Bill Nygren’s fund lost 33% in 2008, not bad considering his largest holding was Washington Mutual. He had a few winners, which helped him to do considerably better than other value managers. He bought Illinois Tool Works, Microsoft, Omnicom and eBay which are described below.
Illinois Tool Works (ITW – $35)
Illinois Tool Works is a broadly diversified manufacturer of industrial components, equipment and consumables. ITW has appeared in the Fund before — during the first half of the decade. We have long admired ITW’s management style and corporate culture. The company may not describe its actions as “benefiting shareholders,” but that is because that’s the only rationale it has for action. When acquiring companies, ITW managers consistently display discipline. They have purchased good businesses at attractive prices and then significantly improved the acquired companies’ cash flow. As a result, ITW has an enviable record of superior growth and returns. ITW’s stock peaked at $60 in 2007 and troughed under $30 in 2008’s fourth quarter. In 2003, which was the last time ITW’s stock traded in the $20s, the company earned only half of its current level. Though we anticipate that ITW’s earnings will decline in a weak economy, we are confident that — as happened in previous cycles — its earnings will sharply improve as the economy strengthens. Selling at about 10 times what we consider to be normalized earnings, ITW appears to be a very attractive opportunity.
Microsoft Corp. (MSFT – $19)
Microsoft is the world’s largest computer software company. Its Windows PC operating system and Office applications have dominant market shares. By almost any qualitative or quantitative measure, Microsoft deserves to be called a high quality business. Investors certainly used to treat Microsoft as a great business. In 1999, a year in which Microsoft’s EPS were 70¢, the stock peaked at $60. Now, with more than twice the earnings and with fewer shares outstanding, the stock sells for less than one-third of that price. In addition to good earnings growth, Microsoft pays a dividend that gives the stock a yield that is now higher than a 30-year government bond. Microsoft also has net cash equal to more than 10% of its current price and generates more cash each year. At less than 10 times earnings, this business can finally be purchased at a price we consider to be a bargain.
Omnicom (OMC – $27)
Omnicom is one of the world’s largest advertising agencies and is widely considered to be the highest in terms of quality. Omnicom has a somewhat better business mix than its competitors, generating over half of its revenues from marketing services rather than traditional advertising. Marketing spending has tended to grow in-line with GDP growth, and Omnicom has been able to grow a little faster by gaining market share. In addition, the business is a very good cash generator, and excess cash has been used to make acquisitions and to repurchase shares. The stock is down by more than 50% from its 2007 high of $55. Selling at about 8 times trailing earnings, Omnicom appears to be a high quality bargain.
eBay Inc. (EBAY – $14)
eBay conducts the overwhelming majority of Internet-based auctions. eBay also operates a large site where fixed-price sellers list their inventory. In addition, eBay owns PayPal, StubHub, Skype and other related Internet businesses. In general, the company receives a commission for helping buyers and sellers find each other. eBay was one of the dot-com bubble winners. Its stock fell after peaking at $32 in 2000, but reached a new all-time high of $59 in 2004. Though we admired eBay’s competitive position, the price of over 100 times earnings made the stock unattractive to us at that time. Since 2004, its sales and earnings have more than doubled, and it has used some of its excess cash to reduce shares outstanding. Combine that with a stock that lost more than three-quarters of its value, and the current multiple is only about 10 times earnings — 8 times when adjusted for excess cash. eBay’s stock price is now consistent with many brick and mortar retailers, which overlooks the substantial premium that we believe it deserves for operating on an Internet platform that benefits from powerful competitive and scale advantages.
Illinois Tool Works (ITW – $35)
Illinois Tool Works is a broadly diversified manufacturer of industrial components, equipment and consumables. ITW has appeared in the Fund before — during the first half of the decade. We have long admired ITW’s management style and corporate culture. The company may not describe its actions as “benefiting shareholders,” but that is because that’s the only rationale it has for action. When acquiring companies, ITW managers consistently display discipline. They have purchased good businesses at attractive prices and then significantly improved the acquired companies’ cash flow. As a result, ITW has an enviable record of superior growth and returns. ITW’s stock peaked at $60 in 2007 and troughed under $30 in 2008’s fourth quarter. In 2003, which was the last time ITW’s stock traded in the $20s, the company earned only half of its current level. Though we anticipate that ITW’s earnings will decline in a weak economy, we are confident that — as happened in previous cycles — its earnings will sharply improve as the economy strengthens. Selling at about 10 times what we consider to be normalized earnings, ITW appears to be a very attractive opportunity.
Microsoft Corp. (MSFT – $19)
Microsoft is the world’s largest computer software company. Its Windows PC operating system and Office applications have dominant market shares. By almost any qualitative or quantitative measure, Microsoft deserves to be called a high quality business. Investors certainly used to treat Microsoft as a great business. In 1999, a year in which Microsoft’s EPS were 70¢, the stock peaked at $60. Now, with more than twice the earnings and with fewer shares outstanding, the stock sells for less than one-third of that price. In addition to good earnings growth, Microsoft pays a dividend that gives the stock a yield that is now higher than a 30-year government bond. Microsoft also has net cash equal to more than 10% of its current price and generates more cash each year. At less than 10 times earnings, this business can finally be purchased at a price we consider to be a bargain.
Omnicom (OMC – $27)
Omnicom is one of the world’s largest advertising agencies and is widely considered to be the highest in terms of quality. Omnicom has a somewhat better business mix than its competitors, generating over half of its revenues from marketing services rather than traditional advertising. Marketing spending has tended to grow in-line with GDP growth, and Omnicom has been able to grow a little faster by gaining market share. In addition, the business is a very good cash generator, and excess cash has been used to make acquisitions and to repurchase shares. The stock is down by more than 50% from its 2007 high of $55. Selling at about 8 times trailing earnings, Omnicom appears to be a high quality bargain.
eBay Inc. (EBAY – $14)
eBay conducts the overwhelming majority of Internet-based auctions. eBay also operates a large site where fixed-price sellers list their inventory. In addition, eBay owns PayPal, StubHub, Skype and other related Internet businesses. In general, the company receives a commission for helping buyers and sellers find each other. eBay was one of the dot-com bubble winners. Its stock fell after peaking at $32 in 2000, but reached a new all-time high of $59 in 2004. Though we admired eBay’s competitive position, the price of over 100 times earnings made the stock unattractive to us at that time. Since 2004, its sales and earnings have more than doubled, and it has used some of its excess cash to reduce shares outstanding. Combine that with a stock that lost more than three-quarters of its value, and the current multiple is only about 10 times earnings — 8 times when adjusted for excess cash. eBay’s stock price is now consistent with many brick and mortar retailers, which overlooks the substantial premium that we believe it deserves for operating on an Internet platform that benefits from powerful competitive and scale advantages.
