The Tweedy Browne Fund Inc. published quarterly letter for 1Q10. The firm think it is more challenging in finding value in the market, but they do come by at a slow pace. The company also think value can be had more among the high quality issues:
In addition, the firm commented on the following three new positions of theirs:
Brown and Brown (BRO, Financial) is the sixth largest insurance brokerage business in the U.S. The company acts as an intermediary between buyers of commercial insurance and insurance carriers, collecting a commission that approximates 10% of the annual premium paid. It is managed on a decentralized basis with over 180 profit centers in 38 different states within the U.S. What we believe is special about the company is its competitive performance-based sales culture. Moreover, 30% of the company is owned by employees. It has a long record of compounding intrinsic value. Since going public in 1993, revenue and earnings per share have grown at a compound annual rate of 17% and 20%, respectively. Earnings quality is high, with free cash flow regularly exceeding GAAP net income, due to a significant amount of merger related amortization expense. We believe a reasonable intrinsic value of the company is 11x trailing earnings before the deduction of interest, tax and amortization expenses, based on comparable businesses that have been acquired slightly above this multiple. At purchase, the company was trading at approximately a 1/3 discount from a conservative measure of intrinsic value. We would expect to add to this position over time.
Roche (RHHBY, Financial) is a globally diversified pharmaceutical company with a market leading position in biological drugs. It’s currently trading at around 13 times 2010 estimates and has a dividend yield of approximately 3.5%. It has increased its dividend every year for the last 20 years and has grown its dividend by 19% per year over the last ten years. The company feels that it should be able to grow its earnings at around 10% in 2010, assuming stable exchange rates, and the dividend payout ratio is about 50%, which we believe is quite reasonable.
The Berkshire Hathaway (BRK-A) (BRK-B) acquisition of Burlington Northern was consummated during the quarter and the Global Value Fund and the Value Fund received the bulk of its proceeds from the sale in Berkshire Hathaway stock. We made the election to receive stock after a thorough analysis of Berkshire. Warren Buffett was able to put a significant amount of cash to work over the last couple of years, and in light of that we felt 10% earnings power on Berkshire’s roughly $83,000 book value was reasonable, which meant the stock at the time of our analysis was trading at roughly 12 times the company’s earnings power. Berkshire has traded up nicely since the completion of the deal.
Read the complete quarterly report.
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As we mentioned in our last quarterly update, there is a quality bent to the portfolio today reflecting where value is showing up in global equity markets. While higher quality companies performed quite nicely during the last year, the bounce off the recession low was largely driven by lower quality stocks, led by financial, media and small cap securities as well as emerging market equities. The top 20 holdings across our four Funds continue to consist for the most part of larger, globally diversified high return on capital businesses that trade at very reasonable multiples of estimated earnings and have a dividend yield on average of nearly 3%. They generally have strong balance sheets, which should allow them to withstand any economic turbulence we may face, and many of them benefit significantly from sales into the emerging markets. So, while our direct exposure to the emerging markets may be modest, our indirect exposure is quite significant and we think at much better prices than those available investing on a direct basis.
In addition, the firm commented on the following three new positions of theirs:
Brown and Brown (BRO, Financial) is the sixth largest insurance brokerage business in the U.S. The company acts as an intermediary between buyers of commercial insurance and insurance carriers, collecting a commission that approximates 10% of the annual premium paid. It is managed on a decentralized basis with over 180 profit centers in 38 different states within the U.S. What we believe is special about the company is its competitive performance-based sales culture. Moreover, 30% of the company is owned by employees. It has a long record of compounding intrinsic value. Since going public in 1993, revenue and earnings per share have grown at a compound annual rate of 17% and 20%, respectively. Earnings quality is high, with free cash flow regularly exceeding GAAP net income, due to a significant amount of merger related amortization expense. We believe a reasonable intrinsic value of the company is 11x trailing earnings before the deduction of interest, tax and amortization expenses, based on comparable businesses that have been acquired slightly above this multiple. At purchase, the company was trading at approximately a 1/3 discount from a conservative measure of intrinsic value. We would expect to add to this position over time.
Roche (RHHBY, Financial) is a globally diversified pharmaceutical company with a market leading position in biological drugs. It’s currently trading at around 13 times 2010 estimates and has a dividend yield of approximately 3.5%. It has increased its dividend every year for the last 20 years and has grown its dividend by 19% per year over the last ten years. The company feels that it should be able to grow its earnings at around 10% in 2010, assuming stable exchange rates, and the dividend payout ratio is about 50%, which we believe is quite reasonable.
The Berkshire Hathaway (BRK-A) (BRK-B) acquisition of Burlington Northern was consummated during the quarter and the Global Value Fund and the Value Fund received the bulk of its proceeds from the sale in Berkshire Hathaway stock. We made the election to receive stock after a thorough analysis of Berkshire. Warren Buffett was able to put a significant amount of cash to work over the last couple of years, and in light of that we felt 10% earnings power on Berkshire’s roughly $83,000 book value was reasonable, which meant the stock at the time of our analysis was trading at roughly 12 times the company’s earnings power. Berkshire has traded up nicely since the completion of the deal.
Read the complete quarterly report.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Tweedy Browne for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
