He was interviewed by Morningsta recently. During the interview he discussed his three-legged stool investment approach and showcased American Tower. A full transcript can be found at Morningstar.com.
Three-Legged Investment Strategy
Akre consider himself both value and growth investor, looking for value in any given situation and growth is considered an integral part of it. In particular, he evaluates a stock based on three aspect: quality of the business enterprise, management, and opportunity for reinvestment:
The first leg has to do with the quality of the business enterprise, and we're looking for businesses that earn high returns in the owner's capital. We spent a lot of time trying to focus on what's causing that better-than-average result, return on capital, to occur, and is it getting better or worse.
The second leg of the stool goes to the issue of the people who manage the business. And not only are they terrific managers, but are they honest and do they have high integrity? Do they see that what's happening at the company level is happening identically at the per share level?
And then lastly, the third leg is the issue of reinvestment. We call it sometimes the glue that holds these together. That is, is there an opportunity that exists because of the skill of the manager, the nature of the business to reinvest what we presume is excess cash. To reinvest that in a way to continue to earn these above-average rates of return. And then to that, we apply our valuation overlay, which is our quantitative way of saying we're just not willing to pay very much for it.
Showcases American Tower Corp. (AMT)
One of Akre’s top holdings is American Tower Corp., a company providing tower for wireless communication companies in the US and other countries. Here is the excerpt of the interview concerning AMT:
- American Tower has the strongest balance sheet and may be the best tower company among the three companies in the business: American Tower, Crown Castle, and SBA
- The demand for their service is created altogether away from them. That is the growth in wireless service, which is a worldwide phenomenon. And that growth has been not only an issue of convenience, but an issue of changes in use, from voice to data to video to now even HD. And each of those generations -- first G, second G, third G -- causes the demand for wireless services to increase.
- So the external demand for the use of the service is great, and it doesn't cost American Tower a nickel to produce that demand, number one. Number two, their business then is really a vertical real estate business: more towers, more tenants per tower, more rent per tenant.
- And then as the demand going from 2G to 3G increases, that requires both a denser antenna network, as well as more complicated antennas. And each one of those is a growth in economic opportunity for American Tower.
- When American Tower or any of the other tower companies gets a tenant that becomes incremental -- and I don't know what that number is, but let's call it two tenants per tower -- the incremental fraction of a tenant comes with margins that might be as high as 90%.
- The assets have a long life, a life well in excess of the depreciation schedules. And in American Tower's case, a great deal of the cash is sheltered by depreciation. So we shareholders are getting a buildup in economic value that's much greater than fully-taxed gap earnings.
- And so we have, really, a compounding machine, and valuation today is sort of 17, 18 times free cash flow of 2010, a reasonable valuation from our perspective for a business that has a long runway of growth and opportunity ahead of them.
- In addition to their domestic business, they have a tower portfolio in Mexico, a tower portfolio in Brazil, and more recently, a tower portfolio in India, all of them places with growing economies and friendly environments in which to operate business outside the United States.
- So I actually think that it may be the best business model we have in our portfolios. It's a terrific business.