Sunday, February 26, 2012

When you think you made a great purchase (Warren Buffett edition)

I consider myself a bit of a Buffettphile - but I did not even know Berkshire had a sizeable agricultural machinery operation. Sure agriculture has been good and because the capital equipment is a lean off that it has been very good. But this throw-away quote from the annual letter is astounding:

Vic Mancinelli again set a record at CTB, our agricultural equipment operation. We purchased CTB in 2002 for $139 million. It has subsequently distributed $180 million to Berkshire, last year earned $124 million pre-tax and has $109 million in cash. Vic has made a number of bolt-on acquisitions over the years, including a meaningful one he signed up after year end.


This business has - in a decade - distributed well over 100 percent of its purchase price in cash to Berkshire and its pre-tax earnings are roughly the acquisition price. 

Of the thousands of listed companies in the world how many have been that good in the last decade. Surely not many.



John

24 comments:

Anonymous said...

Probably a very good investment, but I am hesitant to proclaim it's a "homerun" without knowing the size of the "bolt-on" acquisitions.

John Hempton said...

The implication was that the bolt-ons were funded from internal cash generated. The distributions to Berkshire will be reported net - as they always are.

J

Anonymous said...

So he essentially earned a little less than a 13% annualized yield... Good, but not exactly unbelievable, especially for its size.

John Hempton said...

Huh -

He received back 1.5 times his money in cash and has a business worth maybe 8 times what he paid for it after a decade.

Sounds a bit better than 13 percent to me.

J

Anonymous said...

Well, it was a small company when purchased. I'm sure many businesses go from small to not so small in a decade.

John Hempton said...

Yes - many companies grow in a decade from small to not-so-small.

But very few spin off that much cash whilst doing so.

Usually when you grow from small to not-so-small every penny (and then some) is used to grow the business.

It is a remarkable company that can do it whilst spinning off cash.

J

Rick said...

J - If you throw enough darts at any board you will eventually hit a triple-20!

It's indeed a great result, but a very small part of the overall BH company acquisition/gathering business.

Junked said...

It's been an amazing investment really. Without knowing too much about the business, it's interesting that typically difficult industries such as agriculture can give rise to niche markets that profitably service the industry and in which a good business can be built. It's similar in that way to airlines (and the profitable derivatives such as travel agents, OTAs, GDSs, etc) and most insurers (with brokers).

Anonymous said...

From NYTimes

COMPANY NEWS; BERKSHIRE HATHAWAY IS BUYING CTB FOR $140 MILLION
Published: August 20, 2002

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Berkshire Hathaway Inc., the investment company headed by the billionaire Warren E. Buffett, agreed to acquire the farm-equipment maker CTB International Corporation for $140 million in cash, plus the assumption of $40 million in debt. Shareholders of CTB, which is based in Milford, Ind., will receive $12.75 a share, *************** 13 percent less than Friday's closing price. ************ CTB's 1,300 workers design and make equipment used to feed and house chickens and hogs, gather eggs and store grain.


******* INSIDERS OWNED 55% OF THE COMPANY AND SOUGHT WARREN OUT TO BUY THE COMPANY. WAS AN ILLIQUID OFF-THE-RUN EQUITY. PRACTICALLY WOULD HAVE BEEN TOUGH TO BUY IT / SOURCE THE IDEA. THAT SAID, WARREN CRUSHED THE OPPORTUNITY. WHEN HE FINDS THEM, HE DOES NOT LET THEM SLIP.

Tom said...

See's Candies has paid for itself dozens of times over by now ...

Brian Chan said...

If I remember correctly, this acquisition was suggested by his farmer son.

Conscience of a Conservative said...

When people are digging ditches, selling shovels can be a great business. I think Buffet is onto something here as well.

Anonymous said...

More like 20-25% annualized depending on multiple you assign to earnings.

Historically, this kind of acquisition is why you buy Berkshire. The problem is all the current businesses that aren't returning anywhere near this.

Zach said...

2002 was a cyclical low point to buy commodities companies. Graph US Steel, Valero, Potash, BHP, Suncor, etc.

It's a good return, but lucky since Warren didn't see the commodity cycle coming and was underweight.

Anonymous said...

As someone else says - given the portfolio size, one would expect to find something like that there.

Now, the real question is - is this statistical (=luck), or skill? And there's really absolutely no way to answer that decisively (there's a statisticall answer again, but ...)

Anonymous said...

The NYT article shows just how savvy Buffett is. Not only did he get a great deal, he bought it for less than market price! And yet every time Buffett is in the news, there are a bunch of people saying he's clueless. I wish I was that clueless.

Anonymous said...

WEB is an investing genius, no doubt, but he strayed when he started buying things like COP at the top of the market, EFH, IBM and over 2x what it was going for in 2009 [where I and I'm sure several other investors bought it], and esp selling derivatives.

Nice hit in Ag though.

John Hempton said...

My problem is that I see inept people raise money (often debt) in the hundreds of millions.

It seems easier to raise money for a PE firm than a firm trading liquid securities at the moment.

J

Skeptic said...

John,

I suspect the real dumb money are lenders and private equity LPs. For the GPs you have ten years to hit a few "home runs" and not blow up, in the mean time your capital is locked up and your fees are handsome. Relationship bank lending to PE deals makes so little sense it's farsical, but lending originators have always preferred fees (how they get paid) to preserving capital (credit's problem).

Jeff said...

I'm reading the CTB International annual report from 2001.

He paid $180 million ($140 cash + $40 debt) for a business generating ~$20 million pretax income per year for the past five years and which completed a large number of acquisitions in the past 3-years.

Long-term management team in place, disciplined capital management during that span (little debt), enormous growth potential through a newly formed international division, clearly stated reason to exist and competitive advantages (feed represents 60-70% of cost of raising animals; they design, manufacture and sell systems that maximize efficiency of feeding).

It really looks like a fantastic business. Kudos to Buffett for attracting that kind of company to Berkshire.

http://www.sec.gov/Archives/edgar/data/1038005/000103800502000003/year200110k.txt

I'm going to look for businesses that fit this criteria (<$500 million enterprise value; 9X pre-tax income; management in place; growth prospects).

But then again, he acquired the company in August 2002, so I may need to wait 1-2 years for the next crash.

Jeff

Anonymous said...

John,

I too am a Buffetphile and found that quote very interesting.

Some things WEB has done over the last 20 years or so remind me a little of the career of the late Henry Singleton, the founder of Teledyne.

WEB is on record as having praised Singleton's ability to build a conglomerate. Also, for many years, Singleton ran an equities portfolio through the insurers he controlled.

Coincidence?

Cheers,

Jkarn said...

In my opinion, the answer lies in you last sentence. The minute the company was acquired by BH, it no longer behaved as a listed company. I don't believe the management of any BH companies make the compensation public companies in the US make today. Many public companies are looted by management and the board and shareholders don't care.

Alex said...

As a sector small caps are overvalued, no question. But if you are running long short, and are trying to operate in the less efficient parts of the market, you are going to naturally be in the small caps on both sides. More illiquid off the beaten path longs, still are very cheap (perhaps some are traps) compared to the shorts which are slightly bigger and massively overvalued. If you put these 2 groups together small caps are "not attractive" but we are talking thousands of stocks. It's a silly point. Just because there are a bunch of recent 1 billion ipos that are crazy overvalued, and junky garbage doesnt mean there arent quality small caps to buy (if you are hedging....).

You just can't generalize small cap land. And its a lot different today than when I was loading up in October....

Anonymous said...

John,

Total EV of CTB was 180 mn,which comes around to 12x net profit, but that business was a great business it was previously owned by PE firm and when they wanted to exit aand the management want to grow they became public but due the lack of trading and pressures they went private. If you dig deeper Management still owns a small part of the business.Previous private equity owners made about 40% Annual return based on their purchase & sale prices. Though that PE is a family office.

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