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Jack Byrne, Geico CEO Buffett Cited for ‘Brilliance,’ Dies at 80

Via Bloomberg:

John J. Byrne, whose turnaround of auto insurer Geico Corp. led billionaire Warren Buffett to buy the company and call him “the Babe Ruth of insurance,” has died. He was 80.

Byrne died on March 7 at his home in Etna, New Hampshire, according to Robert E. Snyder, a family spokesman. The cause was prostate cancer.

In his letter to Berkshire shareholders reviewing 1980, Buffett credited Byrne’s “managerial brilliance” with resuscitating Geico after his arrival in 1976.

“There aren’t many Jack Byrnes in the managerial world, or Geicos in the business world,” Buffett wrote. “What could be better than buying into a partnership with both of them?”

Jack Byrne is one of the greatest insurance executives in the past hundred years. If it weren’t for his leadership, GEICO might have gone under or remained a below average institution, and Buffett might never have bought the company.

There’s actually an Insurance Hall of Fame. Byrne was inducted in 2009 and there’s a lot more to read there about  his many accomplishments.

Regarding the Rumours of a Coach (COH) Buyout

This morning there were rumours that Coach (COH) was looking to sell itself. Since my first post on Coach, the share fell slightly more to about $46 and now they are up to about $49 in pre-market trading. This is one example of how good things can happen to cheap stocks.

With that said, however, it seems unlikely this rumour has any substance. For starters, the company is pretty big with a market cap of $13 billion. If you attach any sort of premium that and you get an even bigger number, which would be a very large deal to pull off. I think the easiest and best way to create shareholder value right now would be for the company to repurchase a lot of shares either through a a large self-tender offer or through a leveraged recap.

Alleghany’s (Y) 2012 Annual Report

Alleghany (Y) just recently posted their 2012 annual report. The past year was transformational for Alleghany as it acquired TransRe on March 6, 2012, for approximately $3.5 billion at a discount to book value. With the transaction, Alleghany more than doubled shareholder’s equity and investments per share increased by about 86%.

To summarize Alleghany’s performance:

Alleghany’s common stockholders’ equity per share at year-end 2012 was $379.13, an increase of 10.8% from common stockholders’ equity per share of $342.12 at year-end 2011.… For the five years ended December 31, 2012, Alleghany’s common stockholders’ equity per share increased at a compound annual rate of 6.1%, compared with a compound annual rate of return of 1.6% for the S&P 500 over the same time period.…

For the ten years ended December 31, 2012, Alleghany’s common stockholders’ equity per share increased at a compound annual rate of 8.8%, compared to a compound annual rate of return of 7.1% for the S&P 500 over the same time period. Alleghany’s share price appreciated at an 8.5% compound annual rate of return over the past decade (adjusted for stock dividends).

What’s always interesting in the annual report is CEO Weston Hicks’ commentary. This year, Hicks talks a little about the difference between negative-skew business that is Alleghany’s insurance operations and the positive-skew side of Alleghany, which is the investment operations (whether it’s public equities or private companies).

As primarily an insurance and reinsurance holding company, most of our capital is invested in financial businesses where the best case is that we collect premium and are able to make an underwriting profit. The worst case is that we lose a lot of money if we fail to control risk properly. This is what Nassim Nicholas Taleb refers to as a “negative-skew business.”

Because this is the essential nature of financial businesses, they must be approached with a conservative mindset and an emphasis on underwriting profit, not growth, as the only viable long-term objective.

A key part of Alleghany’s strategy is to combine this (re)insurance chassis with “positive-skew” businesses. Such businesses may operate at a loss in the near-term, but have the possibility to make large amounts if the business is successful.

Hicks then goes to summarize his investment outlook, which is unclear due to central banks purchasing assets around the world at a furious pace. The stock market looks expensive based on historical standards, but is less overvalued than the bond market. Hicks then goes on to explain Alleghany’s heavy preference for oil an gas companies in its investment portfolio.

The last topic of the letter is on Alleghany’s philosophy on compensation for executives at the holding company and the executives of the operating subs.

The whole letter is definitely worth a read. Alleghany is a great insurance company that can be purchased at book value and which ought to more than double over the next ten years.


Flagstar Found Liable for $90.1 mln in Assured Guaranty’s Mortgage Case

This was a long time in coming, but the verdict finally arrived. Judge Rakoff ordered Flagstar Bancorp to pay $90.1 million to bond insurer Assured Guaranty (AGO) in a contract dispute over loans underlying $900 million in mortgage-backed securities. Flagstar materially breached contracts specifying the quality and characteristics of the loans to be packaged into the securities.

This is very positive news for AGO and perhaps for MBI too. This ruling increases the chances of other, larger banks settling with both of these companies in similar cases.

Is Mr. Market Mistreating Coach (COH)?

Lately, Mr. Market seems to have been mistreating shares of Coach (COH). The stock has fallen from $62 to less than $49 in two weeks after sales and earnings disappointed analysts. Some people have also been making a lot of hay about Michael Kors (KORS) taking market share. However, although this is all true, these difficulties have created a potential opportunity for an investor to pick up shares in a luxury retailer at a much greater margin of safety. Another probable reason why shares have declined is investors getting rid of a stock that has gone nowhere over two years.

I don’t doubt that Coach is having greater than foreseen difficulties in regards to competition and meeting analyst expectations, but I doubt the extent to which these factors will continue to be a negative for Coach. The world is a big place and I think there is room for multiple luxury brands in many different retail categories. For example, just look at the luxury watch brands. Competition is intense between Richemont, Swatch, and Rolex, but all these companies have done quite well despite this.

Getting back to Coach, another reason to like the company is the amazing financials. 50%+ returns on equity, 40%+ returns on invested capital, 20%+ profit margins… My heart skips a few beats just thinking about it.

Anyways, one can purchase shares at a P/E of 13.7x or about an EV/FCF of 13.5x. Seems like a good bargain for a company with a strong, global brand that is likely still capable of growing everything at double-digit rates.


Bruce Berkowitz Interview

Bruce Berkowitz, managing member of Fairholme Capital Management LLC, discusses mutual-fund rules, investment strategy and his decision to close existing funds to new investors as of the end of this month. He talks with Erik Schatzker on Bloomberg Television’s “Market Makers.”

IGT Proxy Fight Website Announced

Looks like we can learn a bit more about the Ader Group’s thoughts on how they think they can improve IGT. Via their most recent proxy filing:

Jason N. Ader of Ader Investment Management (AIM) today announced the launch of WWW.RESCUEIGT.COM in connection with the Ader Group’s solicitation to elect stockholder representatives to the Board of Directors at the Annual Meeting of International Game Technology (NYSE:IGT), scheduled for March 5, 2013.

WWW.RESCUEIGT.COM will serve as a hub for IGT investors to access detailed information regarding the value destruction overseen by the current Board and management and the reasons why electing the forward-looking Ader nominees is critical to rebuilding value at the company. Investors are urged to visit WWW.RESCUEIGT.COM frequently to get updated information about the annual meeting and how they can act to ensure that the value destructive strategies of IGT’s management and board are stopped by VOTING GOLD.

Ader said, “We believe IGT is suffering from:

(i) a lack of focus on the core slot machine and systems business that we believe generated IGT’s historic success;
(ii) a lack of casino gaming industry experience in executive management ranks; and
(iii) the results of poor capital allocation decisions highlighted by a series of costly non-strategic acquisitions.”

Freedom of a Freelancer

Today was my last of work as an analyst and portfolio manager at my old employer. I’m looking forward to building up my new venture and making a go at freelance work and also managing a small number of investment accounts on my own. I’ve got a few plans in the works that investors will likely appreciate. If any RSS subscribers are still paying attention to this blog, all I can say is: STAY TUNED.

Activist Knocking on the Door of International Game Technology (IGT)

Just going through the proxy statement filed by the activist group going up against IGT‘s board and management. Things have got to be pretty bad for the former CEO, who led the company from 1986 to 2003 and who is now 84 years old, to try to make a comeback and help turn this company around. Since I don’t know much about the casino and gambling industry, I have no idea how much value can be created with a new board and new management. However, it does seem likely that a more sensible and knowledgeable management and board can stop the value destruction at the company. Here are some examples that Ader Investment Management cites as failures on the part of the board:

  • IGT purchased Entraction Holding for $113 million, which they effectively shut down less than 18 months later.
  • Just seven months after Entraction, IGT purchased Double Down Interactive—an online social network casino game developer—for $500 million. The purchase price included retention payments of $85 million to Double
  • Down’s 80 employees—an average of over $1 million per person! This acquisition puts the company in the position of competing with some of its own core slot machine and systems customers, which we believe is not in the company’s best interests. Not only did the Double Down acquisition result in a changed focus as it relates to IGT’s business strategy, it was incredibly expensive. At the time of announcement, IGT management analogized Double Down to the popular social gaming company Zynga. In the twelve months since IGT acquired Double Down, Zynga’s enterprise value has declined by more than 80%. Shareholders should ask management: Would you pay the same price today?
  • Just one month after Double Down, IGT purchased BringIt – a provider of virtual casino/arcade currency for game publishers, brands and media websites – for $10.1 million (including $2.0 million of retention payments).

Then there’s the questionable background and experience of CEO Patti Hart. Hart was director beginning in 2006 and was hired as CEO in April 2009, but her track record of creating value for shareholders is absolutely nonexistent:

  • Ms. Hart was Chairman, CEO and President of Telocity from June 1999 until April 2001. Telocity went public on March 28, 2000. By April 3, 2001, Telocity common stock had declined by 82.1% from its IPO price.
  • Ms. Hart was Chairman and CEO of Excite@Home from April 21, 2001 through the company’s bankruptcy filing in September 2001. During this period, Excite@Home common stock declined by 100%.
  • Ms. Hart was Chairman, CEO and President of Pinnacle Systems from March 2004 until August 2005. During her tenure, Pinnacle Systems common stock declined by 45.1%.
  • Following her tenure at Pinnacle Systems, Ms. Hart appears to have become a “professional board member” between 2006 and 2009. During this period, she served on the boards of IGT, Yahoo, Korn/Ferry International, Spansion and LinTV. During her respective tenures as a board member of these companies, only Yahoo experienced an increase in share price.
  • However, Ms. Hart’s most noteworthy action on the board of Yahoo appears to have been her heading the special committee that hired Scott Thompson as CEO. Mr. Thompson resigned less than five months later following an investigation of his academic credentials. During the investigation, one of Yahoo’s largest investors identified inconsistencies in Ms. Hart’s own publicly reported academic credentials. Ms. Hart resigned from Yahoo’s board shortly after these inconsistencies were publicly identified. (Granted, this was after we had gotten rid of IGT).
After looking at all of this, I’m reminded of the turmoil at Fairholme that investors might have been able to avoid by digging a bit into Fernandez’s past (he was also an executive of a failed public company if I remember correctly). The message here is that just because a person occupies an important position does not mean they have a pristine past. This is the halo effect to which humans can fall victim. Unless we are talking about Warren Buffet/Charlie Munger or John Malone/Greg Maffei who are well known and have extremely long and public track records, then nothing should be taken for granted. Every investor ought to verify the past records of CEOs and board members and perhaps they’ll be able to avoid losing money in a situation like IGT.

Pershing Square’s Website About Herbalife (HLF)

Just finished watching the video of Bill Ackman’s presentation on why Pershing Square is shorting Herbalife (HLF). You need to visit this website and submit some personal info, but it’s well worth it. The presentation is over three hours long, but I learned a lot about how multi-level marketers operate.

Ackman has said Pershing Square is short over $1 billion of the company’s shares and is absolutely convinced the company is a pyramid scheme. Apparently, Herbalife has said they are going to have their own conference to refute Ackman’s presentation. I’m really looking forward to see how this plays out, but for now, I’m definitely on Ackman’s side.