txlaw

Thanks for posting these! Every time I think I will try to read Security Analysis, I flip through the pages at the bookstore, my eyes glaze over, and I immediately put it back down. I commend you for spending the time to really go through that monster.

Yeah, that's the main problem I have with Lampert. I have no idea whether he's a brilliant investor, but he does seem to be a really great investor based on what I've seen that's public, not withstanding the Citigroup purchase. I just wish he would get some real operators into Sears who will optimize the existing business, if at all possible. I also can't believe that he bought back Sears stock at such high levels. Did he really believe that it was worth that much? I suspect he was really just making a huge bet on himself, which would be okay if were using his own money. But he was using company cash, which really bothered me.

Any holders of ETFC on the board? If so, any opinions on why Citadel is selling some of the shares it currently owns into the market? My understanding is that Citadel's effective ownership will still be quite high based on the shares they keep and their position in ETFC's convertible debt, so that might be one explanation. Also, Citadel has been criticized for saving ETFC in order to access ETFC's order flow for its high frequency trading operations. Can anyone explain to me what the difference is between market making, "front running", and high frequency trading? I'd like to get some clarity on what's really going on here.

I trust Berkowitz's valuation of SHLD's liquidation value (I own quite a bit of FAIRX), but I really wish he had spoken to Eddie Lampert before investing in SHLD. I am afraid that it will in fact turn out to be a cigar butt investment, which is not generally the type of thing I like FAIRX getting into. It would be okay if liquidation would be fairly soon, but it could take a very long time to liquidate SHLD. I wonder if ESL's letters are more instructive as to whether Lampert will, in fact, turn SHLD into a BRK-like vehicle. Good point. He's no Buffett. Berkowitz has noted that Lampert was clearly not as brilliant as everyone hyped him to be, though he is clearly a very smart man. And Lampert appears to be too involved with the retail operations. He should really get a good operator in there, as Buffett did with the BRK operations back in the day. I also think he needs to monetize/liquidate some brands (Lands End and K Mart) and focus on SHLD as a competitor to LOW and HD versus being a competitor to WMT and TGT.

Also forgot to mention the financial services company owned by Slim: Grupo Financiero Inbursa.

Slim is actually more diversified than people think. Grupo Carso has businesses in several different industries: telecom, industrial, infrastructure, and retail. He owns a majority stake in Sears Mexico, I believe. He owns a large stake in the NY Times. He owns a large stake in Saks Fifth Avenue. He owns large stake in Bronco Drilling. He owned close to 3% of Apple right before its great run after the iMac came out. He's been on the board of a number of multinational companies. He may be closer to Li Ka-Shing or Al-Waleed than Bill Gates. You can also compare him to any number of Indian entrepreneurs/entrepreneurial families that own diversified conglomerates (Reliance, Mahindra, Aditya Birla). But I have heard him called the "Warren Buffett of Mexico." It's always a difficult thing to parse the phrase that so-and-so is the Warren Buffett of X country. I've heard Bruce Flatt of Brookfield called the Warren Buffett of Canada. But Brookfield is quite a different animal than Berkshire since its primary focus is on hard assets and asset management.

Carlos Slim, of Mexico/Latin America

The OID interview actually addresses one of the questions asked above about a lack of discussion about generics by Pfizer management. Berkowitz mentions that Kindler knows that PFE gave away a lot of the generics business and that he is being diplomatic in discussing this aspect of their strategy going forward. I guess that's a partial explanation of why management may not be as vocal about the generics business as they could be. By the way, Charles Fernandez used to be an exec at IVAX, which was bought out by Teva. So we can safely assume that Berkowitz's assumptions about the generics business are well informed. Very true. That's another reason why Berkowitz believes that Pfizer will be an ideal partner for smaller drug companies with good prospects for their molecules. He also applies the distribution partner thesis to his stake in Forest Laboratories (FRX). Great point! Totally forgot about this part of the conference call.

I'm not sure what you mean by being overvalued from the standpoint of dividends. If you mean that the dividends aren't high enough, I guess that makes a difference for some small investors but certainly not for all small investors. Regardless, the dividend yield doesn't usually have a bearing on whether a company is overvalued. It does have an effect on the company's balance sheet, however. And it seems very prudent in PFE's case to have cut the dividend prior to the merger. It's true that these companies focus a lot on sales and marketing, definitely too much from society's perspective. And I sympathize with the notion that they have put a disproportionate emphasis on certain conditions that really aren't a big deal compared to some of the important maladies out there that must be addressed. But it's not like these companies are completely failing to innovate. Take a look at Pfizer's pipeline. They are really focusing a lot on some important diseases. The number of oncological treatments in the pipeline seems particularly noteworthy. Additionally, it's almost always the case that when technology-oriented companies become large/megacap companies, they must start forming joint ventures and acquiring other companies to find something to do with the large amounts of cash they generate. Google and Microsoft, both highly innovative high tech companies, also engage in M&A and venture funding because of their size. You can't necessarily build everything in-house. In big pharma's case, it might actually be a good thing for them to focus on providing funds to a number of smaller companies who are potentially onto discovering new, worthwhile drugs rather than giving all that money to their own internal R&D departments. I assume you're talking about an index fund focused on pharmaceutical and biotech companies? That's not at all a bad approach. I just think that both PFE and SNY are, in fact, undervalued and are taking the right steps to help distinguish themselves from their big pharma brethren. I completely disagree with the notion that either PFE and SNY are expensive.

I wonder how the lower prices just negotiated by the Chinese with Fortescue will affect the value of the note carried on LUK's balance sheet. (See http://www.nytimes.com/reuters/2009/08/17/business/business-uk-china-steel.html) Seems like a smart move on Fortescue's part to get on good terms with the Chinese government, since they will be ramping up production in the coming years. It's hard to tell whether this is already reflected in the value of the note as carried on Fortescue's balance sheet.

Yeah, I found the Wyeth deal to be sort of counter to the vision Berkowitz had for Pfizer. It seemed like he was looking for them to do small nuts and bolts acquisitions rather than a huge deal like Wyeth which may be more difficult to close. It's been a while since I've listened to the Fairholme call, and I can't remember if Kindler addressed "branded generics" at any length there. However, PFE has definitely taken the right steps to increase its presence in the branded generics market. It has made several announcements about deals intended to increase this business. PFE also has a newsroom page dedicated to the subject that you can check out if you'd like. See http://www.pfizer.com/news/press_kits/established_products_fact_sheet.jsp ; http://www.pfizer.com/news/press_releases/pfizer_press_releases.jsp?rssUrl=http://mediaroom.pfizer.com/portal/site/pfizer/index.jsp?ndmViewId=news_view&ndmConfigId=1016273&newsId=20090520005604&newsLang=en ) Of course, growth going foward after the Wyeth deal is going to depend on acquisitions and JVs, so that's probably why they've been placing an emphasis on that. You might be right about the Wyeth deal catching Berkowitz off guard. He definitely indicated before the deal was announced that he thought that Pfizer going at it alone would be a great place to be in going forward. But I think that's exactly why he brought Kindler onto a special conference call -- to allay his and his shareholders' fears that the Wyeth deal would destroy the thesis on PFE.

I apologize in advance for the long post. I think now is the time to buy into big pharma and lock your shares away for a decade or two. I like both PFE and SNY, with PFE being my favorite of the two. In fact, I think Berkowitz's position in PFE will one day be seen as similar to Buffett's purchase of KO in 1988. I would encourage everyone to listen to the Fairholme Fund conference call with Jeffrey Kindler, CEO of Pfizer, in addition to the other standard research one would do on these companies. Below is why I think that PFE and SNY will be great businesses to own for the long run. Disclosure: I own both PFE and SNY, as well as FAIRX. --------------- Free cash flow machines: These companies generate huge amounts of free cash flow and currently have FCF yields of well over 10%. Granted, it's difficult to determine exactly what is truly FCF (owner earnings) because big pharma must acquire businesses and IP in addition to doing JVs and conducting their own R&D to maintain their current level of earnings. Still, the standard calculation of FCF (cash from operations minus capex) is a decent approximation of owner earnings, in my opinion. Patent expirations' effects on FCF are both overblown and more than reflected in current prices. You have to keep in mind that the earnings streams from off patent products will no longer be given away, since big pharma is now going to get into the "branded generics" business (more on branded generics below). Furthermore, these companies have so much cash on their balance sheets, it's likely that the reduction in FCF that comes with major patent expiration will be made up by their reinvestment efforts fairly soon after expiration. High ROIC/ROE: Big pharma, which is better run today than it used to be, has excellent returns on the capital that is reinvested into the businesses. These companies are high return on equity businesses with intangible assets making up a large part of their balance sheets. Excellent balance sheets: Big pharma has very solid balance sheets compared to many other industries. In fact, the combined Pfizer and Wyeth will probably return to AAA status after a few years of paying off debt. Health care reform: Contrary to what many people seem to believe, health care reform will probably leave big pharma no worse off than they currently are and might actually increase their profits over the long run. How could pharma benefit from health care reform? First, any pricing pressure put on pharma by the government will be mitigated by an increased number of people who were formerly uninsured being able to purchase their products. Second, by collaborating with the government on health care reform, they are likely setting the stage for cooperation with the government to ensure that they get a "fair" price for their products. From the NY Times on Aug 5: "Pressed by industry lobbyists, White House officials on Wednesday assured drug makers that the administration stood by a behind-the-scenes deal to block any Congressional effort to extract cost savings from them beyond an agreed-upon $80 billion." Third, by collaborating with the government, they appear to have extracted greater patent protection for biologics versus simple molecule drugs, and most people would agree that biologics are really the wave of the future. If big pharma truly were hurt by health care reform as proposed, they would not be joining with SEIU and other advocacy groups to tout health care reform on TV. "Branded generics": Big pharma is no longer going to give away the income stream associated with products that go off patent to the major generic manufacturers. They will go the JNJ route and extract royalties from off patent drug products by selling them as branded/authorized products. Plenty of people will forgo generic Lipitor, for example, if they can get the real deal for just a few bucks more. This will especially be the case in emerging markets, where regulatory enforcement of manufacturing standards isn't as rigorous as in the U.S. If I'm a middle class engineer in India with heart problems, I might feel better knowing that Pfizer has checked up on the authorized Indian generics manufacturer's production standards for Lipitor. SNY is purchasing generics manufacturers in emerging markets. PFE is partnering with generics manufacturers in emerging markets. It's very much like the decision for beverage companies to purchase their own bottlers. Pepsi has decided to buy a major bottler as a low risk way to get a decent return on their free cash. Coke says no, we'd rather use our money to buy new beverage products. Coke's approach is riskier, but has a potentially higher return. Same with SNY and PFE. PFE thinks it'll earn a better return investing its FCF into finding new drugs, biologics, and vaccines. Expanding markets: As we see the "rise of the rest," more and more people who could never afford drugs will become potential customers. This is already happening in the BRIC markets and will continue to be the case as emerging markets gets richer over time. The market for the next Lipitor is much greater today than it was when the original Lipitor first came out. And PFE will have an even bigger amount of potential customers to sell to when Lipitor v. 10.0 comes out 20 years from now. Note that big pharma's customer base will expand over time without their having to do anything. Same amount of R&D for a product but much greater potential for sales. Pharmaceutical/biologics merchant banks: Berkowitz has mentioned that he believes that Pfizer is very much like Exxon in that it will become a "merchant bank" for the pharmaceutical industry. What I think he means is that Pfizer will increasingly be partnering with smaller outfits who need cash to come up with new drugs, biologics, and vaccines. In a way, PFE and SNY will become venture capital funds dedicated to new drug discovery. They will own equity stakes in a number of small firms but go further than mere VCs in helping these companies with distribution if their drugs succeed. The distribution of drug products is highly regulated and this creates a barrier to entry that benefits the big dogs like PFE and SNY. Foreign currency earnings: If you are in the U.S. and you are worried about the dollar depreciating relative to other currencies (especially emerging market currencies), you want to be in companies like PFE and SNY that generate earnings abroad. Over the long run, business done abroad will make up a much greater share of the revenue than business done in the U.S. and U.S. shareholders will benefit from having earnings in a basket of foreign currencies. Low tax rates: Effective tax rates for big pharma are much lower than for other big industries because they do a lot of manufacturing outside of the U.S. in low tax localities. Furthermore, pharma doesn't usually have to repatriate money to the U.S. (except when they are doing major acquisitions) and pay the full U.S. corporate tax rate. Dividend distribution: On top of everything else I've noted above, big pharma is good about returning cash to shareholders. This will continue to be the case over the long run except when cash is needed for M&A. --------- So that's why I think PFE and SNY are fat pitch investments at this time.

This is good news, right? It looks like ORH has been buying shares on the open market and also bought a large chunk of shares from the Holdco (or whichever FFH subsidiary owns ORH shares). ORH will cancel all those shares. This gives FFH cash to use at whichever entity "sold" the shares to ORH. And it also strengthens the case that FFH is going to buy ORH because why would they sell the shares? They sold them because they know they're just going to buy back the company soon . . . Am I wrong? Why would they sell them to ORH now and buy them back higher in a few months? I was thinking that selling ORH shares back to ORH to cancel would be a way to reward the remaining 30% of ORH shareholders in exchange for having cash available to deploy at the holdco level. Part of the whole "fair and friendly acquisitions" thing. But it's hard for me to get my head around the numbers. Wouldn't the number of shares in the 13-F remain the same if FFH had just moved shares around from 100% owned entites? Another way to look at it would be that FFH has decided to partially finance the ORH acquisition by selling ORH shares below intrinsic value to 30% ORH holders rather than by borrowing additional money from the credit markets, where the benefits would accrue to non-FFH and non-ORH shareholders.

I'm pretty sure that FFH would have to report the U.S. securities held at a wholly owned, unlisted foreign subsidiary because FFH exercises "investment discretion" over the 13-F securities held at the foreign subsidiary. But I don't want to give anyone the impression that I know anything about securities law. Just based on what I found at the SEC website and at the University of Cincinnati's website ("Securities Lawyer's Deskbook"). See http://www.sec.gov/divisions/investment/13ffaq.htm , http://www.law.uc.edu/CCL/34ActRls/rule13f-1.html . No legal advice here :)

I think the reason that Torstar, Brick and the like aren't shown in the 13-F is because they aren't listed on a U.S. exchange, not because they're held in a Canadian subsidiary.

Another thing I'm confused about. Doesn't the 13-F show holdings as of the date it was signed? If so, then it could be the case that ownership percentage has changed because the 72% figure was as of the end of Q2.

This is good news, right? It looks like ORH has been buying shares on the open market and also bought a large chunk of shares from the Holdco (or whichever FFH subsidiary owns ORH shares). ORH will cancel all those shares. This gives FFH cash to use at whichever entity "sold" the shares to ORH. And it also strengthens the case that FFH is going to buy ORH because why would they sell the shares? They sold them because they know they're just going to buy back the company soon . . . Am I wrong? Why would they sell them to ORH now and buy them back higher in a few months? I was thinking that selling ORH shares back to ORH to cancel would be a way to reward the remaining 30% of ORH shareholders in exchange for having cash available to deploy at the holdco level. Part of the whole "fair and friendly acquisitions" thing. But it's hard for me to get my head around the numbers. Wouldn't the number of shares in the 13-F remain the same if FFH had just moved shares around from 100% owned entites?

This is good news, right? It looks like ORH has been buying shares on the open market and also bought a large chunk of shares from the Holdco (or whichever FFH subsidiary owns ORH shares). ORH will cancel all those shares. This gives FFH cash to use at whichever entity "sold" the shares to ORH. And it also strengthens the case that FFH is going to buy ORH because why would they sell the shares? They sold them because they know they're just going to buy back the company soon . . . Am I wrong?

Do you have a server that you tip at the end of the meal? Or is it cafe style?

I guess it's because I rarely eat hamburgers, and when I did it was either at In N Out or Five Guys (east coast chain). And I never thought that people got hamburgers when they went to Chili's or TGI Fridays. Guess that shows you how much I go to those types of restaurants! Red Robin looks very interesting at this price. I'm still working on figuring out maintenance capex (historically, at 15% of capex according to an earlier conference call), but it looks to be well run with the right philosophy towards customer service. I was a little worried about the sustainability of the $10 burger joint, but it looks like that was unfounded. I'm also not too thrilled about their having to buy back some franchisees' restaurants. But if growth resumes, this could be a great one to be in.

Has anyone on the board been to a Red Robin (RRGB) restaurant? I find it hard to believe that a chain restaurant that focuses primarily on burgers can sell their burgers for close to $10. What's up with this place?

It seems unlikely that "value investing" will ever get completely thrown out the window after Buffett is gone because it's simply the concept of applying sound business principles to stock market investing. There will always be "value investors" out there so long as there are people who apply their business knowledge to the stock market and assess potential investments based on the fundamentals. Furthermore, there are many people who will learn about how to apply business fundamentals to the stock market by reading what Buffett has written or presented to the public and his shareholders. Of course, what percentage of the general public will practice value investing is anybody's guess. I've always thought the label of "value investing" gives the actual methodology/concept short shrift. Ben Graham didn't invent value investing. There have always been business people who practiced what we would call "value investing" except they were not doing so in the context of modern stock markets. Graham and his pupils just applied sound business principles to stock market investing, adding in an additional requirement that there always be a "margin of safety" in every investment made. If I could go back and rename our style of stock market investing, I'd want to call it "business fundamentals-oriented" stock market investing. Or, perhaps, "margin of safety" stock market investing. -------- As an aside, I subscribe to an RSS feed from a website called Strange Maps that recently posted a map that probably resonates with a lot of value investors. Some of you guys might get a kick out of the map: http://strangemaps.wordpress.com/2009/08/12/406-caruso-cant-touch-you-a-road-map-to-success/ .