Value Investing News - USG - Comments

USG Rights Plan

JellyRollCapital — Fri, 11 Jan 2008 18:12:52 -0500

Guy,
I'm aware of the 15% trigger, but my understanding of the situation is that any buyout will have to be directly negotiated with USG's Board of Directors, who can choose to accept or reject the offer. If the acquiring company pursues a hostile takeover following a rejection, then the you have the Rights Plan taking effect.

Considering that Knauf has a joint venture with USG and is a long-term shareholder, I'm sure they are aware of this.
-James

USG

guywag — Fri, 11 Jan 2008 03:05:47 -0500

Hi James,

While I agree that Knauf's buying is intriguing, USG's new stockholders rights plan ('if any group acquires beneficial ownership of 15% or more, other shareholders will have the right to purchase additional shares at half the market price, therby diluting the triggering stockholder') would make it difficult for them to take over USG.

Regards.

Guy

He has money invested in a

JohannaBartley — Wed, 02 Jan 2008 21:15:54 -0500

He has money invested in a Dryer Parts plant, right? I wanna invest in that as well. That's something you'll always need so it's always gonna be there.

Buffett

bsdwork — Mon, 03 Dec 2007 14:07:29 -0500

Who is this Buffett guy ?:-? Well if he's so known, I've got a question for him: what does he think about unsecured loans?

Too much money!

JohannaBartley — Fri, 30 Nov 2007 12:00:43 -0500

Buffet is a smart man. A really smart man. I'm sure in the future his name will be in the same book with Nostradamus, Davinci, Napoleon...etc...I'm just curious if Warren owns some proprieties of the National Marine Engineers Beneficial Association. Oh well, we'll probably hear that he owns half of the moon or something.

Added ticker and category

admin — Wed, 17 Oct 2007 20:58:23 -0400

Added ticker and category for this entry.

too bad this article is not

jonbo — Sat, 28 Jul 2007 18:18:23 -0400

too bad this article is not free.

Does Altucher now about Louis Simpson?

bingopitts — Mon, 02 Apr 2007 18:50:19 -0400

I don't think Altucher nows that Louis Simpson also works at brk. Many of Buffetts investments should be really credit or debited to Simpson. That is why I take alot of this talk of what is or isn't Buffett buying with a grain of salt.

Great commentary, as usual,

Jason — Thu, 29 Mar 2007 10:01:05 -0400

Great commentary, as usual, Geoff. Although, you are making some bold assumptions that we don't have the same quantity of capital as Mr. Buffett :)

Funny. As I was reading

Nick — Tue, 27 Mar 2007 10:08:51 -0400

Funny. As I was reading Altucher's article last night, I went back to your site to make sure that you hadn't already covered Altucher's points in your follow up. Very timely.

Altucher Beat Me To It!

Geoff — Tue, 27 Mar 2007 07:47:35 -0400

At the end of my last post " On Billionaires, Their Buys, and Buffett" I wrote "I will follow up with another post on this topic tomorrow. Hopefully, I can give you some idea of what you should and shouldn't do based on news of Berkshire's activities in specific stocks." Not much need to now.

A+

Nick — Tue, 27 Feb 2007 02:30:51 -0500

Wow Geoff the amount of thought you put into your posts is always impressive. Thanks you for your time -I'm sure others will enjoy your responses as well.

Berkshire's Second Tier Positions

Geoff — Mon, 26 Feb 2007 23:46:52 -0500

I think of Berkshire's second tier positions as those that definitely appear to be Buffett's picks because of the size and speed with which they were built. Other people know much more about this because they track Berkshire's actual trading more closer. I'm not real worried knowing what Buffett's buying the moment he buys it – Berkshire is in for the long run (at least with all of its best ideas) and the stock can certainly go lower before it goes higher even if there is a little Berkshire bounce.

Last year, I mentioned in my blog posts about Lexmark (LXK) that those looked a lot like Simpson's purchases whether or not they were made by Buffett – Lexmark definitely looked like something Simpson might buy and it was the right size. For Buffett, a $125 million to $150 million position (or whatever it was) is quite small, but that's a sizeable position for Simpson and considering Lexmark only had a market cap of something like $4.5 billion or so at the time (I can't remember the exact numbers off the top of my head) LXK would likely have never been a huge position for Berkshire. Buffett would have needed to own something like 15% of the company just for Lexmark to make it onto the list of investments Buffett includes in his annual letter.

So, whether LXK was Buffett or not, it could never have been thought of like KO, AXP, WFC, etc. because of its size. It would be unreasonable to think Berkshire could have ever built a position that was truly large relative to its other investments.

On the other hand, there are some investments in smaller companies that strike me as being very Buffett like. The two most memorable from (fairly) recent years were USG (USG) and Comdisco (CDCO), which weren't notable for their size, but for the type of investment opportunity they were. They fit Buffett's mind set pretty well. So, regardless of size, I would immediately assume that kind of purchase was his.

As for second-tier purchases. That's hard to say. I think of them as being something less than "permanent holdings". Buffett may someday sell a permanent holding, especially if it has a change in management and/or direction he doesn't like. But, I would consider second-tier positions to be those Berkshire either can't realistically increase in size to be in the same class (in terms of the percentage of Berkshire's equity portfolio) as the top holdings like KO, AXP, WFC etc. or which Berkshire hasn't increased in size.

The second part – the ones Berkshire hasn't increased in size – are tougher to separate out, because I honestly think some intended first tier purchases never make it there, because the price gets away from Buffett. The best known example is definitely WMT. Years ago, he wanted to make that a big Berkshire holding, but he didn't budge on price (and now says that was a mistake). If the price had just fallen and fallen, it probably would be a big Berkshire holding today. There might be other like this – it's hard to tell within a few months of Berkshire's first disclosure of the purchase.

The best example of what I would classify as a second tier position is (or "was", since Berkshire has sold it) H&R Block (HRB). This looked like a Buffett purchase to me and it looked like one he would be willing to own for many years even after substantial price appreciation – in other words, he was thinking of it as a long-term position even if it wasn't going to be on the scale of the Washington Post, Coke, etc. purchases in terms of its effect on Berkshire at the time Buffett bought it (today the WPO stake is small, but when Berkshire bought it that position was huge for the company). You can even see the long-term nature of the HRB holding in that it very quickly increased in price after Berkshire's purchase (back in 2001, I think), because by the time of the annual letter for 2001, Berkshire's cost in HRB was $255 million but its stake already had a market value of $715 million. Berkshire didn't sell for quite some time, if this had been meant to be a quick buck made in a bargain basement stock, Berkshire wouldn't have held as long as it did.

In fact, I suspect the reason Buffett sold HRB wasn't the price, but management/competition issues – especially the adventure into mortgages and the general lack of focus on the key money making franchise, even amidst competition within the tax preparation business. So, I think he saw franchise impairment and/or management approach he wasn't in love with and decided to sell at a fair price rather than wait for a great price for a business he was no longer smitten with.

Also, Berkshire's ownership stake was originally around 8.43%. I think that's another thing to look at in thinking about Berkshire's investments. Buffett prefers investments that are both large from Berkshire's perspective and from the perspective of the company having its shares acquired. I think he's very comfortable with 5-15% ownership stakes in Berkshire's long-term holdings and really likes being on of the top shareowners of the company whenever possible. I don't think he likes owning less than 1% of JNJ, WMT, GE, etc.

So, I think of second-tier holdings as holdings thought of as having an added degree of permanency (and thus familiarity and comfort with the BUSINESS and the stock) as demonstrated by the size of the holding relative to Berkshire's resources and relative to the market cap of the stock being acquired. So, I consider USG to be a second-tier holding, even though it's not that big from Berkshire's perspective, Berkshire's ownership stake is very large from USG's perspective. Also, Buffett built up the stake over time, adding to his familiarity and comfort with the business and didn't sell on a quick pop. These are all evidence of a special way of thinking about the position that separates it from some of Berkshire other positions – even if it doesn't raise it to the level of Coke, P&G, etc.

At first, I thought BUD might be right up with the first tier. But, over time, it's looked like a second tier holding more along the lines of what USG is and what HRB was. But, we'll see, it takes time, because Berkshire doesn't necessarily buy all at once. But, he could've added to BUD and didn't. In fact, Berkshire holds less BUD today than it once did.

Geoff, To answer your

Nick — Mon, 26 Feb 2007 22:53:04 -0500

Geoff,

To answer your question: "On this last point, am I right in calculating the cost of Berkshire's original position at something like $48.64 or so?"

If I remember correctly, that sounds about right. It was just after the first quarter 2005 that the media was buzzing with Warren's purchase of BUD stock. Between January 1st and the end of March BUD traded between $50 and $47. So his initial purchase is probably very close to your calculation; however, if he continued purchasing throughout 2005 his cost basis could be significantly lower. BUD stock dropped to just about $40 later that year.

I have an idea, but what do you mean by "Second Tier" positions? Do you think these are Buffett picks or Simpson picks? Probably a mix?

For reference you and I are talking the same language in respect to a margin of safety and intrinsic value.

Two Thoughts

Geoff — Mon, 26 Feb 2007 21:57:16 -0500

First, I enjoyed reading the article itself. Anyone with any interest in USG should definitely read it.

Second, Nick, that line also jumped out at me: "At the current 54 bucks, one is paying about 20% higher than Buffett’s last purchase, so if we assume he bought with a high margin of safety – at least 30% or 40% as opposed to the 90% he intimated with his Anheuser Busch purchase then one should do just fine."

My only thought on the Anheuser Busch comments is that it may be based on Buffett's 2005 annual letter to shareholders wherein he wrote:

"Expect no miracles from our equity portfolio. Though we own major interests in a number of strong, highly-profitable businesses, they are not selling at anything like bargain prices. As a group, they may double in value in ten years. The likelihood is their per-share earnings, in aggregate, will grow 6-8% a year over the decade and that their stock prices will more or less match that growth. (Their managers, of course, think my expectations are too modest – and I hope they're right)."

Since the annual letter also shows that Berkshire's Anheuser Busch stock had a market value about 11.67% below its cost (in other words, the stock price was lower when Buffett was writing than it had been when Berkshire was buying) the suggestion was that Anheuser had been purchased at a very low margin of safety, otherwise, Buffett wouldn't have written as matter-of-factly on the restrained potential for Berkshire's equity portfolio in general and its largest holdings in particular.

So, I think the article is saying Buffett was buying at ninety cents on the dollar (from his perspective). The idea that he was buying it with an especially wide margin of safety is absurd considering Buffett's expressed thoughts on Berkshire's holdings, his recent purchases, and BUD's price.

However, I agree with you. I think Buffett was actually buying at less than ninety cents on the dollar.

On this last point, am I right in calculating the cost of Berkshire's original position at something like $48.64 or so? The stock last traded at $49.81. If my math is correct (note: I used Buffett's letter, which made sense to me, since that's when he made the comments I'm citing), BUD is now trading not far from the price where Buffett would have been writing about it from.

I think Buffett was focusing on Coca-Cola (KO), American Express (AXP), Wells Fargo (WFC), and Procter & Gamble (PG), when he said "as a group" since these four positions together made up just under 60% of Berkshire's equity portfolio at market. I don't think he was really focusing on what I would call Berkshire's "second-tier" positions like Moody's, PetroChina, Anheuser Busch, etc. when he wrote this.

But, I may be wrong. Anyway, I agree with you that Buffett was buying BUD for less than ninety cents on the dollar according to my calculations. However, the BUD purchase looked to have a smaller margin of safety than most of his past large purchases for Berkshire.

Also, there's always confusion when people use the term margin of safety. Depending on who's talking, they could mean "intrinsic value could be impaired by x% and it'd still be above the price I paid", "I am buying at a discount of x% from intrinsic value", or "the stock should increase by x% from this price to reach its intrinsic value". I usually think in terms of a discount from intrinsic value. So, I talk about buying at "ninety cents on the dollar, sixty cents on the dollar, forty cents on the dollar, etc."