It’s been a while since I posted anything on Seeking Alpha. I was due. The post is part of my California trip. More posts on the subject will come later. Here’s the part of my trip at that concerns Charlie Munger.
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Charlie Munger At The 2018 Daily Journal Corporation AGM
Charlie Munger did a two-hour Q&A. He answered questions on a variety of topics.
DJCO is a cult stock. It’s not in an attractive business, but the company has gained a following with Munger as its Chairman.
In 2009, DJCO invested its excess cash in a portfolio of securities that has gained in value. This portfolio of securities and dividend provides a cushion to DJCO.
DJCO is not a mini Berkshire Hathaway.
*I was in LA for the DJCO AGM. If you are reading this article for an advance analysis on DJCO, you won’t really find it. This article is about the AGM and Charlie Munger.
I recently attended the annual shareholder meeting of Daily Journal Corp. (DJCO) in Los Angeles. I am not a shareholder in DJCO, and I don’t plan to be one anytime soon. But I wouldn’t overlook the company either. I will explain later. So, why attend? The main reason for attending a DJCO AGM is not for its results or the company itself, but for the opportunity to hear Charlie Munger’s wisdom in his Q&A segment, who is the chairman of DJCO. Also, part of the reason for attending is the DJCO meeting reveals itself as a community gathering of fun, fellowship, and learning. There are dinners, lunches, and social gatherings related to investing. It’s great to see familiar faces and to meet new people. Ideas are generated and exchanged. You learn a lot. Attending these investment events is a way for me to regenerate myself. It’s like adding wood to a fire. It fuels the core of why I do this for a living. I can’t wait to get back to my desk. Value investing is a lone wolf business. You spend a lot of time in your bubble. Sometimes, you can drift, so it’s good to re-center yourself. Like the Berkshire Hathaway (BRK.A) AGM, the DJCO one offers a great experience for any serious investors on a much smaller scale. Continue reading “Charlie Munger At The 2018 Daily Journal Corporation AGM”→
I finished Berkshire Beyond Buffett by Lawrence Cunningham (@CunninghamProf). Prof Cunningham is well known for his work on Berkshire Hathaway (BRK) and Warren Buffett. Prof Cunningham’s books on BRK and Buffett are among the best. He’s been a follower for decades and has direct access to Buffett and its managers. If you want to read this book, I would assume it’s not your first book about Buffett and BRK. There’s ton of material you can read before this one. If you don’t know where to start, here’s a good start: The Essays of Warren Buffett: Lessons for Corporate America.
This book on Buffett/BRK book is different. This is not a Warren Buffett centric book. It’s more like the bio of BRK. And not just a book full of happy stories about BRK.
BRK is structually complex and highly decentralized. Lawrence had access to many people in BRK organization to realized this book with Buffett’s blessing. Despite its popularity, few people understand Berkshire and many assume it cannot survive without Buffett. They are wrong and this book proves them wrong. This is a comprehensive portrait of the corporate culture that unites BRK’s subsidiaries and the traits that ensure the conglomerate’s continued prosperity.
“The special Berkshire culture is deeply ingrained throughout our subsidiaries, and these operations won’t miss a beat when I die” – Warren Buffett
The book also goes on to explain why many companies picked BRK as their home, even when a more lucrative offer was on the table. It goes beyond the dollar amount. For many entrepreneurs, their business is their baby. It’s their life’s work. And it’s very important for them to preserve it.
I’m glad I read this book. I was looking forward for a book like that for a while. One that goes inside and throughout the subsidiaries. Even the smallest ones. Cunningham talked to many family businesses belonging to the Blumkins, Bridges, and Child and several entrepreneurs like at FlightSafety and Justin Boots.
An interesting question why aren’t there many more companies like BRK? Markel is the closest clone that I can think off. BRK has been cloned before, but you don’t seem to hear about their success. The reason is because it goes beyond the corporate structure. It’s about the attitude. Berkshire takes a partnership attitude toward its shareholders whereas most corporations are hierarchies, with shareholders seen to own a residual claim on firm assets, an equity stake after liabilities are covered by assets. BRK is simple, but hard to replicate.
Here are some characteristics among many others:
Decentralized. The managers of the subsidiaries have massive power.
It rarely uses intermediaries — brokers, lenders, advisers, consultants and other staples of today’s corporate bureaucracies.
No strategic plans administrated by an acquisitions department.
Berkshire defined itself as a partnership from the outset: “While our form is corporate, our attitude is partnership.”
While American companies borrow heavily, Berkshire shuns debt as costly and constraining, preferring to rely on itself and to use its own money.
BRK generates abundant earnings and retains 100 percent, having not paid a dividend in more than 50 years.
Berkshire earns some $30 billion annually — all available for reinvestment.
In addition, thanks to its longtime horizon, Berkshire holds many assets acquired decades ago, resulting in deferred taxes now nearing $100 billion.
The principal leverage at Berkshire is insurance float. This refers to funds that arise because Berkshire receives premiums up front but need not pay claims until later, if it all.
Walter Elias Disney’s corporate vision since it was codified back in 1957. Only two years after the company’s first theme park opened, Walt detailed an expansive vision for Disney – one where every segment of the business worked in concert.
I will be attending the Charlie Munger DJCO Meeting in LA on February 14, 2018. I booked the day. I will probably bounce around the meetups and lunch afterward. I will then go to San Francisco for a couple days. I also posted on Reddit here. One of the best part of these meetings are the great people that you meet. If anyone wants to meetup reach out. This approach worked when I went to Omaha.
For all the Barron’s 2018 Roundtable articles and notes click here.
Starbucks (SBUX) $61.46 ($59.61 when published). Target $70.
The stock has done nothing since 2015. Comparable-store sales have decelerated significantly since then, from 6% or 7% to maybe 3%.
Current guidance looks achievable. The company is forecasting same-store sales gains of 3% to 5%, high-single digit revenue growth, and earnings-per-share growth of 12% or more in the next three years.
The rate of earnings growth is down from 15%-20%, but the company will be returning roughly $15 billion to shareholders from 2018 through 2020 through stock buybacks and dividends. They will be front-end loaded.
The current yield is 2%.
Starbucks has been streamlining expenses. Examples include the closing of its Teavana retail stores; refranchising of Germany, Taiwan, and Singapore; the sale of Tazo to Unilever; the elimination of the Starbucks e-commerce operation; and the consolidation of China.
For all the Barron’s 2018 Roundtable articles and notes click here.
Cinemark Holdings (CNK) $34.82 ($34.17 when published)
It’s the third-largest movie exhibitor in the U.S. Cinemark controls 4,500 screens in the U.S. and operates 190 theaters in Latin America.
After posting record box-office results in 2015, 2016, and the first quarter of 2017, the studios released a string of terrible movies this past summer.
Box-office receipts declined 4% in the second quarter of 2017 and plunged by 15% in the third. It was the worst summer box office in 17 years.
Wall Street analysts were quick to blame Netflix [NFLX], Amazon.com [AMZN], videogames, high ticket prices, and millennials.
They declared that the industry was in “secular decline,” and identified the final death blows lurking in the form of premium video on demand and the money-losing subscription service MoviePass. As a consequence Cinemark’s stock declined 25% from its peak.
Believe these fears are overblown. Expect the industry to recover.
Despite recent headlines to the contrary, the domestic movie business remains healthy. Over the past 30 years, the domestic box office has grown at a compounded annual rate of 4%. Last year, it was down just 2%. Attendance has been a headwind, with ticket sales falling by 1% annually over the past 10 years.
Cinemark has continued to grow revenue at a 6% compounded annual rate.
Managed higher revenues through higher ticket prices and concessions per patron, and modest screen growth.
Cinemark has invested in its businesses, adding digital projectors, 3-D, large-format screens, leather recliner seating, improved food choices, and alcohol.
Cinemark trades at just over seven times enterprise value to 2018 EBITDA, versus its peak multiple of 10 times EV/Ebitda and a longtime average of eight times. Anticipating a box-office rebound in 2018 and 2019, I see 60% upside for the shares, plus a 3% dividend yield while you wait.
Last month, competitor Regal Entertainment Group [RGC] agreed to buy United Kingdom–based Cineworld Group [CINE.UK] for 9.5 times EV/Ebitda, representing a 40% premium to Regal’s pre-deal trading price.
If you think back to 20-odd years ago, the DRAM industry was all about PCs—new operating systems and new Intel processors. Now, PC DRAM is only about 20% of demand. The demand drivers are much more diverse. Mobile phones are 20%. Servers and data centers are probably 25% to 30%. Then there’s TVs and consumer electronics; it is getting really pervasive. Even automobiles have meaningful memory content.
The demand from cloud data centers is inelastic because people with high-margin businesses like Google or Facebook [FB] don’t really quibble about the cost of memory. It’s not like Dell Computer 25 years ago; it would have killed to save 10 cents on a DRAM module.
Micron is earning about $11 to $12 a share per year. The stock is about $45, which means people don’t think the good times are going to last.
Not sure whether the current degree of profitability is sustainable, but we aren’t going to get down to a cyclical low with the companies losing money again.
The balance sheet has been cleaned up. Micron generated $1.7 billion in free cash flow in the latest quarter. The annualized free cash flow is about $7.5 billion to $8 billion. The enterprise value is about $53 billion.
There is a little more delevering to come. They’ll probably pay down another $2 billion or so of debt and then announce a meaningful share repurchase and capital return later in 2018.
Like I said in the past, I can’t recommend William Thorndike’s The Outsiders enough (More on the Outsiders). It’s one of the best book to have come out on investing in the last couple years. It’s about 8 CEOs that that had extraordinary returns over the long run. Except for Buffett, most people probably never heard of the 7 other CEO mentioned in the book. Here’s a potential blueprint for their success:
From the Preface:
They seemed to operate in a parallel universe, one defined by devotion to a shared set of principles, a worldview, which gave them citizenship in a tiny intellectual village. Call it Singletonville, a very select group of men and women who understood, among other things, that:
Capital allocation is a CEO’s most important job.
What counts in the long run is the increase in per share value, not overall growth or size.
Cash flow, not reported earnings, is what determines longterm value.
Decentralized organizations release entrepreneurial energy and keep both costs and “rancor” down.
Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming.
Sometimes the best investment opportunity is your own stock.
With acquisitions, patience is a virtue . . . as is occasional boldness.