The Longleaf Partners funds, which are managed by Southeastern Asset Management, just published a quarterly summary of its performance, including an outlook and a few interesting investment ideas. I've selected two of their most compelling investment ideas to highlight for your benefit. But first, Longleaf's market outlook:
"Most markets remain elevated in our opinion, with some industries particularly richly priced. The Fund, however, is attractively priced at a high-60%s price to value (P/V). We believe the Fund can continue to outpace the index because of the rigor of our Business/People/Price discipline and the flexibility to invest opportunistically, rather than based on momentum-weighted country or sector allocations. Our contacts and local presence around the world help us find attractive investments. As the Fund’s largest shareholders, we welcome the increased volatility and new investment opportunities it can bring."
Longleaf's philosophy revolves around:
- Strong, quality businesses.
- Great management.
- Buying stocks at a low price.
It is noteworthy that the managers started deploying more capital during the quarter. Counterintuitively, this suggests they are now finding more opportunities while the general market hardly budged.
Vestas
Vestas Wind Systems (VWSYF, Financial) builds wind turbines for power generation and provides maintenance services to the power industry. It appears services is an especially juicy business. Clients buy the equipment at a fair price, but you can squeeze them a little bit on service as it is hard for a competitor to take over a service contract (without the data and historic knowledge of the project) and compete. Today, wind park building projects are bid on by companies foregoing any subsidies. The industry is becoming mature and Longleaf is eyeing this opportunity (emphasis mine):
"...we began investigating this business as the levelized cost of energy for new onshore wind (at good locations) reached parity with traditional power providers, reducing the reliance on subsidies and moving the industry more towards traditional, industrial company characteristics that we can understand. Competitive advantages from economies of scale, accumulated know-how and a global service network should drive future success. The market’s pullback, along with lower-than-expected results at the company provided enough of a discount for us to purchase. Since coming aboard in 2013, our corporate partners have fixed the balance sheet and transformed the company into a stable, net cash, dividend paying, share repurchasing company."
For a growth company with a competitive advantage, Vestas is trading at a very modest cash flow multiple of around 10 times and its forward earnings per share estimates are very reasonable given where markets and 10-year treasuries are:
Comcast
Comcast (CMCSA, Financial) is the number one U.S. cable company. It sold off afer it got mixed up in a bidding war for Sky PLC (LSE:SKY, Financial). Longleaf has a history with the company (emphasis mine):
"...our engagement with CEO Brian Roberts, a substantial owner, gave us insight into his approach to capital allocation, which has earned superior returns for shareholders over time.
While many analysts have compared Sky to Dish Networks to argue that Comcast is overpaying, our global investment team’s unique first-hand knowledge of the quality and value of Sky gave us an advantage in determining that Sky is significantly different and a far superior business to Dish.
Sky owns the rights to top sports and original shows (approximately 40% of viewing comes from exclusive content versus less than 1% at DISH), and has a European subscriber base of 23 million. Most of our Comcast appraisal comes from the company’s existing 29 million U.S. customers. NBC’s network, cable channels, film franchises, theme parks, hockey team and one-third of online video platform Hulu make up the rest of our sum-of-the-parts appraisal.
We are pleased with the long-term prospects at Comcast, whether or not Sky ultimately becomes part of the company."
An important driver of Longleaf's interest seems to be the presence of Roberts as an owner-operator with a knack for capital allocation. This is a view that's shared by Morningstar, to cherry-pick a few comments on management by analyst Neil Macker:
"We hold a favorable view of management’s capital-allocation record, especially compared with telco peers."
"...With predictable dividend growth and generous stock buybacks, Comcast is one of the most consistent capital-return stories in the communications space..."
"...Comcast is a shrewd dealmaker."
Great capital allocation is something that adds tremendous value over time. You can buy a business at a reasonable or unexciting forward earnings multipe even if you do not agree with those analyst estimates. If the great capital allocation happens, you will still be pleasantly surprised 10 years down the line. A great capital allocator is worth a lot more when at the helm of cash flow positive businesses.
Comcast meets that criteria and looks like a compelling idea that's worth checking out.
Disclosure: No positions.
