In the comments to my Kinnevik post some weeks ago, a reader recommended me to have a look at Softbank, the famous Tech conglomerate built by Masa Son. Well sometimes I indeed take suggestions…..
Masa Son – Founder and “Godfather”
In Softbank’s case it makes sense to start with its founder, CEO and major shareholder (21%) Masayoshi (“Masa”) Son.
While looking at General Electric some days ago, I remembered that I had the IPO/Spin-off GE Capital Credit Cards which is now Synchrony Financial on my research list for quite some time.
This is from the 2016 annual report explaining how Synchrony was separated from GE:
Home Capital Group is a Canadian bank/mortgage lending company founded in 1986 and run by the same CEO for 30 years, which came into the spotlight over the past few months. It ran into trouble, almost imploded and then got saved by no one other than Warren Buffett (and Ted Weschler).
There is good coverage following this link. The story in short:
Home Capital wanted to aggressively expand into insured mortgages. However at least one underwriter collaborated with mortgage brokers to get mortgages approved without proper documentation. At some point regulators reigned in but management did not tell shareholders about it. Then the regulator got tough and management had to go. In the meantime, short-term financing was pulled and the company got into real liquidity troubles.
To sum it upfront: In my opinion there was nothing “really new” or spectacular in Buffett’s 2016 letter.
Operationally, 2016 was not such a good year for Berkshire, operating profit was flat and book value gain lower than the S&P. Nevertheless Berkshire’s stock price outperformed the S&P 500. Comprehensive income however was very good, around 50% better than 2015 (which was not very good).
Net tangible assets declined to around 170 bn from 186 bn mostly due to the Precision Cast Part acquisition which added more than 40 bn in intangibles.
I made some notes which might be interesting to some reader (or not).
Berkshire share repurchases:
The most interesting part from my side was where he writes about share repurchases in general and Berkshire in particular. I actually know some investors who treat the “Buffett put” at 120% of NAV as a real one, assuming that the stock price can never go below that level. This is what Buffet says:
Oaktree Capital is an US-based listed asset manager specializing in alternative assets and more specifically in “distressed” securities. Co-founder Howard Marks became quite famous and is one of the most intelligent people in the investment industry. I had reviewed his book 5 years ago and read everything he writes with great interest.
Oaktree is clearly one of the “Highest quality” names in Alternative Asset Management with a very good long-term track record. A reader mentioned Oaktree in the “ideal company post” and as I had them on my list anyway I decided to make this my first analysis for 2017.
Following my Old Mutual “sum of parts” valuation I saw the following Ira Sohn presentation of Exor Spa, the Agnelli family holding (FiatChysler, CNH etc.) as a potential “Sum of part” value investment.
To summarize the presentation in my own words:
- Exor Spa is basically a “Berkshire like” company at a “Graham” valuation
- Exor is managed by a “great capital allocator” and trades at a discount as people see it as an Italian company
- After the acquisition of Reinsurance Partner Re Exor should trade at similar valuations as Berkshire or Markel
- Big upside potential as FiatChrysler, Ferrari (and CNH) are severely undervalued (“Coiled springs”)
The study sees a potential upside of several times the current share price. They forecast a 150 EUR NAV per share (vs. ~50 EUR now and 30 EUR share prices), driven by a quadrupling in value of the FCA and the CNH stakes.
Everyone who has read Thorndikes book “The Outsiders” clearly knows that capital allocation& capital management is one of the most important factors in creating long term shareholder value. After I watched Thorndike give a briliant talk at Google on this topic, I decided to write down my own thoughts on the topic.
What is CAPITAL ALLOCATION & CAPITAL MANAGEMENT anyway ?
CAPITAL ALLOCATION is simply what you do with your profits/cash inflows once they are in your account. You can do a lot of things with it. Thorndike in the talk above uses 5 uses, I would add another 2 (in bold)
1. Reinvest: Maintain your existing assets/infrastructure/operations
2. Grow organically: Expand your business by buying more machines/outlets/opening stores etc.
3. Expand your business by M&A
4. Pay back liabilities (debt, payables, pension liabilities etc.)
5. pay dividends
6. buy back shares
7. just leave the cash on your account and wait for better opportunities