Rakesh Jhunjhunwala buys 2.3% more of Infomedia

RJ has on 13^th April, 2007 brought 2.3% or 4.5 lakh shares of Infomedia India Ltd (according to bulk deal data provided by BSE). This brings his total stake in Infomedia to 7.7% (refer Investments of RJ as on 31^st Dec’06).

This is an interesting and a classic RJ buy. Let’s see why:

1. Infomedia has remained an underdog compared to most benchmarks, returning far less. Also the company has not been able to scale up in spite of a huge and profitable opportunity.

2. In spite of all the above, Infomedia has certain key strengths, which might have appealed to the investor:

a. Company is a leader in yellow pages business, which provides it with a huge moat around this highly profitable and low capial intensive business.

b. The yellow pages business is highly scalable (company can start such ventures in each and every town of India).

c. Such a business has a tremendous pricing power, once it is established (much higher than a dominant newspaper)

d. The company is also all set to exploit the opportunity presented by the growth in Special Interest Publications (SIP) in India

e. Finance is not a constraint for the company (it had cash of about Rs.50 crore or Rs.25 per share in balance sheet as per March 2006 balance sheet).

f. The majority stake (63%) of Infomedia is held by ICICI Ventures, which itself is primarily an investor

g. Excluding cash, it trades at a multiple of 27x


Thus Infomedia has all the making of a classic RJ buy viz., huge size of opportunity (yellow pages, SIP), scalability (launch of yellow pages in new towns) and a reasonable price (Infomedia is currently in investment mode, hence depressing its short-tem earnings, making P/E based valuation appear deceptively expensive).

Warren Buffett announces a 10.9% stake in Burlington Northern Santa Fe Corp (BNSF)

Warren Buffett's Investment vehicle - Berkshire Hathaway - disclosed in a regulatory filing that it held 10.9% stake in Burlington Northern Santa Fe Corp (BNSF), worth about $3.4 billion at current price of $88.08. Burlington Northern Santa Fe Corporation (BNSF), through its subsidiaries, is engaged primarily in the freight rail transportation business. BNSF's key business is to transport a range of products and commodities derived from manufacturing, agricultural and natural resource industries.

BNSF’s subsidiary BNSF Railway Company operates one of the largest North American rail networks, with about 32,000 route miles in 28 states and two Canadian provinces. BNSF Railway Company is among the world’s top transporters of inter-modal traffic, moves more grain than any other American railroad, carries the components of many of the products we depend on daily, and hauls enough low-sulphur coal to generate about ten percent of the electricity produced in the United States.

For 2006, BNSF achieved operating revenues of nearly $15 billion, a 15-percent increase over 2005, which includes double-digit increases in each of the Company’s four business groups. The increase in revenues and an improvement in the Company’s operating ratio enabled BNSF to reach $3.5 billion in operating income, an increase of 20 percent over 2005. As a result, BNSF achieved $5.10 earnings per diluted share for 2006 compared with $4.01 for 2005.

Conclusion:
The buy doesn’t appear to be a classic Buffett pick, as the stock of BNSF is already near its all-time high and does not appear to be a contra bet. However it does have an economic moat in the form of an infrastructure which is difficult to replicate and is much more costly that its book value (Book value of Property, Plant and Equipment in BNSF books was at $27.6 bn, which is at historical asset, current market value of which could be substantially higher). The stock is trading at a trailing twelve months earnings multiple of 17.3x earnings, which appears reasonable for a company which generates a RoE of about 19%. The book value of the stock stands at $28.11 per share, resulting in to a price-book ratio of 3.13x.

Bill Miller Q4 2006 Commentary: Discussing reasons for the 15 year streak.

Excerpts from Q4 2006 commentary of Bill Miller of Legg Mason Value Trust:

According to Bill Miller (BM) there were two fold reasons for his outperformance:
1. Security Analysis
2. Portfolio Management


Security Analysis:
BM highlights the following key factors related to security analysis:
1. Valuation is inherently uncertain, since it involves the future. However, in spite of this uncertainty, he states that 100% of the value of a stock is determined by its future (though this may be an exaggeration, as large number of asset play stocks have more than 50% of their value derived from their past, i.e., assets creation, which resides in their balance sheet)

2. According to BM, the market discounts whatever information is already available regarding the stock into its price (called as market efficiency). However, there are sometimes, when this ‘discounting’ may be optimistic, while other times it may me pessimistic, giving opportunities to create value for patient investors. BM tries to take advantage of such anomalies in his portfolio. Thus he buys things other people hate, like Kodak, or companies that they think will never conquer their problems, like Sprint. Sometimes it involves owning things people don’t understand properly, such as Amazon, where investors wrongly believe today’s low operating margins are going to be the norm for years.

Portfolio Construction:
1. BM constructs portfolio in a way that is defined in portfolio theories, i.e., on a risk-adjusted rate of return basis.

2. According to BM, a key reason for his streak has been factor diversification, which means he owns a mix of companies whose fundamental valuation factors differ. Thus BM portfolios have high PE and low PE, high price-to-book and low price-to-book. According to him, most investors tend to be relatively undiversified with respect to these valuation factors, with traditional value investors clustered in low valuations, and growth investors in high valuations.

3. According to BM, although funds are subject to requirements regarding diversification by industry or company, they do not have to be diversified by factor, that is, by PE ratios, or price-to-book, or price-to-cash flow. And it has been seen that they mostly are not: value funds tend to have almost all their money in low PE, low price-to-book or cash flow, and growth funds have the opposite. Thus, sometimes growth funds beat value funds and the market, as from 1995 through 1999, and sometimes value funds beat growth funds, as from 2000 through 2006, whereas BM funds which are factor diversified tend to do well in both markets.

Warren Buffet 2006 Common Stocks Portfolio Analysis

1. The real growth in the value of common stocks (excluding purchases and sales during the year) was 17%.
2. Growth in market value of new scripts purchased during 2006 was at 35%
3. The market value of the total common stock portfolio increased to US $61.5 bn, an increase of 32% over previous year, while the cost increased by 44% to US $23 bn.
4. Allocation to stocks present as on Dec’05 increased 5.3% (cost of those stocks increased from $10.8 bn to $11.4 bn. The market value of such stocks (including fresh purchases increased by 18.7% to $45.4 bn. These ‘old’ stocks formed about 74% of the total market value of the portfolio.
5. The largest old position in terms of portfolio weight was The Coca Cola Company, followed by American Express Company.
6. Among the stocks finding their entry in to the portfolio in Calendar year 2006, the highest gain was recorded by POSCO at 102%, and the lowest by Johnson & Johnson at 13%.
   

Latest ddition to stocks in Buffett's (Berkshire) Portfolio in 2006:

Figures in $ mn
No.	Name	Cost	Mkt Value	% weight	% chg
1	Conoco Phillips .	1066	1,291	17%	21%
2	Johnson & Johnson	1250	1,409	18%	13%
3	POSCO	572	1,158	15%	102%
4	Tesco .	1340	1,820	24%	36%
5	US Bancorp .	969	1,123	15%	16%
6	USG Corp	536	936	12%	75%
	Total 'New' Common Stocks	5733	7737	100%	35%