Blackmores and Campbell Brothers: Why I like them

Two companies that I have admired for a long time are Blackmores (BKL) and Campbell Brothers (CPB). Both companies have been listed on the ASX for many years and have excellent track records.

Blackmores is a manufacturer of high quality dietary supplements and Campbell Brothers derives most of its profits from the provision of consulting and analytical laboratory services.

Let’s look at some financial statistics:

Statistic	Blackmores	Campbell Brothers
Average 10 year Return on Equity	31.7%	13.5%
Average 10 year Price-Earnings Ratio	16.8	15.1
Current Price-Earnings ratio*	11.7	10.0
Price-earnings ratio based on forecast 08-09 earnings	11.7	7.8
Average compound growth in earnings**	16.6%	17.2%
Debt-to-equity ratio (as at last reporting date)	75%	73%
Current dividend yield*	6.5%	6.02%
Current dividend payout ratio (07-08 year)	69%	76%
Current share price*	$13.85	$18.27
Approximate market capitalization*	$224m	$961m

* As at 9 January 2009.

** 30 June 1999 to 30 June 2008.

A number of interesting things are apparent from the above table:

1. Both companies have exceptional growth rates over the nine year period;

2. Both companies have maintained exceptional growth rates while also maintaining a high dividend payout ratio;

3. The current dividend yields are attractive compared to bank interest rates (note that CPB’s dividend is 50% franked);

4. The current price-earnings ratios are well below historical averages;

5. Debt is a bit on the high side for both companies (but appears manageable);

6. Blackmores has maintained an outstanding return on equity over the 10 year period (although that is likely to be because its equity is understated, i.e. it has not valued brand names etc that clearly have significant value).

Campbell Brothers has forecast huge earnings growth of 70% for 2008-09 (when so many other companies are forecasting earnings declines). Blackmores’ earnings are likely to be flat for 2008-09.

Neither of these companies were included in The Stock Scribe portfolio because they would not have passed one or two of the filters specified by Benjamin Graham. But this is ok. Investors do need to use a degree of judgment in what they do. I’m willing to be somewhat flexible with companies that have very long and successful track records.

While it would be imprudent to expect that the growth rates achieved for both companies over the last decade or so will be repeated over the next decade, it would be reasonable to assume that some level of growth will take place. The multiples that these companies are currently selling at imply that there will be little or no growth and this seems unlikely based on each company’s past record.

Whenever you are contemplating an investment always ask yourself: “What can go wrong?”

One thing that you should be aware of with companies that manufacture food products or drugs is that they always carry a special risk – the possibility that if there is a scare associated with a “bad” batch of a particular product it has the potential to destroy the business. I would definitely not expect that any such thing would happen with Blackmores, but it is something the investor needs to be cognisant of.

Something else to note is that Campbell Brothers has significant intangible assets on its balance sheet. If we were to calculate the debt-to-equity ratio using only tangible assets it would be 220% - very high. Given Campbell Brothers very long history and reputation, it is likely that those intangibles are valued appropriately (although we can’t say that for sure).

Both companies trade low volumes of shares - something which investors need to be mindful of.

So what are these two companies worth?

I will say that in my opinion (and it’s my opinion only), Blackmores is worth approximately $18 and Campbell Brothers is worth approximately $23. That makes for an interesting situation at prices prevailing in early January 2009.

Note: None of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).

Snowball: Things you never knew about Warren Buffett

There are 11 books sitting on my book shelves that are about Warren Buffett – some of them I bought, others were given to me.

Sometimes I have been asked what the best book ever written on Warren Buffett is and I have always said that it’s Roger Lowenstein’s 1995 book: Buffett: The Making of an American Capitalist. However this is no longer true.

I was lucky enough to have been given a copy of The Snowball: Warren Buffett and the Business of Life (by Alice Schroeder). This book is that much better than Lowenstein’s book simply because Buffett, his family and his friends cooperated with Schroeder on the writing of the book.

Schroeder interviewed Buffett over the course of five years for this book and this brings many insights to the reader that are absent from all the other books written about Buffett.

As Buffett is never going to write an autobiography, this book is as close as we are going to get to an autobiography.

Schroeder clearly (but gently) exposes the flaws and genius in Buffett.

Buffett’s family have had their fair share of problems. For example, all of Buffett’s children have had failed marriages and all of them are college drop-outs, some members of his extended family have suffered from mental illness and there has even been the odd suicide in the family. Buffett himself engaged in shoplifting as a teenager.

This is no Brady Bunch family - as many other authors have portrayed it to be. Every family has its problems and the Buffetts are no different to anyone else.

Buffett does come out looking like a rather one dimensional character – obsessed with making money, with his only other interest seemingly being the card game Bridge. This is not really surprising – the vast majority of people who have achieved excellence in their chosen field are fanatical about it, you don’t get excellence any other way.

Buffett’s diet consists of coke, hamburgers, steaks, hash browns, peanuts, ice cream and popcorn (this of course has been well documented elsewhere). Most of these foods (if eaten continuously) are not exactly conducive to longevity and it’s even more surprising when one considers that Buffett has always been obsessed by his own mortality.

In 1989 Buffett was invited to dinner by Akio Morita, the chairman of Sony. Morita had his chefs serve sushi (many courses of it) and Buffett sent every course back without even having tried it. Buffett felt embarrassed about this but even then he could not bring himself to try some of it – this simple example shows an inflexibility that extends far beyond food.

When his sister Doris ended up owing a few million dollars in the wake of the 1987 stock market crash (she had been playing around with derivatives), Buffett refused to clear her debts. He did eventually help her out in a roundabout way, but in his position, I would have helped my sister – most people would have. Whether it was sushi or his sister, he was not prepared to bend his own rules.

He is a person who easily and quickly develops strong emotional attachments to certain people – the late Katherine Graham (no relation to Benjamin Graham), Charlie Munger, Bill Gates, Carol Loomis and Sharon Osberg to name a few. In fact, Buffett is more attached to some of these people than to certain members of his own family.

The whole Salomon debacle (Buffett invested $700m in the 1980s in this now long gone investment bank) occurred primarily because he liked Salomon’s John Gutfreund (they later fell out). Had Buffett known what he was getting into, he would never have touched Salomon.

Many other books do not mention (or gloss over) the failed investments that Buffett has made (there are not too many of them, but they do exist). Dexter Shoe is the most unfortunate investment Buffett has made (up to now).

The book has all sorts of little revelations in it, for example, who knew that Berkshire Hathaway shareholders have been known to steal from some of the stalls set up to promote Berkshire’s businesses at the annual meeting? Who knew that Bono (from U2) was a good friend of Buffett’s daughter Susan and was one of the few non-family members to attend Buffett’s (first) wife’s funeral?

As is normal for this type of book, lots of Buffett wannabes will scour it for some blinding investing insight that they can take away and use to great effect. For me, the best paragraph in the book concerning investing relates to Buffett’s purchase of more than $1 billion of Coca-Cola stock in the late 1980s:

“Buffett applied a margin of safety to his estimates. He did this simply by taking a whack at the number, rather than using some complicated model or formula. He used no computers or spreadsheets in doing any of these calculations; if the answer didn’t hit him over the head like a caveman’s club, in his view, the investment wasn’t worth making.”

No spreadsheets, no computers, no models, no secret formulas – just some basic arithmetic, some historical information and some good judgment – that’s it. It’s as close as you will get (or need to get) to what Buffett does.

Schroeder’s book is 969 pages long (with the index and notes) - it’s one of the largest books I have ever seen. However, it didn’t feel long because Schroeder held my attention all the way through – she has done a superb job. I highly recommend it to you.

Update on my portfolio selected using Graham’s techniques

On 5 December 2008, I selected a portfolio of 11 stocks using techniques detailed by Benjamin Graham in his book The Intelligent Investor (see the original post here).

The initial portfolio value was $1 million with approximately $90,909 invested in 11 companies as follows:

Company	Buy Price	No. of shares	5-Dec-08 Value	2-Jan-09 Value
Caltex	$6.18	14,710	$90,908	$106,206
Harvey Norman	$2.35	38,685	$90,910	$102,515
Soul Pattinson	$8.33	10,913	$90,905	$100,400
Sims Metal	$11.74	7,744	$90,915	$137,611
Flight Centre	$8.30	10,953	$90,910	$95,072
Hills Industries	$2.90	31,348	$90,909	$95,925
Beach Petroleum	$0.75	122,026	$91,520	$114,094
ASX	$31.60	2,877	$90,913	$95,027
Austereo	$1.11	82,271	$91,321	$102,016
WA Newspapers	$4.70	19,342	$90,907	$104,253
Milton Corporation	$14.02	6,484	$90,906	$93,953
Total			$1,001,024	$1,147,072

As can be seen above, as at 2 January 2009 this portfolio had appreciated by 14.6% to $1,147,072. The All Ordinaries Index had appreciated by 6.7% over the same period. So I’m well ahead of the index (for the time being anyway!).

I noted in my original post that ASX, Austereo, WA Newspapers and Milton Corporation were not selected using Graham’s methods – most of those companies are much more to Warren Buffett’s tastes than Benjamin Graham’s. However, I do have confidence in those companies at the prices that were paid above.

It’s pleasing to see a fairly even contribution by most of the companies. The return was not achieved by one company increasing very significantly in value. Sims Metal (up 51.4%) and Beach Petroleum (up 24.7%) were the stand outs but very good contributions were also made by Caltex, Harvey Norman, Soul Pattinson, WA Newspapers and Austereo. In fact, every company had a market value of more than the purchase price.

But let’s not get carried away, this is only one month’s performance and while it is exceptionally good, it doesn’t mean very much. I will keep holding this portfolio and see how it goes. I’m a longer term investor and am happy to ride the ups and downs as long as I have confidence in the underlying values.

Note: None of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).