Like many value investors, John Rogers had a tough year in 2008. But he thinks that market present great opportunities and he can make big decisions. He wrote: “It is the big decisions in periods of maximum optimism or pessimism (like now) where money managers really earn their track records.” One of our recent big decisions has been to increase our exposure to the health care sector. This article summarizes some of his portfolio companies. The quotes are from his portfolio commentaries.
John Rogers has long favored newspapers. In his April 2006 Forbes column, he wrote that newspapers were in Premature Burial. Newspaper stocks have since lost more than 80% of their market values, even with the recent recovery. Maybe they are now cheap enough to justify the future of the business. He believes that the difficulties of the newspaper industry will pass: “During recessions, advertising spending declines as consumers spend less and companies cut costs. While the current recession is the longest and most severe since the Great Depression, we are confident in the coming recovery. U.S. ad spending declined 5% in 2008 and according to Magna Research Group, is projected to decline more than 14% in 2009. Historically, advertising growth has tracked GDP growth and we expect this relationship to hold in the future: as the economy grows, so will ad spending. Gannett’s broad audience reach will attract advertisers with its television stations around the country and millions of USA Today readers in print and on the Internet.”
“In the inevitable recovery, auto advertising, which has been a headwind for the past 18 months, will become a tailwind as manufacturers and dealers reorganize and auto sales accelerate. We expect online classified advertising to exceed past levels, benefiting CareerBuilder, Cars.com, Apartments.com and several other Gannett properties. At its peak, Gannett’s stake in CareerBuilder was valued at more than $1 billion, more than 80% of Gannett’s current market value. Throughout the recession, CareerBuilder has maintained its position as the leading online recruitment destination, and we are confident in its prospects for the future.”
In June Rogers believed that investors are ignoring the long-term value offered by Gannett’s strong brands and broad audience reach. “Every recession is followed by a recovery. This time will be no different.” He assigned a private market value of $5.46 to Gannett shares, when it was traded at $3.57.
Today Gannett is traded at $12.15 a share, more than double of the private market value John Rogers assigned.
Like many other value investors, John Rogers like the management of Markel Corp. “Alan Kirshner, chairman and CEO, leads a management team whose disciplined approach to risk is apparent in its compensation arrangements with underwriters, selective areas of competence and attention to detail. While many insurers pay employees on volume, Markel rewards profitability rather than output. In addition, Steve Markel, vice chairman, and Tom Gayner, executive vice president and CIO, oversee a stock portfolio derived from shareholder funds while deploying high grade bonds to repay claims. This strategy was pioneered by Berkshire Hathaway’s Warren Buffett.”
“The largest headline issue facing Markel now is the caretaking of AIG’s subsidiaries followed by their proposed sales. AIG must maintain clients in order to sell itself which has put pressure on domestic insurance pricing. The loss of capital in the insurance marketplace should have prices rising as there are fewer dollars to go around—an ideal situation for Markel.The opposite is currently occurring as insurers are cutting prices to maintain clients and the cash payments from premiums. AIG is no exception. The turn in the insurance cycle will be a boon for well-capitalized Markel and will coincide with an improving equity market, an unusual yet fortunate coincidence.”
John Rogers has assigned a private market value estimate of $433.12. Markel Corp. has a market cap of $3.21 billion; its shares were traded at around $327.98 with a P/E ratio of 25 and P/S ratio of 1.7. Markel Corp. had an annual average earning growth of 31.4% over the past 5 years. Therefore Markel Corp. is about 25% undervalued.
Markel is owned by five of the gurus we are tracking, among them Mason Hawkins owns 389,331 shares as of 06/30/2009, an increase of 32.32% from the previous quarter. Chris Davis owns 374,550 shares as of 06/30/2009, an increase of 27.88% from the previous quarter. Bruce Berkowitz sold out his holdings in the quarter that ended on 06/30/2009.
Merck & Company, Inc.
John Rogers wrote: “For almost two years, big pharmaceutical manufacturers have been market laggards. A lingering dark cloud stems from worries over patent expirations, potential Medicare and Medicaid reimbursement issues, and thin product pipelines. As contrarians, we believe Merck is addressing these issues head on. We also expect the company’s continued industry leadership to reward shareholders handsomely. The last time pharmaceutical manufacturers were this cheap was in 1994–the “Hillary Care” days when then-First Lady Hillary Clinton spearheaded a failed attempt at health care reform. During the five years following 1994, Merck shares grew five-fold.”
“Current talk of government health care reform spooks the Street. And yet, big pharma has finally come to terms with the elevated health care costs within in the United States and the strain these costs are placing on patients. For the first time, the pharmaceutical industry is working concurrently with the administration to make pharmaceutical products more affordable. To that end, the industry recently agreed to halve some prices on brand-name prescriptions for Medicare patients. This could save patients an estimated $80 billion over a decade and is a win-win for all. The pharmaceutical manufacturers will give up a small amount of profit per prescription while increasing volumes sold.”
John Rogers estimated that Merck shares are worth $40.32 a shares. The shares were traded at around $31.18 with a P/E ratio of 9.5 and P/S ratio of 2.8, therefore about 22% undervalued. The dividend yield of Merck & Co. Inc. stocks is 4.9%.
As one of the largest drug company, Merck & Co. Inc. is owned by 18 Gurus. Prem Watsa bought 8,000 shares in the quarter that ended on 06/30/2009 for the equity portfolio of Fairfax Financial Holdings, Inc. David Dreman and Jean-Marie Eveillard reduced their holding. The Bill & Melinda Gates Foundation Trust sold their shares.