giofranchi

Well… Mr. Ackman said a good roll-up is Berkshire… what’s the difference if I say that the first good roll-up might have been Standard Oil?! Of course, my point is not that roll-ups are good businesses! My point is just that it depends! There simply is no getting around the fact you must make a business judgment… or, if that business judgment is too difficult for you, simply admit that you don’t know! I find the Standard Oil example interesting also because as a roll-up it actually created more value for its owners, when it was finally broken up, than when it was built through many and very frequent acquisitions. I also find interesting that fact Mr. Rockefeller had always been willing to pay-up for what he called “strategic assets”… this of course doesn’t mean overpaying for them! Something I have heard Mr. Pearson repeating many times! I find this thing interesting: if you study the principles Mr. Rockefeller followed while building Standard Oil, and if you read what Mr. Pearson says in conference calls, you’ll end up recognizing a lot of similitudes! Why would you overlook this?! ;) Gio

Ah! By the way… Standard Oil must have been the very first “roll-up”!! And Mr. Rockefeller the very first “serial acquirer”!! And no matter how successful it had become over time... some people remained skeptical about Standard Oil until the end! ;) Gio

Unfortunately business doesn’t work that way… at least in my experience! Once some business proposition can be objectively verified, the opportunity is gone forever! Of course, that’s only my experience… but how could it be different?! Mr. Buffett is the best at judging business propositions… before they become obvious to anyone else! You and I are no Buffetts but, if we want to be entrepreneurs, there is little doubt we also must find good business propositions, before they get discovered by other people as well. And there is no other way that I know of except thinking about the rationale behind a business proposition, and then examining how its execution is carried out. Having read all the VRX conference transcripts of the last 3 years, I can say I have found practically nothing that makes little sense. And I judge Mr. Pearson’s hands capable enough to carry out his strategy effectively. As far as debt is concerned, the result is obvious: if the business proposition is sound, it will magnify good results; if the business proposition is flawed, it will magnify bad results. We will see! ;) Gio

That’s basically why I am out: because it is the toughest business judgment among my firm’s stock investments. I needed some capital… therefore, VRX is the one I sold… But, I think it is extremely dangerous to collect 1 or 2 years of data, and to judge the effectiveness of their business model on the “quantitative picture” they portray… way too short term to rely on that… you would need 1 or 2 decades to rely on numerical data… The question imo remains the same: does Mr. Pearson’s business model make sense? Will it work over the long term? Will it be successful in cutting unnecessary and wasteful R&D costs? If it manages to be successful, when will competition become too fierce? Those are qualitative questions, and imo you cannot provide quantitative answers yet! By the way… what the bears and the bulls have in common about VRX is the following expression: “we'll get to see how it plays out”… sentence that would have no meaning at all, if the numbers were already clear enough! And, of course, if the numbers were already clear enough, no opportunity (bull case) nor threat (bear case) would exist today! ;) Gio

Well, that’s just math… Compound BV at 20% annual for just 8 years, and you get to 4.3 times initial BV. Then use a discount rate of 10%, and you get to a present value of equity that is 2x today’s BV. By this calculation BH could close doors 9 years from now, and still be worth 2x BV. But I know no one here likes math… and for good reasons… it is very easy to deceive ourselves using math… Accordingly, I would say this: I sell a great business, only if it gets extremely overvalued. I don’t really think BH will ever trade at 2x BV, therefore this is basically a journey I am willing to make alongside Mr. Biglari… Wrong partner? Lots of people would say absolutely yes! I, on the contrary, have great respect for what he has achieved till now. Gio

--page 8 Therefore, true BV should be: $64.8 + $543.8 = $608.6 million. I don’t want to put a precise number on fv, but let’s just say I won’t be worried about valuation until BH sells for 2xBV: 2 x $608.6 = $1,217.2 million. As of yesterday BH market cap was $765.57 million. Ragu? Gio

That would be a meltdown… and would certainly slow things down… but capital markets don’t stay close forever, right? Therefore, you will have to answer: do I buy more? ;) I cannot put an exact number to that… but I am pretty sure about the order of magnitude: $trillions. Gio

But... I have not told you if Mr. Pearson is right or wrong... which, unfortunately, is imo the thing that really matters! ;) Gio

Well, if Mr. Pearson is right, I think the 20% IRR he seeks from every acquisition will prove to be conservative. And I think this doesn’t depend on the Allergan deal at all. Gio

First, I explained the difference between how I think about KO and about VRX in my last answer to biaggio. Second, how would you compare KO selling at 35x EPS with VRX selling at 15x Cash EPS? Third, in a meltdown everything get crushed. What you have to answer is: do I buy more? Gio

+1 I totally agree. Gio

No, no! Far from me! Just read the last line of my last post! ;) When will competition become too fierce? That’s preatty hard to say… but as to this day I can see still a lot of status quo thinking and therefore skepticism about VRX business model… if Mr. Pearson is right, still a lot of room to grow! Someday that room will surely shrink down… and the right entrepreneurial judgment will be to recognize VRX will no longer be the right place to put your capital… imo, that moment is still far in the future… I don’t know when or even if it will come to pass… all I can do is to monitor how things evolve and make decisions accordingly. Gio

Ah! That one has been a great day! :) I am not sure I would define this “quality”… Quality imo is JNJ, KO,… anything with a long history of sustaining high ROEs,… with some very durable competitive advantages. Here I think we have something else… something more difficult to judge: a new way to do business in the pharma industry. The fact is: someone is telling you he can achieve pharma’s profitability without incurring pharma’s wasteful costs. He is saying pharma’s profitability has caused complacency, and complacency has led to wasteful costs. And he is saying: no more, time to solve this business distortion. And he has embarked on a journey to show how this could be achieved. And he clearly explains the logic behind his thoughts and actions. The question, therefore, is only one: do you believe he will be successful? Personally, I believe he will be successful… until too many people finally recognize what he is doing, and competition becomes too fierce. Gio

Packer, Those are not incentives… those are threats… And they have never worked. Even if they were incentives, do you really see a whole continent that starts behaving like the German people?! I don’t think it works that way… You have a fiscal union in the US, because it doesn't work that way... But I hope I am totally wrong!! ;) Gio

Ok… then a political and a fiscal union will be the final outcome… that would be very fine! And I really hope we manage somehow to get there, and soon! But… do you really see a French ruled by a German President? Or… do you really see German money leaving for the south? How do you make 1 nation out of a geographic area in which 20 different languages are spoken? How do you make 1 nation out of a geographic area which has just sent 10 teams to the World Cup in Brazil?! ;D ;D Gio

I agree. Try also "Extraordinary Popular Delusions and the Madness of Crowds" by Charles Mackay. Gio

Hi biaggio! Do you remember when we talked about SBUX at the FFH AM last April? You said SBUX probably has always been overvalued. I replied that, having gone from let’s say $5 billion in market cap to $100 billion in more or less 15 years, there must surely have been a lot of times when SBUX was actually very cheap! The same imo is true for VRX… if, and only if, Mr. Pearson’s business model is so effective in eliminating wasteful R&D costs, as I believe it finally will prove to be. There is simply no way to get around this thing: if Mr. Pearson is right, VRX is cheap; if Mr. Pearson is wrong, VRX is expensive. Gio

Packer, why??? As soon as England got off the gold standard in the ‘30s, its economy blossomed rather than falling off a cliff… The same happened to France a few years later… As I have always said, I am not sure I would compare something so small as Sweden’s economy during the Depression to something so big as US economy today… When the Fed’s actions have inflated asset prices so much more than they have improved the economy, I guess the final outcome is still unknown… But here is the old debate between Austrians and Keynesians, right? We all know that, and it is totally pointless to resume here a diatribe that probably would never be solved… Actually, I have my own solution: they both are right! What the Austrians suggest will come to pass sooner or later… but it is much better later than sooner! That’s why what the Keynesians suggest is also so much useful: because it is helpful to spread the pain over the course of many years, instead of concentrating it in a short, and therefore unbearable, amount of time. But that’s only my opinion and is totally inconsequential. What really matters is that Europe is different: we have a common currency, without a political nor a fiscal union… this simply cannot go on forever… and you very well know what Herbert Stein had to say about things that cannot go on forever! ;) Gio

I think you are totally off basis here. A good portion of Valeant's generics are growing internally by simply introducing them to new markets via their global sales force. The company has scored very good wins with some of their acquisitions. So what if their patented drugs are going to decline in sales? They borrowed money at 5% and factoring in total acquisition costs they are making 20%+ returns milking the patents. I'll make that trade all day long. Is their cash earnings metrics a bit too aggressive? Yeah I think so, but you can just make your own adjustments and decide whether the stock is overpriced or not. Yeah! I repeat once again what should be obvious at this point to everyone who follows VRX: If Mr. Pearson is right, meaning VRX business model truly is the one to solve the problem of all those wasteful costs in unproductive R&D that have plagued the pharma industry during the last 15 years, at least until competition doesn’t become too fierce, VRX is very cheap today. And VRX shareholders will make a lot of money. The opposite is true, if Mr. Pearson is wrong. It is an entrepreneurial judgment. I have my answer to that question, but I just cannot muster enough conviction… it will certainly be much fun to see how this will end. ;) Gio

Yeah! That's excatly the question I also thought immediately… It seems Liberty reads my mind!! ;) Gio

No. He is saying that prices are information. When prices get distorted for a very long time, like we have had in Europe since the Euro was ill-advisedly introduced, information get to be very misleading. When information are misleading, people make very bad decisions. And bad decisions have the nasty habit of compounding their nefarious effects. We all agree Italy and Spain , also France I guess, must clear their own houses and start behaving responsibly and reliably. But what doesn’t work must be fixed: a monetary union, without a political and fiscal union has never worked. Show me one single example in history… By the way, I am not saying what Draghi is doing will work… In fact, I think it is only a palliative… Gio

lu_hawk, I think I have understood your question the first time you formulated it… And I have tried to answer it as honestly as I could… Let’s put it this way: “technically” or “in theory” you are perfectly right: neither P, nor E take into account all the debt VRX has accumulated… but “in practice” at least one of them do: because P is the reflection of how the market thinks about VRX… market cap is not “carved in stone”, it is the result of how the market perceives VRX future prospects… and the market is not oblivious VRX has grown very fast (incredibly fast, I daresay!), because or thanks to all the debt it has accumulated on its balance sheet… and the market is not oblivious debt is a burden that must be repaid at some point… Why I think the market is not oblivious to those facts? Because of the multiple the market is according to VRX: it is clearly skeptical of such an amazing growth (meaning it knows that growth has not come without a very real cost!), and is pricing VRX accordingly. But… If you don’t want hear me talking and reasoning about the P to Cash EPS multiple… I am sorry, I don’t think I have another answer to your question… Gio

Unfortunately, since Draghi announced a negative Deposit Rate, the Euro has actually appreciated against the USD… Now that is really amazing!! Go figure!! ::) Gio

Thank you, ni-co! I really appreciate this! We are suffocating here in the south… and it is not just because of the summer heat!! ;D ;D Gio

I have long thought KW deserves its own thread in the Investment Ideas section, and I have found this recent investment thesis about KW by Broyhill Asset Management. Imo it is very well done! A good way to start the discussion about KW. :) Gio KW-Kennedy-Wilson.pdf