Here are some comments from Bill Ackman, managing partner at Pershing Square Capital, on his purchase of shares in Automatic Data Processing (ADP). He bought 7.258 million shares of the stock during the 2nd quarter of 2009. This was his largest purchase during that quarter representing over 11% of his holdings. I've mentioned in previous posts that I like ADP at the right price.
From his latest quarterly letter:
ADP is a high-quality business that trades at a meaningful discount to its intrinsic value due to the near-term effects of the economic downturn. We view ADP as three separate businesses: (1) a payroll processor that has been impacted by rising unemployment and a spike in the corporate default rate, (2) a client fund account that holds money on behalf of its customers ("float") which has shown declining earnings as low interest rates and recent wage deflation reduce float balances, and (3) a dealer services business that has been impacted by the unprecedented turmoil facing the U.S. automotive industry. As the U.S. economy stabilizes, we believe the headwinds facing ADP will become tailwinds. Given the operating leverage inherent in ADP's business model, ADP’s earnings should accelerate as it approaches its normalized earnings potential.
ADP's business has numerous attractive qualities: (1) given the low capital outlays required to run the business, it generates cash flow in excess of reported earnings, (2) its dominant market share and global franchise afford it with meaningful pricing power, (3) it possesses one of the few truly Triple-A balance sheets in the world, (4) the company has additional avenues for growth as it has yet to fully penetrate the global payroll/tax market and has a valuable suite of "beyond payroll" product offerings that it can cross-sell into its existing client base, and (5) it will benefit from higher interest and tax rates (higher taxes lead to greater float balances). We also respect management’s focus on shareholder value. Over the last four years, ADP has spent about $5 billion repurchasing more than 20% of its outstanding shares and paid more than $2 billion in dividends. The combination of a high quality dominant business, shareholder friendly management, and an attractive price in our experience typically leads to a good investment outcome.
Bill Ackman also built a meaningful position (over 6%) in McDonald's (MCD) during the quarter.
Here is the complete letter.
Adam
Long position in ADP
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Applying Newton's Fourth Law
Origin of Newton's 4th Law?
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett
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This site's emphasis? Put simply, it's on finding and buying -- with the long-term in mind -- good businesses at a plain discount to conservatively estimated value; it's on selling shares of those well-bought high quality business reluctantly. The view here is that selling makes sense only when core economics become permanently impaired, prospects have been misjudged, market price not just somewhat but, instead, meaningfully exceed per share intrinsic value, or opportunity costs are high. Buy/sell decisions aren't just an opportunity to increase returns; they're also an opportunity to make mistakes. It's easy to overemphasize the former and forget the latter. The focus here is on minimizing trading, frictional costs, and errors of all kinds; it's on staying comfortably within realistically assessed limits. First and foremost is the view that an investor should never make a specific investment based upon what someone else thinks. In other words, what makes sense to own is necessarily unique for each investor and it'd be unwise to not act accordingly. So, more generally, this site simply attempts to better understand some useful principles and ideas in context of investment. It's about, in a practical sense, what tends to work over the long haul as well as what, at times, gets the investor into trouble. It's not about grand theories in finance and economics. These too often distract from what matters or, worse yet, lead to costly misjudgments. As a result, they are mostly viewed with a healthy dose of skepticism here. Otherwise, the best thinking across disciplines should be learned well then put to good use in a way that's uniquely suitable.
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"Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger