Tom Russo has been a partner at Gardner Russo & Gardner since 1989. He manages $3 billion as general partner of the Sempter Vic Partners and Semper Vic Partners (Q.P.) limited partnerships, as well as other funds. Russ0 has a 25-year cumulative return of 2754.9% compared to 979.9% for the S&P. Throughout his almost 30-year career, he has employed a consistent investing style, which is to buy quality, global holdings and hold for the radically long term (in some cases over two decades). Most of his stocks are in the food, beverage, advertising-supported media and tobacco industries. He prefers companies that are willing to make large investments in growth, even if it will cause the company’s short-term performance to suffer, and that have upstanding management (often family-owned), competitive moats and customer loyalty.
His top four holdings are Philip Morris International (PM), Nestle SA Reg (NSRGY), Berkshire Hathaway (BRK.A), CIE Financiere Rich (CFRHF, Financial).
Philip Morris International (PM)
Prior to owning shares of Philip Morris International, Russo owned shares of Philip Morris Cos Inc., which changed its name to Altria (MO, Financial) in January 2003. Altria spun off 100% of its shares of Philip Morris International Inc. to its shareholders in March 2008, creating the world’s most profitable publicly traded tobacco company.
Russo has 8,240,209 shares of Philip Morris International. He has been adding to the holding every quarter since the fourth quarter of 2009 when the average price was $49, and most recently added 32,006 shares at an average price of $72 per share.
Since becoming an independent company, Philip Morris has seen revenues of $64 billion in 2008, $62 billion in 2009 and $67.7 billion in 2010. The company has also increased its gross margin from 25.5% in the third quarter of 2010 to 26.6% in the third quarter of 2011. Its net margin rose from 10.8% in the third quarter of 2010 to 11.5% in the third quarter of 2011.
While cigarettes are becoming less enticing to American consumers, worldwide demand is increasing, and growth in emerging markets is something Tom Russo looks for. The company has captured an industry-leading 27.6% share of the total international cigarette market, excluding the People’s Republic of China and the U.S.
The company’s primary foes in 2010 were the regulatory environment and excise tax increases. It expects that the threat of requiring plain packaging could persist for the near future. Many countries also turned to the tobacco industry to increase revenue by increasing taxes on the industry. Philip Morris believes these governments are reconsidering their actions as illicit trade has sprung up as a result.
For the 10 years through 2011, the MSCI World Tobacco Index had the highest return of all 67 groups in the MSCI World Index (MXWO).
Russo believes that Philip Morris is undervalued due to its business set up: “They have 100% of their business non-U.S., but because it’s incorporated in the U.S. for tax purposes, though based in Switzerland, the foreign market just doesn’t touch it. So we still have the benefit, by having a global perspective. We can buy BAT, we can buy Philip Morris, but if 94% of foreign money doesn’t desire to look at Philip Morris because it has a U.S. listing and we can buy the global non-U.S. tobacco leader at a price that doesn’t reflect its fair value because of silo-ed capital, we’re still given a bit of an advantage for having a global perspective,” he said at the 8th Annual Value Investor Conference in May 2011.
Nestle SA Reg (NSRGY)
Tom Russo has 10,184,405 shares of Nestle, and first purchased the stock in 1987, just several years after starting at his firm. In the last 10 years the stock has advanced 167%. Nestle has a market cap of $190.94 billion; its shares were traded at around $54.37 with and P/S ratio of 1.81. The dividend yield of Nestle is 3.05%.
Over the last 10 years, Nestle has grown its revenue per share at an annual rate of 8.77% and earnings at a rate of 21%.
Though Russo purchased Nestle decades ago, he said as recently as May 2011 that it’s more promising today than it was when he first bought it. The reason is that they have a large market they can direct capital to at a greater pace to expand their businesses and “build on latent demand for their products.” Nestle has an appealing portfolio of world-famous brands. He likes that the company is introducing their products into the most remote regions where people are just coming off of subsistence-level farming, and then bringing in higher-priced brands, and then aspirational brands.
He also believes Nestle embodies his principle of “the capacity to suffer” because they invested large amounts of capital into developing their Nespresso brand and saw very little return from it for a while. Now, it is a $3 billion business growing at 20%.
In 2010, the company grew the least in the Americas and Europe, at 5.6% and 3.8%, respectively, and the most in its Asia, Oceania and Africa zone, at 11.7%.
Berkshire Hathaway (BRK.A)
Russo’s Berkshire Hathaway holding dates back to 1982. Recently, as the share price has fallen, he has purchased more shares. The P/E of Berkshire Hathaway also fell in the third and fourth quarter of 2011.
Berkshire Hathaway Inc. has a market cap of $197.79 billion; its shares were traded at around $119800. Berkshire had an annual average earnings growth of 18.2% over the past 10 years.
One of Buffett’s key metrics for evaluating insurance companies is book value, which for Berkshire has increased to a record $98.8 billion in 2010, and was up to $99.3 billion in the third quarter of 2010. Its return on equity increased from 5.9% in 2009 to 8.0% in 2010, and return on assets increased from 2.7% in 2009 to 3.5% in 2010. At the end of the third quarter, Berkshire had $34.7 billion on its balance sheet.
Berkshire shares have fallen 4% over the last year but are up 4.4% year to date and almost 12% in the last 12 months. In September, Berkshire’s board authorized an unprecedented repurchase program for its Class A and Class B shares at prices no higher than a 10% premium over the then-current book value of the shares, a vote of confidence that the shares were considerably undervalued.
CIE Financiere Rich (CFRHF)
Compagnie Financiere Richemont is the third-largest luxury goods company in the world by turnover. Its business is divided into four categories: jewelry, watch making, writing instruments and other, which includes clothing and firearms. Some of its subsidiaries include Cartier, Chloe and Baume et Mercier.
The company expected a difficult second half of 2011 due to the global economic problems and their impact on the luxury goods industry, but still forecast that operating profit for the full year would surpass that of the prior year. The company had $2.6 billion in net cash at the end of the period.
For the six months ended Sept. 30, 2011, Richemont’s sales increased 29%, with solid growth across all segments, regions and channels, and its profit increased 10%, reflecting a one-time gain in the comparative period. Demand was strongest in the Asia-Pacific and Americas regions. China is now the company’s third-largest market after Hong Kong and the USA.
Russo addressed their strategy in emerging markets, saying, “Luxury goods – really, there’s just a different relationship with them in Japan and China than in the U.S. For example, the head of Richemont would say the North American market remains still relatively Calvinistic. And you know, how many American men in this audience have more than two watches? And you all have Latin blood or something. Johann Rupert would tell you, that American men don’t invest in their own luxuries in North America. In Europe it’s very common to have six or seven watches. And in China, we hope it’s the same. We know that up until now they’re spending a lot on them.”
See Tom Russo’s portfolio here, and also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Tom Russo.
His top four holdings are Philip Morris International (PM), Nestle SA Reg (NSRGY), Berkshire Hathaway (BRK.A), CIE Financiere Rich (CFRHF, Financial).
Philip Morris International (PM)
Prior to owning shares of Philip Morris International, Russo owned shares of Philip Morris Cos Inc., which changed its name to Altria (MO, Financial) in January 2003. Altria spun off 100% of its shares of Philip Morris International Inc. to its shareholders in March 2008, creating the world’s most profitable publicly traded tobacco company.
Russo has 8,240,209 shares of Philip Morris International. He has been adding to the holding every quarter since the fourth quarter of 2009 when the average price was $49, and most recently added 32,006 shares at an average price of $72 per share.
Since becoming an independent company, Philip Morris has seen revenues of $64 billion in 2008, $62 billion in 2009 and $67.7 billion in 2010. The company has also increased its gross margin from 25.5% in the third quarter of 2010 to 26.6% in the third quarter of 2011. Its net margin rose from 10.8% in the third quarter of 2010 to 11.5% in the third quarter of 2011.
While cigarettes are becoming less enticing to American consumers, worldwide demand is increasing, and growth in emerging markets is something Tom Russo looks for. The company has captured an industry-leading 27.6% share of the total international cigarette market, excluding the People’s Republic of China and the U.S.
The company’s primary foes in 2010 were the regulatory environment and excise tax increases. It expects that the threat of requiring plain packaging could persist for the near future. Many countries also turned to the tobacco industry to increase revenue by increasing taxes on the industry. Philip Morris believes these governments are reconsidering their actions as illicit trade has sprung up as a result.
For the 10 years through 2011, the MSCI World Tobacco Index had the highest return of all 67 groups in the MSCI World Index (MXWO).
Russo believes that Philip Morris is undervalued due to its business set up: “They have 100% of their business non-U.S., but because it’s incorporated in the U.S. for tax purposes, though based in Switzerland, the foreign market just doesn’t touch it. So we still have the benefit, by having a global perspective. We can buy BAT, we can buy Philip Morris, but if 94% of foreign money doesn’t desire to look at Philip Morris because it has a U.S. listing and we can buy the global non-U.S. tobacco leader at a price that doesn’t reflect its fair value because of silo-ed capital, we’re still given a bit of an advantage for having a global perspective,” he said at the 8th Annual Value Investor Conference in May 2011.
Nestle SA Reg (NSRGY)
Tom Russo has 10,184,405 shares of Nestle, and first purchased the stock in 1987, just several years after starting at his firm. In the last 10 years the stock has advanced 167%. Nestle has a market cap of $190.94 billion; its shares were traded at around $54.37 with and P/S ratio of 1.81. The dividend yield of Nestle is 3.05%.
Over the last 10 years, Nestle has grown its revenue per share at an annual rate of 8.77% and earnings at a rate of 21%.
Though Russo purchased Nestle decades ago, he said as recently as May 2011 that it’s more promising today than it was when he first bought it. The reason is that they have a large market they can direct capital to at a greater pace to expand their businesses and “build on latent demand for their products.” Nestle has an appealing portfolio of world-famous brands. He likes that the company is introducing their products into the most remote regions where people are just coming off of subsistence-level farming, and then bringing in higher-priced brands, and then aspirational brands.
He also believes Nestle embodies his principle of “the capacity to suffer” because they invested large amounts of capital into developing their Nespresso brand and saw very little return from it for a while. Now, it is a $3 billion business growing at 20%.
In 2010, the company grew the least in the Americas and Europe, at 5.6% and 3.8%, respectively, and the most in its Asia, Oceania and Africa zone, at 11.7%.
Berkshire Hathaway (BRK.A)
Russo’s Berkshire Hathaway holding dates back to 1982. Recently, as the share price has fallen, he has purchased more shares. The P/E of Berkshire Hathaway also fell in the third and fourth quarter of 2011.
BRK.A pe Interactive Chart
Berkshire Hathaway Inc. has a market cap of $197.79 billion; its shares were traded at around $119800. Berkshire had an annual average earnings growth of 18.2% over the past 10 years.
One of Buffett’s key metrics for evaluating insurance companies is book value, which for Berkshire has increased to a record $98.8 billion in 2010, and was up to $99.3 billion in the third quarter of 2010. Its return on equity increased from 5.9% in 2009 to 8.0% in 2010, and return on assets increased from 2.7% in 2009 to 3.5% in 2010. At the end of the third quarter, Berkshire had $34.7 billion on its balance sheet.
Berkshire shares have fallen 4% over the last year but are up 4.4% year to date and almost 12% in the last 12 months. In September, Berkshire’s board authorized an unprecedented repurchase program for its Class A and Class B shares at prices no higher than a 10% premium over the then-current book value of the shares, a vote of confidence that the shares were considerably undervalued.
CIE Financiere Rich (CFRHF)
Compagnie Financiere Richemont is the third-largest luxury goods company in the world by turnover. Its business is divided into four categories: jewelry, watch making, writing instruments and other, which includes clothing and firearms. Some of its subsidiaries include Cartier, Chloe and Baume et Mercier.
The company expected a difficult second half of 2011 due to the global economic problems and their impact on the luxury goods industry, but still forecast that operating profit for the full year would surpass that of the prior year. The company had $2.6 billion in net cash at the end of the period.
For the six months ended Sept. 30, 2011, Richemont’s sales increased 29%, with solid growth across all segments, regions and channels, and its profit increased 10%, reflecting a one-time gain in the comparative period. Demand was strongest in the Asia-Pacific and Americas regions. China is now the company’s third-largest market after Hong Kong and the USA.
Russo addressed their strategy in emerging markets, saying, “Luxury goods – really, there’s just a different relationship with them in Japan and China than in the U.S. For example, the head of Richemont would say the North American market remains still relatively Calvinistic. And you know, how many American men in this audience have more than two watches? And you all have Latin blood or something. Johann Rupert would tell you, that American men don’t invest in their own luxuries in North America. In Europe it’s very common to have six or seven watches. And in China, we hope it’s the same. We know that up until now they’re spending a lot on them.”
See Tom Russo’s portfolio here, and also check out the Undervalued Stocks, Top Growth Companies, and High Yield stocks of Tom Russo.
