More than two full years have transpired since Buffett hired two relatively unknown managers to begin investing funds for Berkshire Hathaway (BRK.A)(BRK.B), allowing for a slightly clearer picture of their strategies and performance. This year solidified that their tenure as Berkshire portfolio managers has begun on a positive note.
Buffett, when he has mentioned the two men, has indicated he made as good a decision selecting them as most of his investments. In his 2012 letter he gushed:
“Todd Combs and Ted Weschler, our new investment managers, have proved to be smart, models of integrity, helpful to Berkshire in many ways beyond portfolio management, and a perfect cultural fit. We hit the jackpot with these two. In 2012 each outperformed the S&P 500 by double-digit margins. They left me in the dust as well.
Consequently, we have increased the funds managed by each to almost $5 billion (some of this emanating from the pension funds of our subsidiaries). Todd and Ted are young and will be around to manage Berkshire’s massive portfolio long after Charlie and I have left the scene. You can rest easy when they take over.”
Berkshire shareholders and Buffett enthusiasts have eagerly watched to see how the heirs to the financial legend would compare. Below is a review of another year of their equity investing performance.
Review of Combs and Weschler’s stocks
DaVita HealthCare Partners Inc. (DVA)
Though once the managers’ stocks were distinguishable from Buffett’s due to their small quantity, DaVita has worked its way up to become Berkshire’s eleventh largest holding. Weschler amassed 36,514,700 shares of DaVita since beginning the position in the fourth quarter of 2011, giving him a 9.75% stake in the company.
Though a long-term thinker, the investment has already paid off in spades. Weschler has a 73% gain on his lowest average price paid, and a 33% gain on his average price paid of $46.53, based on Friday’s price of $61.69 per share.
DaVita is a fast-growing U.S. kidney care company that in Nov. 2012 acquired the nation’s largest medical group and physician network company, HealthCare Partners, which expanded its reach to areas of health care outside of kidney treatment. Both DaVita and HealthCare Partners focus their business on cutting health care costs through reducing hospital stay time by offering coordinated primary and specialty care for chronic illness patients.
In the following nine months, DaVita HealthCare Partners reported $512.9 million in earnings, compared to $457.4 million in the corresponding period of 2012. Total net revenues also increased to $8.7 billion from $5.7 billion, while its operating margin jumped to 17.5% from 12.3% in the same periods. The company’s cash balance grew to $970.7 million from $382.2 million, and its total debt grew to $8.5 billion from $5.75 billion.
DaVita also continues to expand its business. As of Sept. 30 it hosts about 166,000 patients at 2,108 outpatient dialysis centers, which grew from 150,000 patients at 1,912 outpatient dialysis centers at Sept. 30, 2012.
The Baron Funds initiated a stake in DaVita in the third quarter. The fund’s Neal Kaufman concurred with Weschler on the worthiness of DaVita, commenting:
“We think DaVita is well positioned to capitalize on trends in U.S. healthcare. The dialysis business generates steady growth driven by the increased prevalence of diabetes and has additional growth opportunities from international expansion and integrated care. HCP contracts with health plans and is accountable for the healthcare of its patients in exchange for a fixed fee. In this way, HCP is incentivized to deliver high quality healthcare at low cost. We think DaVita has an opportunity to bring HCP's successful model into new markets and is well positioned to benefit from the shift from fee-for-service reimbursement to risk-sharing and coordinated care.”
DaVita has a P/E of 22.7, P/S of 1.17 and P/B of 2.99, which is close to a three-year low.
Year-to-date gain: 11%
DirecTV has also expanded in size, now occupying the eighth spot in Berkshire’s portfolio. Berkshire holds 36,514,700 shares of the company after buying since the third quarter of 2011, giving it 6.65% ownership of the company. The stock has gained 40% from Berkshire’s average buy price of $47.04, based on Friday’s price of $65.93.
DirecTV is the world’s largest pay TV provider, with over 37 million subscribers, and is split into two businesses: DirecTV U.S. and Latin America, and DirecTV Regional Sports Networks. The company has grown rapidly and estimates that it has significant room for growth in Latin America, where Pan American countries excluding Argentina and Venezuela have just 32% pay-TV penetration. By 2016, it hopes to have doubled its subscriber base to 8 million, in spite of strong competitors in most local markets.
For the first nine months of 2013, DirecTV made $23.16 billion in revenues, greater than $21.69 billion in the corresponding period of 2012, due to higher ARPU at its U.S. segment and subscriber growth at both its Latin American and U.S. segments. Earnings were slightly higher over the same period at $2.069 billion compared to $2.029 billion, and operating profit margin was slightly lower at 16.5% compared to 17.5%. Free cash flow declined to $1.61 billion from $1.74 billion.
It ended the quarter with $18.6 billion in long-term debt and $1.6 billion in cash.
Another DirecTV investor, Mason Hawkins of Longleaf Partners, said of the company in his third quarter letter: “DIRECTV slipped 3% on increased subscriber churn amidst a challenged Brazilian economy. DIRECTV Latin America remains well positioned to benefit from rising pay-TV penetration in the region, and the mature U.S. business continues to generate higher ARPU (average revenue per user).”
DirecTV has a P/E of 12.6 and P/S of 1.2, which is close to a two-year high.
Year-to-date gain: 32%
Visa and MasterCard are about even in the portfolio, at 0.32% and 0.3% weighting, respectively. The MasterCard stake was acquired in the first and second quarters of 2011, and Visa in the third and fourth quarters of the same year. Both have played out incredibly well. Visa has gained 145% from the average buy price of $88.30 based on Friday’s share price of $216.08, and MasterCard has gained 212% since the average buy price of $257.81, based on Friday’s share price of $805.38.
Visa, the global payments technology company, saw the number of transactions processed with its cards in the year ended Sept. 30, 2013 increase 10% over 2012 to 58 billion. Its annual earnings totaled $5.0 billion, an 18% increase over the prior year. Net operating revenue was $11.8 billion, a 13% increase which can be broken down into revenue growth of 10% for service, 17% for data processing, 12% for international transactions and 2% for other, including Visa Europe licensing fees.
Visa holds cash of $2.2 billion, and liabilities of $9.1 billion.
The company has a P/E ratio of 28.5, P/B ratio close to a 10-year high at 6.09, and P/S close to a three-year high at 11.7.
Visa year-to-date gain: 42.5%
MasterCard, another electronic payments company, continued to see steady growth this year. In the first nine months, its number of transactions processed increased 13%. It also had a 13% increase in net revenue to $6.2 billion, broken down into gross dollar volume growth of 14%, and cross-border volume growth of 18%. MasterCard net income rose 15% to $2.5 billion, excluding a litigation charge from 2012.
MasterCard has cash assets of $3.4 billion and total liabilities of $6.06 billion, as of Sept. 30.
Its P/E is 31.9, P/B is 12.7 and P/S is near a 10-year high at 12.21.
MasterCard year-to-date gain: 66%
It is speculated that Verisign (VRSN) and Viacom (VIAB) round out the Weschler and Combs holdings embedded within the Berkshire portfolio. These two stocks this year have gained 53% and 60%, respectively.
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