Investment Guru Mason Hawkins, Chairman and CEO of Southeastern Capital Management, LLC, has three funds under management: Longleaf Partners Fund, Small-Cap Funds, and Longleaf Partners International Fund. Last night he published 1Q09 Quarterly Report, including a letter to shareholders and management discussions to each fund. Despite miserable 2008 performance, Mason Hawkins maintains that his holdings represent more than 50% from the estimated value. The market dislocation presents an opportune time to buy stocks.
According to GuruFocus, the 43-stock portfolio has returned 17.1% through May 7, 2008, handily beating the benchmark S&P 500. In the past month, GuruFocus reported on Mason Hawkins’s sale of Sun Microsystems and Telephone and Data Systems (TDS)
In the current economic downtimes, Mason Hawkins is applying even more rigorous stock criteria on the stocks Business quality has to be even more durable than before; management at our investees has to be so good that they can lead their companies out of this stronger than when they entered; and balance sheets have to be able to survive the most duress ever tested.
Here are some stocks discussed in length in the document:
Marriott International (MAR, Financial)
“In the first quarter we finished building the Fund’s Marriott position which was initiated in late 2008. Bill Marriott and his team are significant owners and have been wonderful partners of ours in the past. Our appraisal accounts for lower occupancy and room rates for the year, but Marriott should gain share in the recession as hotel owners re-flag to gain the higher occupancy that Marriott’s brands generate. In addition, the longer term pricing outlook has improved because supply growth obviously has slowed. Marriott’s management and franchise fee streams are less cyclical than profits from owning hotel properties, and almost all of the U.S. incentive fees are gone in 2009 but will return in the long term. The recession has dealt us the company’s dominant hotel brands at a low multiple to depressed 2009 free cash flow.”
Berkshire Hathaway (BRK-A) (BRK-B)
“We bought a new position in Berkshire Hathaway. For the first time in our careers the stock fell and remained far enough below intrinsic value for us to buy. The company’s misunderstood derivative contracts created optically messy short-term results. In addition, some of Berkshire’s recent investments have been hotly debated, though it is far too soon to judge their ultimate outcome. The company’s book value (as well as our appraisal) incorporates the market price of Berkshire’s public equity stakes, which we believe are also selling for significant discounts to their intrinsic worth.We therefore are getting a double discount for a company that is financially and competitively advantaged, has a proven record of terrific insurance underwriting, owns a number of great brands in non-insurance businesses, and has two of the world’s best capital allocators at the helm.”
Sun Microsystems (JAVA, Financial)
“Sun Microsystems rose over 90% as IBM reportedly pursued an offer to buy the company. Subsequent to quarter-end Oracle has agreed to acquire Sun, and we have sold our stake. “
Liberty Media Entertainment (LMDIA, Financial),
“The (Longleaf Partners) Fund’s largest position, rose double digits. The discount to the market value of the company’s DIRECTV shares started to close as LMDIA’s anticipated spinoff as an independent stock drew closer. Most importantly DTV sells at a large discount to its growing intrinsic value.”
NipponKoa, Cemex(CX, Financial) and Accor
“Two names drove most of the negative return, NipponKoa and Cemex. NipponKoa’s decline occurred in tandem with a proposed merger with Sompo, another Japanese non-life company. Arbitrageurs bet that a merger ratio would favor Sompo at the expense of NipponKoa.We consider this reaction premature because the merger ratio will not be set until July, and the merger will require approval by two-thirds of each company’s shareholders. The values of both firms have increased substantially since the merger was announced as their Japanese equity portfolios have rallied. The peso’s decline against the dollar aggravated worries over how Cemex would pay its dollar-denominated maturities in late 2009. The company has an asset sale awaiting regulatory approval, and in an environment with demand for hard assets, Cemex could sell additional assets if needed. The company is working with its primary banks on financing alternatives and in the meantime, the peso’s recent strength and early signs of easing credit markets helped the stock rebound 55% from its first quarter low.”
“ Cemex and Accor continue to suffer from weak end markets in construction and hotels, respectively. The peso’s decline against the dollar aggravated worries over Cemex’s ability to pay its dollar-denominated maturities in late 2009. The company has an asset sale awaiting regulatory approval, and in an environment with demand for hard assets, Cemex could sell additional assets if needed. The company is working with its primary banks on financing alternatives and in the meantime, the peso’s recent strength and early signs of easing credit markets helped the stock rebound 55% from its first quarter low. At Accor, recent changes in the board reflected management’s commitment to creating value while reducing cyclicality. The market is focused on short-term hotel REVPAR trends while ignoring Accor’s shift away from hotel ownership towards a less volatile, fee-driven operating model. Accor’s voucher business benefits from the current environment as governments utilize vouchers to extend stimulus spending to consumers. We are reasonably confident that the new board will act to highlight the value inherent in Accor.”
Dillard’s (DDS, Financial) and Level 3 (LVLT, Financial)
“In the first quarter the economic environment remained challenging, pressuring earnings at a number of our investees and preventing appraisal growth. However, two of the fourth quarter’s worst performers, Dillard’s and Level 3, each rose over 30% in the first quarter. Dillard’s year-end free cash flow totaled more than half of the company’s market cap, and the company’s cash holdings were four times its debt
maturities over the next two years. Although we expect 2009 store results to be worse than 2008, the stock sells for less than 20% of the company’s liquidation value based on recent sales of lower quality retail real estate comparables. Level 3’s dramatic price movements described in Longleaf’s Annual Report continued through the first quarter in spite of a stable business value. At one point the stock soared to twice the 12/31 price, and then traded 15% below it. At the end of March, the stock had gained 31% over the three months. Given the steady operational results, Level 3’s stock offers a good example of how manic “Mr. Market” can be. “
Fairfax Financial Holding (FFH, Financial)
“(Small-Cap) Fund’s largest holding and best performer in 2008, pulled back 15% in the first quarter, making it the biggest detractor from results. Fairfax declined after reporting somewhat weaker than expected fourth quarter insurance and investment results. The company has never been as strongly capitalized and is well-positioned to benefit from current investment and underwriting opportunities. Volatility in quarterly results is a price worth paying for the superior long-term investment returns that Prem Watsa and his team have delivered to Fairfax shareholders.”
“ Fairfax declined after reporting somewhat weaker than expected fourth quarter insurance and investment results. The company has never been as strongly capitalized and is well positioned to benefit from current investment and underwriting opportunities. Volatility in quarterly results is a price worth paying for the superior long-term investment returns that Prem Watsa and his team have delivered to Fairfax shareholders. There were no additions to the portfolio during the quarter.”
Service Corp International (SCI, Financial)
“Service Corp fell 30% as the stock market’s decline hurt pre-need funeral trust assets’ performance, and the recession made new pre-need sales more challenging. These two challenges should abate in late 2009. This leading funeral services provider has demonstrated pricing power as well as excellent cost control, and demand is certain to grow in the long term. The stock currently trades at an approximate 20% yield on depressed free cash earnings.”
Texas Industries Inc. (TXI, Financial)
“Texas Industries also declined as residential construction stayed in the ditch and commercial construction weakened. While the company expects margin pressure and limited pricing increases in 2009, infrastructure spending, which is half of TXI’s business, should increase nicely beginning in 2010 with the government’s economic stimulus. The stock trades at a seemingly reasonable EBITDA multiple. A deeper review, however, reveals not only that EBITDA in Texas is severely depressed, but the California operation, on which the company has spent over half its current stock price, is at roughly breakeven.”
According to GuruFocus, the 43-stock portfolio has returned 17.1% through May 7, 2008, handily beating the benchmark S&P 500. In the past month, GuruFocus reported on Mason Hawkins’s sale of Sun Microsystems and Telephone and Data Systems (TDS)
In the current economic downtimes, Mason Hawkins is applying even more rigorous stock criteria on the stocks Business quality has to be even more durable than before; management at our investees has to be so good that they can lead their companies out of this stronger than when they entered; and balance sheets have to be able to survive the most duress ever tested.
Here are some stocks discussed in length in the document:
Marriott International (MAR, Financial)
“In the first quarter we finished building the Fund’s Marriott position which was initiated in late 2008. Bill Marriott and his team are significant owners and have been wonderful partners of ours in the past. Our appraisal accounts for lower occupancy and room rates for the year, but Marriott should gain share in the recession as hotel owners re-flag to gain the higher occupancy that Marriott’s brands generate. In addition, the longer term pricing outlook has improved because supply growth obviously has slowed. Marriott’s management and franchise fee streams are less cyclical than profits from owning hotel properties, and almost all of the U.S. incentive fees are gone in 2009 but will return in the long term. The recession has dealt us the company’s dominant hotel brands at a low multiple to depressed 2009 free cash flow.”
Berkshire Hathaway (BRK-A) (BRK-B)
“We bought a new position in Berkshire Hathaway. For the first time in our careers the stock fell and remained far enough below intrinsic value for us to buy. The company’s misunderstood derivative contracts created optically messy short-term results. In addition, some of Berkshire’s recent investments have been hotly debated, though it is far too soon to judge their ultimate outcome. The company’s book value (as well as our appraisal) incorporates the market price of Berkshire’s public equity stakes, which we believe are also selling for significant discounts to their intrinsic worth.We therefore are getting a double discount for a company that is financially and competitively advantaged, has a proven record of terrific insurance underwriting, owns a number of great brands in non-insurance businesses, and has two of the world’s best capital allocators at the helm.”
Sun Microsystems (JAVA, Financial)
“Sun Microsystems rose over 90% as IBM reportedly pursued an offer to buy the company. Subsequent to quarter-end Oracle has agreed to acquire Sun, and we have sold our stake. “
Liberty Media Entertainment (LMDIA, Financial),
“The (Longleaf Partners) Fund’s largest position, rose double digits. The discount to the market value of the company’s DIRECTV shares started to close as LMDIA’s anticipated spinoff as an independent stock drew closer. Most importantly DTV sells at a large discount to its growing intrinsic value.”
NipponKoa, Cemex(CX, Financial) and Accor
“Two names drove most of the negative return, NipponKoa and Cemex. NipponKoa’s decline occurred in tandem with a proposed merger with Sompo, another Japanese non-life company. Arbitrageurs bet that a merger ratio would favor Sompo at the expense of NipponKoa.We consider this reaction premature because the merger ratio will not be set until July, and the merger will require approval by two-thirds of each company’s shareholders. The values of both firms have increased substantially since the merger was announced as their Japanese equity portfolios have rallied. The peso’s decline against the dollar aggravated worries over how Cemex would pay its dollar-denominated maturities in late 2009. The company has an asset sale awaiting regulatory approval, and in an environment with demand for hard assets, Cemex could sell additional assets if needed. The company is working with its primary banks on financing alternatives and in the meantime, the peso’s recent strength and early signs of easing credit markets helped the stock rebound 55% from its first quarter low.”
“ Cemex and Accor continue to suffer from weak end markets in construction and hotels, respectively. The peso’s decline against the dollar aggravated worries over Cemex’s ability to pay its dollar-denominated maturities in late 2009. The company has an asset sale awaiting regulatory approval, and in an environment with demand for hard assets, Cemex could sell additional assets if needed. The company is working with its primary banks on financing alternatives and in the meantime, the peso’s recent strength and early signs of easing credit markets helped the stock rebound 55% from its first quarter low. At Accor, recent changes in the board reflected management’s commitment to creating value while reducing cyclicality. The market is focused on short-term hotel REVPAR trends while ignoring Accor’s shift away from hotel ownership towards a less volatile, fee-driven operating model. Accor’s voucher business benefits from the current environment as governments utilize vouchers to extend stimulus spending to consumers. We are reasonably confident that the new board will act to highlight the value inherent in Accor.”
Dillard’s (DDS, Financial) and Level 3 (LVLT, Financial)
“In the first quarter the economic environment remained challenging, pressuring earnings at a number of our investees and preventing appraisal growth. However, two of the fourth quarter’s worst performers, Dillard’s and Level 3, each rose over 30% in the first quarter. Dillard’s year-end free cash flow totaled more than half of the company’s market cap, and the company’s cash holdings were four times its debt
maturities over the next two years. Although we expect 2009 store results to be worse than 2008, the stock sells for less than 20% of the company’s liquidation value based on recent sales of lower quality retail real estate comparables. Level 3’s dramatic price movements described in Longleaf’s Annual Report continued through the first quarter in spite of a stable business value. At one point the stock soared to twice the 12/31 price, and then traded 15% below it. At the end of March, the stock had gained 31% over the three months. Given the steady operational results, Level 3’s stock offers a good example of how manic “Mr. Market” can be. “
Fairfax Financial Holding (FFH, Financial)
“(Small-Cap) Fund’s largest holding and best performer in 2008, pulled back 15% in the first quarter, making it the biggest detractor from results. Fairfax declined after reporting somewhat weaker than expected fourth quarter insurance and investment results. The company has never been as strongly capitalized and is well-positioned to benefit from current investment and underwriting opportunities. Volatility in quarterly results is a price worth paying for the superior long-term investment returns that Prem Watsa and his team have delivered to Fairfax shareholders.”
“ Fairfax declined after reporting somewhat weaker than expected fourth quarter insurance and investment results. The company has never been as strongly capitalized and is well positioned to benefit from current investment and underwriting opportunities. Volatility in quarterly results is a price worth paying for the superior long-term investment returns that Prem Watsa and his team have delivered to Fairfax shareholders. There were no additions to the portfolio during the quarter.”
Service Corp International (SCI, Financial)
“Service Corp fell 30% as the stock market’s decline hurt pre-need funeral trust assets’ performance, and the recession made new pre-need sales more challenging. These two challenges should abate in late 2009. This leading funeral services provider has demonstrated pricing power as well as excellent cost control, and demand is certain to grow in the long term. The stock currently trades at an approximate 20% yield on depressed free cash earnings.”
Texas Industries Inc. (TXI, Financial)
“Texas Industries also declined as residential construction stayed in the ditch and commercial construction weakened. While the company expects margin pressure and limited pricing increases in 2009, infrastructure spending, which is half of TXI’s business, should increase nicely beginning in 2010 with the government’s economic stimulus. The stock trades at a seemingly reasonable EBITDA multiple. A deeper review, however, reveals not only that EBITDA in Texas is severely depressed, but the California operation, on which the company has spent over half its current stock price, is at roughly breakeven.”
