The Three Most Dangerous Words in Investing, An Update on AIG & Berkshire, Lessons from Netflix, and Two New Ideas: Spark Networks & Hertz Whitney Tilson Value Investing Congress May 7, 2013
Kase Capital Management Manages Hedge Funds and Mutual Funds and is a Registered Investment Advisor Carnegie Hall Tower 152 West 57th Street, 46th Floor New York, NY 10019 (212) 277-5606 WTilson@KaseCapital.com
Disclaimer THIS PRESENTATION IS FOR INFORMATIONAL AND EDUCATIONAL PURPOSES ONLY AND SHALL NOT BE CONSTRUED TO CONSTITUTE INVESTMENT ADVICE. NOTHING CONTAINED HEREIN SHALL CONSTITUTE A SOLICITATION, RECOMMENDATION OR ENDORSEMENT TO BUY OR SELL ANY SECURITY OR OTHER FINANCIAL INSTRUMENT. INVESTMENT FUNDS MANAGED BY WHITNEY TILSON HAVE POSITIONS IN MANY OF THE COMPANIES DISCUSSED HEREIN. HE HAS NO OBLIGATION TO UPDATE THE INFORMATION CONTAINED HEREIN AND MAY MAKE INVESTMENT DECISIONS THAT ARE INCONSISTENT WITH THE VIEWS EXPRESSED IN THIS PRESENTATION. WE MAKE NO REPRESENTATION OR WARRANTIES AS TO THE ACCURACY, COMPLETENESS OR TIMELINESS OF THE INFORMATION, TEXT, GRAPHICS OR OTHER ITEMS CONTAINED IN THIS PRESENTATION. WE EXPRESSLY DISCLAIM ALL LIABILITY FOR ERRORS OR OMISSIONS IN, OR THE MISUSE OR MISINTERPRETATION OF, ANY INFORMATION CONTAINED IN THIS PRESENTATION. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND FUTURE RETURNS ARE NOT GUARANTEED. -3-
The Three Most Dangerous Words in Investing: “I Missed It” • The “I Missed It” phenomenon is the emotional mistake of looking at a stock that’s moved up a lot and, sometimes subconsciously, saying to yourself, “Rats, I missed it,” and doing no further work on it I know people who looked at Berkshire Hathaway, after it had run from $100 to $1,000 (and $1,000 to $10,000, and $10,000 to $100,000) who fell into this trap I talked to a number of people in recent days who started doing research on Netflix after my presentation last October, but then when Carl Icahn filed on the stock on October 31 st and it ran from the low $60s to almost $80 in two days, fell into this trap and didn’t buy (it’s nearly tripled since then) • Therefore, anytime you hear yourself saying “I missed it,” STOP! Re -do your work, ignore the historical price, and focus on the only question that matters: is the stock, at today’s price, an exceptionally attractive investment? If so, BUY IT! • I am going to present five stocks today, all of which are at multi-year or all-time highs right now • Despite this, I not only own them, but if I were starting a new portfolio from scratch today, I would buy them -4-
AIG: From Restructuring Story to Turnaround/Demutualization Story
AIG Since We Presented It A Year Ago at the Value Investing Congress in Omaha Source: Factset, Bernstein research report, 5/1/13. -6-
AIG Today Is Dramatically Simplified, Consisting of Two High-Quality Global Franchises AIA/ DTAs/ Other • Today AIG is a leading, financially sound AI G 2 0 1 1 Revenue 100% Mortgage multi-line insurance company focused on Guaranty Aircraft Leasing Retirement its core businesses Services 80 SunAmerica Life Insurance • High-quality, market-leading franchises Other 60 Consumer in both property & casualty insurance Insurance (Chartis; now “AIG Property Casualty”) 40 Chartis and US life & retirement (SunAmerica; Commercial 20 Insurance now “AIG Life & Retirement”) account for ~90% of revenue 0 Line of Business -7-
Slide from Glenn Tongue’s Presentation, 10/2/12 Catalysts • The overhang of the US Treasury ownership is nearly gone • Additional sales of non-core assets • ROE expansion and operating improvements in core business driven by restructuring initiatives, price increases and an improving insurance market • Use of appropriate leverage to boost returns (AIG has a low debt-to-capital ratio versus peers) • Offense vs. defense: going forward, AIG can focus growing its business and allocating its strong cash flows instead of selling assets and managing government ownership • Additional buybacks and initiation of dividend likely • Fading of institutional taint -8-
Slide from Glenn Tongue’s Presentation, 10/2/12 Catalysts Five of the six catalysts have occurred/are occurring The overhang of the US Treasury ownership is nearly gone Additional sales of non-core assets ROE expansion and operating improvements in core business driven by restructuring initiatives, price increases and an improving insurance market • Use of appropriate leverage to boost returns (AIG has a low debt-to-capital ratio versus peers) Offense vs. defense: going forward, AIG can focus growing its business and allocating its strong cash flows instead of selling assets and managing government ownership Additional buybacks and initiation of dividend likely Fading of institutional taint -9-
AIG Has Made Enormous Progress Since the Beginning of 2012 • $20+ billion in asset sales $5 billion more when the sale of ILFC is completed (expected in the next two months) • A complete exit of the Treasury’s 77% stake • New public investors bought $32 billion of stock • AIG repurchased $13 billion of its own stock at half of book value Reduced share count by 22% Added 11% to book value One percentage point accretive to ROE and 23% to EPS by 2015 • The next catalyst, which I expect later this year, is the initiation of normal corporate program of returning capital to shareholders in the form of a dividend (2%?) and a robust ongoing share repurchase program • Despite all of this progress, the stock’s valuation has barely moved over the past year, from 0.55x book to 0.66x -10-
AIG Just Reported Q1 ‘13 Earnings • EPS beat consensus by more than 50% • Insurance operating income up 28% • Combined ratio (adjusted) of 97 down 3 points year-over- year and significantly better than consensus • The first favorable reserve development in three years in North American P&C • Book value per share rose 17% YOY to $67.41 Excluding accumulated other comprehensive income (AOCI), book value rose 12% YOY to $59.39 • At $44.60, the stock is trading at 0.66x book (0.75x book excl. AOCI) -11-
AIG’s Combined Ratio Is Far Higher Than Its Peers – But Not for Long We Think We Share Bernstein’s Better -Than-Consensus View Source: Factset, Bernstein research report, 5/1/13. -12-
AIG’s Intrinsic Value is ~21-76% Higher Than Today’s Price • Our sum-of-the-parts valuation yields a value of ~$54 to ~$79 per share, a 21%-76% premium to today’s price • We also forecast normalized AIG earnings at ~$5-6 per share, suggesting AIG is trading at ~7-9x AIG Valuation Estimate Book value @ Value low Value high March 31, 2013 ($B) Multiple range ($B) ($B) AIG Property Casualty (Chartis) $49.67 0.9 - 1.3 $44.71 $64.58 AIG Life & Retirement (SunAmerica) $40.43 0.7 - 1.1 $28.30 $44.47 United Guaranty $2.32 0.7 - 1.0 $1.63 $2.32 International Lease Finance Corp (ILFC) $4.80 Acquisition value $4.80 $4.80 Total equity ($B) $79.43 $116.17 Total shares outstanding (B) 1.48 1.48 Intrinsic value per share ($) $53.80 $78.68 Current price $44.60 Upside: 21% 76% Note: excludes 'other' deferred tax assets Note: Excludes “other” deferred tax assets. Source data: AIG supplemental financials Q1 ’13, Kase Capital estimates. -13-
Management Incentives Finally Aligned • The key to understanding why this is such a great investment is rooted not in financial analysis, but rather management incentives • When the government was a shareholder (from late 2008 until just a few months ago), management wanted to buy out the government as quickly and cheaply as possible; in addition, AIG’s pay practices were severely restricted • Thus, in recent years AIG’s management has been incentivized to depress earnings and keep the stock price low so: a) the government could be bought out at a low price; and b) management’s options would be struck at a low price I can’t prove it, but I suspect AIG has been sandbagging reported earnings by over-reserving, paying claims extra fast, and taking their time returning capital to shareholders • Once the government was bought out, AIG adopted a normal corporate incentive plan, including a big stock option package for senior management • Now, management’s incentives have reversed and we think AIG’s results will be spring-loaded over the next year, which should drive substantial share price appreciation -14-
AIG in 2013 Looks Like MetLife in 2000 • “Just as in the demutualizations of the early 2000s, management at AIG has sold stock to the public from its previous owners at a low price, still enjoys the benefits of low expectations, and in 2013, with the Treasury finally gone, management will be incented to begin to realize the value of the substantial capital and earnings initiatives underway that will power their multi- year re- rating.” • “But beyond even the parallels, with AIG’s own CEO Bob Benmosche having let MET through its demutualization and stellar post-IPO performance, using a nearly identical approach, we think his playbook, and the opportunity for investors, couldn’t be more clear.” Source: SNL Financial, company data, Bernstein research report, 1/28/13. -15-
Berkshire Hathaway: A High-Quality, Growing, 85-Cent Dollar
Berkshire’s Stock Has Been on a Tear Over the Past Year Source: BigCharts.com. -17-
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