A few days ago, I profiled the life of Henry Singleton, an investor and businessmen even Warren Buffett (Trades, Portfolio) looked up to. Singleton is not widely known outside value investing circles, but that does not make his career any less impressive.
Leon Cooperman (Trades, Portfolio), chairman and CEO of Omega Advisors Inc., has studied Singleton and the Teledyne empire, compiling perhaps the most comprehensive review of his life. Following this review, Cooperman has narrowed Singleton’s success down to five key strategies, which he highlighted in a presentation at the Value Investing Congress in November 2007.
Below is a brief summary of these strategies, as presented by Cooperman.
Strategy one: Growth through acquisition
Over the years, Singleton grew his business, which is now Teledyne Technologies Inc. (TDY, Financial), rapidly. To achieve the best returns for the most attractive price, Singleton used the company’s unusually low cost of equity capital to his advantage. He was a serial acquirer, buying businesses he believed were undervalued even if they did not fit into the company’s existing business (the conglomerate ended up with companies in many different sectors). Singleton made use of Teledyne’s highly priced stock throughout the 1960s to conduct these deals. Indeed, during this time, Teledyne’s stock traded at an average price-earnings (P/E) ratio north of 20. Singleton was buying up businesses at a typical P/E of 12 with a return on equity of at least 20%.
Strategy two: Intensively manage your business
Singleton and his small management team at Teledyne’s headquarters demonstrated an ability to manage the company’s individual businesses that had never been seen before (and is now copied by Buffett).
Singleton and his team used technology to their advantage and depended on computerized financial reports to assess the finances of each business under the Teledyne umbrella every day. A keen eye for costs kept profit margins wide and return on equity high. The company’s return on equity ranged from 25% to 30% through the boom times. Even in the early 90s, just before Teledyne’s breakup, the company’s return on total capital exceeded 20%, nearly twice that of the wider industry.
Strategy three: Repurchase your undervalued equity
Singleton was not afraid to use Teledyne stock to acquire businesses in the 1960s, but over the next few decades, when conglomerates fell out of favor with the market, he reversed course, stopped acquisitions and began aggressively repurchasing his own stock. He used Teledyne’s excess cash and debt to repurchase approximately 75% of the company’s outstanding shares in the nine years between 1971 and 1980.
There has been no other manager in history that has been so aggressive with purchases. Over the decade from 1969 to 1978, Teledyne’s revenue jumped 89% while earnings per share soared 1,226%.
The effect on earnings per share was dramatic. Between 1969 and 1978, Teledyne’s revenue jumped 89%, net profit more than tripled and earnings per share, thanks to the constant tender offers and buybacks, soared 1,226%. Singleton sometimes used debt for these buybacks, showing his mastery of capital allocation. As Mike Milken, also known as "The Junk Bond King," said:
“Singleton bought in 26% of Teledyne’s equity for $100 million in 10% bonds–a very high coupon in those days. By the early 1980s that repurchased stock was worth more than $1.5 billion.”
Strategy four: Stocks preferable to bonds for the taxable investor
In the mid-1970s, Singleton used the excess cash from Teledyne’s insurance subsidiary to acquire stakes in conglomerates he believed were undervalued, using a similar strategy to Buffett's "float" investing. Singleton also invested in stocks because of the advantageous tax treatment received by one company investing in another.
Strategy five: Build cash for uncertain times
Singleton prioritized cash generation over everything else. Even though he did use debt from time to time to take advantage of the market to repurchase his own stock, Singleton never jeopardized the long-term success of Teledyne by borrowing excessively or increasing expenses to an unsustainable rate.
Disclosure: The author owns no stock mentioned.
