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.
Apple Inc.
AAPL
Google, Inc. GOOG
CF Industries CF
Priceline.com PCLN
BlackRock, Inc. BLK
ExxonMobil XOM
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.”