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Notes from Omaha

Below are some notes from Omaha – a few thoughts on the Berkshire meeting, a look at a new fund dedicated to the “pets economy” and what an international value investing panel said about Exor…


The best part about going to Omaha for the Berkshire meeting is all the side events that go on around it. My Friday, for example, was packed with meetings and events from 8AM through dinner.


Investors from all over flock to Omaha for the Berkshire event and it’s natural to take advantage of that and hold other meetings, etc. In many cases, this can be the only time of year I see certain investor friends of mine.


*** The Berkshire Meeting


The meeting itself is anti-climactic. Yes, it’s great to hear Buffett and Munger. And Munger in particular is often funny. (“If you’ve ever made dumb decisions,” he said, “look up here and feel good about yourself.”) I liked Buffett’s story about the guy who gets 2 and 20 for his hedge fund. When asked why he got that, he said because he couldn’t get 3 and 30.


But I don’t really learn much from the meeting itself these days. The questions are often terrible – particularly the ones that come from shareholders. And when there are good questions, Buffett seems to skate around them. For example, Buffett didn’t want to talk about his largest holding (Apple). He didn’t want to talk about his foreign securities (which he does not have to disclose). He didn’t really say much about the buybacks. Etc.


Now, there are good reasons for not talking about these things. But added all together, it makes for a not so informative meeting. I think it was interesting to hear from Greg Abel and Ajit Jain. (Buffett gave them the floor to answer questions on several occasions). I suspect we’ll hear more from them in the next meeting. And we should.


I own a small position in the stock, simply because it’s hard to beat as far as combining a low risk of permanent loss and decent upside. Even if Berkshire just did 10% annually, that would be pretty good considering the low risks you take in owning it. If the buybacks ever meaningfully kick in, it could do quite a bit better than that.


*** The Pet Economy


Gabelli Asset Management held one of these side events at TD Ameritrade Park. Among the presentations was one by Dan Miller, the portfolio manager of the new Gabelli Pet Parents fund (PETZX). The focus is the “pet economy.” The backdrop for investing in this sector seems compelling.


First, we can start with the fact that 85 million households in the US own a cat or dog. That’s more than the number of households with a child under 25 years old. The funny thing about this is how much people spend on their pets.


The number, per Gabelli, is $72 billion in the US and $150 billion globally, growing 5-8% annually. And it’s resilient too. Dan pointed out that even during the 2008-09 financial crisis, people still spent $565 annually on their pets. That was higher than the ten-year average to that point of $507.


People are nuts about their pets and think of them as members of their family. Dan noted that people spend $700 million on Valentine’s Day presents for pets. And you see similar spikes around all the major holidays.


What are people buying? Pet food is the biggest category, not surprisingly. But there is also a lot spent on veterinary and diagnostic care as well.


The most striking data point Dan shared was the industry consolidation going on and the large premiums acquirers pay to own “pet assets.” Dan had a table that showed acquisitions over the last 5 years. The average EV to EBITDA multiple paid was 18x.


The slides I’m looking at clearly say “not for public distribution.” So I’ll respect that and just highlight a couple of recent deals. In February of 2018, General Mills bought a pet food supplier called Blue Buffalo. It did $8 billion in sales and General Mills paid 25x EBITDA. JM Smucker bought another pet food supplier called Ainsworth Pet Nutrition, a $1.9 billion business. It paid 22x EBIITDA.


So, an investment theme starts to take shape if you can buy public assets for a lot less. The top ten holdings of the include a couple of names you might’ve guessed but also quite a few I never heard of:


Zoetis (ZTS), 8.1%

Dechra Pharmaceutical (DPH:London), 7.0%

PetIQ (PETQ), 6.3%

Heska Corporation (HSKA), 5.7%

Pets At Home Group (PETS:London), 5.5%

Elanco Animal Health (ELAN), 5.4%

Covetrus (CVET), 5.3%

Oil Dri Corporation (ODC), 5.2%

IDEXX Corporation (IDXX), 4.5%

Trupanion (TRUP), 4.4%


It’s an interesting portfolio. Zoetis seems like a great business (and is priced as such). Insiders don’t own much stock, and so I’m not likely to ever own it. But that’s not the case with all of these. Insiders own 14% of the stock at Heska, for example. And I see 22% insider ownership at Oil Dri, a maker of sorbent products.


I’ll probably give these a look. I like resilient industries like this.


*** The International Value Panel


Evermore Global and Longleaf held an event at the Magnolia Hotel. David Marcus (Evermore) and Josh Shores (Longleaf) talked about their investing experiences and methods. They even talked about a few names.


One name they both own and talked about, and that I’ve written about on the blog: Exor, the Italian holding company. (We own it at Woodlock House). David Marcus pegged intrinsic value at 67 euros per share, per a handout at the meeting. He also praised John Elkann, chairman and CEO as “a savvy capital allocator, a value creator and excellent just of managerial quality.”


David said – at least I think it was David, my notes aren’t 100% clear here – that one difference between Elkann’s holding company and Berkshire is that everything is for sale, at a price, at Exor.


For Longleaf’s International Fund, Exor is their largest position at 8.2%.


*** That’s a Wrap


I’ll be back next year. You never know which one of these will be the last that Buffett and Munger do together. Buffett is 88 and Munger is 95. And besides, where else do I get to see so many of my investing friends in one place?


Thanks for reading. You can write me at info [at] woodlockhousefamilycapital.com


***

Published May 6, 2019

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