SUCCESSFUL LONG-TERM INVESTING WITH HIGH-QUALITY STOCKS FEBRUARY - PowerPoint PPT Presentation

SUCCESSFUL LONG-TERM INVESTING WITH HIGH-QUALITY STOCKS FEBRUARY 15, 2020 Susan Christ, CFA Senior Vice President - Investments Hendershot Investments, Inc. 1

INVESTMENT PHILOSOPHY We seek to buy: • HI-quality businesses • Reasonable valuations • To hold for the long term 2

What is long term? High-frequency trader = Nanosecond • Day-trader = Between Lunch and dinner • Uncle Sam = One year • Hendershot Investments > Decade • 3

Our favorite holding period is forever. Only buy something that you would be perfectly happy to hold if the market shut down for 10 years. 2/11/2020 4

HI-QUALITY COMPANY CRITERIA Durable competitive advantage • Strong balance sheet • Predictable growth • Robust free cash flow • 5

Durable Competitive Advantage Evidenced by consistently high ROEs • Opportunities for market expansion • Pricing power • COMPETITIVE ADVANTAGES = MOATS 6

Moats or Durable Competitive Advantages: In Inta tangibl ibles s • Cost t Advantag tages es • Hig igh Swi witchin tching g Costs ts • Netw twork orking ing Eff ffect • 7

In Intang tangibles ibles Patent nts s - Johnson son & Jo Johnson son Propri roprietary etary Techno nolog ogy y – Apple Strong Strong Br Brand d – Di Disney & & Pe Pepsico ico 8

Cost Advantages UPS GE GEIC ICO 9

High gh Swit itching ching Costs sts 10

Networ tworking king Eff ffect ct 11

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Warren Buffett 12

HI-QUALITY COMPANY CRITERIA Durable competitive advantage • Strong balance sheet • 13

Strong balance sheets with little or no long-term debt. The more cash and the less debt on the balance sheet, the better we like the business. Debt-free companies don’t go bankrupt! 14

Warren Buffett on debt … “Companies with large debts often assume that these obligations can be refinanced as they mature. That assumption is usually valid. Occasionally, though, either because of company-specific problems or a worldwide shortage of credit, maturities must actually be met by payment. For that, only cash will do the job. Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed." 15

Strong Balance Sheets Cash & Shareholders' Company Investments Long-term Debt Equity Apple $207.1 billion $93.1 billion $89.5 billion Booking Holdings $11.8 billion $7.5 billion $6.0 billion Facebook $54.9 billion - $101.1 billion Genuine Parts $451 million $2.8 billion $3.7 billion UnitedHealthcare $51.5 billion $36.8 billion $60.4 billion 16

HI-QUALITY COMPANY CRITERIA Durable competitive advantage • Strong balance sheet • Predictable growth • 17

Predictable growth • Sales • Earnings • Dividends 18

HI-QUALITY COMPANY CRITERIA Durable competitive advantage • Strong balance sheet • Predictable growth • Robust free cash flow • 19

Robust free cash flow Free cash flow = Cash flow a business generates from its operations less Capital expenditures to maintain and grow the business 20

Focus on Free Cash Flow Seek intelligent capital allocation by managers who use cash flow to build value for shareholders • Grow the business through strategic acquisitions Pay dividends • Buy back shares at reasonable valuations • We seek companies with the ability to do all three! 21

Focus on Free Cash Flow Yield Free Cash Flow Yield = Free Cash Flow per Share Stock Price Compare Free Cash Flow Yield to Alternative Investments 22

Focus on Free Cash Flow Company Projected Free Cash Flow Yield Apple 5.7% Booking Holdings 8.6% Facebook 7.6% Genuine Parts 6.9% UnitedHealthcare 6.3% 23

Apple designs, manufactures and markets smartphones, personal computers, tablets, wearables and accessories. It also sells operating systems, services like iCloud storage and Apple Pay, and a host of digital content from the popular iTunes store and other portals. Fiscal Year – Sept. 30 (000,000) 2019 2018 2017 2016 2015 $69,391 $77,434 $64,225 $65,824 Operating Cash Flow $81,266 (10,495) (13,313) (12,451) (12,734) Capital Expenditures (11,247) 58,896 64,121 51,774 53,090 Free Cash Flow 70,019 Acquisitions (624) (721) (329) (297) (343) Dividends (14,119) (13,712) (12,769) (12,150) (11,561) Share Buybacks (66,897) (72,738) (32,900) (29,722) (35,253)

Booking Holdings is the world leader in online travel and related services, provided to consumers and partners in over 230 countries and territories through six primary brands-Booking.com, KAYAK, priceline, agoda.com, Rentalcars.com and OpenTable. Fiscal Year – Dec. (000,000) 2018 2017 2016 2015 2014 $5,338 $4,662 $3,984 Operating Cash Flow $3,102 $2,914 (442) (288) (220) Capital Expenditures (174) (132) 4,896 4,374 3,764 Free Cash Flow 2,928 2,782 Acquisitions (273) (553) (1) (140) (2,496) Dividends - - - - - Share Buybacks (5,971) (1,828) (1,012) (3,089) (750)

Facebook, Inc. operates the world’s leading social networking service through its flagship Web site, Instagram, WhatsApp and Messenger. The company’s Web -based tools allow users to connect and communicate with each other. The company had about 2.45 billion monthly active users at 9/30/19 and generates substantially all its revenue from selling advertising placements to marketers. Fiscal Year - Dec. (000,000) 2019 2018 2017 2016 2015 $36,314 $29,274 $24,216 $16,108 Operating Cash Flow $10,320 (15,102) (13,915) (6,733) (4,491) Capital Expenditures (2,523) 21,212 15,359 17,483 11,617 Free Cash Flow 7,795 Acquisitions (508) (137) (122) (123) (313) Dividends 0 0 0 0 0 Share Buybacks (4,202) (12,879) (1,976) 0 0

Genuine Parts Company is a distributor of automotive replacement parts in the U.S., Canada, Mexico, Australasia, France, the U.K., Germany, Poland, the Netherlands and Belgium. The Company also distributes industrial replacement parts in the U.S., Canada, Mexico and Australasia through its Industrial Parts Group. S.P . Richards Company, the Business Products Group, distributes a variety of business products in the U.S. Fiscal Year – Dec. (000,000) 2018 2017 2016 2015 2014 $790 Operating Cash Flow $1,145 $815 $946 $1,159 (108) Capital Expenditures (232) (157) (161) (110) 682 Free Cash Flow 867 658 785 1,049 (288) Acquisitions (462) (1,495) (462) (163) (347) Dividends (387) (395) (387) (368) Share Buybacks (96) (181) (174) (181) (292)

UnitedHealth Group offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services. Fiscal Year - Dec (000,000) 2019 2018 2017 2016 2015 Operating Cash Flow $18,463 $15,713 $13,596 $9,795 $9,740 Capital Expenditures ($2,071) (2,063) (2,023) (1,556) (1,705) Free Cash Flow 16,392 13,650 11,573 8,090 8,184 Acquisitions (8,343) (5,997) (2,131) (1,760) (16,164) Dividends (3,932) (3,320) (2,773) (2,261) (1,786) Share Buybacks (5,500) (4,500) (1,500) (1,280) (1,200)

INVESTMENT PHILOSOPHY We seek to buy: • HI-quality businesses • Reasonable valuations 29

Reasonable Valuation After identifying a HI-quality company, the most important part of the investment equation is to only buy it at a Reasonable Price ... as the price you pay will determine your return. If you pay too high a price, even for a great company, your returns won’t be so great. 30

Reasonable Valuation Intrinsic value = present value of the future discounted cash flows that can be taken out of the business over its lifetime. We’d rather buy a great business at a fair value, rather than a fair business at a great value 31

Wisdom of Great Investors The three most important investing lessons are: 1. Think of a stock as part of business and seek to own a group of high-quality businesses. 2. Use the stock market to serve you, not to instruct you. 3. Always buy with a margin of safety. 32

Wisdom of Great Investors The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists. Benjamin Graham 33

Mr. Market’s emotional roller -coaster 34

Wisdom of Great Investors Be fearfu Be rful l wh when others ers are greedy dy. . Be Be greedy dy when other ers s are fearfu rful. l. Warren Buffett 35

Wisdom of Great Investors The investor’s chief proble lem — an and d his worst st enemy — is is likel ely y to be himself elf. In the end, , how w your r inves estmen ents ts behave ve is much less s importa rtant nt than n how w you behave ve Benjamin Graham 36