Weitz Value Fund 2Q15 Commentary: Long Baker HughesVW Staff
Weitz Value Fund commentary for the second quarter ended June 30, 2015.
Weitz Value Fund - Year-to-Date Contributors
Valeant Pharmaceuticals International is a specialty pharmaceutical and medical device company that develops, manufactures and markets a range of generic and branded generic pharmaceuticals, over-the-counter products and medical devices. Valeant reported terrific first quarter results in late April, just weeks after successfully closing its $15 billion purchase of Salix Pharmaceuticals. In May, Valeant received positive news from the FDA regarding the approval of Salix’s most important drug, Xifaxan, used to treat IBS-D (inflammatory bowel syndrome–diarrhea), creating a potentially lucrative opportunity for the company. Despite our healthy outlook for the business over the coming years, we sold shares during first and second quarter as Valeant’s stock price closed the gap with our intrinsic value estimate.
Martin Marietta Materials is a producer of granite, limestone, sand, gravel and aggregates (products for the construction industry). In February, Martin increased its synergy target for the Texas Industries acquisition from $70 million to $100 million annually and announced a 20 million share buyback plan, which would equate to 30% of shares outstanding. Furthermore, volumes and pricing in their aggregates segment have outpaced consensus expectations, specifically in their public infrastructure end-market. Martin has a strong competitive advantage in an industry with high barriers to entry. We believe they will continue to compound value.
Catamaran Corporation is a provider of pharmacy benefit management services and healthcare IT solutions to the healthcare benefit management industry. Near the end of the first quarter, Catamaran announced an agreement to sell itself to OptumRx (a division of UnitedHealth Group) for $61.50 per share in cash. While we are disappointed to lose a potential "compounder" early on in our investment, we believe we are receiving a fair price for the business. Our intrinsic value estimate of ~$60 per share included the assumption of future M&A success that OptumRx may be unable to capture in the future. We have sold the Catamaran shares we own that qualify for long-term tax treatment and plan to sell the remainder as they become eligible. The Optum-Catamaran merger is expected to close sometime during the third quarter.
Weitz Value Fund - Year-to-Date Detractors
Twenty-First Century Fox is a diversified media and entertainment company. Creative struggles at the Fox Broadcast Network, combined with significant foreign exchange impacts on international earnings, continue to pressure the company’s shares. Furthermore, ratings across the industry have been under pressure as viewers move toward currently unmeasured platforms like online video and video on demand. Investors are broadly anticipating that these pressures will likely lead to a further reduction in management’s outlook for fiscal 2016. The company also announced a generational shift in leadership, as founder Rupert Murdoch’s sons, James and Lachlan, will become CEO and Co-Executive Chairman, respectively, while current Co-COO Chase Carey will hold the title of Executive Vice Chairman through June 2016. We remain attracted by the company’s strong position in news and sports, visible affiliate fee growth opportunities, recurring cash flows and shareholder friendly capital allocation. In addition, we feel comfortable with the shift in management. We added to our position as the stock price declined.
Berkshire Hathaway is a conglomerate holding company owning subsidiaries engaged in a number of business activities. We don't believe the current share price reflects improvements at Berkshire’s Burlington Northern subsidiary that recently has been plagued with congestion, confusion and delay. Berkshire has spent aggressively to rectify the problem and Burlington Northern remains a premier railroad. Berkshire's insurance unit continues to show excellent discipline in underwriting, which results in temporary declines in premiums, but means the company will have significant capacity when insurance pricing returns.
Precision Castparts is a manufacturer of complex metal components and products that provides investment castings, forgings and fasteners/fastener systems for critical aerospace and power applications. Falling oil prices and disappointing organic growth across its aerospace businesses have pressured shares of Precision Castparts over the past 12 months. Most of the stock’s weakness this year came during the calendar first quarter; management pre-announced difficult fiscal Q3 results and formally backed away from its prior goal of $15.50 to $16.50 in fiscal 2016 earnings per share. We added to our position on the news, and continue to find the company’s longer-term opportunity set and capital discipline attractive. Precision’s management has identified several attractive potential acquisition candidates and plans to repurchase a meaningful amount of stock over the coming year.
Weitz Value Fund - Quarterly Contributors
Valeant Pharmaceuticals International Please see the Year-to-Date synopsis for quarterly contribution details.
Discovery Communications is a leading provider of Pay-TV programming with an emphasis on lower-cost, fully-owned, non-fiction content that appeals to passionate global audiences. Discovery’s stock rebounded in the second quarter as ratings trends improved and domestic advertising results were better than expected. We think that the core business will continue to prove more resilient than many investors fear, especially overseas where the company has strong competitive advantages. Discovery is well positioned to benefit from the long-tailed wave of increasing Pay-TV adoption outside the U.S. We project per share cash flow growth in the teens over the next several years, fueled by the international business.
MasterCard Incorporated is a technology company in the global payments industry, which connects consumers, financial institutions, merchants, governments and businesses around the world, enabling them to use electronic forms of payment. MasterCard’s business continues to enjoy considerable momentum despite pockets of economic weakness in Latin America and the Asia Pacific region. Last quarter, sales grew by 8% in constant currency and EPS increased just shy of 30% over the prior year. While the strong U.S. dollar remains a headwind in the near term, we continue to be attracted to the durability and visibility of MasterCard’s underlying growth opportunities as well as its pristine balance sheet.
Weitz Value Fund - Quarterly Detractors
Pioneer Natural Resources is an independent, U.S. based, oil and gas exploration and production company. Shares of Pioneer Natural Resources ended the second quarter back near their 52-week low as optimism surrounding a potential second half rebound in oil faded. Concerns around the scale of non-drilling capital expenditures necessary to support Pioneer’s anticipated ramp in the Midland Basin also continue to weigh on its shares. We generally agree that necessary investments in water lines, tank batteries, gas processing and frac sand capacity make some of the more bullish scenarios for Pioneer less likely, but we still believe its shares are significantly undervalued.
Endo International is a specialty healthcare company engaged in developing, manufacturing, marketing and distributing branded pharmaceutical and generic products as well as medical devices. Endo’s agreement to purchase generic drug manufacturer Par Pharmaceuticals for $8.1 billion in mid-May was greeted with skepticism. While the generic drug industry isn’t as attractive as it was 5-10 years ago (and is presently unpopular on Wall Street), the Par transaction makes sound strategic sense and is modestly accretive to Endo’s business value. Longer term, we believe it is a logical step in Endo’s evolution toward becoming a leading, diversified global specialty pharmaceutical company and positions it for a potentially transformative North American or international branded pharmaceutical acquisition.
Motorola Solutions is a global leader in the sale of public safety communication infrastructure products and services as well as commercial radio systems. Motorola Solutions’ stock price retreated based on unconfirmed news reports that the company has explored a sale but was unable to find a buyer. Furthermore, there were concerns over the impact of the adoption of public safety LTE technology resulting in a decline of market share. We remain confident in our business value estimate for MSI, which is based on the company’s wide moat in public safety radio communications and an aggressive return of capital through share repurchases and dividends.
Weitz Value Fund - New Holdings
Halliburton is the world’s second largest provider of products and services to oil and gas producers. Last November, Halliburton agreed to purchase Baker Hughes for what was then $35 billion in cash and stock. The potential combination is attractive on a number of fronts. The new Halliburton would enjoy enhanced global scale, a stronger competitive position in several key submarkets (specialty chemicals and artificial lift) and a greater ability to capture efficiencies during the present downturn. The Fund initiated a "starter" position in Halliburton through the purchase of both Halliburton and Baker Hughes stock. We believe the merger will be successful despite a relatively wide spread. Fundamentals and sentiment across most of oilfield services are presently poor, creating opportunity (and dampening risk) for patient investors, as both are likely to improve with time. Should Halliburton’s stock weaken further in the coming months, we will look to increase our position size.
Monsanto is a provider of seeds and biotech traits for corn, soybeans and cotton. Monsanto shares have declined with the fall in crop prices as investors became concerned that farmers would switch to less expensive seeds and technology in response to reduced farm incomes. While we believe that farmers will find other ways to reduce input costs, even if farmers temporarily reduce their spending with Monsanto, longer term, the company's technology is absolutely necessary in order to meet global demand for food. As a result, we viewed the recent decline as an opportunity to purchase a high quality business for a discount.
Weitz Value Fund - Eliminated Holdings
Fidelity National Information Services- We sold Fidelity National Information Services at a healthy gain when the stock traded through our value estimate. Business value compounded as expected over our two-plus year holding period and the valuation gap closed relatively quickly, leading to exceptional annualized returns.
Investors should consider carefully the investment objectives, risks, and charges and expenses of the Fund before investing. The Fund's Prospectus contains this and other information about the Fund and should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries, and sectors referenced in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. See the Schedule of Investments included in the Fund's quarterly report for the percent of assets of the Fund invested in particular industries or sectors.
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