Warren Buffett Buys Precision Castparts

When Warren Buffett makes an acquisition on behalf of Berkshire Hathaway, it immediately triggers a hindsight bias reaction that makes you think–oh yes, it was so obvious, how did I not see that coming? The latest news report, covered by the Wall Street Journal, indicates that Warren Buffett is expected to complete the purchase of Precision Castparts for somewhere in the neighborhood of $37 billion.

Some of the commentary about the deal conveyed befuddlement as to why Buffett would be interested in a stock that fell from $275 per share in 2014 to $190 in 2015, and subsequently indicated that Buffett is paying too much by valuing the company in the range of $230 per share. As you can already guess, I regard that commentary as typically short-sighted and ignorant of Precision Castparts’ unusually strong balance sheet and unusually strong earnings per share growth for an industrial.

I always wonder–what … Read the rest of this article!

When A Company Has No Brand Power

There are three dozen companies that spend over $1 billion per year on advertising. If you are a sports fan, you might assume that Anheuser-Busch is the largest advertiser in the world, though it actually comes in the $21 spot with an advertising budget of $1.5 billion. The giants in the industry have been AT&T, Comcast, Verizon, and General Motors, with budgets between $2.5 billion and $3 billion. The true giant in the sphere is actually Procter & Gamble, mostly because it has a diverse constellation of brands that need constant brand equity upkeep, and P&G spends $5 billion per year raising product awareness for customers. It spends over $2 billion per year on TV ads.

There is a lot to learn from studying advertising budgets, as you can learn a lot about effectiveness when you see American Express spend 4x as much advertising to consumers as Visa does, yet … Read the rest of this article!

The Gap Between Altria and Philip Morris International

The United States dollar is performing exceptionally well against the Euro and Japanese Yen in particular, and other global currencies in general, as unease about Greece and other maladies throughout the rest of the world has pushed the U.S. dollar to highs not seen since the aftermath of the 9/11 terrorist attacks. A result is that there are huge disparities in the earnings per share figures of certain companies, depending on whether or not they generate a significant percentage of profits overseas.

Take something like Altria, for example. All of its profits are generated in U.S. dollars. That was part of the terms of the Philip Morris International spinoff in 2008. Altria owns a 27.3% stake in SABMiller, and the beer giant generates profits across the globe, although the payment to Altria is largely unaffected by currency fluctuations on this (it would amount to less than $50 million per year … Read the rest of this article!

Not Your Daddy’s Conoco

For most of its history, Conoco (COP) had been resistant to the types profit streams that enabled Exxon and Chevron to have better reporting results during the low point in the business cycle. Exxon and Chevron are heavily invested in chemicals and always engage in some transportation work which is only mildly resistant to oil prices (the transportation business is affected by lower prices to the extent that oil companies cut back on production and have less oil available for transportation.)

The reason why Exxon and Chevron are more profitable at low points in the business cycle is because they operate what are called “integrated business models.” That’s jargon for upstream, midstream, and downstream production. Chevron and Exxon do all three. Upstream means you find the oil and sell it, midstream means you transport it, and downstream means you modify it into a final product that it can used in … Read the rest of this article!

The Abattoir of Large-Cap Value Fund Performance

In 1993, Joel Dickson and John Shoven came up with a breakthrough insight into the investment markets that they sought to publish in the 1993 National Bureau of Economic Research under the title “Ranking Mutual Funds On An After-Tax Basis” (Working Paper 4393). The paper never got published, but it measured the 1965-1990 investment markets to conclude that churn within the portfolio of mutual funds created significant tax liabilities that meant investors achieved significantly worse after-tax returns on investment than the advertised performance of the mutual fund.

The closest anyone came to picking up the research of Dickson and Shoven came in 2002, when Peterson, Pietranico, Riepe, and Xu published “Explaining After-Tax Mutual Fund Performance” in the FAJ. Their conclusions came with a counterintuitive spin: Although small-cap stocks are the most volatile, the ordinary 401(k) investor is actually more hurt by the behavior of other investors that own large-cap value … Read the rest of this article!