There's nothing like a good old-fashioned crash to separate the men from the boys in the realm of money managers. A recent investor letter from venerable New York firm Tweedy, Browne highlighted the benefits of the company's longtime love affair with value, and doubtless chastened clients chafing at its hallmark conservatism during the boom.
Net of fees, Tweedy, Browne has outperformed in every one of its six categories over the past one-, two-, three-, five-, and 10-year periods, and since inception.
For instance, in 2008 its U.S. equity composite was off 24%, compared to a 37% slump in the S&P 500. (Note that it was not pleased to have lost money.) Over the past five years, its unhedged international equity composite rose just shy of 4%, compared to 1.7 % for the MSCI EAFE. Since its inception 29 years ago, the global high dividend yield equity composite has grown 13.7% annually, outstripping the S&P 500 by nearly 300 basis points and the MSCI World index by more than 400 basis points.
Really, it's pretty impressive
During the go-go years, Tweedy, Browne notably carried high levels of cash, which needless to say served it well when the market sank. This was not a commentary on the course of civilization, but simply an adherence to a value premise that of late has inspired the company to begin buying stocks again.
In its most recent investment letter to clients, the firm focused on three companies that meet its criteria, and that it has been accumulating: 3M (NYSE:MMM), Krones, and National Western Life Insurance (NASDAQ:NWLI). Its rationale for these picks provides fodder for a veritable Graham and Dodd seminar.
A closer look
3M is considered attractive because of its diverse industrial portfolio featuring well-established brands like Scotch Tape and Post-it, but also because of its success in launching new lines. It is described as a technology company -- but at the same time it meets one of Tweedy, Browne's long-held requirements of understanding what it owns.
As important as its broad mix of markets and products is, 3M's strong balance sheet is also a selling point. It has the highest credit rating of any U.S. industrial company (AA), a step above IBM (NYSE:IBM), for instance, or Caterpillar (NYSE:CAT), both of which earn only a single-A rating.
Its net debt equals about 60% of its EBITDA for 2008. Not only is its financial position comforting in today's credit crunch, but its strength gives it a real competitive advantage in a world awash with marked-down businesses. Further adding to the company's appeal is its 51-year history of increased dividends; it most recently hiked its payout this past February by 2%.
Tweedy, Browne analysts estimate that the company's "normalized" earning power approximates $4.50 to $5.00 per share, but acknowledge that in the current year 3M will likely post results shy of that figure. (The consensus among analysts covering the stock is for earnings this year of $4.02). The firm has been buying the stock at around today's price of $50, or at 10 to 11 times "normalized" earnings -- a level not seen in 18 years. At current levels, the yield is at 4%.
Next up
German manufacturer Krones is the world's premier maker of bottling machinery, providing almost half of the equipment used by companies like Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) that supply soft drinks, water, alcoholic beverages, and juice industries.
Many factors beyond the growth in the global consumption of bottled beverages enhance the outlook for Krones, according to Tweedy, Browne, including a replacement cycle founded on innovation as well as fatigue and a sizeable replacement parts business. Over the past decade, revenue growth has approached 10%, but it is still a relatively small company, 52% owned by the founding family.
The stock is trading at around seven times normalized earnings and slightly above book value. Tweedy, Browne bought the shares in 1999 and 2000 and sold them at more than double the price in 2005. It is probably hoping for a repeat performance, though aware that bottlers may well cut back on capital spending in the near term.
And finally
The last pick on the list is National Western Life, whose shares have been trading at a deep discount to tangible book value. As the name suggests, the company sells life insurance policies.
Its appeal lies in its debt-free balance sheet, buttressed by holdings of largely investment-grade bonds. The company's A.M. Best capital adequacy ratio was recently 356%, compared to a "good" rating of 175%.
About a month ago, Tweedy, Browne was buying the stock in the mid $60s (compared to tangible book value of $272); since then the shares have nearly doubled. At $53, the low it hit on March 9, which also proved at least a temporary bottom for the market, it was selling at less than four times earnings and at less than a quarter of tangible book value, even though companies in the sector have been acquired in recent years for more than book value.
Maybe investors panned the stock out of concern that it might have asset problems like insurance giant AIG (NYSE:AIG). Tweedy, Browne explains this shocking recent undervaluation as typical of the "broken psychology" in today's marketplace. Interestingly, there are no analyst estimates available for this company on Yahoo! Finance or on Bloomberg. If the shares double again, maybe someone will notice.
Someone may also notice that Tweedy, Browne is picking through the debris and finding some excellent opportunities to buy stocks, such as the three mentioned here. It's not easy to sit on the sidelines while the game is afoot, as the firm has done in recent years. But that's what real value investors do, and Tweedy, Browne's clients are now celebrating its creed, as well as its patience.
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