Oakmark's Bill Nygren with His Latest Letter to Investors
Last week the shareholders of Heinz were also rewarded for their wait when the company agreed to be acquired for $72.50 per share. The history of Heinz and the S&P is worth a look.
The S&P 500 peaked at 1,527 on March 24, 2000, a level not reached again for nearly 13 years. Though the S&P was fractionally below that March 2000 peak when the Heinz deal was announced, due to dividends, its cumulative total return has been a positive 27% over those 13 years. On March 24, 2000, Heinz shares were priced at $32.69. On a price-only basis, the acquisition is 122% higher. But in addition, Heinz shareholders received $18 in dividends, as well as a fraction of a share of Del Monte Foods when Heinz divested its StarKist tuna and 9 Lives cat food businesses. On a total-return basis, since late March 2000, Heinz stock has returned a whopping 213%.
Heinz also performed well as a business over those years. Net income grew by 57% (adjusted for the spin-off), and EPS grew even more – 76% – because of share repurchases. The quality of earnings also improved as Heinz management divested slow-growth brands and made numerous value-added acquisitions of brands in emerging markets, which helped Heinz transform into one of the packaged food industry’s unit growth leaders. But as value investors, we know that investor perceptions are equally important to stock market returns.
In March 2000, investors had fallen in love with technology stocks. Tech stocks accounted for 33% of the S&P 500. The P/E multiple on the S&P 500 was 28x expected 2000 earnings, and the cash-adjusted P/E of the three largest tech companies (Microsoft, Cisco and Intel) exceeded 100x. In contrast, there was little interest in boring, stable growth consumer stocks. Heinz traded at less than 12x earnings, only 42% of the S&P multiple and just over 10% of the tech multiple. That’s why the Oakmark Fund had zero weighting in the tech sector in March 2000, and had a very heavy weighting in consumer staples. My, how times have changed!
Today the S&P trades at 14x expected 2013 earnings. Technology accounts for only 18% of the S&P 500 and the three largest tech stocks (Apple, Google and Microsoft) are priced at an average of 10x cash-adjusted earnings, just 70% of the S&P 500. And consumer staples have gone from trading at a big discount to the market to trading at a premium. The Heinz acquisition equates to 19x expected 2013 earnings, or 136% of the S&P 500 multiple.
As long-term value investors, Oakmark tends to buy unloved stocks and sell what’s popular. Today, we have very little exposure to consumer staples (only Unilever, which is unloved because of its heavy exposure to European customers, and Wal-Mart). Not only do we own all three of the largest technology companies, but relative to the S&P 500, we are now overweight the technology sector. We are always happy to make changes in our portfolio to capitalize on the opportunities the market presents us with.
We at the Oakmark Fund couldn’t have been more pleased with the Heinz acquisition announcement, and we sold our stock that same day.
Heinz was of special interest to us because it was the last remaining stock that Kevin Grant and I purchased in March 2000 when we were named managers of the Oakmark Fund. In the 52 quarterly reports we’ve written since then, Heinz was never once deserving of mention as one of our extreme performers in either direction. As another value investor says, “Slow and steady wins the race!”
In closing, I want to express our special thanks to Heinz CEO Bill Johnson, CFO Art Winkleblack and the entire management team. At Oakmark, we believe in the importance of investing with managers that act like owners and maximize returns to their shareholders by taking advantage of whatever opportunities the market presents them with. Most managements talk about improving shareholder value, but Heinz management walked the walk. Bill Johnson and his team added value through cutting costs, investing in their brands, acquiring growth platforms, spinning off underperformers, repurchasing inexpensive stock, and paying out an above-average percentage of their earnings in dividends. Most importantly, when they were presented with an offer that they believed fully valued Heinz, they didn’t worry about protecting their own jobs; they focused on doing the right thing for their shareholders.
Gentlemen, I speak for all the Oakmark shareholders when I say, “Thank you for a job well done.”
William C. Nygren, CFA