Archive for the ‘Uncategorized’ Category

Market leader in diabetes medication hits two-year low; Novo Nordisk (NYSE: NVO) shares reach $34

In Investment ideas, Uncategorized on November 7, 2016 at 7:38 pm


By any metric, Novo Nordisk (NYSE: NVO) , the world leader in diabetes medication, is an outstanding company. It commands a 28% global market share in diabetes drugs, one of the largest buckets within specialty pharma. Returns on shareholder’s equity last year was a whopping 45%.

The company is also growing fast. Over the last decade, annual growth rates for revenue and operating income were 15% and 23%, respectively.

Novo is very focused on just four disease areas: diabetes (79%), obesity (<1%), hemophilia (10%) and growth disorders (11%).


Diabetes is clearly its major focus. Diabetes is a medical condition that has affected mankind for millennia. It is currently experiencing rapid growth due to the lifestyle factors associated with modern urban life: western diet and lack of exercise. Type 2 diabetes, also known as adult onset diabetes, makes up 90% of the diabetes market. There is no cure for this condition except purchasing expensive insulin products from Novo, Sanofi and other drug companies.

As India and China urbanize and develop a middle class, there could be a large pool of new customers. Even the United States is a great growth opportunity; according to the American Diabetes Association and the CDC, if current trends continue, 1 in 3 American will have diabetes by 2050.

Novo is highly profitable. Last year, gross margins were 85%. Operating margins were 45%; that is an incredible number and beats almost anything I’ve seen (Coca-Cola’s is 20%, Starbucks’ is 19%, Walmart’s is 5%).

Due to pricing pressures in the US and European markets, management has reduced long-term revenue and operating income targets to 5% from 10%. This is a very sharp reduction and has led to a steep drop off in the share price. Shares reached a two year low today at close to $34.

At this price, the trailing 5-year P/E is 22x (a little pricey) and the forward 2016 P/E is 15x (quite reasonable). The shares sport a 2.79% dividend yield.

Based on my analysis, long term total returns on common shares (share price appreciation plus dividends) are expected to be 10-11% going forward. However, if shares are purchased below today’s prices or growth exceeds the new 5% target (quite possible), your results could be even better.


Berkshire 2016 AGM Q&A

In Investment Theory, News, Uncategorized on June 8, 2016 at 10:03 pm
Berkshire Hathaway 2016 Annual Meeting

Berkshire Hathaway 2016 Annual Meeting

The annual “Woodstock” of capitalism, Berkshire Hathaway’s annual shareholders meeting was held in Omaha, Nebraska on Saturday April 30, 2016. The meeting was open only to investors in the Company and required meeting credentials to attend. But for the first time ever, Berkshire decided to live stream the event via Yahoo! Finance. You can watch the whole thing from the comfort of your living room right here:

And, as been the case for the last few years, some wonderful soul has painstakingly recorded every word said and made the full transcript available for download. Check that out here:

The highlight of the meeting is a six hour question and answer period with the Chairman and Vice-Chairman, Warren E. Buffett and Charles T. Munger. These are two of the brightest minds in investing. The Q&A session is entirely unscripted and shareholders from around the world who attend the meeting can ask almost anything they want. For six long hours, Warren and Charlie do their best to answer these questions whilst sipping Cherry Coke and munching on See’s peanut brittle.

Some abridged highlights:

Q: “In your 1987 letter to shareholders, you commented on the kind of companies Berkshire liked to buy: those that required only small amounts of capital. You said quote; “Because so little capital is required to run these businesses, they can grow while concurrently making almost all of their earnings available for deployment in new opportunities.” Today the company has changed its strategy. It now invests in companies that need tons of capital expenditures, are over regulated, and earn lower returns on equity capital. Why did this happen?”

A (Warren): “Well, it’s one of the problems of prosperity. The ideal business is one that takes no capital but yet grows. There are a few businesses like that and we own some, but we’d love to find one that we can buy for $10bn/$20bn/$30bn that was not capital-intensive and we may, but it’s harder and that does hurt in terms of compounding earnings growth. Obviously, if you have a business that grows, gives you a lot of money every year, and it isn’t required in its growth, you get a double-barrel effect: from the earnings growth that occurs internally without the use of capital, and then you get the capital it produces to go and buy other businesses.

A (Charlie): “Well, when circumstances changed, we changed our minds. In the early days quite a few times, we bought a business that was soon producing 100 percent per annum on what we paid for it and didn’t require much reinvestment. If we’d been able to continue doing that, we would have loved to do it. But when we couldn’t do it we went to Plan B. Plan B’s working very well…”

Q: “You’ve explicitly stated that you’ve not considered diversity when hiring for leadership roles in board members. Does that need to change?”

A (Charlie): “Years ago, I did some work for the Roman Catholic Archbishop of Los Angeles. And my senior partner pompously said, you know, you don’t need to hire us to do this. There’s plenty of good Catholic tax lawyers. And the Archbishop looked at him, like, he’s an idiot and said, Mr Peeler, he says, ‘last year, I had some very serious surgery and I did not look around for the leading Catholic surgeon’. That’s the way I feel about board members.”

Q: “With the rise of and others, there’s been a shift from push marketing to pull marketing – from millions of catalogues having been sent out in the past, to consumers now searching online for what they are looking for. What is your take on how this shift [affects Berkshire]?  ”

A (Warren): The development is huge – really huge – and it isn’t just Amazon. Amazon is a huge part of it and what they’ve accomplished in a fairly short period of time, and continue to accomplish, is remarkable.

We don’t make any decision involving even the manufacturing of goods, the retailing, or whatever it is without thinking long and hard about what the world will look like in five, ten, or 20 years. With that hugely powerful trend that you just described, we don’t look at that as something where we’re going to try and beat them at their own game. They’re better than we are at that.

The effect of Amazon and others that are playing the same game…the full effect on the industry is far from having been seen. It is a big force, which has already disrupted plenty of people and it will disrupt more.




Victim of Change: Blockbuster Inc.

In Uncategorized on June 26, 2011 at 9:14 pm

The Blockbuster store near my house closed this week. It wasn’t a complete surprise – I knew it was coming. We’d all heard the talk about the death of the video store. The parent company filed for bankruptcy in September of last year. Still it was something to see the empty shelves and ‘for lease’ sign. The end of an era I thought. I have fond memories of the time I’ve enjoyed over the years at the video store.

I think the learning lesson here is that all businesses and industries have a finite life. Whether it’s newspapers or Yoga wear, everything comes to an end. In the case of Blockbuster, it didn’t make it much past age 25. The company was started in 1985 and grew through the 1980s as consumers adopted home VHS machines and Nintendo game systems.  The company grew rapidly through organic growth and acquisitions. It had worldwide operations including in the United States, Canada and the UK.

In the recent decade, the Internet facilitated superior alternatives to the video rental business. Consumers could rent movies online through Netflix and Itunes, watch them through video-on-demand or download them for free. This made the video store an inconvenient and outdated option. A clip from parody news website, The Onion, sums it up.

I hope shareholders managed to get some dividend payments when the going was good.

Profit When The Tax Man Cometh: H&R Block

In Uncategorized on December 16, 2010 at 8:48 pm

Tax season is a months away and most people would rather focus on Christmas right now. Retailers are the companies that everyone is talking about. How good will Q4 be for Nordstrom’s? How much will Amazon grow this quarter over last year? But you might be rewarded for taking a quick look at H&R Block.  Its stock has gotten pretty beat up this year and now sports a 4.6% dividend yield.

Taxes are a constant and unavoidable fact of life in developed nations. Income taxes even for fairly normal family situations have complications and wrinkles that require the expertise of a professional tax preparer. This is where H&R Block plays. The Company is the largest tax preparer in the United States – it prepares 15.6% of all U.S. personal tax returns.

It hires low paid seasonal staff (retired people, stay at home moms), trains them well and runs a tight, efficient operation. Some of the Company’s operations are franchised, offering solid cash flow with almost no capital investment. The Company has extended its brand into software and online services to compete in the digital do-it-yourself market (where it competes with Intuit).

The Company also operates a Business Services segment (22% of revenue) which includes accounting firms RSM and McGladrey and Pullen. These firms provide tax and consulting services, wealth management, and capital markets services to middle-market companies.

The Company generates strong “owner earnings” (cash flow from operations less capex/acquisitions) and returns on capital. It requires little in the way of capex and acquisitions leaving lots of money to return to shareholders through dividends and stock buybacks. Growth isn’t great but will keep pace with inflation. By my calculation, normalized owner earnings are around $425m. Based on this and the extra cash on the Company’s balance sheet, I believe the stock is a buy at or below $13.50 per share (market cap of $4165m) for a long term investor. At this price, returns should be superior to those offered by the general market.