance profitability in the years ahead. This decision, well past due in our humble view, underscores the amazing insurance business that Buffett and Ajit Jain have built over the years. There is no comparison anywhere in the world in terms of size, sticky float, and profitability.

    When Buffett states that the largest IV value over book resides in the insurance companies, believe him.

    We have added underwriting profits in the calculation of PTOE/share for all years. The profits of the non-insurance subs eclipsed the insurance side for the first time in 2010 after the sizable acquisition of Burlington Northern. (The purchase of BNSF alone immediately increased the Company's pre-tax earnings by almost 40%, while only increasing the share float by just 6%.)

    Note the underwriting profits in 2006 and 2007, post-Katrina. If Berkshire could ever achieve such results on their current base of float, underwriting profits would approach $5.5 billion.

    In a world of zero to negative interest rates, investment income in excess of $4 billion is remarkable.

    What will Berkshire Hathaway look like at the end of the next 10 years? Well, if the Company continues to retain all earnings, and redeploys capital with the same demonstrated success and discipline, shareholder's equity could reach $650 billion and the stock's market capitalization could reach $1 trillion. We'll take such growth...

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 1st Quarter 2016 Client Letter.  


  • David Rolfe Comments on Charles Schwab

    Charles Schwab (NYSE:SCHW)



    As our conviction in M&T Bank waned, conviction built in another previously held financial, Charles Schwab. We previously held Schwab, ultimately selling the stock for valuation reasons in late 2013, after the stock got well ahead of what we thought were solid fundamentals. Valuation was the driving factor for the sell approximately two years ago, and valuation was the driving factor for this most recent purchase. In other words, little has changed from a fundamental point of view. Schwab has maintained their low-cost leadership (per dollar of platform assets) by leveraging their independent open-architecture asset gathering platform, and scaling over $2.3 trillion in client assets across decades of technology investments. Schwab’s low- cost of servicing allows them to pass on lower fees to advisors and clients, which is a key advantage, particularly in the highly commoditized financial services industry. While Charles Schwab’s capital intensity has increased over the past several years, they continue to maintain industry-leading pretax profit margins. We expect Schwab to continue gathering assets at a mid-single digit organic growth rate, combined with continued expense leverage, and only modest help from the interest rate environment.

      


  • David Rolfe Comments on M&T Bank

    M&T Bank (NYSE:MTB)

    Our growth thesis for M&T Bank was predicated on the company’s ability to maintain its historically successful inorganic growth strategy. We purchased the stock in mid-2013 as the Company moved forward with it’s acquisition of Hudson City Bank (announced in August 2012). More than three years later, after extensive AML/BSA expenses (the company spent over $150 million to improve these systems in 2014 alone) and four extensions to the closure date, regulatory approval was finally granted and the acquisition was complete. Of note in the Fed’s approval, however, was a restriction stipulating that M&T Bank must fully integrate the Hudson City deal and cure all BSA deficiencies fully before pursuing further growth through acquisition. We fully expect the Company to follow through on the Fed’s requirements, but given how cumbersome and expensive it has been to integrate this acquisition, we are not convinced that future acquisitions will be any less cumbersome. Furthermore, we are concerned that future returns on acquisitions will be much lower than we initially expected. As such, we liquidated our holdings in M&T Bank.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 1st Quarter 2016 Client Letter.  


  • David Rolfe Comments on Perrigo

    Perrigo (NYSE:PRGO)

    Perrigo was a bottom performance contributor in the quarter, as the company reported a miss in its Branded Consumer Healthcare (BCH) segment. Management attributed the miss to execution issues and dedicated themselves to solving these problems over the coming quarters. We are willing to be patient; in the meantime, as we think that Perrigo’s core, private label OTC business is unique and should remain a healthy and sustainable source of internal capital.

    Perrigo’s BCH segment was established after closing on the acquisition of Omega Pharma (Belgium) in March 2015. Mylan’s hostile bid for Perrigo was launched a few weeks later, and did not conclude until mid-November. We think that Perrigo’s BCH execution issues are understandable (if not predictable), as management was admittedly distracted by fending off Mylan’s hostile bid for the Company during much of 2015. Over the next several quarters, we expect BCH to post improved results, as it is better integrated with Perrigo’s corporate planning cycle.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 1st Quarter 2016 Client Letter.  


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