Compounding capital at high rates—especially in a taxable account—is a challenge with smaller turnaround investments. If and when the turnaround succeeds, the investor must sell their position and look for the next opportunity. Capital gains will be realized and the next opportunity might not even be immediately available, both of which reduce long-term performance.
We maintain that companies who engage with their shareholders in unique ways likely do so because there is something special about the company, its leadership, or both. This week we extend the theme by looking at a few companies that have taken relevant inspiration from Berkshire Hathaway.
To achieve results different than the average, one must actually do something different. One underappreciated way in which companies may differentiate themselves from their peers is in their approach to communicating with shareholders. The way a company tells its story might just be a sign that something special is going on.
AMT’s business model is one of the most competitively advantaged among publicly traded companies. The company has multiple characteristics, a number of which we have highlighted in past research reports, that make it a high quality and extremely valuable business.
Assessing management’s skill and integrity is a process that defies quantification. We have invested hundreds of hours reviewing proxy statements over the years. Many capable investors can and do get it wrong (we are guilty as charged). Our experience tells us the best protection from a poor management team is to ensure their compensation incentives are aligned to produce good results for shareholders.
With Robertet, we see a company run by owner-operators, that has pricing power, is a provider of “picks and shovels” to its customers, and that has annuity-like revenue streams. Companies that embody multiple investment frameworks like Robertet are always on our radar as potential, long-term investments.
For the full year of 2020 Andvari is up 31.1% net of fees while the S&P 500 is up 18.4%.[i] We are proud to finish another year of composite outperformance against the market. The numbers also do not tell the full story. Andvari manages separate accounts for individuals and institutions with diverse needs. Many clients require fixed income exposure and less concentration relative to other accounts Andvari manages. These factors all impact the firm’s aggregate performance.
Websites that have taken the place of classified newspaper ads can earn extraordinary EBITDA margins of 50% to 70%. Think of eBay (used items), StubHub (market for ticket exchange and resale), or Apartments.com (property listings for renters). Each platform's ability to generate extraordinary profitability, however, depends strongly on the level of market share it has relative to its next closest competitor.
The article which follows is a high-level summary of a deep dive we recently initiated into the history of the desktop publishing software market from its founding in 1984 until the 2000s. These are the software programs used to edit graphics and to lay out pages for documents ranging from brochures to newsletters to magazines. We work through the enduring lessons highlighted below, which are still applicable to investing today and to all businesses. But we certainly encourage our readers to 'go deeper' via our PDF if they are so inclined.
SS&C checks off many of the qualitative boxes on Andvari’s list. Bill Stone, the founder, is still running the business after more than 30 years. He still owns 13.3% of SS&C which now has a market cap of $16.5 billion. He has an extraordinary track record of capital allocation (including demonstrating talent as a serial acquirer, which we value). He is an intense operator and has created a culture that retains and attracts highly motivated people.
If Warren Buffett was 30 years old, all he’d be doing is buying software businesses. They have every attribute of a business he loves. They have incredible moats around them. You can raise prices every year. Your customers don’t leave. You can deliver value and that value is paid for and expected to be paid for.
For the first nine months of 2020, Andvari is up 13.0% net of fees while the S&P 500 is up 5.6% (see Disclaimers at bottom). The table below shows Andvari’s performance against two benchmarks while the chart shows the cumulative gains of $100,000 investments.
The servant leadership culture at Waste Connections (WCN) is a compelling case study for its effectiveness in empowering employees. This concept also allowed WCN to continue its rapid growth via consolidation of the solid waste industry. WCN shareholders since 2004 have enjoyed 10-bagger returns.
Investors may not remember Larry Bossidy, but he is one of the great business leaders of the 20th century. Bossidy worked at General Electric for over three decades where he ultimately became Vice-Chairman. He left GE in 1991 to become CEO of Allied Signal, a manufacturer that badly needed help. His story offers tangible evidence on the power of building strong internal culture, which is a practice we value at Andvari.
Tyler Technologies possesses many qualities that make for a high quality business. The first (and often loudest) criticism we hear about Tyler is related to Valuation. We agree it does have optically high valuation multiples based on current financials. There is also a narrow gap between Andvari’s estimate of fair value and market value. However, these facts mask the opportunity to earn good returns by investing in Tyler. At Andvari, we frequently emphasize that ‘expensive-looking’ stocks aren’t necessarily bad investment opportunities. This is often a function of one’s investment horizon, which, for us, is indisputably long.
Investors might think the purpose of a company is to continually maximize profits, but the process of deliberately lowering short-term profits to invest in a brand can sometimes create enormous value over a longer period of time. This “capacity to suffer” (a phrase I borrow from Tom Russo) during a period of heavy investment is also a sign of a differentiated management team, something Andvari is always eager to discover.
Large, growing markets present obvious appeal to business leaders and investors, but the pursuit of these shiny objects can be fraught with risks of lost time and money. The scenario reminds us what specific behaviors we value in our executives.
Within all industries there is the opportunity for companies to acquire their competitors or other companies in related markets. Some may naturally be better at it than others. Andvari acknowledges that M&A is unlikely to add value, yet we hesitate to say “all M&A” is bad. If a management team has the skills and track record of creating value through M&A, it’s a rare thing worthy of attention. Enter Constellation Software (CSU:CN), a brilliant example of a company that has become the acquirer of choice for owners and founders of software businesses.
For the first half of 2020, Andvari as a whole is up 4.2% net of fees while the S&P 500 is down 3.1%. Andvari clients, please refer to your upcoming reports for your specific performance.
Within a single FTC-forced divestiture, there’s potential to examine not one, but two investment opportunities. One is the company that must sell. If it was dominant enough to merit an FTC action, it's likely to remain the dominant one in its market post-divestiture. The other is the acquiring company because it might be picking up a high-quality asset at a cheap price. The forced nature of the sale is likely to make the price cheaper than it might be in market-driven environments (and, in reality, these types of assets would not come up for sale otherwise). In both cases, the forced divestiture can be fertile ground for finding excellent businesses.
Let’s imagine a contest between a relatively obscure company founded in 1969 and Google, both battling for supremacy in providing digital mapping services and software to enterprises. Google has the benefit of hundreds of billions in revenues and the ability to hire the best engineers in the world while the older company has zero recognition outside its industry and a fraction of the earnings power. Who wins and why?
For the full year of 2019, Andvari was up 48.0% net of fees while the S&P 500 was up 31.5%.1 The chart shows the cumulative gains of hypothetical $100 investments.
For the first six months of 2019, Andvari is up 38.7% net of fees while the S&P 500 is up 18.5%.1 The table below shows Andvari’s composite performance figures against two benchmarks while the chart shows the cumulative gains of hypothetical $100 investments.
For the first quarter of 2019, Andvari was up 28.1% while the S&P 500 was up 13.6%.1 The table below shows Andvari’s composite performance figures against three benchmarks while the chart shows the cumulative gains of hypothetical $100 investments.
For the full year of 2018, Andvari was up 1% while the S&P 500 was down 4.4%.1 The table below shows Andvari’s composite performance figures against three benchmarks while the chart shows the cumulative gains of hypothetical $100 investments.
Instead of beginning with a summary of investment performance, I begin with even more important news. As many of you know, my wife Leann has cystic fibrosis, a rare and life-threatening genetic disease that affects the lungs and digestive system. After being in the hospital six times in 2017, Leann and I traveled to Duke University so she could be evaluated for a double lung transplant. It was an exhausting five days of tests and meeting with everyone on Duke’s transplant team. Duke later told Leann she is a good candidate for their program and Leann decided to join.
Last December I submitted a research report on the British software company Micro Focus—a holding of Andvari clients since late 2015—to SumZero’s “Top Stocks for 2017” contest. Given the company’s recent transformational deal to acquire Hewlett Packard Enterprise’s software division, the contest was the perfect opportunity to update my research and present the Micro Focus investment case to an esteemed community of colleagues.
With change accelerating in the media/telecom world seeming to accelerate in the past few years, I finally got around to reading Walt Hawyer’s history of Capital Cities (I read the paperback edition and through this post I will reference the page numbers in case you have the book and want to follow along). I was already a little bit familiar with the company as a result of reading the Berkshire annual reports and knowing that Buffett has always said great things about Tom Murphy and Dan Burke (the two main leaders at Cap Cities following the death of its founder Frank Smith). I then learned a little more about the extent of the phenomenal returns Cap Cities produced for shareholders when I read William Thorndike’s book The Outsiders.
With Charter Communications one of our largest holdings (via Liberty Broadband), I've continued to look for reasons why I am wrong about the value of the company. During this ongoing process I've come across a few writeups that advocate selling Charter short. The crux of the bull thesis is cable companies in general will be one of the primary beneficiaries of the increasing consumer demand for greater internet speed and capacity as they are better positioned than the traditional telcos. Charter in particular should be able to derive greater benefits as it will be the acquirer of choice to further roll-up the smaller players in the cable industry and thus create a lot of value from synergies and cost savings.
I had the privilege of attending the annual Markel Corporation shareholders’ meeting on May 11, 2015 in Richmond, Virginia. I did my best to take notes of management’s prepared remarks and presentations which I present to you in outline format. The Q&A session is missing because I did not take notes during that time. Following my outline are some of my personal thoughts about what I heard.
After listening to Motorola Solutions’ 2015 Financial Analyst presentation this morning and thinking about the actions the company has completed in the past year, I am even more convinced the company is ripe for a takeover by private equity or by a larger company in the defense industry. Even if a takeover does not materialize, Motorola is in an excellent position to continue delivering good returns to public shareholders. Here’s an outline of my thoughts.
Danaher (DHR) early this morning announced plans to acquire Swiss-based Nobel Biocare for $2.2 billion (CHF 2bn / EUR 1.7bn). Nobel is a leader in the dental implant industry and will become a "cornerstone" of Danaher's dental platform.
I've personally owned shares of Markel for nearly five years and have been to several of its annual shareholder meetings. It's high time I updated my thoughts and feelings with a fresh report on Markel. If you're an investor, I doubt you will find any new or unique insight into the company, but you might appreciate how I look at Markel's historical figures.
After Rolls-Royce (RYCEY) shares fell earlier this year, I mentioned on Twitter how I thought it was a good buy. It is one of the top players in the oligopolistic aero engine market (which has huge barriers to entry), has a huge backlog, growing service revenues, and a strong possibility for margin expansion as it starts to deliver engines for the newest generation of widebody aircraft from Boeing and Airbus.
With Grace (GRA) down about 4% today (apparently analyst expectations were too high), I thought it would be a good time to do a short post on why I think Grace will provide shareholder returns in the 10-13% range for the long-term. The short answer is the company's absolute focus on returns on invested capital. I will borrow a lot from Grace's investor day presentation this past March.
Motorola Solutions (a current holding of ours) announced this morning they would be selling their Enterprise unit to Zebra Technologies for $3.45 billion. With EBITDA of $284 million last year, Zebra is paying about 12.1x, a whole lot less than what Motorola has spent in putting together a division that has just failed to meet high expectations.
BeyondProxy has published another report of mine on StarTek, a current holding of Andvari. StarTek is a company in the middle of a successful turnaround and that I feel is worth 45% to 100% higher than current prices and is also a potential acquisition target in the next two or three years. Visit BeyondProxy to learn more and download the actual report. If you have any questions or comments about the report, feel free to contact me.
Phil Goldstein's Special Opportunities Fund released its 2013 annual report. The fund did very well in 2013 and kept up with the S&P 500 but with (what I also believe) substantially less risk as the fund was invested in a significant amount of assets that undoubtedly returned much less than the market. For example, 12% of the portfolio was devoted to special purpose acquisition vehicles (SPACs) and 10% to cash/money market funds had to drag overall returns of the fund down.
Last Friday, Liberty Media proposed to acquire the remaining 48% of SiriusXM it didn't already own via a tax-free stock swap. In it's conference call regarding the transaction, Liberty described several benefits, but in my opinion the largest benefit will be the enhanced capital structure of the combined company. Liberty will be able to borrow a larger amount against Sirius and use the proceeds for other investment opportunities as it sees fit.
For the past six months, and probably longer than that, investors and the financial media have been asking themselves or have been asked whether the market is overvalued. The market has marched higher and higher and the S&P 500 is now up 29% for the year. There also seems to be signs of a return of ridiculously-priced IPOs, mostly dot coms and bio-tech stocks in my opinion. People have explained why the market is overvalued by citing Schiller's CAPE ratio or that abnormally high profit margins will eventually revert to the mean.
Towards the beginning of this year I put together a research report on TransDigm (TDG) for my clients. TransDigm is an exceptional company that operates in the aerospace parts industry and is unique among virtually all other public companies in that operates on a private equity business model. I've recently updated the report and you can read the bulk of it by visiting Beyond Proxy.
BeyondProxy, a publisher of investment research for the professional value investing community, recently added Doug Ott to its exclusive list of contributors for their website. The first contribution was Doug's thoughts on Motorola Solutions (MSI), a company in which Andvari clients are currently invested. You may read the post on BeyondProxy by clicking here.
Motorola Solutions (MSI) reported results and guidance that disappointed the market. The stock has been down 8%–10% today.
However, I think this overreaction provides an potentially attractive entry point for an investor, especially in light of the fact the company is under-leveraged and continues to return large amounts of capital to shareholders in the forms of dividends and share repurchases.
I can remember last year several individuals voicing concerns regarding the "fiscal cliff" (a buzz phrase that has hopefully been excised from the vernacular) throughout November and December of last year. They were concerned that government spending would be curtailed and the stock market would suffer, therefore wouldn't it be prudent to raise a substantial amount of cash in portfolios?
On April 15 this year, Phil Goldstein and his Bulldog Investors group filed another Schedule 13D as owner of 9.67% of the outstanding shares of the Firsthand Technology Value Fund (SVVC). Shortly thereafter, the Bulldog group reported they owned 9.8% of outstanding shares. SVVC is a closed end fund “that invests in technology and cleantech companies, disclosed today that its top holdings as of April 30, 2013 were Twitter, Facebook, SolarCity, Silicon Genesis, QMAT, and Wrightspeed.”
Mortgage servicer Walter Investment (WAC) fell 20% yesterday after missing analysts' expectations. For the fourth quarter of 2012, Walter only achieved 0.64 in EPS versus (14.3% growth year over year). Analysts expected 0.67 in EPS. Big whoop.
In his annual letter to Sears Holding (SHLD) shareholders, Eddie Lampert reviews the progress of SHLD on its journey to transforming into an integrated retail experience via their Shop Your Way membership program. He also expounds upon the reasons for the turnover of top management across all major retailers (not just Sears).
Yesterday, the Justice Department filed suit against S&P (owned by McGraw Hill) alleging that the largest U.S. rating firm "falsely" represented that crisis-era credit ratings on complex securities "were objective, independent" and "uninfluenced by any conflicts of interest." Deal Journal has some excellent excerpts from the complaint.
©Andvari Associates 2021
All Rights Reserved