Winners Of The Great Recession
By Bud Labitan
Over the past five years, these businesses have prospered mightily. They have produced excellent returns in generating free cash flow for shareholders.
Google, Inc. GOOG
CF Industries CF
BlackRock, Inc. BLK
How did these businesses manage to prosper in a time many consider to be the worst economic period since the great depression of the 1930’s? First, let me place this disclaimer. Some of these business descriptions are taken directly from each company’s marketing material as well as other online sources.
The Great Global Recession of 2009 began around December 2007 and it took a sharper dive in September 2008. Recall that U.S. housing bubble peaked in 2006. But, irrational bubble valuation forces caused the values of securities tied to U.S. real estate pricing to plummet and damage financial institutions globally. It was sparked by the outbreak of the U.S. subprime mortgage crisis and financial crisis of 2007–08. The exact start and end-point for the recession greatly varied from country to country. Overall, it was the worst global recession since World War II.
Let’s review how these businesses prospered during this Great Global Recession.
First, Apple designs, manufactures, and markets personal computers, mobile communication devices, and portable digital music and video players. It sells a variety of related software, services, peripherals, and networking solutions. It’s products and services include iPhone®, iPad®, Mac®, iPod®, Apple TV®, a portfolio of consumer and professional software applications, the iOS and OS X® operating systems, iCloud®, and a variety of accessory, service and support offerings. Apple sells its products through its online stores, retail stores, direct sales force, and third-party wholesalers, resellers, and value-added resellers.
Apple also sells and delivers digital content and applications through the iTunes Store®, App StoreSM, iBookstoreSM, and Mac App Store. In addition, the Company sells a variety of third-party iPhone, iPad, Mac and iPod compatible products, including application software, and various accessories, through its online and retail stores. Its reportable operating segments consist of the Americas, Europe, Japan, Asia-Pacific and Retail. The Europe segment includes European countries, as well as the Middle East and Africa. The Asia-Pacific segment includes Australia and Asian countries. Apple’s success has been in creating appealing devices that attract loyal customers who are willing to pay premium prices to own this brand.
Next, Google Incorporated became the most popular internet search service. This global technology company is engaged in improving the ways people connect with information. It is now focused around the key areas of: search, advertising, operating systems and platforms, enterprise and hardware products. It integrates innovative features into its search service and offer specialized search services to help users tailor their search.
In January 2012, the Company launched Search plus Your World. When a user performs a signed-in search on Google, the user’s results page may include Google+ content from people that the user is close to. Advertising includes Google Search, Google Display, Google Mobile and Google Local. AdWords is the Company’s auction-based advertising program delivering ads relevant to search queries or Web content.
The Company, along with Open Handset Alliance has developed Android mobile software platform that any developer can use to create applications for mobile devices and any handset manufacturer can install on a device.
Google Chrome OS is an open source operating system with the Google Chrome Web browser as its foundation. The Chrome browser runs on Windows, Mac, and Linux computers. Google TV is a platform that enables the consumers to experience television and the Internet on a single screen, with the ability to search and find the content they want to watch. It is based on the Android operating system and runs the Google Chrome browser.
Google’s enterprise products provide Google Apps. These include Gmail, Google Docs, Google Calendar, and Google Sites. The Company provides hosted, Web-based applications that people use on any device with a browser and an Internet connection.
The Company also provides versions of its Google Maps Application Programming Interface (API) for businesses, as well as Google Earth Enterprise (a behind-the-company-firewall software solution for imagery and data visualization).
Google competes with Yahoo! Inc., Microsoft Corporation’s Bing, YouTube, Facebook, Twitter, WebMD for health queries, Kayak for travel queries, Monster.com for job queries, and Amazon.com and eBay for e-commerce. Google’s success has been in creating an appealing and useful search service and the Android operating system that attract customers.
This next business was a bit of a surprise to me. I did not realize how much the fertilizer industry has grown until I viewed an insightful PBS documentary called “America Revealed.”
With only 2,600 employees, CF Industries Holdings, founded in 1946, manufactures and distributes nitrogen and phosphate fertilizer products around the world. The business of the Company is divided into two operating segments, the nitrogen segment and the phosphate segment. The Nitrogen segment includes the manufacture and sale of ammonia, urea, and UAN. The Company’s principal products in the nitrogen segment are ammonia, granular urea, urea ammonium nitrate solution, or UAN, and ammonium nitrate, or AN. The Company’s other nitrogen products include urea liquor, diesel exhaust fluid, or DEF, and aqua ammonia, which are sold primarily to its industrial customers. The Company operates seven nitrogen fertilizer production facilities in North America.
The phosphate segment includes the manufacture and sale of DAP and MAP. The Company’s principal products in the phosphate segment are diammonium phosphate, or DAP, and monoammonium phosphate, or MAP. The Company’s core market and distribution facilities are concentrated in the Midwestern United States and other major agricultural areas of the U.S. and Canada.
CF Industries Holdings also exports nitrogen fertilizer products from its Donaldsonville, Louisiana manufacturing facilities and phosphate fertilizer products from its Florida phosphate operations through its Tampa port facility. In the nitrogen segment, the Company’s primary North American-based competitors include Agrium and Koch Nitrogen Fertilizers. In the phosphate segment, the Company’s primary North American-based competitors include Agrium, Mosaic, Potash Corp. and Simplot.
CF Industries’ success has been in creating a large and efficient producer and distributor of nitrogen and phosphate based fertilizers around the world.
Next, is Priceline.com Incorporated. It shows us that customers took their bargain hunting practices online and found Priceline appealing. Priceline.com is an online travel company that offers its customers a range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services.
Priceline also operates a retail, price-disclosed hotel reservation service in the United States, which enables its customers to select the exact hotel they want to book. Then, the price of the reservation is disclosed prior to booking. It offers such reservations through a merchant model, as well as through an agency model for hotel room night reservations sourced through Booking.com
Booking.com is the internet hotel reservation service, with offices worldwide. Booking.com works with over 185,000 hotels and accommodations in over 160 countries offering hotel reservations on various websites and in 41 languages. In May 2010, it acquired the rentalcars.com business, a United Kingdom-based international rental car reservation service formerly known as TravelJigsaw.
Rentalcars.com offers its car hire services in more than 4,000 locations throughout the world, with customer support provided in 38 languages.
Priceline competes with both online and traditional sellers of the services it offers. The market for the services it offers is intensely competitive, and current and new competitors can launch new sites at a relatively low cost. However, over the past five years, customers found Priceline to be the appealing leader in this space.
Next, Blackrock Incorporated made my list because it showed tremendous growth and profitability during this period. BlackRock, Inc. is the publicly traded investment management firm. BlackRock along with its subsidiaries provides investment management and securities lending services to institutional clients and to individual investors through various investment vehicles.
Investment management services mainly consist of the management of fixed income, cash management and equity client accounts, the management of a number of open-end and closed-end mutual fund families, exchange traded funds and other non-U.S. equivalent retail products serving the institutional and retail markets, and the management of other investments funds, including common trusts and alternative funds, developed to serve various customer needs.
BlackRock also provides market risk management, financial markets advisory and enterprise investment system services to a base of clients. Financial markets advisory services include valuation services relating to illiquid securities, dispositions and workout assignments, risk management and strategic planning and execution.
BlackRock’s clients include taxable, tax-exempt and official institutions, high net worth individuals and retail investors. On December 1, 2009, BlackRock acquired Barclays Global Investors (“BGI”) from Barclays Bank PLC (“Barclays”), referred to as the “BGI Transaction”, adding investment and risk management capabilities and more than 3,500 new colleagues to the combined organization.
BlackRock’s BGI Products include equity, Fixed income, Multi-Asset Class, Alternative Investments, Alternative Investments, Cash Management, BlackRock Solutions and Advisory, Transition Management Services and Product Performance Notes. BGI has long been recognized for product innovation in indexed and scientific investing, including pioneering iShares, the industry’s ETF platform, sophisticated retirement solutions and liability-driven investment strategies. These strengths complement BlackRock’s active fundamental portfolio management capabilities, global mutual fund platform, customized solutions, risk management and advisory services.
BlackRock operates in a global marketplace characterized by a high degree of market volatility and economic uncertainty, factors that can significantly affect earnings and stockholder returns in any given period. The Company’s product offerings, which enhance its ability to offer a variety of traditional and alternative investment products across the risk spectrum and to tailor single- and multi- asset class investment solutions to address specific client needs. In addition, through BlackRock Solutions, the Company offers a broad spectrum of investment management and risk management products and services.
Investment management offerings include single- and multi-asset class portfolios, which might be structured to focus on a particular investment style, capitalization range, region or market sector; credit or maturity profile; or liability structure. It uses Aladdin and other state-of-the-art tools and work closely with BlackRock’s trading cost research team to manage four dimensions of risk throughout the transition: exposure, execution, process and operational risk.
BlackRock manages money for institutional and retail investors worldwide. Its client base is by both geography and client type. The Company serves clients through 74 offices across four regions: United States and Canada, EMEA, Asia Pacific and Latin America and Iberia.
BlackRock clients include tax-exempt institutions, such as defined benefit and defined contribution pension plans, charities, foundations and endowments; official institutions, such as central banks, sovereign wealth funds, supranationals and other government entities; taxable institutions, including insurance companies, financial institutions, corporations and third party fund sponsors; and retail and high net worth investors. Since customers found Blackrock managers to be able and trustworthy, it grew and profited mightily during this period.
Finally, I mention the giant energy company ExxonMobil. I read that Berkshire Hathaway's portfolio has recently shown a new position of 40.1 million shares valued at $3.4 billion.
ExxonMobil (NYSE: XOM) is the largest of the vertically integrated oil companies. It is also the second largest publicly-traded corporation in the world by market cap and revenue. With a market value of $417 billion, and smart strategic investments, ExxonMobil has longevity. It also pays a 2.7% dividend yield.
In his 2011 shareholder letter, Buffett wrote: “A century from now... ExxonMobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions...”
Recent investments in shale and natural gas production indicate that ExxonMobil will be earning cash for its shareholders for the next several decades. It has invested more in natural gas. ExxonMobil completed a $30 billion project to develop the world's largest natural gas field. This field is located in the Persian Gulf state of Qatar. It is expected to boost the company's gas production and make ExxonMobil the world's largest natural gas producer. The North Field is expected to contain 900 trillion feet of natural gas. ExxonMobil also agreed to a joint venture with Royal Dutch Shell and Chevron to construct a liquefied natural gas facility on Barrow Island off the coast of Australia. Chevron will own 50% of the facility while Shell and Exxon will each have 25%.
Exxon strengthened itself in Natural Gas by the acquisition of XTO Energy (shale). XTO has a strong hold in shale, including the Marcellus, Haynesville and the Bakken basins.
XTO drove a surge in U.S. fuel output by exploiting fracking. XTO Energy’s resource was reported to consist of 45 trillion cubic feet of gas. The XTO acquisition complimented Exxon’s presence in other shale areas such as the Piceance Basin in Colorado. The company has been producing natural gas from the basin for more than 50 years and it has a reported estimate of 1.5 trillion barrels of in-place oil shale resources.
So, what about an estimate of ExxonMobil’s stock value? Here, I propose that ExxonMobil has created a sustainable competitive advantage that I did not appreciate prior to reading about Buffett and Berkshire’s recent investment. Its moves to secure future sources of oil, shale, and natural gas has secured more years of future cash flows for its shareholders.
If we do a simple one or two stage DCF valuation estimation based on 10 to 15 years, a big piece of value may be missed. I argue that ExxonMobil has created a valuable advantage for itself and its shareholders that stretch the Excess Return Period (yrs) to at least 20 years, and maybe even more years. So, here is my argument simplified. For the sake of simplicity and estimation, let’s first take a look at the DCF estimate posted at Valupro.net Is it reasonable? Did Buffett and Berkshire get a good bargain?
Here is one view to consider. For the sake of conservatism, we may drop the growth rate to 5% at their model. However, I argue that, in view of long rage planning and investments in shale and natural gas, you may also conservatively extend the Excess Return Period (yrs) to 20 years. This would result in an estimated intrinsic value of about $135 per share. And, if Buffett and Berkshire purchased XOM at an average cost of $85, they got a bargain of around 37% in a large business leader.
Over time, the world economies will demand more energy production. In consideration of ExxonMobil‘s added durable competitive advantages, the “Yield On Cost” of this investment may prove to be even more profitable.
In summary, how do we tie all these good stories together? Think of the times when customers are pleased by the terms of supply and demand. As Ben Franklin wisely said, “No nation was ever ruined by trade.”
* * * *
Bud Labitan is the author and editor of “MOATS : The Competitive Advantages of Buffett & Munger Businesses.” Moats discusses the competitive advantages of 70 Berkshire Hathaway businesses and it is targeted towards business school students, investors, and business managers. He is also the author of other books on investment decision framing and decision making. These include the “1988 Valuation of Coca-Cola”, “Price To Value”, “Valuations”, and “The Four Filters Invention of Warren Buffett and Charlie Munger.”