Saturday, April 21, 2018

Vilas Fund’s Investment Thesis for Walgreens

Walgreens is a compelling buy. The company is trading at roughly 10 times next twelve-month net income estimates, grew its earnings per share by 27% last quarter, continues to gain market share both organically and through store acquisitions, and should continue to grow markedly faster than nominal GDP with rising prescription volume derived from new therapies and the aging population worldwide. Because the company has compounded its earnings per share at roughly double the pace of the S&P 500 for a very long time, the shares have averaged roughly 22 times trailing earnings over the last 30 years, ignoring the late 1990's bubble period. Below please see the chart of Walgreens' next 12 months' P/E ratio, which is currently near the financial crisis lows:
If we assume that Walgreens continues to grow its earnings to $8 per share in three years, in line with current analyst estimates, and sells at 16 times those earnings per share, far below its long-term average, the stock would reach $128, a double from today's price of $64. However, with this better-than-average growth, the multiple could rise back to its long-term average of 22 times earnings. This would equate to $176 per share, up 175% from here. Because of this, we think that Walgreens will be the largest creator of profits in the Fund over the next few years.

Monday, February 12, 2018

Visa, Inc. Investment Thesis

Visa, Inc. (V)

Visa is the largest provider of electronic payment processing services, with a 58% global market share compared to the 26% market share of its closest competitor, MasterCard. Visa is accepted by 44 million merchants worldwide and has over 3.1 billion cards in circulation, twice that of MasterCard. The Visa network processed $8.2 trillion worth of transactions in the twelve months ended September 30, 2017, more than MasterCard, American Express, and Discover combined. Over 16,800 financial institutions are part of Visa’s worldwide network, the biggest in the industry.
Visa's growth has been propelled by increased consumer spending as the global economy has recovered and by the increasing use of digital payments over cash transactions. Still, more than 85% of the world’s retail transactions are conducted with cash or checks, leaving significant upside for all electronic processors to grow. For consumers, the transition from cash to plastic brings numerous benefits including convenience, safety, and increasingly attractive rewards programs.
In June 2016, Visa completed its acquisition of affiliate Visa Europe for EUR18.3 billion. The combination provides scale advantages, cost savings, and revenue opportunities to Visa, as the company will now capture 100% of Visa Europe’s growing cross-border volumes, fees, and profits. The acquisition is expected to be accretive to Visa’s earnings this upcoming year. Visa is also eyeing expansion in China, where the state bank clearing system was recently opened to Visa and MasterCard to launch card-processing networks as early as 2018.
We consider Visa’s financial position to be sound, with high operating margins, strong free cash flow, and modest debt. Management is shareholder- friendly and returned $8.5 billion to investors during 2017 in the form of stock buybacks and dividends. Visa stock trades at a premium to the market at 27.9 times estimated 2018 earnings, but we believe that premium is justified by the company’s dominant market position, strong brand equity, and significant growth prospects driven by Visa Europe.

Alphabet (Google) Investment Thesis

Alphabet, Inc. (GOOG)

 Alphabet, Inc., the parent of Google, is a global technology company best known for its dominant internet search engine, which currently controls 80% of global online searches. The company’s revenue growth has averaged nearly 18% annually for the last three years and topped 24% year-over-year in the third quarter of 2017. This growth has been driven by substantial increases in both desktop and mobile advertising revenue, which together account for 87% of total company revenues.
In addition to search, the company’s array of internet services includes Gmail, YouTube, Google Maps, Google Earth, and Google Play, as well as the Chrome internet browser and the mobile Android operating system, which powers an estimated 75% of smartphones around the world. We believe these core assets provide a cohesive, end-to-end experience for consumers and, most importantly, drive internet advertisers to Google sites.
As the online advertising market has matured, advertisers have increasingly consolidated their spending around companies like Google with broad platforms, a vast user base, and unique assets. Consumers use Google products almost habitually (an estimated 90% of all mobile searches are performed on the Google platform), creating a switching cost based on familiarity and not just technology, which we believe will continue to protect the company’s online dominance and fuel growth.
Alphabet also invests heavily in emerging technologies, including enterprise cloud services, artificial intelligence, and autonomous vehicles. These investments leverage the company’s technological expertise and have the potential to drive growth for decades to come.
Alphabet’s financial position is currently as strong as its market presence. The company should generate a record $107 billion of revenues in 2017, an increase of 19% over 2016. Alphabet also generates approximately $25 billion of free cash flow annually and held $100 billion of cash and marketable securities at September 30, 2017. We believe the balance sheet is solid, with just $4 billion of long-term debt and over $150 billion of total shareholder equity.
At 24 times estimated 2018 earnings, Alphabet stock trades at a premium to the S&P 500 average of 19 times, but it trades closer to that average when adjusted for the company’s large cash position. Furthermore, we believe the company’s higher than average growth prospects and strong competitive advantages justify a premium and make Alphabet stock an attractive long-term investment.

Saturday, February 3, 2018

Mohnish Pabrai’s 5 categories

1) Wide and deep moats so good that idiots can run - examples include KO, See’s Candy, MCO, V, MA, AMEX.  Most take advantage of human vices.

2) Deep moats, but management needs to be competent. Examples include Restaurant Brands International, Amazon, Yum Brands, Dominos Pizza. Marriott International, Costco, Geico

3) Markets confused between risk and uncertainty. Examples include IPSO, Frontline, FCAU, Tesoro, Teck cominco

4) Special Situations. Examples include Danielson Holdings and Coventa

5) Upside without downside. Example - Silicon Valley Bank

Saturday, October 28, 2017

Howard Hughes Corporation Valuation

Horizon Kinetics 3Q17 letter gives the following fair value estimates for HHC properties:

South Street Seaport, Manhattan, NY - $2.5B to $3B
Houston Assets, Houston, TX - $4.25
Summerlin, Las Vegas, NV - $2.5B
Columbia, MD - $0.57B
Ward Village, Honolulu, HI - $2.5B
Other properties - $0.48B

Total = $13B

In Pershing Square’s May 2017 Ira Sohn presentation, Bill Ackman values all properties except Summerlin and Ward as approximately equal to the enterprise value of the company. If you assume that Summerlin and Ward are worth $2.5B each, as Horizon Kinetics does, then Ackman’s  back of the envelope valuation also yields a $13B intrinsic value.

Sunday, April 9, 2017

Texas Pacific Land Trust -TPL

I noticed that TPL is the largest holding for Horizon Kinetics and decided to study it.  Here is what I have found out.

TPL has 877553 total surface acres in Texas.

236194 of these surface acres have a 1/16 non-participating perpetual royalty interest and 32536 of these surface acres have 1/128 non-participating perpetual royalty interest.  Furthermore, the Trust has 1/16 and 1/128 non-participating perpetual royalty interests in 137583 acres and 52878 acres in which the Trust has no surface ownership.  The oil & gas royalties from these acres account for about half of the earnings, and royalty revenues are growing fast - about 50% growth for each of the last two years despite an oil price slump because the Midland and Delaware basins are the hottest shale plays on the planet.

With only 10 employees, no debt, no capex, extremely low expenses, and huge exposure to accerating growth in the Permian Basin, an interesting case for TPL as a Rip Van Winkle stock can be made, but at 60x earnings, I am going to wait for a better entry point (which might never come).