AGENDA. Company A vs. Company B. In Today s Context

Transcription

1 A Case Study in Capital Allocation

2 AGENDA Company A vs. Company B In Today s Context

3 Which Company Do You Prefer? 1200 Sales ($M) A Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 B Sales ($M) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

4 Which Company Do You Prefer? 70 Net Profit ($M) A Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 B Net Profit ($M) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

5 Key Additional Notes Both Companies in Comparable Industries Both Companies have Great Management Both Companies Growing Net Income Faster than Sales Growth What Else We Need to Know as an Owner?

6 Which Company Do You Prefer? A 16.00% 10 Year ROE Average 9.8% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 B 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 10 Year ROE Average 20.5% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

7 Which Company Do You Prefer? A B 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 10 Year ROA Average 4.3% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year Year ROA Average 10.7% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

8 Key Additional Notes Both Companies in Comparable Industries Both Companies have Great Management Both Companies Growing Net Income Faster than Sales Growth Average ROE of Company B Twice of Company A Average ROA of Company B Twice of Company A Company A Growing Sales and Net Profit At Least 5 Times Faster than Company B What Else We Need to Know as an Owner?

9 Recap Key Metric Company A Company B 10 Year Sales Growth CAGR 73.3% 8.9% 10 Year Profit Growth CAGR 98.6% 16.3% 10 Year Average ROE 9.8% 20.5% 10 Year Average ROA 4.3% 10.7% Key Metric Company A Company B 5 Year Sales Growth CAGR 33.8% 5.3% 5 Year Profit Growth CAGR 36.8% 6.7% 5 Year Average ROE 12.03% 24.57% 5 Year Average ROA 5.24% 14.00% Can you Pick Your Choice and Note It Down?

10 A How is the Growth Being Funded? Shares in M Year Shares Outstanding CAGR 65.5% Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year Year Shares Outstanding CAGR (13.3)% B Shares in M Adjusted for Stock Splits Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11

11 How Does It Affect the Metrics Key Metric Company A Company B 10 Year Sales Growth CAGR 73.3% 8.9% 10 Year Profit Growth CAGR 98.6% 16.3% 10 Year Average ROE 9.8% 20.5% 10 Year Average ROA 4.3% 10.7% 10 Yr. Sales Growth per Share 4.7% 26.0% 10 Yr. Profit Growth per Share 20.0% 34.6% 10 Year Shares O/S CAGR 65.5% (13.3)% Remarks Serial Diluter Serial Acquirer

12 How Does It Affect the Metrics Key Metric Company A Company B 5 Year Sales Growth CAGR 33.8% 5.3% 5 Year Profit Growth CAGR 36.8% 6.7% 5 Year Average ROE 12.03% 24.57% 5 Year Average ROA 5.24% 14.00% 5 Yr. Sales Growth per Share 13.9% 10.2% 5 Yr. Profit Growth per Share 16.4% 11.6% 5 Year Shares O/S CAGR 17.5% (4.4)% Remarks Serial Diluter Serial Acquirer

13 Both Company A and Company B Created Significant Shareholder Value Over the 10 Years; Company A by Growing Net Income Faster than Shares Issued; Company B by Buying Back Shares Aggressively

14 Combined Company A and Company B Would Create Significant Value for Shareholders as Both the Companies are the Same One Over Different Periods of Time

15 Welcome Master Capital Allocator Henry Singleton Founder and Former Chairman of Teledyne Company A is 1961 to 1971 Company B is 1972 to 1982 EPS Growth in First Decade 20% CAGR Building a $1B Sales Firm by Issuing Shares at High PE EPS Growth in Second Decade 34% Buying Back Shares in a Depressed Environment

16 Henry Singleton

17 Teledyne Compounded at 17.9% over 25 Years Starting 1966; 53X over 6.7X over S&P 500

18 Teledyne Consolidated Financials 10 Year Teledyne year CAGR CAGR Sales ($M) % 33.8% NI ($M) % 36.8% Sales per Share % 13.9% NI per Share % 16.4% Shares Outstanding (M) % 17.5% ROE % 2.40% 4.57% 8.49% 10.51% 9.77% 13.30% 14.17% 12.82% 11.90% 10.52% 9.47% ROA % 1.62% 1.48% 3.05% 4.11% 5.11% 7.04% 0.65% 6.74% 6.37% 5.39% 5.26% Teledyne Year CAGR 5 year CAGR Sales ($M) % 5.3% NI ($M) % 6.7% Sales per Share % 10.2% NI per Share % 11.6% Shares Outstanding (M) % -4.4% ROE % 12.25% 12.39% 6.59% 20.78% 26.64% 28.10% 28.39% 29.17% 24.53% 24.48% 12.77% ROA % 5.26% 5.38% 2.84% 8.95% 11.16% 13.63% 15.86% 18.35% 13.47% 14.52% 8.19% Adjusted for Stock Splits Omega Advisors Presentation

19 Issuing Shares at High PE and Buying Back at Low PE -- Teledyne EPS Closing Stock Price (normalized for splits) Remarks Implied PE Share Issue / Buyback Not Known Issue Not Known Issue Not Known Issue Not Known Issue Not Known Issue Issue Split; Stock Div Issue Stock Div Issue Split; Stock Div Issue Stock Div Stock Div Stock Div Buyback Stock Div Buyback Stock Div Buyback Stock Div Buyback Stock Div Buyback Stock Div Stock Div Stock Div Split Buyback Split

20 AGENDA Company A vs. Company B In Today s Context

21 Buybacks are the Latest Form of Value Destruction in Corporate America

22 Example One: Cisco Systems CISCO Shares O/S (M) % -567 Spent on Re-Purchase of Stock ($M) ,323 Avg. Price to Shareholder for Repurchased Stock ($) Issuance of Stock to Employees ($M) EPS % CAGR Market Price ($)

23 Cisco Cisco Bought Back Shares at Market Price and Issued Shares to Employees for Compensation Net Decrease over 5 Years was 567M Shares with Average Price of $55 Cisco Defends this as Required to Retain Talent Cisco Could Show ONLY 2.5% CAGR on EPS for Retaining these Employees that Cost the Share Holders $55/Share for Every Share Buyback or Maintenance Costs of Employees? Magnitude of Value Destruction to Shareholders??

24 Example Two: Microsoft Microsoft Shares O/S (M) % -528 Spent on Re-Purchase of Stock ($M) Avg. Price to Shareholder for Repurchased Stock ($) Issuance of Stock ($M) EPS % Market Price ($)

25 Microsoft Microsoft Bought Back Shares at Market Price and Issued Shares to Employees for Compensation Net Decrease over 5 Years was 528M Shares with Average Price of $76 Microsoft Defends this as Required to Retain Talent Microsoft Could Show ONLY 6% CAGR on EPS for Retaining these Employees that Cost the Share Holders $76/Share for Every Share Buyback or Maintenance Costs of Employees? Magnitude of Value Destruction to Shareholders??

26 Example Three: Intel Intel Shares O/S (M) % -640 Spent on Re-Purchase of Stock ($M) Avg. Price to Shareholder for Repurchased Stock ($) Issuance of Stock ($M) EPS % Market Price ($)

27 Intel Intel Bought Back Shares at Market Price and Issued Shared to Employees for Compensation Net Decrease over 5 Years was 640M Shares with Average Price of $55 Intel Could Show ONLY 4% CAGR on EPS for Retaining these Employees that Cost the Share Holders $55/Share for Every Share Buyback or Maintenance Costs of Employees? Magnitude of Value Destruction to Shareholders??

28 Example Four: Auto Zone Intel Shares O/S (M) % Spent on Re-Purchase of Stock ($M) Avg. Price to Shareholder for Repurchased Stock ($) Issuance of Stock ($M) EPS % Market Price ($)

29 Autozone Net Decrease over 5 Years was 16M Shares with Average Price of $410 against Current Price of $677 Autozone Increased EPS at 20% CAGR over the Same Period Autozone has Created More Shareholder Value Compared to S&P 500 (+234% versus +97%)

30 Share Buybacks Share Buybacks are a Way to Return Money to Shareholders Creating Value for the Remaining Shareholders is Possible Only When Executing Buybacks Way Below Intrinsic Value and Mr. Market is Giving You an Opportunity like Teledyne Did in 1960 s and 1970 s Share Issuance and Buybacks can Both be Used as Shareholder Value Creation Tools like Teledyne but Opportunity Comes Very Rarely Very Few Buybacks We have Evaluated Create Shareholder Value Autozone is One Berkshire has Announced Buyback only Thrice in 50 Years During 1999, 2011 when Trading Near Book Value and Once at 1.2 Times Book Not All Buybacks are Created Equal; Caveat Emptor If Everyone is Doing It, Something Must Definitely be Wrong