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  • David Rolfe Comments on Mead Johnson Nutrition

    Mead Johnson Nutrition (MJN)

    Edward Mead Johnson: founder of not one, but two great companies in his lifetime. Now, how many of us can say that?! In 1885, after graduating from the University of Michigan with a degree in law, he and his two brothers, Robert Wood Johnson I and James Wood Johnson, would found Johnson & Johnson, the consumer healthcare products company in Brunswick, New Jersey. With no lack of success, Edward soon 15 decided he wanted to do more. Ten short years later, he broke off from Johnson & Johnson and founded American Ferment Company in Jersey City, N.J., making nutritional products. Fast forward another ten years, in 1905 American Ferment re-­‐ established itself as Mead Johnson and Company and the +100 year history of the Mead Johnson Nutrition Company begins. While Mead Johnson's name has remained intact throughout its history, the company – with sales then of $131 million – was acquired in 1967 by Bristol-­‐Myers for $240 million. Bristol-­‐Myers Squibb owned Mead Johnson as a wholly owned subsidiary for the next four decades until they announced in April 2008 plans to sell 10-­‐20% of Mead Johnson to the public through an IPO in order to better focus on its burgeoning biopharmaceutical business. Bristol-­‐Myers Squibb would proceed to split off Mead Johnson and by February 2009 the IPO was complete. Shortly thereafter, in November of 2009, Bristol-­‐Myers would spin out the rest of their ownership of Mead Johnson in a stock swap, valued at $7.7 billion. Mead Johnson Nutrition would operate as a fully independent public company going forward.


  • David Rolfe Comments on LKQ Corporation

    LKQ Corporation (LKQ) is the world's largest procurer and distributor of alternative and aftermarket collision replacement parts for automobiles and other vehicles. The Company has grown rapidly since its inception in 1998, by executing an expansion strategy that has included aggressive organic and inorganic investments. To date, LKQ's strategy has resulted in a business with unparalleled scale, at over $5 billion in revenues across three continents, compared with aftermarket and salvage parts competitors that routinely post less then $100 million in sales, usually with the largest footprints limited to regional geographies.

    LKQ has a very clear, defensible value proposition that we believe should continue to generate superior business results for many years to come. Consider vehicle owners and collision repair shops have three options when sourcing replacement collision parts: the original equipment manufacturer (also known as "OEMs" – think GM, Chrysler, Toyota or Honda), aftermarket manufacturers (generic car parts, similar in quality to OEM -­‐ "off-­‐brand") or alternative parts, which includes recycled, remanufactured and refurbished OEM parts (usually from the purchase and dismantling of salvage vehicles). LKQ specializes in procuring and distributing the latter two categories – alternative and aftermarket replacement collision parts – which is a $15 billion market opportunity in the U.S. These alternative parts are 13 typically 20% to 50% cheaper than OEM parts, with headlamp assemblies, hoods, as well as rear and front bumper covers rounding out some of the most popular products.


  • David Rolfe Comments on Berkshire Hathaway

    Although we view Berkshire Hathaway (BRK.A)(BRK.B) to be an exceptional growth and profitability machine, that doesn't mean Mr. Market agrees with us. In other words, despite our expectations for double-­‐digit BVPS growth and value-­‐added advantages, growth could turn out to be "not growth." Essentially, we could be wrong. While this might sound helpless, quite the contrary, we believe it is this admission of potential error that allows us to seek an effective cushion from the very risk of "not growth." If Chapter 20 of the Intelligent Investor just came to mind, then kudos to you! If not, we understand, particularly because Ben Graham's examples of a "margin of safety" are much more draconian than we use. But the concept of preserving capital by not overpaying for the future earnings stream of a business is very much the same.

    Berkshire Hathaway is a good example of how we expect long-­‐term value creation to drive excellent shareholder returns, provided that we do not overpay for such potential returns. Consider the Company's share repurchase strategy, which authorizes management to repurchase shares at prices equivalent to or less than 120% of book value. Berkshire currently has in excess of $40 billion in unencumbered cash on its balance sheet, relative to slightly more than $300 billion market capitalization, so there are substantial resources available for the Company to execute such a buyback strategy. Assuming book value growth falls short of our double-­‐digit expectations, we expect shares to simply not appreciate, rather than depreciate, as we estimate shares currently trade near 120% of book value, with buybacks effectively providing a valuation "floor." So we could be wrong about Berkshire's upside, but we think we have accounted for that risk by ensuring relatively limited downside. We conclude by reiterating that any business can sell $100 bills for $95 to generate billions of revenue. But that is not a true value proposition. We believe that profitability represents the existence of value creation and capture – the higher the sustained profitability the better. Further, as these profits are retained and successfully reinvested back into the business at continued high levels of profitability, the ensuing earnings growth is what drives long-­‐term shareholder returns. While not all businesses have such an explicit (and accretive) buyback strategy as Berkshire, it is a good example of why we look for businesses that not only have ample profitability and per-­‐share earnings growth but also trade at attractive valuations. We like the rewards of a rapidly appreciating stock just as much as any investor, but we also like to maintain those rewards by recognizing the ever-­‐present risk that we could be wrong.


  • David Rolfe Comments on Visa

    During the quarter, Visa (V) reported strong year-­‐over-­‐year growth with earnings up 14%, as the business continues to operate at a superior level – very much in-­‐line with the past several years. Visa has been a core holding for our clients since October 2008 and rarely has a year gone by without the Company and its partners having to contend with lawsuits and legislation aimed at limiting pricing power and 4 distribution. 2014 is no exception, though most of the news has been favorable, with a ruling for "no change" to Visa's exclusivity for high-­‐value signature transactions. We continue to see Visa's pricing power as being derived from VisaNet's superior value proposition relative to substitutes, particularly paper-­‐ based payments, automated clearinghouse (ACH), and more recently, "cryptocurrencies" (e.g. Bitcoin). While these emerging payment platforms, including PayPal and Square, represent very legitimate substitutes to traditional interchange, in our view they are not quite "good enough," as evidenced by merchant acceptance that is largely sequestered to small businesses. While we have been net sellers of Visa over the past 18 months, it has been solely due to valuation – our primary tool for risk management at Wedgewood. We believe Visa will continue to maintain its superior competitive positioning, as competitors find it difficult to achieve the network-­‐effect benefits that have compounded the value proposition of VisaNet, particularly as acceptance and issuance of the Visa brand continues to expand.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first quarter 2014 commentary.  

  • David Rolfe Comments on Stericycle

    Stericycle (SRCL) alone operates globally and generates close to $2 billion in annual revenues. Despite Stericycle's strong business performance during the recently reported quarter, the stock detracted from performance, partially driven by headlines of rumored regulatory action related to one of the Company's incinerators. We believe the issue is not meaningful to results and we would be willing to add to shares on pullbacks related to this. Stericycle's stock trades in the mid to high-­‐teens EBITDA range, but the company routinely purchases smaller competitors for just 3X-­‐6X EBITDA. This accretion is a byproduct of Stericycle's competitive positioning and we believe it paves a multi-­‐year runway for double-­‐digit growth.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first quarter 2014 commentary.  

  • David Rolfe Comments on Varian Medical Systems

    Varian Medical Systems (VAR) has been a staple in our portfolio since the fall of 2005. The stock has rebounded smartly, up +31% from its April 2013 lows through the first quarter. Varian continues to be the global market share and technological leader in the radiation oncology business. Unfortunately, the incidence of cancer continues its deadly growth. In the U.S. alone, the American Cancer Society projects that some 1.7 million people will be diagnosed with cancer. Expectations of new cancer cases around the world are approaching 25 million over the next three decades. Of these new cases, approximately two-­‐thirds will be treated with some sort of radiation therapy. Varian has been at the forefront of linear particle accelerator since the late 1940's. Today the Company's installed base numbers over 7,300 LINACS across the globe – a 60% market share. As impressive as that may sound, the availability of state-­‐of-­‐the-­‐art radiation therapy (radiosurgery and proton therapy) outside of the U.S. is woefully low. The developed world has access to 35 to 110 LINACS per million people over the age of 65. In the U.S., it's 110 LINACS per million. Western Europe and Japan is 35 to 65 per million. In India, Africa, Eastern Europe and Southeast Asia there are between 1 and 20 machines per million. In China there is less than 10 machines per million. Complementing the Company's long-­‐term growth opportunity in radiation therapy is the secular trend in the "digitization of radiology," which is a key driver of their lucrative software and flat-­‐panel services business, plus their X-­‐ray tube replacement business that sells into the installed base of competing LINACS. The Company's initiatives to drive greater productivity continue to bear fruit. In 2013 sales per employee increased 14% and operating income per employee increased 20% over 2012 levels. Such productivity has helped the Company offset the continuing losses as they rollout their proton therapy machines. Cutting edge technologies such as proton therapy are one of the many reasons why cancer survivorship rates are up to nearly 70% from 50% from just the 1970's. You will be hearing much more about the marvels of proton therapy in the years to come. The key benefit of proton therapy over the latest x-­‐ray technology is that proton beams, due to proton's relatively larger sub-­‐atomic mass, can be controlled and stopped at the tumor. Conventional X-­‐rays particles cannot be 3 stopped and risk damaging surrounding healthy cells. Due to the exceptional accuracy of a proton beam, the oncologist can more safely deliver much higher doses of radiation (hypofraction), which kills cancer faster with fewer treatments. Furthermore, tumors that are close to vital organs are ideal for proton therapy. These include head and neck, breast, lung, gastrointestinal, prostate and spine. Proton therapy is also ideal for children to avoid longer-­‐term side effects of traditional radiation therapy. The advantages of this therapy have been known since the 1940's, but the cost of commercialization has been a nearly insurmountable hurdle. The Varian proton therapy equipped facility at the Scripps Proton Therapy center in San Diego just went online in January. This $220 million, 102,000 square-­‐foot, facility is only the 15th proton therapy facility in the U.S. At its core sits a 95-­‐ton superconducting cyclotron where the proton beam is generated using oxygen and hydrogen to create a plasma stream. Protons are then extracted and accelerated to roughly 100,000 miles per second. Such miracles of science and technology (Cincinnati Children's Hospital just recently placed a proton order) come at considerable costs. The Company needs to get the costs of such systems below $25 million in order to drive any meaningful growth and profitability from proton therapy. Given Varian's long and exceptional history of innovation with LINACS, combined with proton therapy's high barriers to entry, we believe the Company is well-­‐positioned to eventually reap a substantial proportion of any potential financial rewards generated by this ground-­‐breaking technology. Stericycle continued its steady streak of growth. Last quarter earnings per share were up 12%, driven by a 13% increase in revenues, compared to the December 2012 calendar quarter. Stericycle is able to methodically deliver such growth through a unique combination of organic and inorganic means. For instance, during the quarter they closed eight acquisitions that will generate roughly $34 million in incremental annual revenues. As for the Company's competitive positioning, the regulated medical waste industry market opportunity is roughly $10.5 billion spread across a highly fragmented competitive field, consisting of regional or local players, with none generating revenues above $100 million.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first quarter 2014 commentary.  

  • David Rolfe Comments on Schlumberger

    Schlumberger (SLB) was a top performer during the quarter, continuing its strong performance since the summer of 2012. Since late June 2012 (6/22) through mid-­‐ April 2014, the stock (a holding since late September 2011) is up approximately 60% -­‐ nearly double the S&P 500 Index's gain of 36%. Schlumberger continues to do what it does best – dominate their respective industry and generate industry-­‐ leading growth and cash flow generation. The Company is a leading global provider of oil services. At the risk of repeating an oil service industry cliché, "the easy oil has been found." The technological development being brought to bear to the extremes and complexities in the exploration and development of hydrocarbon energy is relentless. The Company's depth and breadth of their integrated products and services has been at the forefront of the unceasing progress of energy services for decades. Indeed, according to the Company, over the past decade, total E&P capital expenditures have increased by 400%, yet global oil production is up only a scant 15%. Furthermore, in just the last three years, the upstream E&P industry has spent on average $600 billion per year yielding only a net increase in global oil production coming from the shale deposits in North American. Due to the significant advancements in horizontal drilling and multistage fracking natural gas prices are generally one-­‐third of what they are in Europe or Asia. This differential has had 2 profound implications, for instance in the U.S. chemical industry. Chevron Phillips just this month broke ground on a $6 billion ethane cracker plant in Texas – the first petrochemical refinery built in the U.S. in twenty-­‐five years. Circa-­‐2014 finds the Company at the cutting edge in the continued search for unconventional oil and gas, plus in the environmentally challenging area in offshore and deepwater. The Company continues to enhance their capabilities, scale and integration with strategic acquisitions – including of late, Rock Deformation Research (geological software), Saxon (international land drilling), Gushor (petroleum geochemistry and fluid analysis) and GeoKnowledge (exploration risk and resource software). In an inherently cyclical industry, Schlumberger is a beacon of consistent profitability – posting net margins regularly between 12½% and 14½%. Free cash flow over the past twelve months ($5.8 billion) is 90% higher than the last cyclical peak in calendar 2007. Schlumberger is the only peer-­‐related company that has increased margins and generated double-­‐digit growth in operating earnings and earnings per share over the past two years.

    From David Rolfe (Trades, Portfolio)'s Wedgewood Partners first quarter 2014 commentary.  

  • David Rolfe's Wedgewood Partners Q1 2014 Investor Letter

    Review and Outlook

    Our Composite (net-­‐of-­‐fees) gained approximately +1.9% during the first quarter of 2014. This gain is inline with the gain in the Standard & Poor's 500 Index of +1.8% and middling to the gain of +1.1% in the Russell 1000 Growth Index.


  • Conscious Justification - Do We Have Free Will or Free Not?

    There has been a rigorous debate for the last 2000 years dating back to the Platonic ages pertaining to free will, consciousness and decision-making. Have you ever asked yourself when making decisions, what are the influences of the decisions? Do I have free will? Is the outcome already determined?

    It is beneficial for us as conscious creatures to try to understand the dynamics of the decision-making process and the process the brain uses. I would like to examine individually some of the crucial factors of the decision making process. We can call it the mental model of metacognition, or thinking about how we think.

  • Warren Buffett Rediscovered

    One of my favorite videos of all time was a speech Alice Schroeder gave at the University of Virginia Darden School of Business during 2008. The reason I like the video so much is because Ms. Schroeder did a fantastic job revealing a few facts that were relatively unknown, or misunderstood about the Oracle of Omaha.

    I think the following quotes from Ms. Schroder are worth a good amount of pondering:


  • The Greatest Growth Stock You've Probably Never Heard Of

    Better than Berkshire? The numbers say yes.

    Is Valmont industries the greatest growth stock you’ve never heard of?


  • Amid Recall Crisis, GM Could Be Up for 50% or Greater Upside

    The shares of General Motors (GM) have struggled as the company deals with its recall crisis. The auto giant has estimated $1.3 billion as the recall cost, which does not account for its tarnished reputation. Long-term investors, however, might consider this as a buying opportunity.

    Although the company’s shares might continue to struggle in the short term, by the end of the year, when the crisis would be history, analysts at JPMorgan believe that the GM could rise to $52 per share, which shows a potential upside of 53% from the current levels.


  • Wal-Mart Faces Uncertainty Over India

    World’s largest retailer Wal-Mart (WMT) were among the first retail players to have bet big on the huge prospect of the Indian retail Industry. India’s retail industry is still largely unorganized and mostly comprised of small mom-and-pop stores. So, after the present government in India allowed 51% foreign ownership in supermarkets, Wal-Mart should have enjoyed the first mover advantage. However, it hasn’t quite turned out that way for the Arkansas-based retail giant.

    Problems Galore


  • After Apple and Samsung, BlackBerry Also Focusing on Health

    Lately we have seen a lot of discussion regarding Apple (AAPL) and Samsung (SSNLF) focusing on health apps. It’s rumored that the next iPhone that will run on iOS 8, Apple will include Healthbook – an app focused on monitoring and recording health-related issues of its users. Even the Korean smartphone major is working on S-Health. However, these two may not be the only players stressing on health. BlackBerry’s (BBRY) latest announcement clearly suggests that the company is thinking about stepping into the area.

    BlackBerry’s Acquisition of NantHealth


  • Sprint-T-Mobile Merger Proposition Weakens as FCC Addresses Problem

    The roadblocks in the way of Sprint (S) and T-Mobile (TMUS) merger seem endless. The merger proposal of the third and fourth largest U.S. carriers has been one of the hot wireless headlines from quite some time. Whether the merger would materialize or not, remains a big question.

    We have seen it in the past when in 2011 the Federal Commissions Communication and the Department of Justice turned down AT&T’s proposal of acquiring T-Mobile for $39 billion. This was done on the grounds that the merger between two national carriers would concentrate too much power in the hands of the new entity and defeat the spirit of competition.


  • Genuine Parts Company (GPC) Dividend Stock Analysis

    Linked here is a detailed quantitative analysis of Genuine Parts Company (GPC). Below are some highlights from the above linked analysis:

    Company Description: Genuine Parts Co is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products.


  • Google Will Destroy Smartphones as We Know Them

    Back in 2007 Apple (AAPL) completely changed the way we used to look at smartphones and took the world by storm with its iPhone. However, since then a change of such magnitude hasn’t been felt, until now. The online search giant Google (GOOG) is on to something and this might again change the face of the smartphone space entirely. Industry experts and analysts are so keen on this innovation that they feel this will bring an end to smartphones, as we know them. So, what’s so special about the secret thing Google is working on? Let’s take a look.

    Google’s Wonder Gadget


  • Will AT&T Really Keep Away from the FCC Incentive Spectrum Auction?

    Spectrum is the buzz word in the U.S. wireless industry. Growing data demand and rising popularity of smartphones and tablets has put huge pressure on telecom carriers who need more airwaves. Understanding the pressing need, the proposal of an incentive auction was introduced in 2010, and the Federal Communications Commission started planning the auction on a more serious scale. The auction is scheduled for mid next year.

    FCC realized that the demand for spectrum would continue to increase dramatically as national carrier Verizon (VZ), AT&T (T), Sprint (S) and T-Mobile (TMUS) complain that their existing spectrum holding isn’t enough to manage the burgeoning need. As a solution the regulator came up with the idea of transferring unused spectrum from television operators to the wireless carriers.


  • Mondelez May Make a Tasty Investment in 2014

    Mondelez International Inc. (MDLZ) is a snack manufacturing company. The Company manufactures and markets food and beverage products for consumers in approximately 165 countries around the world. The company produces biscuits, chocolate, candy and powdered beverages as well as gum and coffee.

    The company's portfolio includes nine brands including Oreo, Nabisco and LU biscuits; Milka, Cadbury Dairy Milk and Cadbury chocolates; Trident gum; Jacobs coffee; and Tang powdered beverage. In addition, the company's portfolio of snack foods and refreshments includes 52 brands.


  • Altria Group Is Smoking Higher This Year

    Altria Group (MO) is engaged in the manufacture and sale of cigarettes and certain smokeless products in the U.S. With 50% market share in the U.S. tobacco industry, the company dominates the market. Altria owns UST, the world's largest moist smokeless tobacco manufacturer by sales. UST provides Altria with the leading smokeless tobacco brands, Skoal and Copenhagen. The company's diversification into smokeless tobacco is crucial to promoting its growth due to the declining market for smokers in the U.S.

    Altria, whose brands include top-selling Marlboro cigarettes, Skoal smokeless tobacco and Black & Mild cigars, also reaffirmed its 2013 full-year adjusted earnings forecast of between $2.35 and $2.41 per share. The company also owns a wine business, holds a voting stake in brewer SABMiller, and has a financial services division.

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