The Yacktmans went in 2008 with a sizable cash position. At the peak of the crisis when most people were selling and raising cash, they were busy buying – mostly in the economic sensitive names. Then in 3Q2009, after the stock recovered, they sold their low quality holdings and rotated into the high quality issues. The result was nothing short of outstanding: for the two years of 2008 and 2009, while S&P 500 declined more than 20%, Yacktman Focus Fund was up nearly 25% and Yacktman increased 18%. True to their words, the Yacktmans did not lose money.
GuruFocus profiled their investment strategy and techniques before, read Part 1 and Part 2.
Recently, Donald and Steven Yacktman, and the firm’s Vice President and portfolio manager Jason Subotky had an interview with The Wall Street Transcript. They repeated some of the points on their investment philosophy and discussed some of their top holdings. I leave to you to read about their investment philosophy, here are some of the comments they made on their top holding positions:
TWST: I want to ask about two sectors in which you have a heavy focus. The first one is the beverage sector, where you have fixed stakes with Coke and Pepsi.
Mr. Stephen Yacktman: While Pepsi is partially a beverage company, you’ve also got Frito-Lay and Quaker foods. Additionally, you have Gatorade, which is extraordinarily dominant in the sports drink category.
On the Frito-Lay business, all I could say is if you walk down the chip aisle of a grocery store, it is hard to find a bag that’s not a Pepsi brand. There are niche players, but Frito-Lay has some of the highest market share of any major product in the grocery store. It’s a fabulous business. We like to say that if you can buy it from a vending machine, we want to own it. Chewing gum, chips, candy, beverages, sodas — those categories have the wind at their backs compared to other packaged food categories.
Coca-Cola is a diversified company, and prior to the bottling acquisition, 80% of its earnings came from outside the United States. Coke has high market share in many of the top emerging markets, which we think will allow the company to grow volume at an attractive rate for decades to come.
Mr. Subotky: I think it’s less about owning beverage companies and more about investing in dominant packaged food companies with great global footprints. We took these positions because we think the predictability of these businesses is really strong and the valuations are very attractive. When you look at Coke, the stock is in the low $60s, and it sold for more than $80 a share in 1998. In the next 12 months, we think Coca-Cola will earn a bit less than three times as much per share as it did in 1998, so you’ve had huge valuation compression.
TWST: The other sector I wanted to ask you about is media, where you have a heavy dose of News Corp. in each fund and several other big holdings from this sector.
Mr. Stephen Yacktman: When you look at something like News Corp. (NWS), half of its earnings come from pay-television content, like Fox News, Fox Sports, FX and a variety of international channels.
The other content company we hold is Viacom (VIA) — and they’ve got Nickelodeon, MTV — and if you look at the number of hours viewed per household, they deliver about 20% of total cable/satellite viewership. Viacom’s channels only cost about $2 a month for each subscriber, which compares favorably to ESPN (DIS), which is more than $5 per month for all of its channels, which produce lower total viewership.
In general, corporate profit margins are back at all-time-high levels. In News Corp.’s case, we think you have got margins that are still going permanently higher. For a typical company in the S&P 500, margins have nowhere to go but down. In News Corp., you’ve got margins that are going up, so the wind’s at their back and it’s cheap.
Mr. Subotky: We also like the monthly recurring revenues News Corp. and Viacom receive from cable and satellite companies. It makes their businesses predictable. News Corp. is one of the old media newspaper/network television companies that successfully transitioned its business model. The cable content sector, which Steve mentioned, is now more than half of pre-tax profits and has grown pre-tax earnings more than 30-fold in the last decade-plus. In the last three years — in the face of a recession — the cable content business has doubled its operating income, and in the last five years, it tripled, which is far higher growth than we normally find in value-priced securities.
Read the full text at the Yacktman Fund’s website.