Amazing Value Investing Presentation by Whitney Tilson's T2 Partners
I just came across the following fantastic presentation on three long ideas that was made by the famous value investor Whitney Tilson of T2 Partners at the recent the 7th Annual Value Investing Seminar (does it make me a nerd to say that I would absolutely love to attend one of those things one of these days?).
The presentation has the uncreative, yet descriptive title Our View on the U.S. Stock Market and Three Long Ideas.
T2 Partners Presentation-7!13!10
In it, T2 Partners describe the reasons why they are long three large cap companies, Anheuser-Busch inBev (BUD), Microsoft (MSFT), and BP (BP - I suppose that I didn't have to post the symbol next to this one :)).
Of these companies, I am currently long BUD in CAPS.
I have taken a look at Microsoft in the past. I can certainly understand the logic behind investing in it. The one thing that I don't like about MSFT is the use of its cash, or lack there of. The Company has zillions of dollars just sitting there and rotting on its books. There's something to be said for playing it safe and having a decent level of cash on hand, particularly after the scary credit crunch that we just went through. However, MSFT's cash horde is just sitting there doing nothing. It significantly hurts shareholder value. If they can't use the money productively in a reasonable period of time, they should return it to the company's owners in the form of a larger regular, or a special dividend. Microsoft isn't even using the cash to pay down debt. It is sitting on billions of dollars in cash and actually issuing new debt. Here's a great Vitaliy Katsenelson article on the subject, Microsoft Debt Issuance Makes Zero Economic Sense.
Tuesday’s headline from the WSJ reads: “Microsoft Corp. (MSFT) to offer up to $1.25 billion in 3-year convertible notes.”
The software company will use the sales proceeds to repay short-term debt. If it was any other company I’d ignore this headline as a daily noise as this kind of things happens all the time. But Microsoft has $39 billion of cash and generates $16-$17 billion of free cash flows a year. Issuing short-term debt, for which Microsoft will surely pay higher interest than it receives on the pile of its cash makes absolutely no economic sense – zero.
Microsoft has $1 and $0.75 billion of debt that matures in 2019 and 2039, respectively. Ironically, though this debt comes with higher interest, it makes sense if the company believes that we’ll have significant inflation and it will be paying off its debt with inflated dollars.
When you are sitting on pile of cash that earns nothing, borrowing short-term (three years is short-term) makes no economic sense. It seems Microsoft finance department suffers from the same problem many investors do, it cannot sit on its hands, it has to do something even if it is losing proposition for the company and shareholders.
Last but not least we have BP. BP is well...BP. Some people in the media claim that the company is close to capping the well or at least implementing a new containment system that will capture 90-something percent of all the oil escaping. BP has proven itself to be so amazingly inept throughout this entire ordeal that at this point I'll believe it when I see it. I can see the logic in investing in BP, but I personally have chosen to play it safer and purchase shares of a a driller that is not directly involved in this whole ordeal Ensco (ESV) in real life as well as a number of drillers in CAPS.