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How Warren Buffett's New Managers Returned More Than 26% in 2012

Holly LaFon

Holly LaFon

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The year 2012 proved that Warren Buffett is as good at picking people as stocks. On the “good news” list of his 2013 annual letter was the performance of his two new managers, Todd Combs and Ted Weschler. Both of the managers outperformed the S&P 500 by double-digit margins, he said – meaning with the S&P’s 16% return in 2012, the managers each returned at least 26%, beating their boss as well.

Having thus aced their first years with Berkshire Hathaway (BRK.A)(BRK.B), Buffett increased their assets under management to almost $5 billion each. It was also the first time one of their holdings, DirecTV (DTV), appeared on Berkshire’s official lists of common stock holdings whose market values exceed $1 billion. The two men’s combined holding of the company was valued at $1.154 billion at year-end 2012, compared to an original cost of $1.057 billion.

How the two managers achieved their outsized returns had a great deal to do with the performance of their top stock holdings: DirecTV (DTV), DaVita HealthCare Partners (DVA) and Viacom Inc. (VIA.B).

DaVita (DVA)

DaVita continually makes the news for Berkshire Hathaway’s ever-expanding holding of the company, which ballooned to 15.52% of its outstanding shares on the last purchase, dated Feb. 27. The position began in the fourth quarter of 2011, and has been increased ten times since Nov. 26, 2012.

The company’s market value has increased over 40% in the last year alone.

DaVita, a kidney dialysis and kidney patient care company, has grown rapidly in recent years. Its average annual growth rates over the past five years are 10% for revenue, 10.4% for EBITDA, 39.6% for free cash flow, and 7.2% for book value.

The company reported strong fourth quarter and year-end 2012 results year over year as well. Adjusted net income was $173.3 million, or $1.68 per share, for the fourth quarter, and $612.4 million, and $6.25 per share, in 2012. These results compare to $148.1 million, or $1.56 per diluted share, and $492.4 million, or $5.11 per share, respectively, for the quarter and year ended Dec. 31, 2011.

Both of the fourth quarter results exclude expenses related to its acquisition of HealthCare Partners Holdings LLC, one of the nation’s largest operators of medical groups and physician networks, in November 2012.

Total revenue for the quarter was $2.48 billion compared to $1.79 billion, and $8.19 billion for the full year 2012, compared to $6.73 billion.

DaVita also opened 22 dialysis centers and acquired 22 dialysis centers within the U.S. in the fourth quarter of 2012, and acquired 10 dialysis centers and opened two dialysis centers outside of the U.S.

At Ted Weschler’s former company, Peninsula Capital, he had invested between 20% and 40% of his portfolio in DaVita between 2001 and 2011.

DirecTV (DTV)

After buying shares from the third quarter of 2011 to the fourth quarter of 2012, Berkshire owns more than 34 million shares of DirecTV, placing it at 5.6% ownership of the company. Before joining Berkshire, Ted Weschler had 18.45% of his total assets managed in the company.

The company’s stock has gained 5% over the past year, and has a price of $48.94 in Monday trading.

DirecTV has also grown rapidly, in the past five years particularly. In the past five years it has average annual growth rates of 27.7% for revenue, 28.7% for EBITDA and 20.3% for free cash flow.

In the fourth quarter, DirecTV’s revenue increased 8% to $8.05 billion and net income increased to $942 million, compared to $718 million in the fourth quarter of 2011. For the full year, revenue increased to $29.7 billion from $27.23 billion in 2011, and net income increased to $2.95 billion, from $2.61 billion in 2011.

Its 31% increase in net income in the fourth quarter resulted primarily from higher operating profit, a pre-tax gain for the sale of its 18% ownership in the Game Show Network, and a lower effective tax rate. Full-year revenue’s 9% increase had to do with higher subscriber growth at DTVLA and DirecTV U.S. and higher ARPU at DirecTV U.S.

The company’s DTVLA revenue increased 23% to $6.24 billion due primarily to strong subscriber growth of 26% to a full-year record of 4.42 million, with strongest growth in Brazil, Argentina, Colombia and Venezuela.

GuruFocus notes that DirecTV has been issuing new debt over the past three years, of $8.8 billion, though it has an acceptable level of debt. It also has a P/E ratio of 10.6, which is close to a 10-year low, and a P/S ratio of 1.05, which is also close to a 10-year low.

Viacom Inc. (VIA.B)

Berkshire has been acquiring Viacom (VIAB) since the first quarter of 2012 and has a total holding of about 7.6 million shares, with no new purchases in the fourth quarter. Viacom’s market price gained about 23% in the past year. They are priced at $59.55, almost brushing a 52-week high of $60.84, on Monday afternoon.

Viacom is an entertainment company composed of two segments, media networks and filmed entertainments, and owns brands such as Paramount Pictures, MTV Films and Nickelodeon Movies, to name a few.

In the past five years, Viacom had average annual growth rates of 6.5% for revenue, 22.3% for EBITDA, 19% for free cash flow and 8.7% for book value.

The company’s fourth quarter results included a 16% decrease to $3.31 billion, primarily as a result of 37% lower Filmed Entertainment revenue from inopportune timing and mix of releases. Net earnings increased to $470 million from $212 million.

Viacom repurchased 13.3 million shares in the quarter for $700 million in aggregate, leaving $3.85 billion remaining on its $10 billion stock repurchase program. It has a dividend yield of 1.84%. In the past three years, Viacom has issued $1.5 billion of new debt, although its current debt level is acceptable. Its operating margin, however, has been expanding.

Two of Viacom’s measurements are close to 10-year highs: its stock price of $59.64 and P/S ratio of 2.36. The company has a P/B ratio of 4.2.

Its upcoming prospects for increased revenue and earnings are several upcoming releases, including G.I. Joe: Retaliation, Pain & Gain, Star Trek Into Darkness and World War Z.

See more of Todd Combs and Ted Weschler’s stock picks in Berkshire’s portfolio here. Also check out their Undervalued Stocks, Top Growth Companies and High Yield stocks.


Rating: 3.3/5 (16 votes)

Comments

john
John premium member - 1 year ago
"The two men's combined holding of the company was valued at $1.154 billion at year-end 2012 compared to an original cost of $1.057 billion".

That's a 10% gain for Direct TV a large holding....what accounted for the overall 26% gain? What moved the needle beyond the S&P 500s 16%? Clearly it wasn't Direct TV.

J

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Have they sold some of these or other positions?

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