Wednesday, August 22, 2012

Candies and Creations

Preliminary information from 'Nickwebb' - http://aliceschroeder.com/forum/topics/analysis-sees-candies
-
This is a bit of an add-on from my earlier post.
1972 2006   2006 (1972 prices) CAGR
25000000 1200000000 12.1%
Purchase Price 25000000
Sales 30000000 383000000 80000000 7.8%
on lbs of candy 16000000 33000000 33000000 2.2%
price per lb 1.88 11.61 2.42 5.5%
Pre-tax Profits 4500000 82000000 17000000 8.9%
Gross margin 15.00% 21.41% 21.41%
Post-tax Profits 2250000 60000000 12500000 10.1%
Net Margin 7.50% 15.67% 15.63%
Profit per lb 0.14 1.82 0.38 7.8%
Total cost per lb 1.73 9.79 2.05 5.2%
Invested Capital 8000000 40000000 -
PBT / Invested Capital 56% 205%

These are See's Candies approximate numbers.
Sales grew by 7.8% CAGR over a 34 year period (give or take)
PBT grew by 8.9% CAGR and PAT grew by a 10.1% CAGR. Sure, these numbers are un-audited and taxation for See's is, I believe, unavailable to the public.
My general question is: Was it really worth buying a company which managed to grow its earnings at 10% odd for 34 years? Because, 10% does sound like a small number relative to BRK's long term track record or even some of the awesome hedge fund managers' long term records...
The kicker is the second to last row.
Apparently, when BRK bought See's, USD 5 Mn had been invested in See's (Ch 34, Pg 345 of the Snowball) (give or take). In the 34 years hence, an incremental amount of USD 40 Mn was supposedly required to sustain and grow operations.

Yes, Profit grew by 10% odd for 34 years, but in the interim, an approx. USD 500 Mn - USD 550 Mn had been ploughed out of See's Candies and funneled into other acquisitions.
That, ladies and gentlemen, is how it's done! Bring it home now!!
And that is how BRK has grown and how the Tata Conglomerate has grown, in addition to many others.

In value investing, a lot of 'investors' forget the utility of free cash earnings - earnings which can be removed from the business and paid off to stakeholders or grow the business or diversify into other businesses.
And this is where corporations like the Mahindra Group may do well. Of course, in the process of buying new corporations or starting something, relatively, from scratch, there might be hiccups and blunders.
Take the case of Kodak - it used to make money and the company itself field for Bankruptcy protection, but understand that the company didn't really go kaput... why? Because in the year 1994 odd, it spun off Eastman Chemical, which is now a USD 7.3 Bn market cap company.

Take the case of Apple - I strongly believe that the company has no idea how to use its USD 100 Bn of cash for further expansion; may be it does, but may be it may piss it away, which is why certain investors ask for a cash disbursal, because then those investors can use that capital in other ventures/ deployments.

When we think of GE - GE is a real conglomerate with various businesses, all of which could grow because of cash earnings from other businesses. This should have eventually rewarded the shareholders, but GE Capital made a big boo boo - hence, the shareholders were distraught :P
Which may be a good case for why dividends are important - that, is a real way to diversify holdings...

Going back to Berkshire, WB has not created a single real company in his life; but he saw himself as an excellent allocator of capital. To make a case for this, I can imagine See's old owners squandering the money away, but on the whole, WB was able to efficiently use the cash earnings of See's to fund other purchases and hence, grow his conglomerate.
On a side note, WB has always hated conglomerates because they are near impossible to understand - one would never know how future capital allocations would take place and there are just too many businesses to understand! However, BRK is a goliath of a conglomerate!

Is it important to understand the difference between profits and free cash flows?
What is the corporation going to do with the free cash flows?
Does the corporation have a good track record of doing outstanding stuff with free cash flows?

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