Warren Buffett's Historical Investments (Part 6)

Warren Buffett's Historical Investments (Part 6)

Hershey Foods: Buffett is rumored to have purchased Hershey Foods on several occasions, but we have no confirmed purchase to sink our teeth into. He has used it as an example in discussing the concept of a durable competitive advantage. Its been making chocolate forever and is the largest producer in America. The majority of the voting stock fo the company is held in trust for the benefit of the Milton Hershey School for Orphans. The company's founder, Milton Hershey, left the majority of his wealth to benefit the children who had made him rich. What this means to you the investor is that there is one large shareholder - the trust for the orphanage - which can wield an incredible amount of weight. The company gets high ROE and ROTC. Its per share earnings have been growing at an annual rate of 9.9% for the last 10 years. It traded at a PE of 33 during the bubble, which is too steep for this business. Try to get it at a PE below 15, which you could ahve done up until 1996. Even if you have a sweet tooth, wait for a recession or panic sell-off to take a bite.

ROE: high
ROTC: high
Per share earnings annual growth rate: 9.9% (the last 10 years)
Price bought: Wait for a recession or panic sell-off to buy



Interpublic Group of Companies: In 1974, Interpublic was the largest company in the international advertising business. Now it is number three. Advertising agencies, according to Buffett, earn a royalty on the growth of other businesses. When manufacturers want to take their products to market, they have to advertise, so they use an agency.
Agencies produce and place ads in the media and are paid a percentage of what the advertiser spends for these services. Agencies are almost inflation-proof. Inflation causes advertisers to spend more for the same amount of work, and the more advertisers spend, the more the agencies make. Agencies are service businesses so they spend only modesly on capital equipment, which means that profits don't go toward replacing worn-out plant and equipment. Plus, only 4% of U.S. advertisers change agencies every year! In other words, those big accounts stay in place. Many of the large agencies that dominated the marketplace years ago still dominate it today. Seven of the top ten are in their fifth or sixth generration of management. The key here is that there is no limit on how big they can grow. As long as businesses grow and the media continue to be where manufacturers take their products to market, advertising agencies will continue to grow as well.
The numbers on Interpublic are great. For the last 10 years it has earned an annual ROE of 16% or better, with the last 3 years at over 20%. Per share earnings for the last 10 years have been growing at an annual rate of 13.8%. Buffett used the 1973-74 recession to buy 17% of Interpublic, which traded as low as $3 a share, against earnings of $0.81. He paid a total $4,531,000 for 592,650 shares, for an averge price of $7.65 per share. We don't know when he sold his interest in this company. We do know that if he had held his position, he would have 74.6 million shares, adjusted for stock splits, worth approximately $2.8 billion. This equates to a compounding annual rate of return of approximately 27% for the 27-year period. If you're patient, you can get a great price on this one. During the 1999 bubble, it traded at a PE of 33 - too high for even this wonderful business. In the midnineties, you could have bought it for 14 x earnings.

Price bought: average price $7.65 (bought in 1973-74 recession, was traded as low as $3 a share)
Earnings: $0.81 a share
ROE: > 16% (over the last 10 years, with last 3 years, ROE greater than 20%)
Per share earnings annual growth rate: 13.8% (over last 10 years)


Kaiser Aluminium & Chemical Corp: This is one of the few investment mistakes that Buffett made in his early days. He bought based on earnings in good "businesslike" fashion, but the earnings soon vanished as they often do in a price-competitive business. He lost money on this one.



McDonald's Corp: McDonald's made the hamburger into a brand-name product with some 28 thousand restaurants - no easy feat. Over the last 10 years the company has had a yearly ROE between 16% and 20%, which is delicious. And its per share earnings have been growing at an annual rate of 12%. It's a great company, and at the right price it is a great investment. Buffett acquired 60 million shares in 1994 and 1995 for $1.2 billion, which equates to $20 a share. He was then rumoured to be selling them in 1997 to 1999 for between $30 and $45 a share as he sold into the bubble. This turned out to be a wise decision. At the right price, Buffett will once agains be buying McDonald's shares, and so would you.

Price bought: average $20 a share (in 1994 and 1995)
ROE: 16%-20% (over the last 10 years)
Per share earnings annual growth rate: 12% (the last 10 years)
Price sold: $30 - $45 a share ( in 1997 to 1999, sold into the bubble)


Related topics:
Warren Buffett's Historical Investments (Part 1)
Warren Buffett's Historical Investments (Part 2)
Warren Buffett's Historical Investments (Part 3)
Warren Buffett's Historical Investments (Part 4)
Warren Buffett's Historical Investments (Part 5)
Warren Buffett's Historical Investments (Part 6)
Warren Buffett's Historical Investments (Part 7)
Warren Buffett's Historical Investments (Part 8)
Warren Buffett's Historical Investments (Part 9)