[From The Archives] Tom Gayner 2011 Value Investor Insight Interview – Part Three

July 10, 2015

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By Rupert Hargreaves. Originally published at ValueWalk.

Tom Gayner: Position analysis

After discussing Tom Gayner’s investment process, the Value Investor Insight’s interview moved on to discuss Markel’s equity portfolio, picking out four key investments; Wal-Mart, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), Intel Corporation (NASDAQ:INTC) and Nestlé. (At the end of Q1 2015 Markel still held a position in Wal-Mart, Berkshire and Intel. Nestlé had been sold)

Gayner picked each of these companies for specific reasons. He gives a run-down of these reasons in the interview.

Tom Gayner: Investment returns

Wal-Mart was picked for its record of financial performance:

“Very few companies earn the returns it does on such a giant capital base, which is a credit to the talent of its management and to what I consider its “it” factor, which is an extensive distribution system in the U.S. – and increasingly around the world – that delivers products to customers at the lowest cost. That’s competitively very difficult to displace and provides the company with a worldwide platform for continued growth.”

Berkshire was picked for its valuation, Gayner’s sum-of-the-parts valuation placed on each part of the business showed that at the time, Berkshire was trading at a significant discount to where it should be.

“I break the business into three parts, insurance, investments and the other operating companies. For the insurance business, which is currently relatively soft but is well-positioned and well-run, I look at the level of insurance premiums running through the business and assume at the low end that it breaks even on an underwriting basis, in the middle range makes 4-5 points of underwriting profit and at the high end makes 8-9 points. For the investment portfolio, I assume it earns from 3% at the low end up to 10-12% at the high end. For the operating businesses, I look at the actual cash flow produced over the past three years and overlay my expectations over the next few years to get a range of possible normalized earnings.

On all of that, I apply 10x, 14x and 18x earnings multiples to arrive at a fair value range for the company overall.”

Of course, on top of this valuation Tom Gayner placed a high value on Berkshire’s management team:

“…Buffett has built an incredible capital allocating machine and set of operating businesses that should prosper for a very long time…over the next several decades there will be a series of top executives at Berkshire Hathaway whose names probably won’t be on the tips of everyone’s tongue, but that doesn’t mean the company won’t continue to thrive…The assets and the capital discipline won’t go away when Warren Buffett is no longer in charge.”

Nestlé was a pure valuation play:

“Nestlé’s shares have been stuck in the 14-15x earnings range for quite a while. To me, it’s a way-above average company trading at an average price…

Even with no increase in the multiple, I’m earning a 3.6% dividend yield and should see earnings grow on a per-share basis in the high single-digits per year. That would produce a double-digit annual return on the stock. If you look at something like this against a Treasury bond, the risk/reward strikes me as highly favorable.”

And Tom Gayner purchased Intel using a similar thesis:

“This is the leading company in the world at what it does, with 35% operating margins and earnings that grew in the latest quarter by 30%. What it does is and is likely to remain in high demand. But the stock trades at 10x trailing earnings and has a 3.4% dividend yield. It’s hard for me to imagine ten years from now considering that as anything but an incredible bargain.”