Value-Oriented Equity Investment Ideas For Sophisticated Investors

Value-oriented Equity Investment Ideas for Sophisticated Investors
A Monthl y Publication of BeyondProxy LLC Subscribe at manualofideas.com

If our efforts can further the goals of our members by giving them a discernible edge
over other market participants, we have succeeded.

Copyright Warning: It is a violation of federal copyright law to reproduce all or part of this publication for any purpose without the prior written consent of
BeyondProxy LLC. Email support@manualofideas.com if you wish to have multiple copies sent to you. 2008-2013 by BeyondProxy LLC. All rights reserved.

Investing In The Tradition of
Graham, Buffett, Klarman
Year VI, Volume VII
July 2013
When asked how he became so
successful, Buffett answered:
We read hundreds and hundreds
of annual reports every year.
Top Ideas In This Report

DirecTV
(NYSE: DTV) .. 34
Norfolk Southern
(NYSE: NSC) . 66
Oracle
(Nasdaq: ORCL) 70
Also Inside

Editorial Commentary 3
MOI Members on Moats 7
Interview with David Rolfe .. 14
20 Wide-Moat Companies .. 26
10 Essential Value Screens 106
About The Manual of Ideas

Our goal is to bring you investment
ideas that are compelling on the
basis of value versus price. In our
quest for value, we analyze the top
holdings of top fund managers. We
also use a proprietary methodology
to identify stocks that are not widely
followed by institutional investors.
Our research team has extensive
experience in industry and security
analysis, equity valuation, and
investment management. We bring a
buy side mindset to the idea
generation process, cutting across
industries and market capitalization
ranges in our search for compelling
equity investment opportunities.

THE WI DE-
MOAT I SSUE

MOI Members Share Thei r Insights into Moats
Exclusive Interview with David Rolfe
20 Compani es Profil ed by The Manual of Ideas Research Team
Propri etary Selection of Top Three Candidates for Investment
10 Essenti al Screens for Value Investors
Companies profiled include Abbott Labs (ABT), Danaher (DHR),
DIRECTV (DTV), Express Scripts (ESRX), Hershey (HSY), Intel (INTC),
Jack Henry (JKHY), Johnson & Johnson (JNJ), McCormick (MKC),
MSCI Inc. (MSCI), Norfolk Southern (NSC), Oracle (ORCL), Pfizer (PFE),
Procter & Gamble (PG), Republic Services (RSG), Stratasys (SSYS),
Tyco International (TYC), Union Pacific (UNP), Wal-Mart (WMT),
and Walt Disney (DIS).

New Exclusive Videos
in the MOI Members Area
(log in at www.manualofideas.com
or email support@manualofideas.com)
Rupal Bhansal i on contrarian investing strategies
Ken Shubin Stein on building a successful process
Ideas: Sealed Ai r, Haynes International, Berkshi re Hathaway

Register at ValueConferences.com

Table of Contents

EDITORIAL COMMENTARY ..........................................................................3
MEMBERS SHARE THEIR INSIGHTS INTO MOATS ...................................7
EXCLUSIVE INTERVIEW WITH DAVID ROLFE ......................................... 14
PROFILING 20 WIDE-MOAT INVESTMENT CANDIDATES ...................... 26
ABBOTT LABS (ABT) GEODE, GMO, MFS, J ENNISON, PRIMECAP, SOUTHEASTERN ................ 26
DANAHER (DHR) T ROWE, MFS, WINSLOW, VIKING, CAP RE, NEUBERGER ............................ 30
DIRECTV (DTV) AKRE, BAUPOST, BERKSHIRE, LANE FIVE, SOUTHEASTERN, WEITZ ................ 34
EXPRESS SCRIPTS (ESRX) CAP WORLD, DAVIS, GMO, T ROWE, WEDGEWOOD, WEITZ ......... 38
HERSHEY (HSY) HERSHEY TRUST, CAP WORLD, FMR, J PM, PIONEER, RENTECH ................. 42
INTEL (INTC) WELLINGTON, HARRIS, FRANKLIN, GEODE, BLEICHROEDER, WALTER SCOTT...... 46
JACK HENRY (J KHY) FINDLAY PARK, J PM, KAYNE ANDERSON, ROYCE, TIMESSQUARE .......... 50
JOHNSON & JOHNSON (J NJ ) FAIRFAX, FRANKLIN, MFS, WELLINGTON, WEST COAST ............. 54
MCCORMICK (MKC) T ROWE, FRANKLIN, PARNASSUS, MS, NEUBERGER, GEODE .................. 58
MSCI (MSCI) BAMCO, DELAWARE, GSAM, IFP, MSIM, T ROWE, VALUEACT ....................... 62
NORFOLK SOUTHERN (NSC) CAP RE, CAP WORLD, CITADEL, DFA, GEODE, MS, T ROWE ...... 66
ORACLE (ORCL) CAP RE, CAP WORLD, MFS, FMR, GMO, HARRIS, EAGLE, T ROWE ............ 70
PFIZER (PFE) WELLINGTON, T ROWE, FMR, MFS, CAP WORLD, DODGE & COX, GMO .......... 74
PROCTER & GAMBLE (PG) BERKSHIRE, CAP WORLD, PERSHING SQUARE, YACKTMAN, GMO . 78
REPUBLIC SERVICES (RSG) CASCADE, SENTRY, FRANKLIN, SASCO, CAP RE, ARTISAN ........... 82
STRATASYS (SSYS) KORNITZER, PRIMECAP, SAMSON, TIGER TECH, TURNER, WELLS ............ 86
TYCO (TYC) CITADEL, CLEARBRIDGE, DODGE & COX, IRIDIAN, MFS, THREADNEEDLE ............ 90
UNION PACIFIC (UNP) CAP WORLD, CAP RE, T ROWE, WINSLOW, J PM, DFA, PRIMECAP ....... 94
WAL-MART (WMT) BERKSHIRE, CAP WORLD, EAGLE, FRANKLIN, GMO, MARKEL ................... 98
WALT DISNEY (DIS) CHILDRENS, DAVIS, FMR, MARKEL, TIGER GLOBAL, T ROWE ............... 102
10 ESSENTIAL SCREENS FOR VALUE INVESTORS ............................ 106
MAGIC FORMULA,BASED ON TRAILING OPERATING INCOME ................................................. 106
MAGIC FORMULA,BASED ON THIS YEARS EPS ESTIMATES ................................................. 107
MAGIC FORMULA,BASED ON NEXT YEARS EPS ESTIMATES ................................................ 108
CONTRARIAN: BIGGEST LOSERS OVER PAST 52 WEEKS (DELEVERAGED & PROFITABLE) ........... 109
CONTRARIAN: CHEAP FREE CASH FLOW GUSHERS ................................................................ 110
VALUE WITH CATALYST: CHEAP REPURCHASERS OF STOCK ................................................... 111
PROFITABLE DIVIDEND PAYORS WITH DECENT BALANCE SHEETS............................................ 112
DEEP VALUE: LOTS OF REVENUE, LOW ENTERPRISE VALUE ................................................... 113
DEEP VALUE: NEGLECTED GROSS PROFITEERS .................................................................... 114
ACTIVIST TARGETS: POTENTIAL SALES, LIQUIDATIONS OR RECAPS ......................................... 115


2008-2013 by BeyondProxy LLC. All rights reserved. JOIN TODAY! www.manualofideas.com July 2013 Page 3 of 117
Editorial Commentary
he search for great businesses is both harder and easier than the search for
cheap but mediocre businesses. It is harder because truly great businesses
those with sustainable competitive advantageare rare.
Making matters worse, imposters abound, as CEOs are naturally inclined to
portray their companies as great, and as many businesses manage to earn high
returns on growing amounts of capital over multi-year periods. Try Green
Mountain Coffee Roasters (GMCR), Lululemon (LULU), or Priceline (PCLN).
Each company has had strong operating momentum, rightfully earning the label of
great business at this time. Unfortunately, the markets apparent judgment that
each of these businesses is sustainably greatas deduced from the stocks
aggressive market quotationsmay prove incorrect. The likely imposters GMCR,
LULU and PCLN have managed to fool the majority of investors, even as a
handful of smart, value-oriented investors may have sold short shares of one or more
of the companies. Perhaps GMCR, LULU and PCLN will prove to have been the
real deal in terms of the prospective returns for shareholders, but we have our doubts.
The search for great businesses may be easier than the search for cheap but mediocre
equities, as great businesses tend to stay great for long periods of time. This makes
knowledge more highly cumulative than is the case with mediocre businesses, which
come and go or are forced to drastically reshape operations due to outside pressures.
An investor looking chiefly for statistical bargains is constantly running screens and
climbing the research curve on new equities, many of which will look materially
different in just a few short years. On the other hand, Buffett-style investors can read
about businesses over many years, building up a base of long-term knowledge and
context in specific companies. Buffett had likely followed the business and culture of
Goldman Sachs (GS) for decades prior to swooping in with an investment during
the financial crisis. Similarly, when the call came to consider the acquisition of
Heinz, Buffett could draw on decades of accumulated knowledge about the business.
The likelihood of missing a major driver of value or a major risk is considerably
lower in such a scenario than in the case of an investor who must quickly get up to
speed on a mediocre business that may be available at a temporarily low price.
Many fellow members of The Manual of Ideas who seek to invest in great businesses
at reasonable prices have built up watch lists of such businesses, tracking the width
of their competitive moats over time. This is not a quantitative process but rather a
matter of ongoing judgment. Buffett must have felt the monopolistic pricing power
of local newspapers start to erode quite a bit before their financials removed any
doubt that major changes were afoot in the media landscape. Similarly, those who
have followed cable operators for a long time must be growing ever more concerned
about the evolution of their competitive position vis--vis Internet-based video. On
the other hand, investors who have followed U.S. railroads for a long time probably
started seeing major improvement in railway economics quite a bit before the rest of
the investment community caught on. As such, an investment process that relies on
knowledge accumulation over time can deliver an edge in judgment at key inflection
points in the attractiveness of certain companies or industries. Such an edge may be
less available to those who focus on screening-based deep value approaches.
Inside, we bring you a variety of perspectives on wide-moat investing, including our
recent in-depth interview with value investing thought leader David Rolfe, chief
investment officer of Wedgewood Partners, a multi-billion dollar investment firm
founded in 1988 and based in St. Louis, Missouri. David is also a keynote instructor
T


at Wide-Moat Investing Summit 2013 (online at ValueConferences.com). We also
bring you other MOI member perspectives on wide-moat investing. Even as a wealth
of literature already exists on the topic of investing in great businesses, we hope
youll uncover some new nuggets of wisdom on the following pages.

Before we delve into this months three highlighted ideas, Id like to review the top
selections from last years Wide-Moat Issue, published on J uly 1, 2012. Each of the
three ideas went on to perform strongly over the subsequent twelve months, so the
question is, why? We were quite simply lucky to some extent, and Im not sure we
would be reviewing the selections had they worked out poorly. So, take this exercise
with a grain of salt. Nonetheless, its interesting to consider each of the three theses
below. If you read them a year ago, what did you think of them? Why did you invest,
or why not? (If you are a new member of The Manual of Ideas, perhaps youll enjoy
considering what you might have done with the following three ideas last J uly.)
A look back: Top three ideas highlighted in The Manual of Ideas on July 1, 2012:
Abercrombie & Fitch (NYSE: ANF, $30 per share; MV $2.5 billion)
Abercrombie & Fitch enjoys premiumbrand equity in the teen apparel market,
propelling the companys stores to industry-beating returns. ANF has achieved
returns on capital in excess of 30% in normal years. This trend continues today
outside the U.S., where the company generates EBIT margins in the mid-30s. We
believe ANF retains significant growth opportunities internationally, as evidenced
by both store growth and same-store-sales growth.
While ANFs large FQ1 share repurchases may have been badly timed, they reflect
managements judgment that the stock is undervalued. Continued repurchases and
international expansion should create incremental value on a per-share basis. We
view the equity as compelling at the recent price of $30 per share.
Goldman Sachs (NYSE: GS, $91 per share; MV $46 billion)
Goldman Sachs can legitimately claimto be one of few investment banks whose
intrinsic value resides more in the franchise than in top-performing staff, though
this is not necessarily evident in a lower comp ratio. Many GS partners would earn
much less if they worked elsewhere, making GS their preferred place for building a
long-termcareer. While some cracks have appeared in Goldmans the-client-comes-
first faade, the firms franchise is not yet seriously threatened. We view the recent
quotation of 8x 2012E EPS, 7x 2013E EPS and 0.7x tangible book as sufficiently
compelling to consider an investment.
Iconix (Nasdaq: ICON, $16 per share; MV $1.1 billion)
Iconix makes for a difficult judgment call, but we have warmed up to the company
over time. Management has assembled a portfolio of attractive lifestyle brands and
operates a model with low capital intensity and high returns. While the companys
negotiating leverage and licensing opportunities would diminish in a weak
economy, Iconix undeniably owns brands retailers want to have, including J oe
Boxer, Danskin, Rocawear, Starter, Ecko Unltd, Peanuts, and Sharper Image. We
are comforted by the fact that Iconix generates both strong GAAP earnings and
FCF, enabling the company to reduce leverage. Recent stock repurchases also
reflect positively on Iconix cash-generative model and could increase per-share
intrinsic value.


We found this years choice of the top three wide-moat ideas more difficult, as
reasonable valuations seem harder to come by than only a year ago. Even as equities
have declined in price in recent weeks, we find that the declines have been
concentrated primarily in mediocre or commodity-based businesses. The 52-week
low list is full of metals and mining companies. With that in mind, we highlight the
following three wide-moat businesses as worthy of closer consideration. Of the three
ideas, we believe Oracle (ORCL) offers the most compelling risk-reward.
DirecTV (NYSE: DTV, $60 per share; MV $34 billion)

At a 10% forward earnings yield, the market continues to treat DirecTV as if it had
little to no growth prospects. This belies growth in Latin America where DirecTV is
the largest pay-TV provider. With Latin America contributing ~25% of EBITDA,
and DirecTV still growing in the U.S., the valuation is attractive. What makes the
situation compelling are exemplary capital allocation and the ability to reinvest
capital from the maturing U.S. market into Latin America and other markets for a
long time to come. Despite concerns about competition and capital intensity, as well
as increasing leverage, we like the risk-reward.
Norfolk Southern (NYSE: NSC, $73 per share; MV $23 billion)

Norfolk Southerns model has improved over the past decade, as higher gas prices
and traffic congestion have made the highway system less competitive. While
railroads are a capital-intensive business, barriers to entry are so high that existing
players can enjoy improving economics for a long time as railroads become more
appealing to shippers. Unfortunately, the fact that the business has gone from bad to
good has not remained a secret, and railroads no longer trade at bargain prices.
While we may be inclined to wait for a recession or another adverse event before
considering a long-term investment in a railroad, we acknowledge that companies
like Norfolk Southern are likely to create value for long-term shareholders even from
recent elevated trading levels.
$0
$10
$20
$30
$40
$50
$60
$70
J un 13 J un 12 J un 11 J un 10 J un 09 J un 08 J un 07 J un 06 J un 05 J un 04
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90


Oracle (Nasdaq: ORCL, $30 per share; MV $142 billion)

Oracle is rivaled by only a handful of companies as a long-term success story in
software, thanks in large part to the execution skill of CEO Larry Ellison. The
company has ably leveraged strength in relational databases into application software
as well as hardware, both via acquisitions. The company benefits from some of the
highest switching costs in the IT industry, as customers use complex Oracle solutions
to power mission-critical applications. As a result, Oracle has become a predictable,
modestly growing FCF machine, with per-share value creation helped by friendly
capital allocation policies. The recent revenue growth disappointment provides an
opportunity, as shares trade at an FCF yield, adjusted for net cash, of ~11%..

Fellow member Ciccio Azzollini has once put together a wonderful value investing
conference to take place in Molfetta, Italy. The 10
th
Value Investing Seminar will be
held on J uly 11-12, with quite a few members of The Manual of Ideas in attendance.
Guy Spier, Francisco Parames, Robert Robotti, Joel Cohen, and David Poulet
are just a few fellow members who will be speaking at the event. Be sure to say hello
to them, and have a great time!
J oin us at Wide-Moat Investing Summit 2013 on J uly 9-10. The fully online Summit
will feature the best investments among competitively advantaged companies.
Speakers include Rupal Bhansali of Ariel Investments, Pat Dorsey of Sanibel
Captiva Investment Advisers, Paul Lountzis of Lountzis Asset Management, David
Rolfe of Wedgewood Partners, Dave Sather of Sather Financial Group, Jeff Stacey
of Stacey Muirhead Capital Management, Don Yacktman of Yacktman Asset
Management, and other leading investors. To register, visit ValueConferences.com
Sincerely,

J ohn Mihaljevic, CFA
and The Manual of Ideas research team

$0
$5
$10
$15
$20
$25
$30
$35
$40



Members Share Their Insights into Moats
We invited our members to share their thoughts on identifying companies with
sustainable competitive advantage. We present selected responses below.
We polled members for their insights last year as well. The July 2012 Wide-
Moat Issue included the wisdom of Pat Dorsey, Daniel Gladi, Michael McKee,
Guy Spier, Josh Tarasoff, and other MOI members. If you have not seen last
years issue, we highly recommend downloading it from The Manual of Ideas
online members area at http://www.manualofideas.com/protected

ETHAN BERG, CHIEF INVESTMENT OFFICER, G4 PARTNERSHIP
While there are numerous potential sources of advantage, what strikes me is
how genuinely rare it is to find sustainable competitive advantage. A company
may have good products, a good reputation, significant market share, and high
returns on capital, but each one of these is susceptible to erosion. By themselves,
none of those factors indicates sustainable competitive advantage. The latter
exists only when a firm clearly understands customer needs and uniquely and
decisively configures their own assets and activities to deliver against those
needs better than any other firman advantage so great that it is not replicable
no matter how much a competitor spends. The advantage should almost seem
unfair. Otherwise, if the opportunity is good enough, other firms will build the
capabilities, and the advantage will not endure.
The three most important things to look at in searching for competitive
advantage are 1) customers needs, 2) a companys assets and activities, and 3)
the fit between those two things relative to other firms.
For commodity products, the need is almost always price. Low prices can only
be maintained over time if the company in question has a lower cost structure.
As Ken Peak correctly pointed out in his Contango [MCF] roadshow when he
discussed their core beliefs since inception, The only competitive advantage in
the natural gas and oil business is to be among the lowest cost producers. He
configured the company to be a low-cost producer. Helpfully, he would detail
the full costs of production for him and others in his industry. He was focused
on the one thing that mattered in his business.
In non-commodity businesses the needs vary, but the analysis is the same.
Good strategy in non-commodity businesses begins with an understanding of
who the customers are and what their needs are. I live a few minutes from
Tanglewood, the summer home of the Boston Symphony Orchestra. My wife
and I occasionally host chamber music concerts. We have in our living room a
piano made by Steinway [LVB]. One hundred years, ago, Steinway had strong
market share amongst concert pianists. Today, it has strong market share
amongst concert pianists. While they are still short of Buffetts preferred holding
period of forever, they remain a candidate.
There are quite explicit reasons their advantage has endured and will continue to
endure. Generally speaking, within the piano market, there are four primary
segments: professional/serious players, institutions, furniture buyers (!), and
families. Each segment has specific needs. Focusing on the concert pianists, the
need is what is called the voice, which is Steinways legendary sound. (For
institutions, it is durability. For furniture buyers, it is type of wood and size. For
We have in our living room
a piano made by Steinway.
One hundred years, ago,
Steinway had strong market
share amongst concert
pianists. Today, it has strong
market share amongst
concert pianists. While they
are still short of Buffetts
preferred holding period of
forever, they remain a
candidate.


families, it is primarily price.) Regarding voice, the underlying assets and
activities are technical excellence (more than 100 piano-related patents), 12,000
parts, craftsmen with 20+years of experience, the concert bank, master piano
technicians, know-how in wood selection, etc. There just isnt any easy way for
this system of assets and activities to be replicated for this part of the market.
While there could be questions about size of the market, the collection of
individual advantages results in sustainable advantage.

ANTHONY CAMBEIRO, PRESIDENT, ANTHOLOGY CAPITAL
To find a firm with sustainable competitive advantage, you first have to find a
firm that actually has a competitive advantage. One primary way of identifying a
firm with competitive advantage is to look at the historical returns on invested
capital. A long history of high ROIC is usually indicative of some kind of
sustainable competitive advantage. There are many ways to measure this. Our
preferred measure is [EBIT / (total assets - current liabilities +short term debt -
excess cash)]. Another favorite method is to ask a CEO a variation on these
questions: Which one of your peers do you most admire and respect? If you
could put a silver bullet in the head of one of your competitors, who would it be
any why? If you could pick one other company in your industry to own/run,
which would it be and why? If you ask enough players in the space these
questions, youll end up with a pretty good view of the market.
Lets say you find a company that has generated high ROIC. Start looking to see
why they generate these returns and if the reasons are sustainable or temporary.
A more difficult challenge is to find a company whose financials do not yet
demonstrate competitive advantage. Finding a situation like that is every
investors dream since the stock is likely to be mispriced by a wider margin.
To determine the question of sustainability of returns and thus sustainability of
competitive advantage, it requires a deeper understanding of the business model
and the reasons those returns exist. This requires a lot of reading (SEC
documents, transcripts, presentations, industry research) on the company in
question and all the other companies in the ecosystem (competitors, customers,
suppliers). Additionally, it can help to speak with industry participants to deepen
your understanding of the advantages a company may have.
A company with durable competitive advantage is Carmax [KMX]. I learned
about Carmax KMX at my former firm. We were the largest shareholders in the
KMX tracking stock in the early 2000s. Im quite certain we were the first (in
2003) to figure out how to scrape the companys website every night and
estimate the number of cars sold to within 100 cars out of 70,000.
Carmax was once thought to be a terrible business. In the late 1990s and early
2000s, they found themselves in a land grab war with AutoNation [AN]. The
company spent millions of dollars building huge superstores all across America,
racking up huge losses. The stock fell nearly 90% from its IPO price.
AutoNation eventually cried uncle and gave up. That day KMX shares hit an all-
time low. However, this was the best possible news for KMX. The primary
competitor who had forced them into a land-grab strategy had decided to quit.
This allowed KMX to stop expanding and focus on optimizing the business.
Carmax was once thought
to be a terrible business. In
the late 1990s and early
2000s, they found themselves
in a land grab war with
AutoNation. The company
spent millions of dollars
building huge superstores all
across America, racking up
huge losses. The stock fell
nearly 90% from its IPO
price. AutoNation eventually
cried uncle and gave up. That
day KMX shares hit an all-
time low. However, this was
the best possible news for
KMX.


What they developed over the coming years was a differentiated and unique
business. There are hundreds of little advantages which combine to create an
enduring and significant advantage. KMX has created something that has never
existed in the used car marketa brand associated with trust. The long-term
value of that brand association in the used car market is and will continue to be
incredibly high, and no other company is close to building something similar.
Here are a handful of the advantages we see KMX possessing:
Economies of scale. KMX sells over 500 cars per location. The average for other
dealerships is closer to 40. This huge volume advantage allows the employees to
become more efficient and allows the company to leverage fixed overhead and
spend more on advertising to build a national brand.
Footprint of superstores in single-store markets. KMX has opened over 100
locations, and many are superstores in markets the company believes only
support a single store of that size. This serves as a deterrent for a potential
entrant since the prospective returns on capital would not look attractive.
Appraisal lane and wholesale market. KMX will purchase any car a customer
brings into their stores. They have huge economies of scale, buying over
400,000 cars per year from their customer base. The margins on cars purchased
through this appraisal lane are better than cars bought at auction. KMX can only
buy at scale if they have an outlet for the cars they dont want. And so they run
their own auctions for other dealers to come buy the cars KMX does not want to
retail. You can only get dealers to come to your own auctions if you have
enough volume to make it worth their while. Another benefit from this is that
one of the first things a customer does before they buy a car is figure out how
much they can get for their old car. Studies show that a large percentage of
customers who purchase a car will do so from the first place they visit. Getting
them to start at KMX thanks to the appraisal lane is a big advantage.
Brand. KMX has built a brand consumers can trust. The company stands behind
the quality of their cars and the consumer offerno-haggle pricing, la carte
offering of finance and extended warranties, and fixed commissions for
salesmen, incentivizing them to put you in the car best for you.
Systems. Huge investment in systems has allowed KMX to know how to manage
inventory and adjust quickly to changing market environments.
History in ABS market. KMX has a 15-year history in the securitization market.
The proven history of their paper allows them to continue to securitize at rates
far better than a new participant. This allows them to earn a better margin and
keep accessing the market in tighter environments. This is not easily replicated.
There are other advantages as well, but this should give you a flavor of what
makes the advantages of KMX durable. My experience with investing in KMX
is that despite the long-term advantages, the stock market can still be overly
concerned with near-term issues. KMX stock has been quite volatile, which is
great for the longer-term investor since you can continue to buy stock during
periods of weakness. Only by having conviction in the long-term advantages are
you able to buy with both hands when the market is giving it to you.

My experience with
investing in Carmax is that
despite the long-term
advantages, the stock market
can still be overly concerned
with near-term issues. KMX
stock has been quite volatile,
which is great for the longer-
term investor since you can
continue to buy stock during
periods of weakness. Only by
having conviction in the
long-term advantages are
you able to buy with both
hands when the market is
giving it to you.


JOHN GILBERT, CIO, GENERAL RENEW ENGLAND ASSET MANAGEMENT
Sustainable competitive advantage has become more appreciated, but not more
persistent. The investing challenge of finding it at a discount has gotten harder.
Occasionally it comes our way. Mead Johnson [MJ N] was the infant formula
spinoff from Bristol-Myers [BMY]. It has all the things we likean
oligopolistic industry structure with high shares for the participants, a well-
known and longstanding brand name in Enfamil, and unusually large exposure
to emerging market economies, where infant nutrition and safety can be even
bigger issues than in developed markets. Beyond the industry structure issues,
however, MJ N has an advantage most businesses crave but do not possess
price-inelastic customers. A baby is the most important thing in the world to
young parents. What MJ N is really marketing isnt a liquid, it is trust. Price is
never irrelevant, but in this product is secondary. MJ N and its small cohort of
competitors have pricing flexibility and the margins and ROIC that go with it.
On lack of sustainable competitive advantage: Technological change has been
poison for many legacy businesses that at one time appeared bulletproof.
Newspapers are an obvious example. Another is Pitney Bowes [PBI], which had
80% share of the mailroom equipment market. A good businessuntil email
became the dominant written form of communication. It was clear to us several
years ago that attrition was inevitable in their client base. We eliminated any
holdings and have not regretted that decision.

HEWITT HEISERMAN JR., AUTHOR, THE CHECKLIST INVESTOR
In the book Its Earnings That Count I describe a three-step test to find bargain
growth companies: authentic earnings power, durable competitive advantage,
and low price to intrinsic value.
Morningstar says there are five types of durable competitive advantage: cost
leadership, intangibles, switching costs, network effect, and efficient scale. I add
a sixth criterion: ecosystem (e.g., Apples iOS platform).
Companies with authentic earnings power, which I define as rising levels of
GAAP net income, confirmed by steady increases in FCF and EVA, tend to
enjoy competitive advantage. The more durable the moat, the more valuable the
business. (Some firms enjoy multiple advantages, as Morningstar points out.)
To estimate competitive advantage durability, I used to compare my target to
other companies that offered a similar producta left-right landscape
analysis. When I bought video retailer Blockbuster because entertainment is a
perpetual want, and because the stores have convenient locations, I identified
other companies that also distributed movies via physical locations, like
Coinstar [CSTR] and their Redbox vending machines. I preferred Blockbuster,
which offered a broader selection. That was a competitive advantage, I thought.
Due to the rise of the Internet, I have learned to consider non-traditional
substitutes. With its mail-deliver distribution model, Netflix [NFLX] was even
more convenient than Blockbuster. Lots of other consumers realized the same,
to Blockbusters detriment. Selling for over $18 in 2002, Blockbuster declared
bankruptcy in 2010, and shares last traded for $0.07. Lesson? When assessing
the durability of a moat, think two-dimensionally. Dont just look at traditional
substitutes (left-right), also consider alternate substitutes (up-down).
Mead Johnson has all the
things we likean
oligopolistic industry
structure with high shares for
the participants, a well-
known and longstanding
brand name in Enfamil, and
unusually large exposure to
emerging market economies,
where infant nutrition and
safety can be even bigger
issues than in developed
markets. Beyond the industry
structure issues, however,
MJN has an advantage most
businesses crave but do not
possessprice-inelastic
customers.


ARKO KADAJANE, PORTFOLIO MANAGER, AMBIENT SOUND INVESTMENTS
We dont have any good quantitative metrics for finding companies with
sustainable competitive advantage. Its rather easy to find companies which
currently have a wide-moat business. Return on equity or return on invested
capital gives you some sort of a preliminary understanding that the company
should enjoy some edge over competitors. The problem is that in most sectors
its impossible to predict which companies have sustainable competitive
advantage and high return on capital in the future.
The main questions for me is how sticky the product or service is, and does the
company have the ability to raise prices. If those two qualities arent met there
should be a scale advantage or some other low-cost operator advantage.
I always like to think about the service or product as a customer, although
sometimes this approach has a bias risk.

DAVE SATHER, PRESIDENT, SATHER FINANCIAL GROUP
We are happy to find oligopolies. Monopolies are either governmental partners,
or the government will break up the monopoly. Either way, this presents a risk
to an investment thesis. As such, a few strong competitors will provide very
good returnswhile keeping new competitors at arms-length.
Having an oligopoly alone does not assure a good investment. However, an
oligopoly with wise management can be fantastic. This will quickly show up in
the numbershigh return on equity, high return on capital, high free cash flow.
If the return on capital is too high, it can show a vulnerability for new
competitors to come in. Obviously, being a low-cost producer is always good.
Wal-Mart [WMT] is a great example. They are certainly not an oligopolybut
it is extremely difficult to compete against them.
Fannie Mae and Freddie Mac both were oligopolies that turned out to be bad
investments because of a change in credit policy and poor management. These
were also ones in which the negative influence of government or politics caused
the management to do foolish things. In the end, the wide moat collapsed.
Cemex [CX] is an example where the moat was challenged. In our assessment,
the moat was still there since a geographical monopoly arises around a cement
plant due to transportation costs. Unfortunately, the incurrence of too much
debtand the stacking of the debt in a few maturitiesgreatly hurt Cemex.
Furniture Brands [FBN] appeared to have a moat. They had a great reputation
and brand names. Unfortunately, once Asian markets decided to mass-market
competitors, Furniture Brands could not compete due to their high labor costs.

FABIAN SCHILCHER, PRIVATE INVESTOR
As to finding moats in general, I could only repeat what the great investors have
put in writing. There is, however, one specific concept I found appealing and
wanted to analyze/backtest further but have not gotten around to doing so yet. It
is the concept Sanjay Bakshi describes in a presentation about floats and moats.
To quote Bakshi: My argument in the presentation is that float comes in many
forms, and if there is a solid moat, its quite likely there will be a low or zero
Having an oligopoly alone
does not assure a good
investment. However, an
oligopoly with wise
management can be fantastic.
This will quickly show up in
the numbershigh return on
equity, high return on
capital, high free cash flow.


cost float as well. If I am right, then there is a quantitative way to spot a moat
just measure the size of float and its trend over time

GREG SPEICHER, PRIVATE INVESTOR
Finding wide-moat businesses begins with developing a clear idea of what you
are looking for. To do this, you need, la Munger, a latticework of mental
models drawn from the master teachers on competition and competitive strategy:
Buffetts complete corpus, Porters five forces, Greenwald, Pat Dorsey, and
classic microeconomics works such as Shapiro and Varians Information Rules.
This needs to be complemented by a growing mental library of wide-moat
companies to use as reference points when evaluating possible investments.
Obvious examples include Coke (brand, scale, cost advantages), GEICO (low-
cost provider), Sees (brand), BNSF (lack of substitutes, insurmountable barriers
to entry); there are many others. An added plus is experience running a business,
because there is no substitute for seeing these competitive forces from an
operating perspective. This can be further complemented by reading the best
books on industries, companies, and business leaders.
Once you know what you are looking foran ongoing, cumulative process
there is no subsitute for broad, sustained reading and thinking to find wide-moat
business. There is no way to automate this process. Good places to look are
industries with superior economics: high barriers to entry, high returns on
capital, stable market share. Another place to look is the 13Fs of focused value
investors who specialize in wide-moat businesses. Once you find a wide-moat
candidate, you must research it like a journalist, looking for insights into the
nature and durability of the moat. Many such businesses are hard to find, but
some great ones are hiding in plain sight and simply require the patience to wait
for the right opportunity and the courage to invest when the time arrives.

JEFFREY STACEY, FOUNDING PARTNER, STACEY MUIRHEAD CAPITAL MGMT
Most investors intuitively understand the concept of investing in companies with
enduring competitive advantages or what is referred to as a wide moat. But
while the concept is simple, it is not easy to do. J udging whether a moat exists
and the sustainability of that moat is difficult. Even Warren Buffett, who is
clearly the greatest wide-moat investor of all time, misjudged the sustainability
of the moat around newspapers when the Internet emerged as a disrupting force.
As I search and sift and study companies in an attempt to assess the size and
durability of the moat a business may possess, I try to keep things as simple as
possible. Does the business show a high return on shareholders equity over a
long period of time? Does it have a pristine balance sheet? If a business
generates high returns through leverage and financial engineering, it probably
doesnt possess an enduring moat. Does the business have pricing power or
brand presence or the lowest-cost production? Does it have high margins and a
track record of consistent free cash flow generation? These are all pretty basic
things and are easy to assess. While it wont necessarily result in an investable
moat, insisting on the basics will lead you to high-quality companies, which
should result in an ample margin of safety if you dont pay too much.
Does the business show a
high return on shareholders
equity over a long period of
time? Does it have a pristine
balance sheet? Does the
business have pricing power
or brand presence or the
lowest-cost production? Does
it have high margins and a
track record of consistent
free cash flow generation?


The search is never easy and there are many potholes on the investment road.
Several years ago we invested in Indigo Books and Music [Toronto: IDG].
Indigo is the largest book retailer in Canada with the largest market share by far.
At the time we invested, it had best-in-class margins, net cash on the balance
sheet, and high returns on equity. It was a destination stop with a great brand
image with Canadian book lovers. The basics were all present. However, the
moat wasnt enduring, and the emergence of e-reading was a game changer.
While management is very talented and continues to do all the right things, the
simple fact remains that book retailing must reinvent itself to be successful. It
seems so easy to conduct this public post mortem and reach the conclusion that
Indigo didnt have an enduring moat. But while the concept of investing in
wide-moat companies is a simple one, our experience with Indigo all too
convincingly demonstrates that it isnt easy to do. The search continues

GLENN SUROWIEC, PORTFOLIO MANAGER, GDS INVESTMENTS
I probably have a non-traditional perspective on wide-moat investing. I
largely accept that, if executed correctly, wide-moat investing is a relatively
low-risk way to achieve market-beating returns. That said, in this pursuit one
will likely find more moat imposters than not. Why?
There are certain laws of capitalism and economics. One that routinely holds
is that capital chases high returns and withdraws from low returns. The majority
of high-return companies cant withstand a flood of new supply. Industry pricing
and returns come down; companies get re-priced from extraordinary to ordinary.
Its easier for me to invest in this high-probability scenario than the low
probability that a high-moat company retains its position over the long term.
The other issue with wide-moat investing is that most obvious moats are priced
as such, e.g., Coca-Cola [KO] or Disney [DIS]. Its rare to find a truly wide-
moat company, and even more so to find one thats materially undervalued. I do
track a list of wide-moat companies and do buy them when they occasionally
fall out of favor. Specifically, I look for consistently high returns on capital and
exceptional brand strength. You need both because many high-ROIC companies
have the illusion of strength simply because theres an absence of competitors.
Microsoft [MSFT] stands out in this regardhigh returns, with ambivalent
customers just waiting for a new entrant. Cable/phone companies are other
exampleswe deal with them because we have to; this is a temporary condition.
My advice is to be really honest about how durable the moat is. If you find a
company that truly has a wide moat thats materially discounted, then back up
the truck because there are few easier ways to make money. A current example
would be Apple [AAPL].

The views expressed above do not necessarily reflect the views of the firms with
which the authors are affiliated. The authors may have positions in the
companies mentioned and may transact in the securities of those companies at
any time without further notice.

My advice is to be really
honest about how durable the
moat is. If you find a
company that truly has a
wide moat thats materially
discounted, then back up the
truck because there are few
easier ways to make money.
A current example would be
Apple.


Exclusive Interview with David Rolfe
We recently had the pleasure of speaking with David Rolfe, chief investment
officer at Wedgewood Partners. St. Louis-based Wedgewood Partners, founded
in 1988, has approximately $3 billion of assets under management. David joined
the firm in 1992 in his current role and has been instrumental in shaping
Wedgewoods investment philosophy and approach. By investing in growing,
wide-moat companies, Wedgewood has managed to compound capital at 12%
per year, net, from 1992 through March 2013, versus 9% for the S&P 500.

(The following is a lightly edited interview transcript and may contain errors.)
The Manual of Ideas: Youve been in the business for decades as an investor.
Before we discuss your investment approach and some of your favorite ideas,
tell us a bit about your background and what got you interested in investing.
David Rolfe: I was born and raised in St. Louis, Missouri and thats where
Wedgewood is located. I was very fortunate to become passionately interested in
the investment business back in 1984, a long time ago.
I had an investments professor at the University of Missouri, St. Louis, Dr. Ken
Locke. Ill never forget Investments 334. I didnt have any expectations when I
signed up for the class. The first day the professor dismissed the chapter at hand,
and all he did was talk about the stock market. It turned out he was a market
junkie. I imagine most of the class was rather bored but there were a few of us
that were fascinated. We couldnt get enough of it. He made it very interesting.
In factmyself and another student and the professorwe actually started the
student investment club at the University of Missouri, St. Louis. It started out as
a paper portfolio. Its still there, still running. Its $175,000 or $180,000 and
well-organized, and they compete against other schools for monetary prizes.
That was the initial bug, but how he really helped me was he put me in the
direction of outside reading, non-academic reading. That was my first exposure
to the likes of Buffett and Graham, Templeton, and T. Rowe Price He was
also influentialif you really are interested in this topic, buy these books. Buy
the classic books, read them and reread them. I was hooked. Then when I
finished school in late 1985, I joined on the sell side of the Street. I was a
stockbroker. That was my easiest way to get into the business.
The second planet that aligned for me in early 1988, after the crash of 1987
and I like to joke that after the crash of 1987 I couldnt sell a brokered CD to my
parentsbut I was fortunate that I was able to go to the buy side of the Street as
a portfolio manager at the old St. Louis Union Trust Company, and it was
quickly bought out by Boatmens Trust. St. Louis is a big trust company town.
What was key in my career development at that firmall the portfolio managers
had a discretionary book of business. They could do whatever they wanted in
terms of philosophy and process. In addition, the combined entity had a huge
custody business, so that was my first exposure to the likes of Mason Hawkins
at Southeastern Asset Management and the early growth gang at J anus: [Tom]
Marsico, [J im] Craig and [Tom] Bailey. They were doing the focus thing.
Out of that rich environment, I had become enamored with focus investing.
After almost four years of being a portfolio manager at Boatmens Trust, luck
would befall me again in that the founding chief investment officer of
he put me in the direction
of outside reading, non-
academic reading. That was
my first exposure to the likes
of Buffett and Graham,
Templeton, and T. Rowe
Price He was also
influentialif you really are
interested in this topic, buy
these books.


Wedgewood Partnersthe firm was founded in 1988 so this is in the spring of
1992the founding chief investment officer retired.
At the ripe old age of thirtyand I knew all the mysteries in the investment
worldwith little track record at hand, I then met my partner Anthony
Guerrerio, the president and founder of Wedgewood Partners, and he gave me a
chance. He gave me a shot. In May 1992, I joined as chief investment officer
with a blank slate to bring this developing philosophy with me to Wedgewood.
And along the way, we vetted a couple folks on the investment team. First, Dana
Webb in 2002; Michael Quigley in 2006; and so the four of us have been doing
this single strategy beginning in 199221+years.
MOI: Youve had a great track record since then. Im curious to delve a little bit
deeper into that investment philosophy of yours. You have three key tenets
focus, patience, and discipline. Lets pick focus. What do you mean by it?
Rolfe: One of the phrases we like to chat about when we describe our
philosophy at Wedgewood Partners is this idea that focused investing has
structural advantages over other strategies. At Wedgewood, we typically own
about twenty stocks, thats how focused we get. By being focused at the
company level, were going to be picky. Were putting our twenty best ideas in
the portfolio, and thats where we stop. Given that we have very little turnover at
Wedgewood, we hope to own these terrific growth companies for many years.
Our focus is on businesses we think are best in class, uniquely competitively
advantaged, that we believe at a minimum can double over the next three to five
years. Its not growth for growths sakehypergrowth, imprudent growth, risky
balance sheet leverage growth. Were looking for these terrific businesses,
market share dominating leaders that dont have to use financial leverage.
Once we identify that small subset, we have to wait patiently for the value side
of the equation. Its just as important, critically so. We know if were buying
companies at fair value, and if they compound at 15% over the next five years,
the underlying growth is going to drive the out-years of the stock appreciation.
However, we want to buy them at a discount to intrinsic value. And we know
from experience, and it makes intuitive sense, that its the value side of the
equation thats going to be the biggest driver of your potential return on that
company over the next week, month, quarter, year, even two years.
If were right on these business models, they shouldnt be changing that much.
But as we know with Mr. Market, valuation changes constantly and it can get
extreme. Were picky on the types of companies we want to own. And were
picky on the valuation in which we invest in them, or trim or sell them.
MOI: You talked about Warren Buffett as an influence. The companies that you
identify and would like to invest in at the right price are companies that exhibit
strong growth. Tell us about the challenges of being a value investor and
investing in these types of companies that some would say are growth stocks.
Rolfe: It is a big challenge. Every investment style has its Achilles heel. I
believe the big Achilles heel for far too many growth managers is the fact that
they overpay or have to overpay for these companies. Its really difficult.
If you want to build a portfolio of fifty or sixty, even a hundred terrific growth
companiesI dont know if there are a hundred terrific growth companiesbut
to populate a portfolio that large, you have to suspend a lot of your valuation
criteria just to get them in the portfolio. Its great owning an industry darling
when the stock price is rising and revenues and earnings are terrific. The
Were putting our twenty
best ideas in the portfolio,
and thats where we stop.
Given that we have very little
turnover at Wedgewood, we
hope to own these terrific
growth companies for many
years.


company is doing what you expect it to do. But far too many growth managers
pay too high a price for these companies. The biggest challenge is having the
patience to wait for the company to get valued attractively.
Said another way, theres got to be some hair on the story. You look at the list of
all the holdings in our portfolio and its very easy to identifygreat company,
but theres an issue with it right now. Thats how you get the opportunity.
Our work is to determine if its a short-term problem thats fixablecompany
level, industry level. And if so, were getting the best of two worlds: a great
franchise at a discount. The biggest challenge is to have this value orientation to
growth. So many growth investors I would almost characterize as maybe closet
momentum investors. You see the darlings of the day and you see them populate
many portfolios. Weve come to learn over our careers that if a company is truly
a terrific company that has a great growth pass for the next ten, fifteen years, the
market will deliver it up at a price that makes sense. You have to be patient,
thats the biggest thing. Youve got to be patient.
No company clicks along without bumps in the road forever. You look back at
the great investments over timeWal-Mart [WMT], Coca-Cola [KO], maybe
even GEICO as an example here talking about Buffett. There have been plenty
of times when those companies were out of favortheres something going on
at the company level [so that] the valuation comes in.
The trick is to discern if its a short-term phenomenon thats fixable or not. Our
biggest mistakes have been getting the company wrong, not the valuation
wrong. Were not chasing momentum stocks, paying 35x, 40x earnings for a
20% growerif the stock turns out to be an 18% or 19% grower and the
valuation comes down, theres the mistake. Its getting the business wrong.
Thats where our focus is at Wedgewood, day in and day outat the company
level. Then again, we have to be patient on the valuation to come to levels where
we believe the risk-reward is attractive enough that we swing the bat.
MOI: Lets stay with the business side of things. Help us understand how you
identify these great businesses. What really differentiates a truly great business
from a merely good one? Perhaps thats where some investors make the
mistakehow do you separate those truly outstanding businesses? We already
heard from you that they are quite rare. There arent that many out there.
Rolfe: You do even a little cursory screening of companies of reasonable size,
say $5 billion and above, large mid-cap to large-cap, thats our universe.
Depending on where you are in the business cycleif you just go back over any
period [of] five to six years, and you look for companies that have compounded
their earnings consistently at 15% plus a year, the list is not that large.
What were looking for to discern great from good is ultimately profitability. If a
company has significant competitive advantagesthe key metric is cash, return
on invested capital. We want to own companies that generate buckets of cash.
And for a company to consistently do that, theyre going to have to ward off all
those competitive threats.
Customers are a threat. Certainly, customers want more from a company and
pay less. Same as suppliers, on and on it goes. When you find these businesses
that have a long enough history of demonstrating that they can ward off the
multitude of competitive pressures, and theres this great business franchise
thats generating unlevered returns on invested capital of 20%, 30%, 40% or
theres got to be some
hair on the story. You look at
the list of all the holdings in
our portfolio and its very
easy to identifygreat
company, but theres an issue
with it right now. Thats how
you get the opportunity.


even higher, thats when our antenna perks up and we just have to wait for the
valuation to come in to pull the trigger.
Also, going back to this idea of the structural advantage of focus investing, if we
are truly dedicated to finding these top-rate, best-of-breed businesses, our
prospective list of companies isnt that large. There are only four of us at
Wedgewood. Including the companies we have in our portfolioright now its
about twenty-twoand on our shortlist at any given time its maybe another ten
to twenty companies.
While we only have four people doing this, our watchlist is only about thirty-
five or forty companies, its not that many. That list doesnt change that often.
Related to that, while we currently own about twenty or so stocks in our
portfolio, over the last twenty to twenty-five years weve only owned a little
more than seventy-five or eighty others. Thats it.
We swung the bat about a hundred times in twenty-five years. Im linking my
previous firm since over the course of Wedgewood weve owned most of those
stocks that were in the portfolios at my predecessor firm. Thats it. We think
thats a market distinction and difference to so many firms. Thats really the root
of our culture and how we think and act at Wedgewood. Again, classic Buffett,
we wait for a fat pitch.
MOI: What are your favorite sources of mispricing?
Rolfe: Most of them come at the company level, and it can be a multitude of
things. These companies have a terrific product or service. Many times there
may be some competitive inroads, maybe their market share starts to level off,
maybe they start to lose some market share. They have to adapt. Companies
cant become complacent. There are times when competition begins to take its
toll, and thats when you might see an earnings miss or two. If it has been a
previous growth darling, chances are it had a pretty healthy multiple, so now the
stocks crutching quite a bit. Thats when we sharpen our pencils.
If we can understand these business models well enough, understand the history
of the management team, how they have dealt with problems in the past, nothing
is steady-state at any business. Thats the mosaic that we put together in our
heads. Then the four of us reach a conclusion if we think there are better days
ahead for these great businesses and the near-term problem can be addressed.
Then we have to try to get our heads around the valuation. Those are the day-in,
day-out discussions I have with my three partners.
MOI: One often hears this term secular growth. I never really understood
what that means. How do you go about identifying growth thats sustainable? It
seems growth in a way is cyclical
Rolfe: How we try to differentiate between this idea of secular growth and
cyclical growthwere reminded of T. Rowe Prices definition of growth. Back
in his day, the economy had bigger booms and bigger busts. The economy was
much more cyclical. His definition was, through the course of a business cycle
or successive business cycles, a company will [have] higher lows and higher
highs in terms of revenues and earnings. As a company goes through the cycle
in a secular way or over a longer period, that growth chugs along
Simplistically, too many cyclical companies are boom-bust, and they arent
necessarily forging a long-term growth path that we would find attractive. The
way we view secular growth is, all companies are cyclical and its just that over
We swung the bat about a
hundred times in twenty-five
years Thats it. We think
thats a market distinction
and difference to so many
firms.


a three- to five-year period, the underlying growth rate of the company, the
underlying size of the company will grow through business cycles.
What were looking for at a minimum is a company that can double over three
to five years. If we dont think a company can double, its probably not a good
enough growth opportunity. Were only looking for twenty companies.
MOI: We are in a low interest rate environment When you invest in
companies that are growing rapidly, that have prospects for sustained growth,
how does the level of interest rates affect your thinking about value?
Rolfe: This is a unique period. Consider how low interest rates have been for
such a long period of time. It changes a lot of behavior. You have changes in
your opportunity set. As an example, our largest holding is Apple [AAPL].
Weve owned it in size since the end of 2005. The company has all this cash on
its balance sheet But now the stock has gotten so cheap that theyre going to
start returning buckets of it back to shareholders, which we applaud. They dont
need $150 billion to stay relevant. Interest rates are so low that they can take
advantage and borrow money, and its very accretive. It creates opportunities.
Companies that maybe would not borrow money before [now] have that
opportunity.
On the flipside, we saw in 2006 and 2007 so many cyclical companies had
cheap and easy credit, a credit bubble, and rising material prices. Return on asset
was high because prices were high. Revenues were running at a nice rate so you
had operational leverage. Combined with financial leverage, a lot of these
cyclical companies were booming, and those were the market leaders back then.
What we have now in terms of a change of behavior is, look at what the chase
for yield has wrought. We see excesses in the fixed income market. We see
excesses in the credit market, the levered credit market.
Were seeing it significantly in the stock market, the industry leaders over the
last year certainly. Over the last six months or so, the classic blue chip
companies that pay a big dividend, many of them are priced at a P/E of 20x,
21x, 22x. In the chase for yield, these companies have been bid up to what we
believe are excessive levels.
We actually like this environment. We would rather a company not pay a large
dividend. By our definition of the growth, what we want is compounding of
retained earnings. When companies dont have those opportunities and theyre
paying out a third to a half of their retained earnings in the form of a dividend,
you have these companies with underlying growth of 4%, 5%, 6%, 7% are now
priced at a P/E of 20x, 21x, 22x. The chase for dividend yield, this is classic Mr.
Market. We get to extremes. As an investment manager, we have to have the
courage of our conviction, trust our research, stay with our philosophy and
process, and not chase, just like in 2006 and 2007 when we were lagging, you
cant chase that so-called leadership just because youre behind.
The markets can change on a dime. Leadership can change on a dime. Low
interest rates change behavior on a number of fronts. Were seeing extremes
across the board here.
MOI: Help us understand how the low interest rate environment can feed into
valuation models. What are your favorite valuation methods for these types of
companies? Some people may be enticed to take the low interest rates and feed
them into their discount rates.
This is a unique period.
Consider how low interest
rates have been for such a
long period of time. It
changes a lot of behavior.
You have changes in your
opportunity set. As an
example, our largest holding
is Apple [AAPL].


Rolfe: Thats a classic problem with the so-called Fed model. You put in a silly
discount rate and youre going to get some obscene prices. When we do our
valuation work, we always have to step back and say, what variable doesnt
makes sense here? What variable isnt sustainable? If interest rates are too low,
everything else being equal, in a low interest rate environment, a dollar of
earnings is worth more. But common sense has to rule the day, and so you build
in some scenarios. What would the numbers look like five years from now if
rates went up 200 basis points?
When it comes to valuation, when were looking at a technology company that
had a huge valuation in 1998, 1999 and early 2000, averages are deceiving. You
have to throw those numbers out because there was an extreme. Same thing
when you had such a valuation compression in 2008 and early 2009, throw those
[numbers] out unless youre modeling another end of the world.
A key aspect when we model businesses or model intrinsic value, a lot of
common sense goes into those models. You have to step back and say, what
really makes sense here? Thats part experience, part discipline. We dont model
to the second or third decimal point. Theyre not that elegant. They can appear
to be, but that can also be a trap for investors.
MOI: The spectrum of value investing is quite wide. Give us some sense of how
you fit in. How do you see the dilemma between value and growth?
Rolfe: Its the valuation thats going to give us an opportunity, or an extreme
valuation thats going to turn a decent investment over the near term into a really
good investment. So many people have said it over the yearsBuffett and
Munger includedvalue and growth are two sides of the same investment coin.
The changes of valuation give us opportunity. Everything else being equal, I
would much rather own a better business than a turnaround business, a secularly
growing business rather than a deep cyclical business.
There are too many people in the industryfor various institutional, imperative-
driven reasonsthey want to talk about growth or value and put managers in
certain camps. We want to do both. And again, if were only looking at a
twenty-stock portfolio, we think that we have more of an opportunity to execute
on the classic tenants of both growth and value investing. We dont have to
lower our hurdle on either score to get something into the portfolio.
On the one hand, its good that the industry is like this. It gives us opportunity.
Im glad that 98+% of money managers out there arent focused managers. It
keeps us away from the traffic jam, if you will.
MOI: Youve studied the example of GEICO to illustrate this misnomer of
growth versus value investing. Can you share with us some of the insights that
youve got out of studying GEICO over the years?
Rolfe: Its a story weve liked to tell when weve met with clients and
prospective clients because the history of GEICO is ripe with examples for
growth investors and value investors. The company was started in 1937 with
about $100,000 in seed capital. In 1948, Benjamin Graham broke his rules and
he put 25% of his investment partnership in a privately held company. Fate
would have it that the SEC ultimately ruled to allow that purchasehe was an
advisor buying an insurance company. It allowed for the first publicly traded
shares of GEICO, and GEICO soared, and it soared.
Graham was quick to admit two things. He purchased half of GEICO in 1948 for
about $712,000. Ultimately, it rose in value to over $400 million at its peak in
the history of GEICO is
ripe with examples for
growth investors and value
investors. The company was
started in 1937 with about
$100,000 in seed capital. In
1948, Benjamin Graham
broke his rules and he put
25% of his investment
partnership in a privately
held company.


1972. Graham was very upfront [about] admitting that the gain in GEICO was
more than all of his other successes combined. If it wasnt for GEICO, his
reputation as a great investor wouldnt have been such. Whats interesting is that
a lot of the study of Benjamin Graham is classic deep value, honed out of the
scars of the great depression. He broke the rules and he bought this company,
and held it for all those years where his discipline would have said to sell it.
As fate would have it, Buffett became involved when he was going to school at
Columbia, studying under Graham. He found out about GEICO. It was a
company he hawked when he was a stockbroker after he left Columbia. When
GEICO stumbled in the early 1970s, it was Buffett who swooped in and started
buying the shares when they had fallen. They reached a high of $61 in 1972,
were about $40 in 1974, and they fell to a couple of dollars [by 1976]. Here was
the opportunity, a classic value opportunity. Buffett knew that the underlying
advantage of GEICO, their low-cost advantage versus their competitors, was
still intact, and that would be the foundation for growth going forward.
For those who have followed Buffetts career, they know that GEICO was a
huge win for him, a huge success. He bought about a third of the company in
those dark days. His last investment was in 1980. Through share buybacks at
GEICO, he ultimately got to about 50% of GEICO. He bought the other half in
late 1995 for $2.3 billion. When you read the annual reports, even when he first
invested in GEICO, and then particularly in the annual reports starting in 1995-
1996, when the details were singing the praises of GEICO
He liked to joke that he wanted Tony Nicely to step on the accelerator to spend
all this [money on] advertising, and then Buffett kept his foot on Nicelys foot.
When Buffett arrived on the scene, GEICO was spending about $33 million in
advertising per year. Theyre up to a billion now per year. Its three times the
advertising, roughly, of their three largest competitors combined.
Ive never heard Buffett talk about it in these terms, but it had to give him
satisfaction that he played a significant role in saving GEICO. And Benjamin
Graham still owned it. His wife, when he passed away in 1976, members of the
Graham family, still had their GEICO investment, and that was a significant part
of that rebirththe impact of Buffett. Its been sixty years, and Buffett still
sings the praises of this great growth company, GEICO. Its the story I like to
tell to explain what were trying to do at Wedgewood.
There are plenty of times when a great growth company stumbles. That was a
significant stumble back then, but all along the way, there were times that
GEICO was eminently investable in terms of a good valuation, and all the while,
the growth was clicking along.
MOI: Lets talk about some of the GEICOs in your portfolio, some of the
great businesses that you were able to acquire at a good price. You talked a little
about Applehow do you see the investment case here?
Rolfe: In the fall of last year when it was $705 a share, it was a crowded trade.
They have stumbled. Their product introductions havent had the same regular
sequence, and there are many people who believe that Apples best growth days
are well behind them. We also fall into that camp, just in terms of the raw
growth numbers they were able to put up over the last couple of years, just
before their recent stumble. But the stock got almost cut in half, and we actually
believe it was more dramatic than that. All along while Apples earnings have
disappointed, they were still generating buckets of cash.
There are plenty of times
when a great growth
company stumbles.
[GEICOs] was a significant
stumble back then, but all
along the way, there were
times that GEICO was
eminently investable in terms
of a good valuation, and all
the while, the growth was
clicking along.


If you look at when the market value was $700 billion, and where it fell to a low
of $380 [per share]all along the way over those seven, eight months, they
were generating a ton of cash. If you subtract the cash out and you look at the
decline in Apple from an enterprise value [standpoint], it was almost cut by two-
thirds. At [recent] prices, the market-implied growth rate is flat. Its assuming
flat growth and a significant and permanent contraction in their margins, and we
dont think thats the case. We [have] added more to our position.
We believe that the long-term growth case of Apple is made through the prism
of analyzing their ecosystem. Thats a significant distinction [versus] other
technology companies, present and past. We live in a world of ecosystems. The
average revenue from a customer within that ecosystem is a lot higher than a
one-off purchase. You buy an iPod, you might buy an iPhone. You buy an
iPhone, you might buy an iPad, and you might buy successive generations once
you get locked into that ecosystem with software and services.
The ecosystem growth is very healthy. 400+million iOS users, hundreds of
millions of active iTunes credit cards. We think the markets obsession with
individual products at current margins, prospective margins, one-off product
introductions, one-off product growth rates clouds the judgment of this
ecosystem growth. Ultimately, these various products and services are
peripheral, important but peripheral, to the growth of the ecosystem. We dont
think ecosystem growth is over. We still think [Apple] is a true growth
company, not at the rates it once was, but at current prices, it doesnt take much
to move the needle. In total, they are going to return about a hundred billion
dollarslargely sixty billion in stock buybacks over the next 2.5 years.
Theyre still building cash. Depending on when they buy back stock, you could
see a reduction of shares outstanding from 10% to 15%, and that balance sheet is
going to be loaded up again in two or three years, and they can do the same.
The valuation is extremely low, and when we look out three to five years,
theres going to be this growing franchise that prospectively can have anywhere
from 20%, maybe one-thirdthats probably a little bit on the high side over the
next five yearsof their shares bought back. Thats a big driver of intrinsic
value growth per share. Well see how it turns out; Apple is our largest holding.
MOI: Some investors would sayand perhaps that is the key factor that makes
some investors uncomfortable with Appleis this comparison with Nokia
[Helsinki: NOK1V], this comparison with other technology companies where
you just dont know the rapid change and the risks. Is that in your view the key
insight herethis ecosystem that Apple has versus lets say Nokia?
Rolfe: Thats a great question. The reason why Nokia is where it is right now is
they havent had an ecosystem. Their products were one-off hits and misses if
you will vis--vis the competition. As much as I say that these gadgets are
peripheral to the ecosystem, make no mistake about it: If Apple starts to deliver
me-too, low-quality products, the ecosystem growth is going to grind to a halt,
and that ecosystem can shrink.
Every year the iPhones been out since 2007and they just recently again won
J .D. Powers for consumer satisfactionwe see developers developing apps for
their ecosystem, and we see the usage of iPhones, particularly iPads. They still
deliver high user satisfaction that is keeping those ecosystem members
interested in future products. Certainly, if something comes along with a better
mousetrap, technological obsolescence is right there. Theres no question about
The reason why Nokia is
where it is right now is they
havent had an ecosystem.
Their products were one-off
hits and misses if you will
vis--vis the competition. As
much as I say that these
gadgets are peripheral to the
ecosystem, make no mistake
about it: If Apple starts to
deliver me-too, low-quality
products, the ecosystem
growth is going to grind to a
halt, and that ecosystem can
shrink.


it. Its inherent in almost every company, particularly technology companies.
We worry about that a lot and we think about that a lot. But we look at the
totality of hardware and software, throw in iTunes. iTunes is growing so rapidly.
Theyre at a run right now. iTunes and accessories are surprisingly at a runway
of $16-17 billion per annum. Thats starting to approach the size of Windows or
Microsoft Officethats significant. Thats also part of the ecosystem. Apple
has a number of avenues of growth that feeds that ecosystem. As long as theyre
delivering high quality, best-in-class consumer satisfaction with their products,
well be happy to own the company.
MOI: On the return-of-capital front, are you comfortable with how the current
leadership of Apple has approached this?
Rolfe: Quite frankly, we were getting a little frustrated. Management talked
about that they were thinking about this, they knew the stock was down, at the
board level they were having active discussions, and we wanted them to swing
the proverbial big bat when they made an announcement. And they did, and so
they get it. Im very pleased that the emphasis is going to be on buying back
stock, its very accretive.
We hope they exhaust that $60 billion now. They could buy back the stock at a
billion a week for the next year, roughly speaking. Do it now and do it in size
while the stock is down. Corporate America is littered with many examples of
poor stewardship, of management buying back a bunch of stock at high prices.
When I think about the tens of billions that Cisco [CSCO], Hewlett-Packard
[HPQ], and Research in Motion, now BlackBerry [RIM], have spent, Im sure a
lot of the management would like to have that cash back.
Apple is a difference [because] theyre still generating a ton of cash. That
buyback shotgun is going to be loaded and recocked three or four years from
now. Theyre going to return $100 billion by the end of 2015. Its not like, there
goes the cash, now what? Apples business model and cash generation speak to
ongoing share buybacks that can be very significant. Its not out of the realm ten
years from now that half the shares could be bought back.
MOI: What are some of the other positions in the portfolio that perhaps could
give us insight into how you generate ideas? What are some of the reasons why
these great companies become cheap and what the investment case is?
Rolfe: Weve owned Berkshire Hathaway [BRK.A] nearly continuously since
1998. J ust from a growth company perspective, theres been debate, not so much
of late, is Berkshire really a growth company in the traditional sense?
Obviously, pre the purchase of General Re, it was the big stock positions
Coca-Cola, Gillette, ABC/CapCities, GEICO, the whole thing. As the company
has morphed into more of a conglomerate, the growth has been outstanding. I
still cant believe what Buffett was able to pull off when he bought the rest of
Burlington Northern. Its been an outstanding investment, incredibly accretive.
We just got word of buying the rest of Iscarterrific.
Weve owned Visa [V] for a number of years. Weve owned American
Express [AXP] for a number of years. Weve owned Google [GOOG] for a
number of years. Again, these are just terrific businesses that the market served
up at terrific prices and we swung.
MOI: What about Qualcomm [QCOM]? Its a big position of yours. Whats the
investment case?
When I think about the tens
of billions that Cisco
[CSCO], Hewlett-Packard
[HPQ], and Research in
Motion, now BlackBerry
[RIM], have spent, Im sure a
lot of the management would
like to have that cash back.
Apple is a difference
[because] theyre still
generating a ton of cash.
That buyback shotgun is
going to be loaded and
recocked three or four years
from now.


Rolfe: In this mobile Internet world, theyre the arms merchant. They have an
incredible intellectual portfolio of patents, and they are at the forefront of
Moores law in terms of shrinking the size of semiconductors. Their
multipurpose chipsets find their way into almost the least expensive phones all
the way to the high end. If you want to be competitive in todays mobile world
in terms of a handset, a smartphone, even a non-smartphone, Qualcomm is on
your speed dial. Their solutions and technology stand at the forefront of the
mobile Internet. Weve owned that company for quite a few years as well.
MOI: What was the reason that you were able to acquire it at the right price,
when you think at when you bought it?
Rolfe: They had a period of stalled growth, and that got Wall Street a little bit
impatient. Also, Qualcomm had a lot of initiatives that were kind of hard to get
your arms around. Ultimately, whats the plan here? Are they ever going to
move the needle? Again, what resuscitated Qualcomm was the smartphone. We
have these sophisticated networks, different networks around the world. When
you look at the totality of the silicon in the smartphone that Qualcomm can
address, it has helped their average selling price stabilize, and in some cases
even go up. That was the long term bear case on Qualcommthat the average
selling price of their components is going to go down every year forever. What
has surprised folks over the last couple of years is just how steady the average
selling price has been. As the company generated more revenue, through
operational leverage, they generated a bunch of cash. Theyve been good
stewards of shareholder capital, buybacks, and so a lot to like at Qualcomm.
MOI: Some investors may not look at it the way you do and perhaps dismiss
Qualcomm as just another tech company where its difficult to gain comfort.
What is really the moat here with Qualcomm?
Rolfe: Its their intellectual capital. Its their patents. They were the inventor of
CDMA technology. Their intellectual footprint in terms of a moat is deep and
wide. The scale and scope of what Qualcomm is doing are unmatched. Their
ability not only to recognize market opportunity and get there before
competitors, in size, but also drive innovation, its huge. But I understand, there
are a lot of folks, Mr. Buffett included, wholl say its a technology company
and Im just not going to try to get my head around it. Thats fine. But when you
look at the totality of what Qualcomm has been able to build, its stunning, that
franchise. It would take a lot to knock them out of the top spot.
MOI: In the case of Qualcomm or any of the other businesses you mentioned,
how do you think about valuation? How do you assess whether the market
quotation of a business is attractive enough to remain in the portfolio?
Rolfe: [Qualcomm] hasnt done much of late, actually. We think the shares are
pretty attractive. But its like with any other investment. At the company level,
were trying to ascertain their total addressable market, their competitive
position. Do we have confidence in a certain level of earnings power three to
five years from now? What do we think would be an appropriate valuation, a
significant discount from intrinsic value?
Another way to look at it is the old Charlie Munger invert. We ask ourselves,
whats the market-implied growth rate? Thats where you get that big difference
of where your numbers are, if theyre close to consensus or not. It could be
below, the same or higher. Now youve got a pretty good debate. If youre right,
Another way to look at it is
the old Charlie Munger
invert. We ask ourselves,
whats the market-implied
growth rate? Thats where
you get that big difference of
where your numbers are, if
theyre close to consensus or
not. It could be below, the
same or higher. Now youve
got a pretty good debate. If
youre right, theres your
upside.


theres your upside. If youre wrong and the company is still growing, youre
not overpaying, theres that buffer on the downside so your mistakes arent fatal.
MOI: Do you apply in these models a similar discount rate across the board and
then adjust the numbers of each company? Or do you apply different rates?
Rolfe: Theres a little bit of a variation depending on the companies. The ones
where you have higher convictiondifferent numbers for those that have a little
more risk in their business. Our head isnt so much in those valuation models.
If you have conviction in the company and the valuation makes sensewith that
margin of safety that ought to hit you across the head If its close and its,
lets kind of massage the numbers of the model to make sense, now youve lost
the forest for the trees. Its got to be that big margin of safety.
We hope we can understand the Qualcomm business model well enough and
their competitive aspects to have confidence in an earning power three to five
years from now. There are other folks that would just stay away because its a
technology company, but thats okay.
MOI: The companies you mentioned are all listed in the U.S. Have you looked
at companies that are domiciled abroad? Is your approach global?
Rolfe: No, its U.S.-based. From time to time, we may own a company that is
domiciled out of the United States, but its rare. In a twenty-stock portfolio, if
we cant find twenty companies in the U.S., were not doing something right.
MOI: Help us understand how you go about constructing this portfolio and how
you think about position sizing?
Rolfe: The three pillars of what we do are growth, valuation, and then portfolio.
They all play a key role. Out of our list of thirty to forty companies we want to
own, we are going to select about twenty that have the best risk-reward in terms
of prospective growth and valuation. Portfolio management plays a key role.
We want these businesses to have minimal business model overlap. We dont
want businesses largely competing for the same profit dollar. That will eliminate
a prospective candidate. As an example, we own Google. We wont own
Facebook [FB] at the same time. No opinions on Facebook, its just that those
two businesses have too much of their business model as an overlap.
The maximum well let a stock get to is 10%, the minimum well do is 2.5%.
What you see as the end result in our portfolio, out of our thirty to forty favorite
businesses, these are the ones that we believe are priced right today. At the
portfolio level, these business models are not overlapping or competing with
other companies in the portfolioand thats it.
We actually think thats maybe a different yet thoughtful way of diversifying.
We dont think you need fifty companies to be prudently diversified. Were not
going to own three railroadsthat defeats the purpose. If were wrong on one,
were probably going to be wrong on the other one or two related businesses.
Its been our long history and understanding as investors of this idea of investing
through the lens of a business owner, having the right temperament, having the
right behavior set. Identify these businesses, wait for the valuation. When it
makes sense, swing hard enough to make a difference. At the portfolio level,
thoughtful, prudent diversification from a business model perspective, not just
raw numbers, where it says we need fifty different stocks to be diversified. We
think far too many people have to do it that way. We just choose not to.
We want these businesses to
have minimal business model
overlap. We dont want
businesses largely competing
for the same profit dollar.
That will eliminate a
prospective candidate. As an
example, we own Google. We
wont own Facebook at the
same time.


MOI: What is the single biggest mistake investors make, perhaps focusing
specifically on investors who may be hesitant to invest in companies that are
growing rapidly. What do you think they are missing?
Rolfe: A couple of things. Depending on where we are at in the business
cyclewe just entered the fifth year of a bull marketpeople start to chase
things. When we were in 2008 and 2009, look at mutual fund flows, people
couldnt get out of stocks fast enough. Its just that temperament, its huge.
At the individual company level, people make the mistake of assuming a great
growth company can grow, can compound at a large number for quite a few
years and they bid up the valuation to what are extremes. Theres almost no way
to make a fundamental case that valuation is reasonable. But weve learned over
time, stocks can stay really high really long, and the opposite is you get into a
company where the business doesnt turn. Its a permanently impaired growth
company and it deserves to sell at a cheap multiple, or a cyclical company that
just doesnt turn. Most of the big [mistakes] are because of temperament and
behavior, the psychological aspects of investing, not the IQ side of it.
MOI: How do you keep improving as an investor in great businesses? What are
some books or resources you could share? Whats your advice to investors?
Rolfe: In this business, we are all very fortunate that we can sit on the shoulders
of the giants. There is literature out there, non-academic, just go to Amazon. The
best investment books, theres plenty of them starting with Buffett and the
partnership letters, his chairman letters, then the classic Phil Fisher, on and on.
Id be the first to admit [that] at Wedgewood we slavishly copy from the greats.
Again, were not reinventing the wheel at all. There are certain aspects of
investingin this case growth, value and portfolio managementwe decide to
do in a very specific, differentiated way from most of our peers.
A significant part of what we do at Wedgewood is a decision of what we choose
not to do. As J ohn Bogle of Vanguard has said over and over again, theres
power of simplicity, fewer ideas but more impactful ideas. What we love about
indexation, its largely a buy and hold endeavor. Said another way, its let your
winners run. Thats what we try to do at Wedgewood.
Once you find that terrific business, unless the valuation gets extreme, we hold
on to it like a junkyard dog because theyre too hard to find. Thats just how we
think, and thats part of the culture Ive tried to embed with my three partners.
Their contribution has been very significant in that they add to that culture.
Thats the biggest thing the four of us do at Wedgewoodbuy into this culture.
Over the years, weve never had discussions of why dont we get thirty stocks or
why dont we do another strategy. Thats huge. When you think about how low
our turnover is, over the last two years or so weve only added five or six
companies to the portfolio. This isnt a team of twenty or thirty where
everybody is coming up with great ideas and they want to see their work in the
portfolio. Its huge to buy into that culture.
MOI: Back to focus, patience, and discipline
Rolfe: Thats it. Dont overthink it. Each of those elements is very powerful
growth, concentrating on your best growth ideas, classic tenets of valuation,
maybe a thoughtful but different application of diversification. Throw them all
together and youve got something.
MOI: On that note, David, thank you for your time and insights.
Most of the big [mistakes]
are because of temperament
and behavior, the
psychological aspects of
investing, not the IQ side of
it.


Profiling 20 Wide-Moat Investment Candidates
Abbott Labs (ABT) Geode, GMO, MFS, Jennison, Primecap, Southeastern
Heal th Care: Bi otechnol ogy & Drugs, Member of S&P 500 ABBOTT PARK IL www.abbott.com
Trading Data Consensus EPS Estimates Valuati on
Price: $35.58 (as of 6/21/13) Month #of P/E FYE 12/31/12 18x
52-week range: $29.48$38.77 Latest Ago Ests P/E FYE 12/31/13 18x
Market value: $55.5 billion This quarter $0.44 $0.44 21 P/E FYE 12/31/14 16x
Enterprise value: $54.0 billion Next quarter 0.53 0.53 20 P/E FYE 12/31/15 14x
Shares outstanding: 1,558.9 million FYE 12/31/13 2.01 2.01 25 EV/ LTM revenue 2.5x
Ownership Data FYE 12/31/14 2.25 2.25 24 EV/ LTM EBIT 24x
Insider ownership: <1% FYE 12/31/15 2.46 2.46 16 P / tangible book 7.8x
Insider buys (last six months): 26 LT growth 12.0% 12.1% 9 Greenbl att Criteria
Insider sales (last six months): 15 EPS Surprise Actual Est. LTM EBIT yield 4%
Institutional ownership: 67% 4/17/13 $0.42 $0.41 LTM pre-tax ROC 21%

Operati ng Performance and Fi nancial Positi on
($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 22,476 25,914 29,528 30,765 35,167 38,851 21,494 21,588 5,284 5,378
Gross profit 12,661 14,492 16,916 17,555 20,502 23,311 11,914 11,908 2,925 2,946
R&D 2,255 2,506 2,689 2,744 3,724 4,129 1,459 1,442 364 346
Adjusted operating income 4,056 4,579 5,827 6,609 6,457 6,619 2,931 4,685 509 615
Adjusted net income 3,731 3,606 4,774 5,035 4,995 5,595 3,158 3,161 351 545
Adjusted diluted EPS 2.44 2.34 3.09 3.25 3.23 3.59 2.00 2.01 0.22 0.35
Dividend 1.18 1.30 1.44 1.60 1.76 1.92 1.67 1.30 0.51 0.14
Shares out (avg) 1,530 1,543 1,545 1,547 1,546 1,558 1,575 1,574 1,574 1,569
Cash from operations 5,329 5,184 7,344 7,275 8,736 8,970 9,314 7,550 2,225 460
Capex 1,338 1,656 1,288 1,089 1,015 1,492 1,795 1,616 453 275
Free cash flow 3,991 3,528 6,057 6,186 7,721 7,479 7,519 5,933 1,772 186
% of revenue:
Gross profit 56.3% 55.9% 57.3% 57.1% 58.3% 60.0% 55.4% 55.2% 55.3% 54.8%
R&D 10.0% 9.7% 9.1% 8.9% 10.6% 10.6% 6.8% 6.7% 6.9% 6.4%
Adjusted operating income 18.0% 17.7% 19.7% 21.5% 18.4% 17.0% 13.6% 21.7% 9.6% 11.4%
Cash, investments 1,373 2,821 5,080 9,932 5,452 8,097 15,174 8,517 9,527 8,517
Receivables 4,231 4,947 5,466 6,542 7,184 7,684 7,613 3,918 7,660 3,918
Inventory 2,806 2,951 2,776 3,265 3,189 3,284 3,792 2,710 3,549 2,710
PP&E, net 6,946 7,518 7,219 7,620 7,971 7,874 8,063 5,792 7,955 5,792
Intangible assets 15,853 15,849 15,139 19,492 28,082 25,695 24,362 15,482 25,696 15,482
Tangible assets 20,325 23,865 27,281 33,089 32,492 34,582 42,873 27,204 36,720 27,204
Short-term debt 5,401 2,726 2,732 5,190 6,395 3,375 2,391 3,635 4,785 3,635
Long-term debt 7,010 9,488 8,713 11,266 12,524 12,040 18,085 3,467 11,862 3,467
Tangible equity -1,799 1,929 2,341 3,652 -5,405 -1,255 2,359 7,106 -242 7,106
EBIT/capital employed 20% 40% 51% 62% 45% 45% 3% 21% 18% 28%

Ten-Year Stock Price Performance and Tradi ng Vol ume Dynami cs

$0
$5
$10
$15
$20
$25
$30
$35
$40
$45


BUSINESS OVERVIEW
Abbott provides a broad line of health care products.
Nutritional Products (established 50 years ago; ~30% of
sales) provides adult and pediatric products (~50/50 split).
Diagnostic Products (est. 40 years ago; ~20%) provides
diagnostic systems and tests for a variety of healthcare sites.
Medical Devices (est. 20 years ago; ~25%) sells coronary,
endovascular, structural heart, and vessel closure devices.
Established Pharma Products (est. 2 years ago; ~25%) sells
a broad line of branded generic pharmaceutical products.

INVESTMENT HIGHLIGHTS
Retains strong business portfolio after AbbVie
(NYSE: ABBV) spinoff on J anuary 1. AbbVie is
Abbotts former proprietary pharma business, which
was 45% of sales and more than half of EBIT in
2012. Abbott and AbbVie have market caps of ~$54
billion and ~$66 billion, respectively. Abbott now
has 70,000 employees and ~$22 billion in revenue
in vascular health, diabetes, diagnostic screening
and detection, vision correction, and nutrition.
Science-based, diversified healthcare firm, with
strong positions in diagnostics ($27 billion market),
devices ($30 billion), nutritionals ($36 billion), and
branded generic pharma ($630 billion). The units
are aligned with long-term health trends: an aging
population, higher prevalence of chronic disease,
and greater access to care in growing economies.
Leadership in multiple healthcare segments,
including #1 in adult nutrition globally, #1 in U.S.
pediatric nutrition, #1 in immunoassay diagnostics,
#1 in blood screening, #1 in drug-eluting stents, #1
in bare metal stents, #1 in LASIK, #2 in cataract,
and #1 in three separate generic pharma products.
Well balanced geographically, with 30% of sales
in the U.S., 30% in Western Europe, Canada, J apan
and Australia, and 40% in fast-growing economies,
including India, China, Russia, and Brazil. The
latter should grow to nearly 50% of sales by 2015.
Guiding for ongoing EPS of $1.98-$2.04 and
GAAP EPS of $1.39-$1.45 in 2013. The latter
includes intangibles amortization and other items.

INVESTMENT RISKS & CONCERNS
Portfolio too far-flung, even after AbbVie spinoff?
Abbotts four major segments do not appear to be
highly synergistic, with each perhaps requiring
greater attention than top management can provide.
Post-AbbVie capital allocation unclear as yet.
Positively, Abbott has authorized a stock buyback
and dividend payments. However, to what extent
the company pursues M&A remains to be seen.
SELECTED OPERATING DATA
FYE December 31 2008 2009 2010 2011 2012 1Q13
revenue 14% 4% 14% 10% 3% 2%
gross profit 17% 4% 17% 14% 6% 1%
Revenue ($bn) 29.5 30.8 35.2 38.9 39.9 5.4
from U.S. 49% 46% 43% 41% 42% n/a
% of revenue by segment:

Proprietary pharma (AbbVie)
1

57% 53%
44% 44% 45% 0%
Established pharma 13% 14% 13% 23%
Nutritional products 17% 18% 16% 15% 16% 32%
Diagnostic products 12% 12% 11% 11% 11% 20%
Vascular products 8% 9% 9% 9% 8% 14%
Other 7% 9% 8% 8% 7% 11%
Operating margin by segment:

Proprietary pharma (AbbVie)
1

38% 38%
43% 42% 44% n/m
Established pharma 21% 23% 24% 23%
Nutritional products 17% 17% 14% 13% 16% 20%
Diagnostic products 10% 12% 15% 19% 19% 24%
Vascular products 9% 23% 28% 29% 29% 25%
Selected items as % of revenue:

Gross profit 57% 57% 58% 60% 62% 55%
R&D 9% 9% 11% 11% 11% 6%
EBIT 20% 24% 17% 15% 20% 11%
Net income 17% 19% 13% 12% 15% 10%
D&A 6% 7% 7% 8% 7% 8%
Capex 4% 4% 3% 4% 5% 5%
Calculation of return on capital employed ($bn):

Reported operating income 5.8 7.3 6.1 5.8 8.1 0.6
+ non-recurring items 0.0 -0.7 0.4 0.9 2.6
Adjusted EBIT 5.8 6.6 6.5 6.6 10.7 0.6
Current assets 15.5 20.2 22.8 23.0 27.5 25.2
- Cash, ST investments -4.0 -7.5 -7.7 -6.8 -11.6 -11.8
- Current liabilities -10.3 -12.3 -15.2 -16.4 -14.4 -11.8
+ Short-term debt 2.7 4.0 5.8 4.9 2.9 3.0
+ Net fixed assets 7.4 7.4 7.8 7.9 8.0 6.9
Capital employed 11.3 11.7 13.6 12.7 12.4 11.5
= Return on capital employed 51% 56% 48% 52% 86% 21%
Tangible assets ($bn) 27.3 33.1 32.5 34.6 42.9 27.2
Selected items as % of tangible assets:

Cash, investments 19% 30% 17% 23% 35% 31%
ST debt 10% 16% 20% 10% 6% 13%
LT debt 32% 34% 39% 35% 42% 13%
Tangible equity 9% 11% -17% -4% 6% 26%
Shares out (avg) (mn) 1,545 1,547 1,546 1,558 1,575 1,569
shares out (avg) 0% 0% 0% 1% 1% 0%
1
Abbott Labs spun off AbbVie (NYSE: ABBV), its research-based proprietary
pharmaceutical business, effective J anuary 1, 2013.

MAJOR HOLDERS
Insiders <1% | FMR 1% | Wellington 1% | MFS 1% | Cap Re
1% | GMO 1% | Primecap 1% | Southeastern <1%

RATINGS
VALUE Intrinsic value materially higher than market value?
DOWNSIDE PROTECTION Low risk of permanent loss?
MANAGEMENT Capable and properly incentivized?
FINANCIAL STRENGTH Solid balance sheet?
MOAT Able to sustain high returns on invested capital?
EARNINGS MOMENTUM Fundamentals improving?
MACRO Poised to benefit from economic and secular trends?
THE BOTTOM LINE
Abbotts size was cut roughly in half with the J anuary spinoff of AbbVie, the proprietary pharma business. We welcome the
separation as it rationalizes the portfolio, although the latter remains quite far-flung. Value could be created by culling the
portfolio further over time, but this seems unlikely. In its current state, Abbott holds leading market share in several attractive
healthcare segments, positioning it well for continued growth. The shares are fairly valued at 17-18x 2013E adjusted EPS.


ABBOTT LABS EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive
Based on revenue for the twelve months
ended March 31, 2013 and average
EBIT margin for past seven fiscal years

Based on median consensus EPS
estimate for the fiscal year ending
December 31, 2013

December 31, 2014

TTM net sales: $22 billion

Consensus FY13E EPS: $2.01 ()

multiplied by

minus

minus
Average 7-year EBIT margin: 18.0%

Assumed upside/downside to

equals

FY13 EPS estimate: 5% * $2.01

Estimated EBIT: $3.9 billion

equals

equals
multiplied by

Revised FY13 EPS estimate: $2.11

Assumed fair value multiple of EBIT:

multiplied by

multiplied by
10.0x

Corresponding industry P/E: 18.3x (*)

equals

equals

equals
Estimated fair enterprise value of

Industry multiple-implied fair value:

Abbott Labs: $39 billion

$60 billion ($39 per share)

plus

multiplied by

multiplied by
Cash, ST investments: $8.5 billion

Assumed ABT multiple as a

Assumed ABT multiple as a
minus

percentage of the industry multiple:

Total debt: $7.1 billion

110%

120%
equals

(18.7x fair value P/E multiple)

Estimated fair value of the common

equals

equals
equity of Abbott Labs:


$40 billion, or $26 per share


(based on 1.6 billion shares out)


27% downside from the recent


stock price ($36 per share)

19% upside to the recent

(*) Represents Biotechnology & Drugs industry median.


() The FY13 consensus EPS estimate of $2.01 is unchanged fromthree months ago. () The FY14 consensus EPS estimate of $2.25 has been revised down by 1% from$2.26 three
months ago. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

ABBOTT LABS CALCULATION of ADJUSTED EARNINGS FROM CONTINUING OPERATIONS, 2008-2012

Source: Company presentation dated April 26, 2013.

Adjusted earnings from continuing
operations per share increased
from $3.32 per share in 2008 to
$5.07 per share in 2012


ABBOTT LABS BUSINESS PORTFOLIO

Source: Company presentation dated J une 11, 2013.

ABBOTT LABS POSITION in KEY MARKETS


ABBOTT LABS ALIGNMENT with HEALTHCARE TRENDS

Source for above table and chart on the right: Company presentation dated April 26, 2013.
ABBOTT LABS GROWTH in DIVIDENDS, 1972-2012

Consistent dividends increased to $2.01 per share in 2012,
up from $1.88 in 2011, $1.72 in 2010, and $1.56 in 2009


Danaher (DHR) T Rowe, MFS, Winslow, Viking, Cap Re, Neuberger
Technology: Scienti fic & Technical Instruments, Member of S&P 500 WASHINGTON DC www.danaher.com
Shares outstanding: 692.7 million FYE 12/31/13 3.40 3.40 25 EV/ LTM revenue 2.5x
Insider ownership: <1% FYE 12/31/15 4.18 4.20 9 P / tangible book n/m

per share data) 2006 2007 2008 2009 2010 2011 2012 3/29/13 3/30/12 3/29/13
Revenue 9,466 11,026 12,698 10,517 12,550 16,091 18,260 18,389 4,316 4,445
Gross profit 4,197 5,041 5,940 5,070 6,405 8,177 9,448 9,505 2,236 2,326
R&D 440 601 725 600 774 1,019 1,138 1,164 270 296
Adjusted pretax income 1,429 1,637 1,798 1,439 2,230 2,592 3,134 3,237 696 922
Dividend 0.04 0.06 0.06 0.07 0.08 0.09 0.13 0.11 0.03 0.00
Shares out (avg) 616 622 639 642 653 676 693 693 692 692
Cash from operations 1,547 1,646 1,859 1,801 2,084 2,626 3,415 3,406 645 637
Capex 136 162 194 175 191 335 458 457 118 116
Free cash flow 1,411 1,484 1,665 1,625 1,893 2,292 2,957 2,949 528 520
% of revenue:
Gross profit 44.3% 45.7% 46.8% 48.2% 51.0% 50.8% 51.7% 51.7% 51.8% 52.3%
R&D 4.6% 5.5% 5.7% 5.7% 6.2% 6.3% 6.2% 6.3% 6.3% 6.7%
Cash, investments 318 239 393 1,722 1,633 537 1,679 2,151 1,043 2,151
Receivables 1,655 1,984 1,895 1,917 2,098 3,050 3,267 3,118 2,997 3,118
Inventory 989 1,194 1,142 993 1,166 1,781 1,813 1,867 1,889 1,867
PP&E, net 869 1,109 1,109 1,143 1,130 2,101 2,141 2,110 2,105 2,110
Tangible assets 4,606 5,666 5,760 7,122 8,516 9,635 11,135 10,962 9,986 10,962
Debt 2,434 3,726 2,619 2,933 2,825 5,305 5,343 4,471 4,926 4,471
Tangible equity -1,614 -2,720 -1,921 -843 10 -3,410 -2,790 -1,827 -2,612 -1,827
TBV / tangible assets -35% -48% -33% -12% 0% -35% -25% -17% -26% -17%
EBIT/capital employed 98% 90% 82% 69% 97% 85% 83% 80% >100% 95%


$0
$10
$20
$30
$40
$50
$60
$70



BUSINESS OVERVIEW
Danaher provides a range of specialized professional,
medical, industrial, and commercial products and services.
Large designer of diversified machinery, with
strong brand names, innovative technology, and
major market positions in several verticals. The firm
has executed well on M&A-driven growth strategy.
It earns mid-teens ROIC on $23 billion of capital.
Test and measurement business (19% of sales,
21% EBIT margin) provides electronic tools for
enterprise and communications networks. Danaher
entered the business in 1998 through an acquisition.
Environmental business (17%, 21%) is a leader in
products that protect the water supply (entered via
M&A in late 1990s) and air quality (since mid-80s).
Life sciences and diagnostics (36%, 13%) offers
analytical instruments, reagents, and other products
to help diagnose disease. The life science businesses
offer research and clinical tools. Danaher entered
these businesses in the mid-2000s through M&A.
Dental (11%, 14%) provides products to diagnose,
treat and prevent diseases of the teeth and gums.
Danaher entered the market in 2004 through M&A.
Industrial technologies (18%, 21%) makes
components for a diverse set of applications. The
product identification and motion control businesses
were acquired in 2002 and 1998, respectively.
Expanded margins in virtually every segment
over the past decade, with each unit now reporting
gross margin of at least ~50%. Management sees an
organic path to 20% long-term operating margin.
Well-managed business. The Danaher Business
System is designed to drive efficiencies. The firms
co-founders are still major shareholders and on the
Board, supporting equity-friendly capital allocation.
Recurring revenue has grown to 40% of revenue, up
from 25% in 07, due in part to consumables focus.
Heavily reliant on acquisitions. Danaher, having
been organized as a Massachusetts REIT in 1969
and reorganized as Diversified Mortgage Investors
in 1978, has evolved into its current state through a
large number of acquisitions. Danaher has closed
more than 150 deals over the past decade alone.
NOTABLE HOLDERS
CEO Culp <1% | Co-founder and director M. Rales 7% |
Co-founder and chairman S. Rales 6% | T Rowe 9% | MFS
4% | Winslow 2% | Viking 2% | Cap Re 1% | Neuberger 1%
FYE December 31 2008 2009 2010 2011 2012 1Q13
revenue 15% -17% 19% 28% 13% 3%
gross profit 18% -15% 26% 28% 16% 4%
Revenue ($bn) 12.7 10.5 12.6 16.1 18.3 4.4
% of revenue by major segment:

Test and measurement 22% 21% 23% 21% 19% 19%
Environmental 19% 23% 22% 18% 17% 16%
Life sciences and diagnostics 12% 14% 18% 29% 36% 35%
Dental 14% 16% 15% 12% 11% 11%
Industrial technologies 27% 20% 20% 19% 18% 18%
Operating income by major segment:

Test and measurement 17% 14% 20% 22% 21% 22%
Environmental 20% 19% 21% 21% 21% 19%
Life sciences and diagnostics 13% 12% 10% 9% 13% 13%
Dental 10% 13% 11% 12% 14% 13%
Industrial technologies 16% 14% 20% 21% 21% 21%
% of revenue by major geography:

U.S. 52% 53% 45% 42% 43% n/a
Germany 14% 13% 7% 7% 6% n/a
China 6% 6% 6% 7% 8% n/a
% of revenue by major product group:

Analytical/physical instrumentation 39% 39% 41% 37% 33% n/a
Medical and dental products 26% 28% 33% 41% 47% n/a
Motion/industrial automation controls 14% 11% 12% 10% 9% n/a
Mechanics and related hand tools 7% 8% 5% 2% 2% n/a
Product identification 7% 7% 7% 7% 8% n/a

Gross profit 47% 48% 51% 51% 52% 52%
R&D 6% 6% 6% 6% 6% 7%
EBIT (adjusted)
1
15% 15% 16% 17% 18% 16%
Net income (adjusted)
1,2
11% 11% 14% 13% 13% 16%
D&A 3% 3% 3% 4% 5% 5%
Capex 2% 2% 2% 2% 3% 3%
Calculation of return on capital employed ($mn):

Adjusted EBIT 1,918 1,553 2,050 2,729 3,288 731
Current assets 4,118 4,704 5,643 6,169 6,930 7,749
- Cash, ST investments -316 -1,057 -1,677 -1,085 -1,108 -1,915
- Current liabilities -2,823 -2,753 -3,041 -3,746 -4,189 -4,066
+ Short-term debt 198 55 43 70 77 61
+ Net fixed assets 1,109 1,126 1,137 1,615 2,121 2,125
Capital employed 2,287 2,075 2,104 3,023 3,831 3,955

Debt (mostly long term) 44% 41% 33% 54% 47% 40%
Tangible equity -33% -12% 0% -35% -25% -17%
Shares out (avg) (mn) 639 642 653 676 693 692
shares out (avg) 3% 0% 2% 4% 3% 0%
1
Adjusted for unusual items of -$49 million in 2008, -$113 million in 2009, -$144 million in
2011, and -$123 million in 2012.
2
Adjusted for nonrecurring items of $65 million in 2009,
$75 million in 2010, $237 million in 2011, and $93 million in 2012.
RATINGS
THE BOTTOM LINE
Danahers history reveals an opportunistic approach to capital allocation. Rather than view the company as committed to any
one market, the co-founders (still active on the Board) have cultivated a culture of M&A-driven growth while focusing on
acceptable returns on capital. The company has created equity value by meeting the twin objectives of growing invested
capital and improving ROIC. From 2008-2012, invested capital grew from $12 billion to $23 billion while cash ROIC rose
from 14.2% to 16.1%. Management sees opportunity to deploy $8 billion of additional capital over the next two years, setting
the stage for incremental intrinsic value creation. Unfortunately, the 7% FCF yield is a bit too low to entice us to invest.


DANAHER EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive

December 31, 2014

Based on free cash flow for the twelve
months ended March 29, 2013



Operating cash flow: $3.4 billion
multiplied by

minus

minus


Capex: $460 million
equals


equals

equals

Free cash flow: $2.9 billion
multiplied by


divided by

multiplied by

Industry median FCF yield: 4.4% (*)
10.0x


equals
equals

equals

Industry FCF yield-implied fair value:


Danaher: $30 billion


multiplied by
plus

multiplied by

Assumed required FCF yield as a

Assumed DHR multiple as a

percentage of the industry FCF yield:
minus


90%

110%

(4.0% required FCF yield)
equals


equals

equals

equity of Danaher:


equity of Danaher:

equity of Danaher:

(based on 690 million shares out)






(*) Scientific & Technical Instruments industry median.


() The FY14 consensus EPS estimate of $3.80 has been revised down by 1% from$3.84 three months ago. Source: Company filings, The Manual of Ideas.

DANAHER ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit to Reach Tang. LTM EPS Yield LTM Rev./ Rev. % LTM Rev. Equity/
relevant websites) 7-Year MV EV Book/ FCF This Next Rev./ Empl. Last Gross Adj. Tang.
Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT Assets
General Electric / GE -75% 80% 241,545 549,105 16% 6% 6% 7% 8% 27% 483 2% 0% 42% 12% 7%
Emerson Electric / EMR -55% 14% 39,365 42,294 2% 7% 5% 6% 7% 58% 183 3% 1% 40% 20% 6%
SPX Corp. / SPW -64% 97% 3,347 4,283 n/m 5% neg. 6% 8% 119% 339 8% -2% 27% 13% -9%
Danaher / DHR -62% 4% 43,024 45,345 n/m 7% 6% 5% 6% 41% 292 7% 3% 52% 17% -17%
Abbreviations: MV =market value | EV =enterprise value | LTM =last twelve months | FY =fiscal year | empl. =employee | rev. =revenue | tang. =tangible | adj. =adjusted | = change
Explanations: revenue represents year-over-year change in revenue | EPS yield for this and next FY is based on consensus EPS estimates | EBIT is adjusted for certain unusual items

DANAHER SEGMENT EVOLUTION, 2001 to 2012


Major gross margin
improvement has
accompanied strong
revenue growth


DANAHER RECURRING REVENUE

DANAHER MARGIN EXPANSION

DANAHER MANAGEMENTS CORE ROIC ANALYSIS

Source for the above charts: Company presentation dated J une 12, 2013.
~200 bps core increase in ROIC
since 2008 despite 2009 recession
Management aims to utilize
M&A and leverage the
installed base in order to
increase recurring revenue
Profitable growth, portfolio
evolution, and post-acquisition
margin improvement initiatives
have produced major gross
margin expansion since 2001
Management sees organic
path to 20% operating margin,
up from 18% in 2012


DirecTV (DTV) Akre, Baupost, Berkshire, Lane Five, Southeastern, Weitz
Services: Broadcasti ng & Cabl e TV, Member of S&P 500 EL SEGUNDO CA www.directv.com

per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 14,756 17,246 19,693 21,565 24,102 27,226 29,740 30,274 7,046 7,580
Gross profit 7,158 8,337 9,745 10,635 11,997 13,271 14,161 14,419 3,479 3,737
D&A 1,034 1,684 2,320 2,640 2,482 2,349 2,437 2,520 595 678
Adjusted operating income 2,357 2,486 2,695 2,673 3,896 4,629 5,085 5,415 1,308 1,408
Adjusted pretax income 2,299 2,388 2,471 2,404 3,463 4,009 4,506 4,600 1,157 1,251
Shares out (avg) 1,262 1,195 1,110 985 880 747 638 622 678 572
Cash from operations 3,162 3,645 3,910 4,431 5,206 5,185 5,634 5,407 1,763 1,536
Capex 1,976 2,692 2,229 2,071 2,416 3,170 3,349 3,364 811 826
Free cash flow 1,186 953 1,681 2,360 2,790 2,015 2,285 2,043 952 710
% of revenue:
Gross profit 48.5% 48.3% 49.5% 49.3% 49.8% 48.7% 47.6% 47.6% 49.4% 49.3%
D&A 7.0% 9.8% 11.8% 12.2% 10.3% 8.6% 8.2% 8.3% 8.4% 8.9%
Capex 13.4% 15.6% 11.3% 9.6% 10.0% 11.6% 11.3% 11.1% 11.5% 10.9%
Cash, investments 2,669 1,093 2,005 2,605 1,502 873 1,902 1,679 4,526 1,679
Receivables 1,345 1,535 1,423 1,625 2,001 2,474 2,696 2,649 2,197 2,649
Inventory 148 193 192 212 247 280 412 418 285 418
LT investments 806 838 923 1,434 1,755 1,738 1,711 1,683 1,749 1,683
PP&E, net 4,453 5,833 6,647 6,476 6,679 7,438 8,395 8,587 7,718 8,587
Tangible assets 9,815 9,817 11,614 12,965 12,687 13,417 15,660 15,886 16,914 15,886
Debt 3,662 3,438 6,375 8,547 11,033 13,464 17,528 18,365 17,461 18,365
Tangible equity 1,355 1,056 -294 -2,384 -5,416 -8,113 -10,326 -10,912 -8,640 -10,912


$0
$10
$20
$30
$40
$50
$60
$70



BUSINESS OVERVIEW
DirecTV provides satellite television services.

Largest U.S. satellite TV provider with 20.1 million
subscribers as of March 31, 2013 (up 1% y-y),
ahead of DISH Networks 14.1 million (flat y-y).
U.S. housing units total 130+million, of which
~100 million currently subscribe to a formof pay-TV.
20% subscriber share of U.S. pay-TV industry,
which includes cable (57% share), satellite (34%),
and, increasingly, telephone companies (5%+).
Strong ARPU growth in the U.S. reflects the
strength of the DirecTV brand and popularity of its
product and service offerings in a challenging U.S.
operating environment. ARPU is up 13% since 2009.
Largest pay-TV provider in Latin America,
which contributes nearly 25% of total revenue.
Wholly-owned PanAmericana and 93%-owned Sky
Brazil have 10.9 million subscribers and 41%-owned
Sky Mexico (accounted for under the equity
method) another 5.4 million subscribers.
Valuation implies little to no growth expectation
at a 10% forward earnings yield, based on
consensus EPS of $5.98 for 2014. While the U.S.
may indeed have muted growth prospects, the market
seems to be ignoring the growth in Latin America.
Exemplary capital allocation under CEO Mike
White (61), including aggressive repurchases. Since
White joined in 2010, share count is down by 40%+).

Competition from cable and telco companies, as
well as Internet video as Hulu, Netflix, YouTube
and other online providers gain popularity. However,
DirecTV continues to grow subscribers (up 1% y-y
in 2012) and ARPU (+4%) in the U.S., while keeping
churn low and subscriber acquisition costs in check.
Debt-funded share buybacks are unsustainable.
While the buybacks have created value over the
years, DirecTV has increased net debt from $5.4
billion at yearend 2009 to $16.7 billion to help fund
$17.2 billion of buybacks from 2010 through 1Q13.
Free cash flow in the period totaled $7.7 billion.
Capital intensity. Capex continues to be at ~11%
of revenue, despite revenue up by ~50% since 2008.
~$17 billion of net debt (2.0x run-rate EBITDA
based on Q1 adjusted EBITDA of $2.1 billion).

NOTABLE HOLDERS
Insiders <1% | Berkshire Hathaway 7% | Southeastern 5%
Akre <1% | Baupost <1% | Lane Five <1% | Weitz Funds <1%
FYE December 31 2008 2009 2010 2011 2012 1Q13
revenue U.S. 11% 8% 9% 8% 6% 5%
revenue Latin America 39% 21% 25% 42% 23% 16%
revenue 14% 10% 12% 13% 9% 8%
gross profit 17% 9% 12% 11% 7% 7%
assets 10% 10% -2% 3% 12% -6%
Revenue ($bn) 19.7 21.6 24.1 27.2 29.7 7.6

DIRECTV U.S. 88% 87% 84% 80% 78% 76%
DIRECT Latin America 12% 13% 15% 19% 21% 23%
EBIT margin by segment:

DIRECTV U.S. 13% 13% 16% 17% 18% 19%
DIRECTV Latin America 18% 12% 17% 18% 15% 7%

Gross profit 51% 51% 51% 49% 48% 49%
EBIT (adjusted)
1
14% 12% 16% 17% 17% 19%
Pretax income (adjusted)
1
13% 11% 14% 15% 15% 17%
1
8% 7% 9% 10% 10% 11%
D&A 12% 12% 10% 9% 8% 9%
Capex 11% 10% 10% 12% 11% 11%
Operating metrics DIRECTV U.S.:

Subscribers (mn) 17.6 18.6 19.2 19.9 20.1 20.1
Change (y-y) 5% 5% 4% 3% 1% 1%
ARPU
2
$84 $85 $90 $93 $97 $96
Change (y-y) 6% 2% 5% 4% 4% 4%
SAC
3
$715 $712 $796 $813 $859 $899
Change (y-y) 3% 0% 12% 2% 6% 5%
Monthly churn 1.5% 1.5% 1.5% 1.6% 1.5% 1.5%
Operating metrics DIRECTV Latin America:

Subscribers (mn)
4
3.9 4.6 5.8 7.9 10.3 10.9
Change (y-y) 18% 18% 27% 36% 31% 29%
ARPU $55 $57 $58 $63 $57 $54
Change (y-y) 14% 4% 1% 8% -9% -11%
5

Monthly churn 1.8% 1.8% 1.8% 1.8% 1.8% 1.9%

LT investments 8% 11% 14% 13% 11% 11%
PP&E, net 57% 50% 53% 55% 54% 54%
ST debt 1% 12% 0% 0% 2% 3%
LT debt 54% 54% 87% 100% 110% 112%
Tangible equity -3% -18% -43% -60% -66% -69%
Trailing P/E (end) 17x 35x 16x 12x 11x 12x
Forward P/E (end) 24x 13x 12x 9x 10x 11x
Diluted EPS (cont.) ($) 1.36 0.95 2.48 3.47 4.58 1.20
Shares out (avg) (mn) 1,110 985 880 747 638 572
shares out (avg) -7% -11% -11% -15% -15% -16%
1
Adjusted for unusual items of -$570 million in 2009, $51 million in 2010, -$25 million in
2011, -$64 million in 2012, and -$166 million in 1Q13.
2
ARPU =average revenue per user.
3
SAC =subscriber acquisition cost.
4
Excludes Sky Mexico subscribers.
5
Excluding the impact of foreign currency exchange rates, ARPU increased 1.5%.

RATINGS
THE BOTTOM LINE
At a 10% forward earnings yield, the market continues to treat DirecTV as if it had little to no growth prospects. This belies
growth in Latin America where DirecTV is the largest pay-TV provider. With Latin America contributing ~25% of EBITDA,
and DirecTV still growing in the U.S., the valuation is attractive. What makes it compelling is exemplary capital allocation
and the ability to reinvest capital from the maturing U.S. market into Latin America and other markets for a long time to
come. Despite concerns about competition and capital intensity, as well as increasing leverage, we like the risk-reward.


DIRECTV EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive
Valuation methodology:




December 31, 2013



multiplied by

minus

minus

Capex: $3.4 billion

equals

equals



equals
multiplied by

divided by



multiplied by
10.0x

equals

equals


equals


DIRECTV: $46 billion

multiplied by

plus


multiplied by


Assumed DTV multiple as a
plus

85%

Long-term investments at fair value


110%
discount of 25%: $1.3 billion

equals

minus


equals
Total debt: $18 billion

equity of DIRECTV:

equals


equity of DIRECTV:


equity of DIRECTV:






(*) Represents Broadcasting & Cable TV industry median multiple.
() The FY13 consensus EPS estimate of $4.96 has been revised upward by 3% from$4.80 three months ago.

Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

DIRECTV COMPOSITION of FREE CASH FLOW ($ in millions)

Source: Company earnings release dated February 2013.

Operating cash flow was $1.54 billion in
1Q13, down from $1.76 billion in 1Q12
Capex was $830 million in 1Q13
compared to $810 million in 1Q12
FCF has lagged modestly
behind net income over the
past two years
Its unclear what portion of
capex might be regarded as
expansion rather than
maintenance capex


DIRECTV KEY OPERATING METRICS of U.S. SEGMENT


DIRECTV KEY OPERATING METRICS of LATIN AMERICA SEGMENT


U.S. financials have benefited from strong ARPU
while the subscriber trend has been rather flat
Strong subscriber growth is fueling financial performance
in Latin America, even as ARPU erodes modestly


Express Scripts (ESRX) Cap World, Davis, GMO, T Rowe, Wedgewood, Weitz
Services: Retai l (Drugs), Member of S&P 500

ST. LOUIS MO www.express-scripts.com
Institutional ownership: 86% 4/29/13 $0.99 $0.98 LTM pre-tax ROC n/m

per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 21,563 21,824 21,941 24,722 44,973 46,128 93,858 107,789 12,133 26,063
Gross profit 1,469 1,759 2,031 2,424 2,958 3,240 7,330 8,465 832 1,967
Adjusted operating income 826 1,061 1,274 1,498 2,071 2,344 3,490 4,889 567 842
Adjusted pretax income 742 945 1,207 1,308 1,909 2,057 2,896 3,516 437 638
Adjusted net income 475 601 776 827 1,205 1,306 2,046 3,256 268 374
Shares out (avg) 559 521 498 527 539 501 731 753 485 819
Cash from operations 659 827 1,103 1,772 2,117 2,192 4,740 5,171 532 964
Capex 67 75 84 148 120 144 160 250 19 109
Free cash flow 592 752 1,019 1,624 1,998 2,048 4,580 4,921 513 855
% of revenue:
Gross profit 6.8% 8.1% 9.3% 9.8% 6.6% 7.0% 7.8% 7.9% 6.9% 7.5%
Cash, investments 131 435 531 1,070 524 5,620 2,794 1,990 9,578 1,990
Receivables 1,293 1,185 1,156 2,516 1,721 1,916 5,481 4,294 2,008 4,294
Inventory 191 166 203 313 382 374 1,662 1,657 385 1,657
Total current assets 1,772 1,968 2,044 4,144 2,941 8,058 10,757 8,708 12,104 8,708
PP&E, net 198 216 222 347 373 416 1,634 1,680 406 1,680
Tangible assets 2,051 2,219 2,296 4,553 3,347 8,500 12,714 10,708 12,535 10,708
Payables 576 517 496 706 657 928 2,909 2,574 1,118 2,574
Short-term debt 180 260 420 1,340 0 1,000 935 632 1,000 632
Total current liabilities 2,429 2,475 2,722 5,457 3,917 5,458 13,057 11,524 5,667 11,524
Long-term debt 1,270 1,760 1,340 2,493 2,494 7,076 14,980 13,815 10,537 13,815
Total liabilities 3,983 4,560 4,431 8,379 6,951 13,133 34,726 31,968 16,833 31,968
Common equity 1,125 696 1,078 3,552 3,607 2,474 23,385 23,618 2,776 23,618
Tangible equity -1,932 -2,341 -2,136 -3,826 -3,605 -4,633 -22,013 -21,260 -4,298 -21,260


$0
$10
$20
$30
$40
$50
$60
$70



BUSINESS OVERVIEW
Express Scripts provides pharmacy benefit management
(PBM
*
) services in North America.

Largest pharmacy benefit manager in the U.S.
Express Scripts provides healthcare management and
administration services on behalf of payors (e.g.
HMOs, health insurers, employers) through networks
of contracted retail pharmacies and mail-order.
~$25 billion acquisition of Medco Health
Solutions in mid-2012 adds scale. Scale leads to
competitive advantage related to the ability to negotiate
higher discounts from drug manufacturers on behalf
of the companys healthcare payor customers.
Guiding for $4+ billion of annual FCF (8%+ yield)
including $1 billion of Medco-related synergies.
Based on FCF of $855 million in Q1, the synergies
and FCF targets appear achievable in the near term.
Capital-light model generates significant FCF,
enabling potentially increasing return of capital.
While Express Scripts does not pay a dividend, it
has been a repurchaser of shares in the past.
U.S. healthcare reform provides volume tailwinds.
More than 90% of new lives are in 40 states where
the company has a key managed care relationship.
Helps customers manage the cost pressures of
rising drug prices by: 1) evaluating drugs for price,
value and efficacy to assist clients in selecting a cost-
effective formulary; 2) leveraging purchasing volume
to deliver discounts to health benefit providers; and
3) promoting the use of generics and low-cost brands.

Low entry barriers and switching costs. While
scale is important, customers are well-informed and
can relatively easily move among the various PBMs.
Competition includes other independent PBMs (e.g.
Catalyst RX, MedImpact), PBMs owned by managed
care companies (e.g. OptumRx-UnitedHealth), and
retail pharmacy-owned PBMs (e.g. Caremark-CVS).
Customer concentration and retention risk.
WellPoint, the Dept. of Defense and UnitedHealth
Group represented 34% of 2012 revenue.
$4+ billion FCF target may be too aggressive in
the near term due to risk related to customer churn,
merger integration and regulatory developments.
~$12 billion of net debt (2.1x annualized EBITDA
based on Q1 EBITDA of $1.4 billion).

NOTABLE HOLDERS
Insiders <1% | GMO 2% | Wedgewood <1% | Weitz <1%
1

FYE December 31 2008 2009 2010 2011 2012 1Q13
revenue 1% 13% 82% 3% 103% 115%
gross profit 15% 19% 22% 10% 126% 136%
assets 5% 117% -12% 48% 272% 183%
BV per share 62% 211% -1% -26% 547% 404%
Revenue ($bn) 21.9 24.7 45.0 46.1 93.9 26.1

Gross profit 9% 10% 7% 7% 8% 8%
EBIT 6% 6% 5% 5% 3% 3%
EBIT (adjusted)
2
6% 6% 5% 5% 4% 3%
1
6% 5% 4% 4% 3% 2%
2,3
4% 3% 3% 3% 2% 1%
D&A 0% 0% 1% 1% 2% 2%
Capex 0% 1% 0% 0% 0% 0%
Industry EBIT margin
4
-2% 5% 5% 5% 3% 3%
Px processed (mn)
5
506 531 754 752 1,396 390
px processed 0% 5% 42% 0% 86% 102%
Generic penetration
6
67% 70% 73% 75% 79% 81%
% of revenue from Top 5
7
18% 24% 55% 57% 39% 40%

Receivables 50% 55% 51% 23% 43% 40%
Inventory 9% 7% 11% 4% 13% 15%
PP&E, net 10% 8% 11% 5% 13% 16%
Payables 22% 16% 20% 11% 23% 24%
ST debt 18% 29% 0% 12% 7% 6%
Current liabilities 119% 120% 117% 64% 103% 108%
LT debt 58% 55% 75% 83% 118% 129%
Tangible equity -93% -84% -108% -55% -173% -199%
Diluted EPS (cont.) ($) 1.54 1.55 2.21 2.53 1.79 0.45
Dividends per share ($)
BV per share (end) ($) 2 7 7 5 32 29
Share price (end) ($) 28 43 54 45 54 58
Volume (mn shares) 1,431 1,412 1,169 1,639 1,679 350
Shares out (avg) (mn) 498 527 539 501 731 819
shares out (avg) -4% 6% 2% -7% 46% 69%
1
Figures reflect the acquisition of WellPoints PBM business NextRx in 2010 and Medco
Health Solutions in April 2012.
2
Adjusted for unusual items of -$30 million in 2011 and -$705 million in 2012.
3
Adjusted for nonrecurring items of $0.2 million in 2008, $1.0 million in 2009, -$23 million in
2010, -$28 million in 2012, and -$1.2 million in 1Q13.
4
Retail (Drugs) industry median.
5
Reflects adjusted prescriptions (home delivery prescriptions are multiplied by 3, as they
typically cover a time period 3 times longer than retail prescriptions).
6
Generic drugs processed as a percentage of network prescriptions.
7
WellPoint represented 14% and the Dept. of Defense 11% of 2012 revenue.

RATINGS
*
PBMs combine retail pharmacy claims processing, formulary management
and home delivery pharmacy services to create an integrated product
offering to manage the prescription drug benefit for payors.
THE BOTTOM LINE
Following the acquisition of PBM rival Medco in April 2012, Express Scripts has become the largest pharmacy benefit
manager in the U.S. While the added scale should help, customers are generally well-informed and can relatively easily move
among the various PBMs in what remains a competitive industry. We do like the companys capital-light model which
generates ample free cash flow, enabling more return of capital. Based on guidance of $4+billion of post-deal free cash flow,
the implied yield of 8%+looks attractive, especially as U.S. healthcare reform should provide additional growth tailwinds.


EXPRESS SCRIPTS EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive

December 31, 2013




multiplied by

minus

minus


Capex: $250 million
equals


equals

equals

multiplied by


divided by

multiplied by

10.0x


equals
equals

equals



Express Scripts: $52 billion


multiplied by
plus

multiplied by


Assumed ESRX multiple as a

minus


90%

110%

equals


equals

equals

equity of Express Scripts:










(*) Represents Retail (Drugs) industry median multiple.


() The FY13 consensus EPS estimate of $4.30 has been revised upward by 1% from$4.27 three months ago. Source: Company filings, The Manual of Ideas.

EXPRESS SCRIPTS ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance
(Click to visit to Reach Tang. LTM EPS Yield LTM Rev./ Rev. % LTM Rev.
relevant websites) 7-Year MV EV Book/ FCF This Next Rev./ Empl. Last Gross Adj.
Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit EBIT
Allscripts / MDRX -68% 142% 2,296 2,748 n/m 3% neg. 4% 5% 52% 201 -21% -5% 41% 1%
Catamaran / CTRX -95% 16% 10,292 11,055 n/m 2% 1% 4% 5% 104% 3,467 71% 88% 8% 2%
Cerner / CERN -84% 6% 16,258 15,435 13% 2% 3% 3% 3% 18% 227 15% 6% 79% 22%
Express Scripts / ESRX -76% 7% 50,655 63,112 n/m 10% 3% 7% 8% 171% 8,216 85% 115% 8% 5%

EXPRESS SCRIPTS CALCULATION of EBITDA, 2012

Source: Express Scripts recast worksheet.

The company generated adjusted EBITDA of nearly $4 per claim in 2012


EXPRESS SCRIPTS WHAT PLAN SPONSORS SEEK in a PHARMACY BENEFIT MANAGEMENT (PBM) PLATFORM

U.S. HEALTHCARE REFORM EXCHANGE TYPES, by STATE

BRANDED PHARMACEUTICALS SNAPSHOT of PATENT EXPIRATIONS, 2010-2016E ($ in billions)

Source for the above charts: Company presentation dated J une 2013.
> 90% of new lives in 40 states
where ESRX has a key managed
care relationship
Snapshot of Express Scripts PBM platform
Continued positive sales
outlook for generics should
benefit Express Scripts


Hershey (HSY) Hershey Trust, Cap World, FMR, JPM, Pioneer, RenTech
Consumer Non-Cyclical: Food Processi ng, Member of S&P 500 HERSHEY PA www.hersheys.com
Insider ownership: 8% FYE 12/31/15 4.43 4.42 8 P / tangible book 61.5x
Institutional ownership: n/a 4/25/13 $1.09 $1.04 LTM pre-tax ROC 65%

per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 4/1/12 3/31/13
Revenue 4,944 4,947 5,133 5,299 5,671 6,081 6,644 6,740 1,732 1,827
Gross profit 1,868 1,632 1,758 2,053 2,429 2,571 2,908 2,994 765 851
Adjusted operating income 1,007 736 685 845 1,004 1,101 1,229 1,378 368 402
Adjusted pretax income 891 617 587 754 908 1,009 1,133 1,168 344 379
Adjusted net income 574 491 406 519 608 675 779 799 232 253
Dividend 1.03 1.14 1.19 1.19 1.28 1.38 1.56 1.60 0.38 0.42
Shares out (avg) 236 229 227 228 228 227 225 225 225 224
Cash from operations 723 779 520 1,066 901 588 1,095 1,112 276 293
Capex 199 204 283 146 202 348 278 280 92 94
Free cash flow 525 575 237 920 700 240 817 832 184 200
% of revenue:
Gross profit 37.8% 33.0% 34.2% 38.7% 42.8% 42.3% 43.8% 44.4% 44.2% 46.6%
Cash, investments 97 129 37 254 885 694 728 730 567 730
Receivables 523 487 455 410 390 400 461 517 503 517
Inventory 649 600 593 520 534 649 633 627 650 627
PP&E, net 1,651 1,540 1,459 1,405 1,438 1,560 1,674 1,705 1,586 1,705
Intangible assets 642 741 665 697 647 634 808 796 821 796
Tangible assets 3,515 3,507 2,969 2,978 3,626 3,774 3,947 4,050 3,779 4,050
Short-term debt 844 856 502 39 286 140 376 353 245 353
Long-term debt 1,248 1,280 1,506 1,503 1,542 1,749 1,531 1,540 1,749 1,540
Total liabilities 3,474 3,654 3,317 2,955 3,370 3,550 3,718 3,745 3,739 3,745
Common equity 683 593 318 721 902 857 1,037 1,100 860 1,100
Tangible equity 41 -148 -347 23 255 224 229 305 40 305
TBV / tangible assets 1% -4% -12% 1% 7% 6% 6% 8% 1% 8%
EBIT/capital employed 42% 21% 29% 42% 56% 62% 58% 65% 88% >100%


$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100


BUSINESS OVERVIEW
Hershey produces and distributes a broad line of branded
chocolate, confectionery, and related grocery products.

Among leading chocolate companies, with 13,000
employees and 43% share in the U.S. (31% for
Mars/Wrigley and 6% for Nestle). Brands include
Hersheys, Reeses, Ice Breakers, J olly Rancher,
Almond J oy, York, KitKat, Whoppers, Rolo, and
Twizzlers. The company has 30% share of the U.S.
candy, mint and gum category, having captured
46% of industry growth from 2009-12. It has grown
U.S. convenience store market share from 26.2% in
2008 to 31.4% in 2012. Ad expense has gone up
from 3.1% of sales in 2008 to 8.0% in 2013E.
Large confectionary category, with global sales up
5% annually from 2007-2012 to $194 billion.
Fundamentally advantaged model. The company
benefits from strong U.S. consumer loyalty, with
high household penetration, checkout conversion,
and impulse buying. Economic ROIC, as calculated
by the company, has averaged in the high teens.
Aims to grow sales and EPS 5-7% and 8-10%
annually, respectively, in the long term. EPS
growth should exceed the target by 200 bps in 2013.
Leveraging North American strength to expand
globally. Hershey seeks to grow the overseas
footprint, both organically and through acquisitions.
Management expects China sales to grow strongly
from a small base over the next five years. Overall
non-U.S./Canada sales should increase 15-20% in
2013 and grow to 25% of sales within five years.
Dividend payout ratio of at least 50%, with 2012
dividend of $1.56 per share. Hershey has bought
back 141 million shares at ~$28 per share from
1993-2012, spending $4.0 billion, while the share
count has declined from 361 million to 224 million.

Exposed to spikes in input costs. While Hershey
possesses pricing power, spikes in the price of
sugar, cocoa and other key commodities could
pressure margins in the short term. Inflation could
have a longer-term impact by affecting demand.
59% of sales from 25 supermarkets and 34 mass
merchandisers, including 22% of sales from
McLane, the primary distributor to Wal-Mart. The
desire to retain shelf space at key retailers translates
into a need to engage in promotional activities,
putting varying amounts of pressure on pricing.
FYE December 31 2008 2009 2010 2011 2012 1Q13
employees 3% -5% -7% 4% 3% n/a
revenue 4% 3% 7% 7% 9% 6%
gross profit 8% 17% 18% 6% 13% 11%
Employees 12,800 12,100 11,300 11,800 12,100 ~12,100
Revenue ($mn) 5,133 5,299 5,671 6,081 6,644 1,827
from U.S. 14.4% 14.3% 14.6% 15.6% 16.1% ~16.2%
to distributor McLane 25% 26% 23% 23% 23% ~23%

Gross profit 34% 39% 43% 42% 44% 47%
EBIT (adjusted)
1
13% 16% 18% 18% 18% 22%
1
8% 10% 11% 11% 12% 14%
D&A 5% 3% 3% 4% 3% 3%
Capex 6% 3% 4% 6% 4% 5%
Industry gross margin
2
27% 29% 28% 30% 26% 27%
2
5% 7% 7% 7% 6% 7%

Reported operating income 590 762 905 1,055 1,111 392
+ non-recurring items 95 83 99 46 118 11
Adjusted EBIT 685 845 1,004 1,101 1,229 402
Current assets 1,386 1,365 1,695 2,026 2,080 2,147
- Cash, ST investments -83 -145 -569 -789 -711 -729
+ Short-term debt 679 270 162 213 258 365
+ Net fixed assets 1,499 1,432 1,421 1,499 1,617 1,690
Tangible assets ($mn) 2,969 2,978 3,626 3,774 3,947 4,050

Receivables 15% 14% 11% 11% 12% 13%
Inventory 20% 17% 15% 17% 16% 15%
PP&E, net 49% 47% 40% 41% 42% 42%
ST debt 17% 1% 8% 4% 10% 9%
LT debt 51% 50% 43% 46% 39% 38%
Tangible equity -12% 1% 7% 6% 6% 8%
Shares out (avg) (mn) 227 228 228 227 225 224
shares out (avg) -1% 0% 0% -1% -1% 0%
1
2010, -$46 million in 2011, -$118 million in 2012, and -$11 million in 1Q13.
2
Food Processing industry median.

NOTABLE HOLDERS
Shares outstanding: 163.1 million common shares (NYSE:
HSY; one vote per share) and 60.6 million Class B common
shares (wholly owned by Hershey Trust; ten votes per share)
Economics: Management <1% | Hershey Trust 33% | FMR
2% | Pioneer 1% | J PM 1% | RenTech 1% | Cap World 1%

RATINGS
THE BOTTOM LINE
Hershey is a wide-moat producer of branded chocolate and related products, having built up significant brand preference and
consumer loyalty in the U.S. The company is in a position to engage in premium pricing and to increase prices at or above
the rate of inflation. More recently, Hershey has focused on leveraging the strong North American base to expand into
international markets, with the goal of generating a quarter of sales overseas within the next five years, up from 10% today.
When evaluating a great business like Hersheys, the key question from an investment standpoint seems to be what purchase
price will afford us an attractive long-term return. At a trailing FCF yield of 4-5%, we do not find the shares compelling.


HERSHEY EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive

December 31, 2013


TTM net sales: $6.7 billion


multiplied by

minus

minus


Capex: $280 million
equals


equals

equals

Free cash flow: $830 million
multiplied by


divided by

multiplied by

10.0x


equals
equals

equals



Hershey: $11 billion


multiplied by
plus

multiplied by

Cash, ST investments: $730 million

Assumed HSY multiple as a

minus


90%

115%

equals


equals

equals

equity of Hershey:


equity of Hershey:

equity of Hershey:







(*) Represents Food Processing industry median.



HERSHEY CASH FLOW COMPOSITION ($ in millions)

Source: Company factbook.
FCF has fluctuated from year to year while
growing over multi-year periods


HERSHEY MANAGEMENTS CALCULATION of ECONOMIC ROIC, 1998-2012

HERSHEY FIVE-YEAR GROWTH of SELECTED FINANCIAL ITEMS (in thousands, except per share data)

Source for the above chart and table: Company factbook.

Economic ROIC, as calculated by
management, is materially lower
than return on capital employed, as
calculated on page 43
Economic ROIC is calculated by
dividing net operating profit after
taxes (NOPAT) by the average
invested capital


Intel (INTC) Wellington, Harris, Franklin, Geode, Bleichroeder, Walter Scott
Technology: Semi conductors, Member of S&P 500

SANTA CLARA CA www.intel.com

per share data) 2006 2007 2008 2009 2010 2011 2012 3/30/13 3/31/12 3/30/13
Revenue 35,382 38,334 37,586 35,127 43,623 53,999 53,341 53,015 12,906 12,580
Gross profit 18,218 19,904 20,844 19,561 28,491 33,757 33,151 31,952 8,265 7,066
R&D 5,873 5,755 5,722 5,653 6,576 8,350 10,148 10,274 2,401 2,527
Adjusted net income 5,671 7,687 7,534 4,821 11,589 13,074 11,005 10,270 2,797 2,062
Dividend 0.40 0.45 0.55 0.56 0.63 0.78 0.87 1.11 0.21 0.45
Shares out (avg) 5,797 5,816 5,663 5,557 5,555 5,256 4,996 4,984 4,999 4,948
Capex 5,860 5,000 5,197 4,515 5,207 10,830 11,842 11,075 2,977 2,207
Free cash flow 4,772 7,625 5,729 6,655 11,485 10,133 7,042 9,122 -5 2,078
% of revenue:
Gross profit 51.5% 51.9% 55.5% 55.7% 65.3% 62.5% 62.1% 60.3% 64.0% 56.2%
R&D 16.6% 15.0% 15.2% 16.1% 15.1% 15.5% 19.0% 19.4% 18.6% 20.1%
Receivables 2,709 2,576 1,712 2,273 2,867 3,650 3,833 3,536 4,037 3,536
Inventory 4,314 3,370 3,744 2,935 3,757 4,096 4,734 4,358 4,489 4,358
LT investments 4,421 5,385 7,329 8,612 7,438 4,964 7,755 8,801 4,782 8,801
PP&E, net 17,602 16,918 17,574 17,225 17,899 23,627 27,983 28,418 25,027 28,418
Tangible assets 43,520 50,775 45,765 47,791 57,795 55,598 68,406 67,520 56,365 67,520
Debt 2,028 2,122 1,287 2,221 2,115 7,331 13,448 13,231 7,450 13,231
Tangible equity 31,904 37,886 34,839 36,400 44,039 30,390 35,258 35,631 31,308 35,631
TBV / tangible assets 73% 75% 76% 76% 76% 55% 52% 53% 56% 53%


$0
$5
$10
$15
$20
$25
$30
$35
$40



BUSINESS OVERVIEW
Intel designs, makes and markets semiconductors.
PC Client Group (65% of revenue): platforms designed for
notebook and desktop markets, and wireless products
Data Center (20%): semis for servers, workstations, storage
Other Intel architecture (8%): platforms for embedded apps,
netbook market, tablets, mobile phone components
Software and services (4%): McAfee, Wind River, etc.
Largest chip maker, dominant in Windows OS
markets. Intel drives a regular two-year upgrade
cycleintroducing a new microarchitecture every
two years and ramping the next generation of silicon
process technology in the intervening years.
Added high-quality software businesses through
M&A over the years, including Wind River (~$1
billion in 2009) and McAfee (~$8 billion in 2011).
The McAfee acquisition allows Intel to bundle
hardware and software security in one solution.
Weakness creates opportunity? Intels lacking
presence in fast-proliferating non-PC devices has
affected the companys preeminence, but it has also
created low-hanging opportunities for incremental
revenue growth. Intel had only 0.2% of the phone
chip market in 2012, a growth focus going forward.
Repurchased ~$90 billion of stock since 1990.
Intel bought back 191 million shares for $4.8 billion
in 2012 and 25 million shares for $530 million in
1Q13. Over the past decade, the share count has
declined from 6.5 billion to just under 5.0 billion.
HP and Dell accounted for 18% and 14% of
revenue in 2012, respectively. Intel does not derive
material revenue from Apple. Intels total revenue is
expected to grow in the low single digits in 2013.
Capex-intensive business, with D&A above 10%
of revenue. There is a constant need to replace
physical assets in light of technology advancement.
Industry transitioning from PCs and servers to
Internet-connected mobile devices and integrated
platforms, challenging Intels dominance.
Competitive industry. AMD has been Intels
primary competitor in chips for PCs. In the server
market, Intel competes against AMD, IBM, and
Oracle. One of the toughest competitors is NVIDIA,
which has shifted some of the workload performed
by the microprocessor to the graphics processor.
NOTABLE HOLDERS
Insiders <1% | Wellington 2% | Harris 1% | Franklin 1% |
Geode 1% | Bleichroeder 1% | Walter Scott 1% | Cap Re 1%
FYE December 29 2008 2009 2010 2011 2012 1Q13
revenue -2% -7% 24% 24% -1% -3%
gross profit 5% -6% 46% 18% -2% -15%
assets -9% 5% 19% 13% 19% 16%
BV per share -5% 7% 19% -2% 17% 11%
Employees (end) (000)
2
84 80 83 100 105 n/a
Revenue ($bn) 37.6 35.1 43.6 54.0 53.3 12.6

PC client 74% 71% 70% 66% 64% 64%
Data center 18% 18% 20% 19% 20% 21%
Other Intel architecture 5% 8% 7% 9% 8% 8%
Software and services 2% 0% 1% 3% 4% 5%
Operating margin by segment (excl. loss-making All Other segment):
PC client 34% 30% 43% 42% 38% 31%
Data center 32% 35% 50% 50% 47% 42%
Other Intel architecture -4% -2% 9% -12% -31% -62%
Software and services -180% -87% -66% -2% 0% -4%

Gross profit 55% 56% 65% 63% 62% 56%
R&D 15% 16% 15% 15% 19% 20%
EBIT (adjusted)
1
26% 17% 36% 32% 27% 20%
1
26% 18% 37% 33% 28% 20%
1
20% 14% 27% 24% 21% 16%
D&A 12% 14% 11% 11% 14% 16%
Capex 14% 13% 12% 20% 22% 18%
3
38% 36% 43% 43% 40% 39%

+ non-recurring items 2.2 0.5 0.1 0.1 0.0
Adjusted EBIT 9.7 5.9 15.6 17.5 14.6 2.5
Current assets 21.9 20.5 26.4 28.7 28.6 30.0
+ Short-term debt 0.1 0.1 0.1 0.1 0.3 0.2
+ Net fixed assets 17.2 17.4 17.6 20.8 25.8 28.2

Inventory 8% 6% 7% 7% 7% 6%
LT investments 16% 18% 13% 9% 11% 13%
PP&E, net 38% 36% 31% 42% 41% 42%
Debt (all long term) 3% 4% 4% 13% 19% 19%
Tangible equity 76% 76% 76% 55% 52% 53%
Shares out (avg) (mn) 5,663 5,557 5,555 5,256 4,996 4,948
shares out (avg) -3% -2% 0% -5% -5% -1%
1
Adjusted for unusual items of -$2.2 billion in 2008, -$452 million in 2009, -$125 million in
2010, -$132 million in 2011, and -$17 million in 1Q13.
2
Increase in employees in 2011
due to McAfee and the WLS business of Infineon.
3
Semiconductors industry median.

RATINGS
THE BOTTOM LINE
Intel remains the juggernaut in the semiconductor industry, but growth has been impacted by Apples increasing dominance
in all things computing. Intels largest customers, HP and Dell, accounted for a combined 32% of sales in 2012. Despite
Intels exclusion from the Apple camp and the transition away from PCs, Intel should remain an industry leader. Market
share gains in tablets and mobile phones off a very low base remain a wildcard that could re-accelerate growth. We favor
long-time leaders like Intel, Microsoft, Oracle, and Cisco at FCF yields in the high single digits or higher (Intel is at ~8%).


INTEL EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive

December 29, 2013




Operating cash flow: $20 billion
multiplied by

minus

minus


Capex: $11 billion
equals


equals
Estimated EBIT: $14 billion

equals

multiplied by


divided by

multiplied by

7.5x


equals
equals

equals



Intel: $101 billion


multiplied by
plus

multiplied by

Cash, ST investments: $17 billion

Assumed INTC multiple as a

plus


90%

105%



equals
minus

equals



equity of Intel:
equals

equity of Intel:



equity of Intel:






(*) Represents Semiconductors industry median.

() The FY13 consensus EPS estimate of $1.87 has been revised down by 3% from$1.93 three months ago.

INTEL ANALYSIS OF SELECTED COMPARABLE COMPANIES

Low High ($mn) ($mn) MV Yield LTM FY FY EV ($000) LTM Q Profit R&D EBIT
Advanced Micro / AMD -60% 968% 2,858 3,899 n/m -25% neg. neg. 1% 126% 476 -25% -31% 34% 26% -7%
IBM / IBM -64% 10% 216,725 238,130 n/m 7% 7% 9% 9% 43% 238 -3% -5% 48% 6% 23%
NVIDIA / NVDA -60% 175% 8,331 4,636 46% 9% 6% 5% 6% 93% 541 9% 3% 53% 27% 16%
Qualcomm / QCOM -54% 14% 104,828 91,335 29% 5% 6% 7% 8% 24% 813 25% 24% 63% 20% 31%
STMicroelectronics / STM -59% 129% 8,239 7,230 68% 0% neg. 0% 8% 117% 175 -28% 0% 33% 27% 11%
Texas Instruments / TXN -62% 13% 38,765 40,586 10% 7% 5% 5% 6% 31% 369 -7% -8% 49% 14% 25%
Intel / INTC -50% 21% 120,273 116,431 30% 8% 8% 8% 8% 46% 503 -2% -3% 60% 19% 25%

INTEL OPERATING CASH FLOW, 2008-2012 ($ in billions)

INTEL CAPEX, 2008-2012 ($ in billions)

Source for the above charts: Company website.

Capex has
increased faster
than operating
cash flow in the
past two years


INTEL COMPONENTS of FREE CASH FLOW, 2010-2012

Source: Company annual financial statements.

MOORES LAW

Source: Company presentation dated May 2013.
Reduced cost [emphasis added by
Intel] is one of the big attractions of
integrated electronics, and the cost
advantage continues to increase as
the technology evolves toward the
production of larger and larger
circuit functions on a single
semiconductor substrate.
Electronics, Volume 38, Number 8,
April 19, 1965
It is becoming progressively more difficult to keep Moores Law going, but Intel has an advantage over smaller semiconductor companies


Jack Henry (JKHY) Findlay Park, JPM, Kayne Anderson, Royce, TimesSquare
Technology: Computer Networks, Member of S&P MidCap 400 MONETT MO www.jackhenry.com

($ millions, except Fiscal Years Ended J une 30, LTME FQE FQE
per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 591 667 743 746 837 967 1,027 1,098 256 282
Gross profit 257 287 307 299 345 399 424 461 103 115
R&D 32 36 43 43 51 63 61 62 16 16
Adjusted operating income 141 160 164 158 182 216 236 254 57 66
Adjusted pretax income 142 162 164 157 181 208 232 250 55 65
Dividend 0.20 0.24 0.28 0.32 0.36 0.40 0.44 0.48 0.12 0.13
Shares out (avg) 91 90 88 84 85 86 87 86 87 86
Cash from operations 169 174 181 207 219 240 265 299 22 33
Capex 62 55 55 56 80 59 79 93 18 24
Free cash flow 108 119 126 150 139 181 185 206 4 10
% of revenue:
Gross profit 43.5% 43.0% 41.4% 40.2% 41.3% 41.3% 41.3% 42.0% 40.3% 40.7%
R&D 5.4% 5.4% 5.8% 5.8% 6.1% 6.6% 5.9% 5.6% 6.0% 5.7%
Receivables 180 209 214 195 215 225 227 130 126 130
PP&E, net 252 250 239 238 275 270 277 291 273 291
Intangible assets 324 373 432 435 856 834 822 822 824 822
Tangible assets 583 626 589 616 704 672 797 741 621 741
Short-term debt 50 71 70 64 106 26 26 38 29 38
Long-term debt 0 0 0 0 273 128 106 95 113 95
Tangible equity 252 225 169 192 -106 46 161 257 155 257
TBV / tangible assets 43% 36% 29% 31% -15% 7% 20% 35% 25% 35%
EBIT/capital employed 52% 62% 68% 74% 91% >100% >100% 90% >100% >100%


$0
$10
$20
$30
$40
$50
$60



BUSINESS OVERVIEW
J ack Henry provides computer systems and electronic
payment solutions primarily to financial services firms.

Large provider of financial tech and payment
processing, with 11,600 customers in the U.S. The
firm has three core brands: Jack Henry Banking
helps community to mid-tier banks with information
processing. Symitar is the leading info processing
provider to credit unions. ProfitStars solutions such
as bill pay and online invoicing serve institutions
using any core processing system. J ack Henry has
reported a 20.4% revenue CAGR from 1991-2012.
Revenue comes mostly from recurring outsourcing
fees and processing fees, with 5+year deal terms.
Improving operating environment, with solid
new core sales and sales to existing customers.
Banking industry consolidation continues while
bank closures have declined from the peak in 2010.
As institutions continue moving from in-house to
outsourced solutions, J ack Henry has an opportunity
to grow recurring revenue under multi-year deals.
Attractive operating model, with operating margin
in the 22-23% range and 80% of revenue recurring.
Deferred revenue roughly matches receivables.
M&A has grown the ProfitStars platform, with
revenue from acquired companies accounting for
29% of ProfitStars revenue in 2012, up from 12% in
2007. ProfitStars has grown to almost 30% of
company revenue, driven by adoption of iPay (2.1
million active subs) and other niche solutions.
Increased quarterly dividend by 54% to $0.20 per
share in May. J ack Henry bought back $34 million
of stock in 2012. Trailing FCF is $206 million.

Dependent on U.S. banks and credit unions.
Industry weakness, consolidation, and changes in
the competitive landscape may affect long-term
demand. The number of financial institutions is not
growing, making growth dependent on share gains
and higher value capture on a per-institution basis.
Competition could pressure pricing. Competitors
include Fidelity National Information, Fiserv, Open
Solutions, Harland, and many smaller companies.
M&A strategy carries integration risks, as the
addition of new products and technologies requires
complex platform integration to ensure both high
performance and high data and transaction security.
J ack Henry has completed 19 deals since 2004.
FYE June 30 2008 2009 2010 2011 2012
YTD
3/31/13
revenue banks 11% 0% 9% 11% 4% 8%
revenue credit unions 14% 1% 28% 34% 13% 14%
total revenue 11% 0% 12% 16% 6% 9%
Revenue ($mn) 743 746 837 967 1,027 831
% of revenue by type:

License 10% 8% 6% 5% 5% 5%
Support and service 78% 82% 86% 88% 89% 90%
Hardware 12% 10% 8% 6% 6% 5%
Gross margin by type:

License 91% 88% 89% 88% 89% 91%
Support and service 37% 37% 39% 39% 39% 41%
Hardware 27% 27% 26% 26% 27% 27%

Bank 83% 83% 80% 77% 76% 75%
Credit union 17% 17% 20% 23% 24% 25%
Gross margin by segment:

Bank 42% 40% 42% 42% 41% 42%
Credit union 41% 40% 38% 38% 41% 44%

Gross profit 41% 40% 41% 41% 41% 42%
R&D 6% 6% 6% 7% 6% 6%
EBIT 22% 21% 22% 22% 23% 23%
Net income 14% 14% 14% 14% 15% 16%
D&A 8% 9% 9% 9% 9% 9%
Capex 7% 8% 10% 6% 8% 8%

GAAP = adjusted EBIT 164 158 182 216 236 193
Current assets 340 345 376 374 411 431
- Current liabilities -336 -343 -394 -412 -391 -332
+ Short-term debt 70 67 85 66 26 32
+ Net fixed assets 244 238 256 272 273 284
Capital employed 241 214 200 204 209 245
Tangible assets ($mn) 589 616 704 672 797 741

ST debt 12% 10% 15% 4% 3% 5%
LT debt 0% 0% 39% 19% 13% 13%
Tangible equity 29% 31% -15% 7% 20% 35%
Shares out (avg) (mn) 88 84 85 86 87 86
shares out (avg) -2% -5% 1% 2% 1% -1%

NOTABLE HOLDERS
Insiders 1% | J PM 6% | Kayne Anderson 4% | TimesSquare
4% | Royce 2% | T Rowe 2% | FMR 2% | Findlay Park 1%

RATINGS
THE BOTTOM LINE
J ack Henry has carved out a strong niche providing financial technology-related services to banks and credit unions. The vast
majority of the companys revenue comes from high-margin services, with roughly 80% considered recurring. The company
has grown value for shareholders through accretive acquisitions and organic market share gains, but the U.S. financial
technology industry is not exactly a growth industry. The number of banks and credit unions has been declining at a modest
rate, making increased per-customer value capture a priority. Investors may want to assume conservatively that J ack Henry
will grow per-share FCF at a mid to high single-digit rate, making the trailing FCF yield of 5% only modestly attractive.


JACK HENRY EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive



estimate for the fiscal year ending J une
30, 2013




Operating cash flow: $299 million
multiplied by

minus

minus


Capex: $93 million
equals


equals
Estimated EBIT: $248 million

equals

multiplied by


divided by

multiplied by

10.0x


equals
equals

equals



$5.1 billion ($60 per share)
J ack Henry: $2.5 billion


multiplied by
plus

multiplied by


Assumed J KHY multiple as a

minus


90%
Total debt: $133 million

125%

equals


equals

equals

equity of Jack Henry:


$2.5 billion, or $29 per share








(*) Represents Computer Networks industry median.



JACK HENRY ANALYSIS OF SELECTED COMPARABLE COMPANIES

DST Systems / DST -60% 37% 2,848 3,432 20% 4% 12% 7% 8% 76% 145 6% 4% 15% 7% 20%
Fidelity National / FIS -74% 8% 12,498 n/m n/m 6% 5% 7% 7% n/m 168 3% 5% 32% 19% -151%
Fiserv / FISV -68% 5% 11,519 15,212 n/m 6% 5% 7% 8% 30% 226 3% 5% 41% 23% -137%
Jack Henry / JKHY -70% 2% 4,075 4,025 6% 5% 4% 4% 5% 27% 225 9% 10% 42% 23% 35%

JACK HENRY MANAGEMENTS BREAKDOWN of FREE CASH FLOW ($ in millions)


Jack Henry enjoys a premium valuation
Note that management subtracts dividends
from FCF. Using a more appropriate
definition of FCF, i.e., including dividends,
FCF was $185 million in 2012


BANKS INDUSTRY CONSOLIDATION, 2012

CREDIT UNIONS INDUSTRY CONSOLIDATION, 2012

BANKS and CREDIT UNIONS ASSETS, 2012 vs. 2011

JACK HENRY GROWTH in CONSOLIDATING INDUSTRY

JACK HENRY GROSS and OPERATING MARGIN TREND (fiscal years ended June 30)

JACK HENRY EBITDA MARGIN TREND (fiscal years ended June 30; $ in millions)

Source for the above tables and charts: Company presentation dated May 2013.
How long can margin
improvement continue?
Expanding EBITDA
margin reflects
operating leverage


Johnson & Johnson (JNJ) Fairfax, Franklin, MFS, Wellington, West Coast
Heal th Care: Bi otechnol ogy & Drugs, Member of S&P 500 NEW BRUNSWICK NJ www.jnj.com

per share data) 2006 2007 2008 2010 2011 2012 2012 3/31/13 4/1/12 3/31/13
Revenue 53,324 61,095 63,747 61,897 61,587 65,030 67,224 68,590 16,139 17,505
Gross profit 38,267 43,344 45,236 43,450 42,795 44,670 45,566 46,293 11,224 11,951
R&D 7,125 7,680 7,577 6,986 6,844 7,548 7,665 7,804 1,645 1,784
Dividend 1.46 1.62 1.80 1.93 2.11 2.25 2.40 2.44 0.57 0.61
Shares out (avg) 2,936 2,883 2,803 2,760 2,751 2,736 2,753 2,763 2,737 2,790
Capex 2,666 2,942 3,066 2,365 2,384 2,893 2,934 3,018 502 586
Free cash flow 11,582 12,080 11,906 14,206 14,001 11,405 12,462 11,860 2,293 1,691
% of revenue:
Gross profit 71.8% 70.9% 71.0% 70.2% 69.5% 68.7% 67.8% 67.5% 69.5% 68.3%
R&D 13.4% 12.6% 11.9% 11.3% 11.1% 11.6% 11.4% 11.4% 10.2% 10.2%
Receivables 8,712 9,444 9,719 9,646 9,774 10,581 11,309 11,515 10,982 11,515
Inventory 4,889 5,110 5,052 5,180 5,378 6,285 7,495 7,691 6,800 7,691
PP&E, net 13,044 14,185 14,365 14,759 14,553 14,739 16,097 15,721 14,824 15,721
Tangible assets 41,868 52,191 57,217 63,497 70,898 79,368 70,171 71,178 81,698 71,178
Short-term debt 4,579 2,463 3,732 6,318 7,617 6,658 4,676 4,529 6,439 4,529
Long-term debt 2,014 7,074 8,120 8,223 9,156 12,969 11,489 11,363 13,010 11,363
Tangible equity 10,630 14,556 14,816 19,403 24,569 22,804 13,650 16,497 26,870 16,497


$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100



BUSINESS OVERVIEW
J &J develops and markets branded healthcare products.

~70% of revenue is attributable to products or
businesses with #1 or #2 global market share.
J &J s world-leading health care product franchises
provide diversified and high-margin income streams.
Valuation may not fully appreciate J&Js growth
prospects and the net cash balance sheet ($6 billion
of net cash and marketable securities. The forward
earnings yield is 7% based on consensus EPS of
$5.79 for 2014, implying ~7% y-y EPS growth.
No major patent expirations. Largest product
Remicade (9% of 2012 revenue) is protected until
2018 in the U.S. The steady and abundant FCF of
most of J &J s businesses enables reinvestment as
well as more aggressive return of capital.
Medical device business (~40% of revenue) is #1
player in ~$360 billion global market. J &J projects
an industry CAGR of 3-6% in 2011-16 (developed
markets: 2-4%, emerging markets: 10-13%). The
recent $19 billion purchase of Synthes further
strengthens global orthopedics leadership of DePuy.
Pharma business (~40% of revenue) is one of the
largest players in ~$960 billion global market.
IMS expects a 2012-17 market CAGR of ~4.5%,
driven by aging, emerging markets, rising incidence
of chronic disease, and unmet medical needs.
Consumer business (~20% of revenue) owns
some of the worlds most recognizable brands
including Tylenol, Acuvue and Neutrogena. OTC
drugs/skin care items are ~55% of segment revenue.

Capital allocation. Given the strong balance sheet,
defensible and highly cash generative businesses,
and a modest valuation, we would like to see J &J be
more aggressive with share repurchases. While J &J
pays a dividend (3% yield), it has not been a net
repurchaser of shares over the last three years,
seemingly preferring M&A (e.g. Synthes in 2012).
The appointment of Alex Gorsky (52) as CEO in
2012 may not have changed this preference.
Earnings growth is a challenge given the size of
the business, regulatory and competitive pressures,
and the already high adjusted EBIT margins in 2012
(pharma: 33%, devices: 32%, consumer: 14%).
Management may succumb to a growth imperative
to buy earnings growth in a value-destructive way.
1
FYE December 30 2008 2009 2010 2011 2012 1Q13
revenue 4% -3% -1% 6% 3% 8%
due to volume 1% 0% -1% 3% 6%
} 10%
due to price 1% 0% -1% 0% 0%
due to currency 2% -3% 1% 3% -3% -1%
employees 0% -3% -1% 3% 8% n/a
Revenue ($bn) 63.7 61.9 61.6 65.0 67.2 17.5
Pharmaceutical 39% 36% 36% 37% 38% 39%
Medical devices 36% 38% 40% 40% 41% 40%
Consumer 25% 26% 24% 23% 21% 21%
Revenue growth by segment:
Pharmaceutical -1% -8% -1% 9% 4% 10%
Medical devices 6% 2% 4% 5% 6% 10%
Consumer 11% -2% -8% 2% -3% 2%
EBIT margin by segment:
2

Pharmaceutical 31% 28% 32% 26% 24% 36%
Medical devices 31% 33% 34% 20% 26% 21%
Consumer 17% 16% 16% 14% 12% 15%
U.S. as % of revenue 51% 50% 48% 44% 44% 46%
U.S. revenue growth 0% -4% -5% -2% 3% 11%
International growth 10% -1% 4% 12% 4% 6%
Intl at constant forex 5% 4% 2% 7% 8% 9%
Gross profit 71% 70% 69% 69% 68% 68%
R&D
3
12% 11% 11% 12% 11% 10%
EBIT 27% 26% 28% 20% 21% 24%
Net income 20% 20% 22% 15% 16% 20%
Net cash from ops 23% 27% 27% 22% 23% 13%
D&A 4% 4% 5% 5% 5% 6%
Capex 5% 4% 4% 4% 4% 3%
PP&E, net 25% 23% 21% 19% 23% 22%
ST debt 7% 10% 11% 8% 7% 6%
LT debt 14% 13% 13% 16% 16% 16%
Tangible equity 26% 31% 35% 29% 19% 23%
Diluted EPS (cont.) ($) 4.57 4.40 4.78 3.49 3.86 1.22
Dividends per share ($) 1.80 1.93 2.11 2.25 2.40 0.61
Shares out (avg) (mn) 2,803 2,760 2,751 2,736 2,753 2,790
shares out (avg) -3% -2% 0% -1% 1% 2%
1
J &J acquired orthopedic devices manufacturer Synthes for ~$20 billion in J une 2012.
2
Excludes corporate expenses (-1% of revenue in 2012).
3
Excludes in-process R&D.

NOTABLE HOLDERS
Insiders <1% | Fairfax <1% | West Coast <1%

RATINGS
THE BOTTOM LINE
J &J has world-leading franchises in branded medical devices, pharmaceuticals and consumer healthcare products. While
organic earnings growth is a challenge for a business of J &J s size and efficiency, the recent valuation at a 7% forward
earnings yield (including a 3% dividend yield) may not fully appreciate J &J s growth prospects and the net cash balance sheet.
On balance, we would like to see the shares trade closer to a 10% earnings yield before getting interested. Capital allocation
is also a concern, which has not gone away following the appointment of Alex Gorsky as CEO in mid-2012. We would like
to see J &J be more aggressive with share repurchases instead of using its fortress balance sheet on further acquisitions.


JOHNSON & JOHNSON EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive




December 30, 2013



multiplied by

minus

minus

Capex: $3.0 billion

equals

equals


Free cash flow: $12 billion

equals
multiplied by

divided by



multiplied by
9.0x

equals

equals


equals


J ohnson & J ohnson: $158 billion

multiplied by

plus


multiplied by


Assumed J NJ multiple as a
minus

90%



110%
equals

equals



equals
equity of Johnson & Johnson:










(*) Represents Biotechnology & Drugs industry median multiple.

() The FY13 consensus EPS estimate of $5.41 is unchanged from$5.41 three months ago. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

JOHNSON & JOHNSON ANALYSIS OF SELECTED COMPARABLE COMPANIES

Becton Dickinson / BDX -40% 7% 18,654 20,403 12% 6% 6% 6% 7% 38% 265 2% 4% 52% 6% 21%
Covidien / COV -56% 11% 29,099 32,493 n/m 6% 6% 6% 7% 37% 280 3% 5% 57% 5% 24%
C.R. Bard / BCR -46% 3% 8,861 9,390 1% 6% 5% 6% 7% 32% 243 1% 1% 62% 7% 29%
Merck / MRK -57% 31% 141,922 146,725 9% 6% 4% 7% 8% 31% 564 -4% -9% 76% 17% 44%
Novartis / NVS -52% 9% 189,191 204,100 3% 6% 6% 7% 8% 28% 453 -2% 2% 67% 16% 21%
Pfizer / PFE -59% 9% 201,873 206,942 n/m 8% 5% 8% 8% 28% 630 -28% -9% n/m 16% 47%
Sanofi / SNY -53% 9% 136,887 147,759 n/m 0% 4% 7% 8% 31% 412 -3% -9% 70% 14% 24%
Johnson & Johnson / JNJ -44% 8% 233,699 227,923 7% 5% 4% 7% 7% 30% 538 6% 8% 67% 11% 32%

JOHNSON & JOHNSON COMPONENTS of REVENUE GROWTH, 2010-2012

Source: Company annual report for the year ended December 31, 2012.

Growth has been a challenge, even after M&A


JOHNSON & JOHNSON BREAKDOWN of SEGMENT SALES, 2012

* Operational excludes the impact of currency. ** Rounded for visual accuracy.
1
Excluding the net impact of the Synthes acquisition, MD&D total change =(1.5%) and Orthopedics total
change =(0.4%). Source: Company annual report for the year ended December 31, 2012.

JOHNSON & JOHNSON PERFORMANCE SUMMARY, 2002-2012

1
Attributable to J ohnson & J ohnson. Source: Company annual report for the year ended December 31, 2012.
J&J has one of the most diversified product portfolios among peers,
making J&J defensible, but also leading to only GDP-like growth
While J&J grew international
sales from 38% of total sales
in 2002 to 56%in 2012, overall
growth, has been a challenge
over the last five years
Total shareholder return has
been modest, averaging 5.5%
per year over ten years, with
roughly half of the return
coming from dividends


McCormick (MKC) T Rowe, Franklin, Parnassus, MS, Neuberger, Geode
Consumer Non-Cyclical: Food Processi ng, Member of S&P 500 SPARKS MD www.mccormickcorporation.com

($ millions, except Fiscal Years Ended November 30, LTME FQE FQE
per share data) 2006 2007 2008 2009 2010 2011 2012 2/28/13 2/29/12 2/28/13
Revenue 2,716 2,916 3,177 3,192 3,337 3,698 4,014 4,042 907 934
Gross profit 1,115 1,192 1,288 1,327 1,418 1,523 1,618 1,624 355 362
Dividend 0.72 0.80 0.88 0.96 1.04 1.12 1.24 1.27 0.31 0.34
Shares out (avg) 132 129 129 131 133 133 133 133 133 133
Capex 85 79 86 82 89 97 110 108 15 12
Free cash flow 226 146 229 333 299 243 345 357 7 19
% of revenue:
Gross profit 41.0% 40.9% 40.6% 41.6% 42.5% 41.2% 40.3% 40.2% 39.2% 38.7%
Receivables 379 457 381 365 387 427 466 404 381 404
Inventory 406 430 439 458 478 614 615 607 640 607
Total current assets 899 983 968 971 1,016 1,223 1,285 1,212 1,193 1,212
LT investments 96 108 99 123 187 202 314 328 311 328
PP&E, net 470 488 461 490 488 523 547 533 523 533
Intangible assets 997 1,087 1,605 1,717 1,650 2,044 2,019 2,014 2,052 2,014
Tangible assets 1,571 1,701 1,615 1,671 1,770 2,044 2,147 2,072 2,027 2,072
Short-term debt 81 150 354 116 100 222 393 454 283 454
Long-term debt 570 574 885 875 780 1,030 779 776 1,029 776
Common equity 933 1,085 1,055 1,335 1,454 1,602 1,683 1,707 1,674 1,707
Tangible equity -64 -2 -550 -382 -196 -443 -336 -307 -378 -307


$0
$10
$20
$30
$40
$50
$60
$70
$80


BUSINESS OVERVIEW
McCormick, founded in 1889, provides herbs and spices.

Largest herbs and spices company globally, with
18% market share, solidly ahead of competitors,
none of whom has more than 5% share. Key brands
include McCormick, Lawrys, and Club House.
40% of McCormicks sales come from industrial
customers, including industry leaders Kraft, Yum,
General Mills, McDonalds, Sysco, and Pepsico.
Herbs/spices is one of the faster-growing flavor
categories, with global sales of $9 billion expected
to grow $1 billion by 2017 (Euromonitor). The firm
may gain share in China, where it ranks second. In
Europe and the Americas, private label represents
tough competition. Revenue from emerging markets
should rise from 14% of sales in 12 to 20% by 15.
Modest but predictable grower. Management
expects long-term growth in sales of 4-6%, EBIT
growth of 7-9%, and EPS growth of 9-11% (by
leveraging cash allocation), and total shareholder
return of 11-13% (via dividends). Trailing five-year
sales, EBIT, and EPS growth has met those targets.
Attractive economics, especially in higher-margin
consumer segment. Herbs and spices comprise a
fairly small portion of the overall cost of a typical
meal, lessening consumers price consciousness.
Conservative balance sheet, with net debt of
slightly above $1 billion, less than 2x EBIT. The
company owns most of its manufacturing facilities.
Returned ~$300 million to shareholders in FY12,
constituting the majority of $345 million in FCF.
This is higher than managements long-term return
of capital percentage of modestly less than 50%.

Margin expansion realistic? Sales growth of 4-6%
cannot support EBIT growth of 7-9% forever. For a
business that has been in existence for more than a
century, we wonder why management believes it
can keep growing EBIT 300 bps faster than sales.
Near-term challenges include sporadic share losses
to private label products in consumer markets, and
weaker demand from quick-service restaurants in
the U.S. and (less) in China. Management expects
industrial sales and income to growth in 2H13.
Customer concentration makes price increases a
matter of negotiation rather than unilateral action.
Wal-Mart accounted for 11% of sales in 2012, while
three industrial customers comprised 50-53% of
industrial revenue (Pepsico was 11% of total sales).
FYE November 30 2008 2009 2010 2011 2012 1Q13
revenue consumer 11% 3% 5% 10% 10% 7%
revenue industrial 6% -3% 4% 12% 7% -2%
total revenue 9% 0% 5% 11% 9% 3%
gross profit 8% 3% 7% 7% 6% 2%
Revenue ($mn) 3,177 3,192 3,337 3,698 4,014 934

Consumer 58% 60% 60% 59% 60% 61%
Industrial 42% 40% 40% 41% 40% 39%

Consumer 19% 21% 20% 19% 19% 15%
Industrial 6% 7% 8% 7% 8% 7%
% of revenue by geography:

U.S. 58% 62% 61% 60% 59% n/a
EMEA 24% 21% 20% 21% 21% n/a
Other countries 18% 17% 18% 19% 20% n/a

Gross profit 41% 42% 42% 41% 40% 39%
EBIT (adjusted)
1
13% 15% 15% 15% 14% 12%
1
9% 10% 11% 10% 10% 8%
D&A 3% 3% 3% 3% 3% 3%
Capex 3% 3% 3% 3% 3% 1%
2
27% 29% 28% 30% 26% 27%
2
5% 7% 7% 7% 6% 7%

Adjusted EBIT 418 481 510 551 580 112
Current assets 976 969 993 1,119 1,254 1,248
- Current liabilities -948 -926 -827 -914 -1,090 -1,152
+ Short-term debt 252 235 108 161 308 423
+ Net fixed assets 474 475 489 506 535 540

Inventory 27% 27% 27% 30% 29% 29%
LT investments 6% 7% 11% 10% 15% 16%
PP&E, net 29% 29% 28% 26% 25% 26%
ST debt 22% 7% 6% 11% 18% 22%
LT debt 55% 52% 44% 50% 36% 37%
Tangible equity -34% -23% -11% -22% -16% -15%
Shares out (avg) (mn) 129 131 133 133 133 133
shares out (avg) 0% 1% 2% 0% 0% 0%
1
Adjusted for unusual items of -$41 million in 2008, -$14 million in 2009, -$0.1 million in
2010, -$11 million in 2011, and -$1.7 million in 2012.
2
Food Processing industry median.

NOTABLE HOLDERS
CEO % | T Rowe 3% | Enhanced 2% | Franklin 2% |
Parnassus 2% | MS 1% | Neuberger 1% | Geode 1%

RATINGS
THE BOTTOM LINE
McCormick is the leader in herbs and spices, a market with attractive economics and positive, albeit unspectacular, long-term
growth. The business earns solid returns on capital, but investors may overestimate pricing power. Customer concentration,
especially in the industrial segment, makes price increases a matter of negotiation. While McCormick has brand awareness,
its unclear to what extent it also enjoys brand preference. Managements long-term shareholder return target of 11-13%
appears aggressive given an expectation of 4-6% sales growth. We find the shares fully valued at the 4% trailing FCF yield.


MCCORMICK EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive
ended February 28, 2013 and average

November 30, 2013

months ended February 28, 2013



multiplied by

minus

minus


Capex: $108 million
equals

FY13 EPS estimate: -5% * $3.20

equals

equals

multiplied by


divided by

multiplied by

10.0x


equals
equals

equals



McCormick: $5.7 billion


multiplied by
plus

multiplied by


Assumed MKC multiple as a

minus


110%

90%

equals


equals

equals

equity of McCormick:










(*) Represents Food Processing industry median.



MCCORMICK SELECTED FINANCIAL DATA, 2002-2012

Source: Company presentation dated May 31, 2013.


MCCORMICK CASH from OPERATIONS, 2002-2012

MCCORMICK DIVIDEND HISTORY, 1986-2012

MCCORMICKS CONSUMER BUSINESS LEADING GLOBAL MARKET SHARE

MCCORMICK MANAGEMENTS GROWTH TARGETS

* On comparable basis. Source for the above charts: Company presentation dated May 31, 2013.
The top-line outlook
seems realistic; we are
less sure about the path
to a shareholder return
of 11-13%per year
McCormick is by far the market leader


MSCI (MSCI) BAMCO, Delaware, GSAM, IFP, MSIM, T Rowe, ValueAct
Financi al: Investment Servi ces, Member of S&P Mi dCap 400 NEW YORK NY www.mscibarra.com
Insider ownership: 2% FYE 12/31/15 2.46 2.46 4 P / tangible book n/m
Institutional ownership: n/a 5/1/13 $0.57 $0.54 LTM pre-tax ROC n/m

per share data) 2007 2008 2009 2010 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 370 431 443 663 73 901 950 973 229 252
Gross profit 249 308 324 464 52 624 662 677 157 172
D&A 28 34 38 59 7 85 82 102 20 20
Shares out (avg) 85 100 101 112 120 121 122 122 122 121
Capex 1 26 13 13 2 23 45 46 4 5
Free cash flow 110 130 118 170 41 232 302 303 65 66
% of revenue:
Gross profit 67.3% 71.4% 73.2% 70.0% 71.0% 69.2% 69.7% 69.6% 68.4% 68.2%
D&A 7.5% 7.8% 8.5% 8.9% 10.2% 9.5% 8.6% 10.4% 8.9% 7.8%
Capex 0.1% 5.9% 3.0% 2.0% 2.5% 2.6% 4.7% 4.7% 1.9% 1.9%
Receivables 80 88 77 148 138 181 154 167 172 167
Total current assets 281 392 603 536 575 678 515 523 713 523
PP&E, net 4 28 29 34 36 38 67 65 40 65
Intangible assets 616 588 562 2,423 2,417 2,354 2,425 2,431 2,338 2,431
Tangible assets 289 428 639 600 640 740 595 601 776 601
Payables 17 36 2 2 0 0 3 1 0 1
Short-term debt 22 22 42 55 55 10 43 43 10 43
Long-term debt 403 380 338 1,208 1,208 1,067 812 786 1,064 786
Common equity 200 286 507 1,080 1,102 1,305 1,425 1,489 1,365 1,489
Tangible equity -416 -301 -55 -1,343 -1,315 -1,048 -999 -942 -973 -942


$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
J un 13 J un 12 J un 11 J un 10 J un 09 J un 08


BUSINESS OVERVIEW
MSCI provides investment management-related tools.
The Performance and Risk business (87% of revenue)
provides equity indices, real estate indices, portfolio risk and
performance analytics, credit analytics and other products.
Governance (13%) facilitates the voting of proxies by
investors and helps inform their voting decisions.
MSCI acquired Barra in 2004, completed an IPO in 2007,
and acquired RiskMetrics/ISS for $1.6 billion in mid-2010.

Leading global provider of investment decision
support tools. Flagship products are the MSCI
indices, with $7 trillion benchmarked to them; Barra
multi-asset class factor models, portfolio risk and
performance analytics; RiskMetrics market and
credit risk analytics; IPD real estate data; MSCI
environmental, social and governance research; ISS
governance research and outsourced proxy voting
services; and FEA valuation and risk management
software for the energy and commodities markets.
Wide-moat business. The MSCI indices generate
high-margin recurring revenue from customers who
use the data for benchmarking. Barra is the standard
in risk management software for investment firms.
ISS is the largest of a handful of respected proxy
advisory firms. The businesses generate high
margins, with renewal rates in the 80-90% range.
Cash-generative business model, with revenue
recognition trailing cash receipts. The company had
deferred revenue of $350 million as of March 31, up
from $308 million at yearend 2012. The vast
majority of revenue is recurring, as it derives from
product subscriptions and/or asset-based fees.
Clear capital allocation priorities: (1) organic
investment, (2) bolt-on acquisitions with mid-teens
ROIC in 3-5 years, and (3) return of capital via
repurchases. MSCI reported net CFO of $347
million and allocated $100 million to buybacks in
2012. Debt reduction has also been a priority.

Dependent on fortunes of investment industry,
making MSCI a pro-cyclical equity. While MSCI
tools may be mostly non-discretionary, revenue
depends on industry AUM. A recession may drain
cash due to the large deferred revenue liability.
Competitors include FTSE, Russell, and S&P in
indices; Bloomberg, Capital IQ, and FactSet in
portfolio analytics; Algorithmics and SunGard in
risk; Broadridge and Glass Lewis in proxy services.
FYE December 31
1
2008 2009 2010 2011 2012 1Q13
revenue 16% 3% 50% 36% 5% 10%
Revenue ($mn) 431 443 663 901 950 252

Performance and risk 100% 100% 91% 87% 87% 87%
Governance 0% 0% 9% 13% 13% 13%

Performance and risk 32% 34% 33% 40% 40% 40%
Governance n/m n/m 10% 10% 10% 12%

Americas 51% 51% 53% 54% 54% 53%
EMEA 33% 32% 32% 32% 32% 35%
Asia and Australia 16% 17% 14% 14% 13% 12%
% of revenue run rate by product:
2

Index and related products 34% 40% 43% 44% 48% 48%
Risk management analytics 28% 27% 28% 28% 27% 27%
Portfolio management analytics 19% 16% 14% 13% 11% 11%
Energy and commodity analytics 2% 2% 2% 2% 1% 1%
Governance 17% 15% 13% 12% 12% 13%
% of revenue run rate by type:
2

Subscriptions 92% 87% 86% 86% 87% 85%
Asset-based fees 8% 13% 14% 14% 13% 15%

Gross profit 71% 73% 70% 69% 70% 68%
EBIT 32% 34% 31% 36% 37% 36%
Net income 15% 18% 14% 19% 19% 23%
D&A 8% 8% 9% 9% 9% 8%
Capex 6% 3% 2% 3% 5% 2%
Aggregate retention rates by product category:
Index and related 94% 91% 92% 93% 93% 95%
Risk management analytics 87% 81% 88% 90% 89% 94%
Portfolio management analytics 86% 79% 80% 88% 85% 82%
Energy and commodity analytics 92% 89% 85% 83% 78% 90%
Governance 87% 80% 84% 86% 89% 90%

Receivables 20% 12% 25% 24% 26% 28%
Other current assets 9% 8% 15% 14% 18% 16%
Current liabilities 68% 46% 78% 61% 86% 80%
LT debt 89% 53% 201% 144% 136% 131%
Shares out (avg) (mn) 100 101 112 121 122 121
shares out (avg) 18% 1% 11% 1% 1% -1%
1
Fiscal years ended November 30 for fiscal years through 2009.
2
Revenue run raterepresents contractual revenue for the next twelve months, equaling the
vast majority of projected revenue. 1Q13 data represents breakdown of actual revenue.

NOTABLE HOLDERS
CEO 1% | MSIM 11% | T Rowe 11% | IFP 6% | Delaware
5% | ValueAct 5% | Bamco 4% | GSAM 4% | Burgundy 1%

RATINGS
THE BOTTOM LINE
MSCI serves the investment management industry with tools such as the MSCI indices, Barra risk metrics, and ISS proxy
services, which have become industry standards. MSCI extracts rents while helping capital providers evaluate investment
alternatives (even if not in the most appropriate way). MSCI operates a capital-light business, the growth of which depends
heavily on industry AUM growth and product diversity. MSCI should be able to retain a strong competitive position, but
alternative tools may gain share over time. We find the quotation moderately compelling at a trailing FCF yield of 7%.


MSCI EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive


December 31, 2013

TTM net sales: $970 million


multiplied by

minus

minus

Capex: $46 million

equals

equals



equals
multiplied by

divided by



multiplied by
10.0x

equals

equals


equals


MSCI Inc.: $3.4 billion

multiplied by

plus


multiplied by


Assumed MSCI multiple as a
minus

95%

Total debt: $830 million


110%
equals

equals



equals
equity of MSCI Inc.:










(*) Represents Investment Services industry median multiple.


MSCI CALCULATION of ADJUSTED NET INCOME and EPS



MSCI AUM LINKED to MSCI INDICES

MSCI MSCI-LINKED ETF AUM by MARKET EXPOSURE


MSCI EQUITY ETF MARKET SHARE by INDEX PROVIDER
*

* At yearend 2012. Assumes shift of Vanguard ETFs.
Source: Company presentation dated March 2013.
MSCI INDEX and RELATED RUN RATE by CLIENT TYPE


MSCI REVENUE BREAKDOWN
*

* 2008 revenue is shown on a combined basis and FY2009 and FY2010 are shown as pro forma for the acquisition of RiskMetrics.
Virtually all revenue consists of recurring
asset-based fees and subscriptions
Asset managers represent by far MSCIs
largest category of customers


Norfolk Southern (NSC) Cap Re, Cap World, Citadel, DFA, Geode, MS, T Rowe
Transportati on: Railroads, Member of S&P 500

NORFOLK VA www.nscorp.com

per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 9,407 9,432 10,661 7,969 9,516 11,172 11,040 10,989 2,789 2,738
Gross profit 3,678 3,360 3,888 2,799 3,495 4,075 4,040 3,989 969 918
Dividend 0.68 0.96 1.22 1.36 1.40 1.66 1.94 1.97 0.47 0.50
Shares out (avg) 406 390 372 367 367 346 321 319 328 315
Cash from operations 2,206 2,333 2,715 1,860 2,714 3,227 3,065 2,753 1,035 723
Capex 1,178 1,341 1,558 1,299 1,470 2,160 2,241 2,159 461 379
Free cash flow 1,028 992 1,157 561 1,244 1,067 824 594 574 344
% of revenue:
Gross profit 39.1% 35.6% 36.5% 35.1% 36.7% 36.5% 36.6% 36.3% 34.7% 33.5%
D&A 8.0% 8.3% 7.6% 10.6% 8.7% 7.8% 8.4% 8.4% 8.0% 8.3%
Capex 12.5% 14.2% 14.6% 16.3% 15.4% 19.3% 20.3% 19.6% 16.5% 13.8%
Cash, investments 918 206 618 1,086 1,110 301 668 687 831 687
Receivables 992 942 870 766 807 1,022 1,109 1,158 1,056 1,158
Inventory 151 176 194 164 169 209 216 246 228 246
LT investments 1,755 1,974 1,779 2,164 2,193 2,234 2,300 2,341 2,263 2,341
PP&E, net 21,098 21,583 22,247 22,643 23,231 24,469 25,736 25,870 24,703 25,870
Tangible assets 26,028 26,144 26,297 27,369 28,199 28,538 30,342 30,599 29,375 30,599
Debt 6,600 6,368 6,667 7,153 7,025 7,540 8,682 8,485 8,017 8,485
Tangible equity 9,615 9,727 9,607 10,353 10,669 9,911 9,760 10,110 9,815 10,110
TBV per share 23.68 24.97 25.80 28.20 29.11 28.69 30.41 32.15 29.90 32.15


$0
$10
$20
$30
$40
$50
$60
$70
$80
$90



BUSINESS OVERVIEW
Norfolk Southern is a North American railroad.
Operates 20,000 route miles in the U.S., serving
every major container port in the eastern U.S. NSC
operates the most extensive intermodal network in
the East and is a major transporter of coal, auto, and
industrial products. It owns 4,000 locomotives,
80,000 cars, and 35,000 other pieces of equipment.
NSC also has a $1 billion investment in Conrail,
with 58% of the economics (CSX owns remainder).
Economics of railroad business have improved.
While the business is capital-intensive, it earns
respectable returns on capital due to growth in trade,
fuel cost advantages over trucking (plus no traffic
congestion on railways), and improved train
operating efficiency on a unit basis. Barriers to
entry are prohibitively large in the railroad business.
Positive outlook for intermodal services, with
continued highway conversion, new intermodal
service lanes ahead as new corridor terminals open,
and growth with international shipping partners.
NSC has opened three Crescent Corridor facilities
since mid-2012 to handle higher intermodal volume.
$8+ billion of fixed-rate debt has average maturity
of 24 years and interest rate of 5.5%. If inflation
accelerates, the debt service burden would diminish.
Balanced capital allocation, with $11 billion spent
on capital expenditures and $11 billion spent on
buybacks and dividends over the past seven years.
Weak short- and long-term outlook for coal (20-
25% of revenue). In 2013, utility coal is impacted
by electricity demand, competition from natural gas
and higher stockpiles; soft domestic metallurgical
market to support steel production; weak demand in
Europe for met and steam coal; and a weaker Asian
market. Longer term, coal appears likely to lose
share of the energy mix to affordable natural gas.
High-cost labor. NSCs workforce of 31,000 has an
average wage cost per employee of $69,000 per
year and an benefit cost per employee of $38,000
per year. 80+% of employees are unionized, making
major savings unlikely, though it is hard to imagine
per-employee costs increasing faster than CPI.
Regulated by the U.S. Surface Transportation
Board, which has jurisdiction over some rates,
routes, fuel surcharges, conditions of service, and
the extension or abandonment of rail lines. While
regulation has not been a major factor in industry
economics, it could have an impact in the future.
FYE December 31 2008 2009 2010 2011 2012 1Q13
revenue 13% -25% 19% 17% -1% -2%
assets 1% 4% 3% 1% 6% 4%
Employees (avg) 30,709 28,593 28,559 30,329 30,943 n/a
Wage cost / employee ($) 66,000 63,000 69,000 71,000 69,000 n/a
Benefit cost / employee ($) 31,000 32,000 37,000 39,000 38,000 n/a
Revenue ($bn) 10.7 8.0 9.5 11.2 11.0 2.7
% of revenue by market group:

Coal 29% 28% 29% 31% 26% 23%
Chemicals 12% 13% 14% 12% 13% 14%
Agriculture/consumer 12% 15% 14% 13% 13% 13%
Metals and construction 12% 9% 11% 11% 12% 12%
Automotive 8% 7% 7% 7% 8% 9%
Paper/clay/forest 8% 8% 7% 7% 7% 7%
Intermodal 19% 19% 19% 19% 20% 21%
Units by market group (000):

Coal 1,766 1,419 1,557 1,620 1,414 343
Chemicals 394 345 406 374 389 106
Agriculture/consumer 612 563 628 599 596 148
Metals and construction 742 504 628 665 670 155
Automotive 412 289 290 332 375 99
Paper/clay/forest 394 306 328 314 306 77
Intermodal 3,029 2,531 2,927 3,211 3,358 856
Total units 7,350 5,957 6,764 7,115 7,107 1,784
Revenue ton miles (RTN) (bn) 195 159 182 192 186 n/a
Freight train miles traveled (mn) 80.0 67.5 72.6 75.7 76.3 n/a
Revenue per ton mile () 5.46 5.03 5.23 5.82 5.95 n/a
RTN per employee-hour worked 3,075 2,900 3,218 3,207 3,153 n/a
Railway opex to railway revenue 71.1% 75.4% 71.9% 71.2% 71.7% n/a
Property additions (including capital leases) ($mn):

Road and all other property 1,070 1,128 1,153 1,222 1,465 n/a
Equipment 488 171 317 938 776 n/a

EBIT 29% 25% 28% 29% 28% 25%
Net income 16% 13% 16% 17% 16% 16%
D&A 8% 11% 9% 8% 8% 8%
Capex 15% 16% 15% 19% 20% 14%

Operating income 3.1 2.0 2.7 3.2 3.1 0.7
/ Capital employed 21.7 22.2 22.7 23.7 24.9 25.6
Tangible equity 37% 38% 38% 35% 32% 33%
Shares out (avg) (mn) 372 367 367 346 321 315
shares out (avg) -4% -1% 0% -6% -7% -4%
1
Railroads industry median.

NOTABLE HOLDERS
Insiders 1% | T Rowe 2% | Cap World 2% | Cap Re 1% |
DFA 1% | Citadel 1% | Geode 1% | MS 1%

RATINGS
THE BOTTOM LINE
Norfolk Southerns model has improved, as higher gas prices and traffic congestion have made the highway system less
competitive. While railroads are a capital-intensive business, barriers to entry are so high that existing players can enjoy
improving economics for a long time as railroads become more appealing to shippers. Unfortunately, the fact that the
business has gone from bad to good has not remained a secret, and railroads no longer trade at bargain prices. While another
recession would likely offer a better entry point into the shares, modest long-term returns should accrue even from here.


NORFOLK SOUTHERN EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Base Case

Aggressive

Base Case

December 31, 2014




multiplied by

minus

minus


Capex: $2.2 billion
equals


equals

equals

multiplied by


divided by

multiplied by

7.5x


equals
equals

equals



Norfolk Southern: $23 billion


multiplied by
plus

multiplied by


Assumed NSC multiple as a

plus


95%

105%



equals
minus

equals



equity of Norfolk Southern:
equals










(*) Represents Railroads industry median multiple.


NORFOLK SOUTHERN ANALYSIS OF SELECTED COMPARABLE COMPANIES

Can. Nat. Railway / CNI -69% 10% 40,169 47,227 26% 4% 6% n/a n/a 20% 406 7% 5% 53% 37% 41%
Can. Pacific Railway / CP -79% 18% 20,777 25,095 25% 1% 3% n/a n/a 22% 368 5% 9% 50% 30% 36%
CSX Corp. / CSX -71% 15% 23,985 32,331 39% 4% 8% 8% 9% 36% 367 -1% 0% 68% 30% 31%
Union Pacific / UNP -78% 5% 71,272 79,216 28% 3% 6% 6% 7% 27% 454 5% 3% 73% 33% 41%
Norfolk Southern / NSC -63% 11% 22,970 30,768 44% 3% 8% 8% 9% 36% 355 -3% -2% 36% 28% 33%

NORFOLK SOUTHERN CASH FROM OPERATIONS and CAPEX, 2008-2012 ($ in millions)

Source: Company presentation dated J une 2013.

Positive FCF generation,
even as capex remains
significantly higher than D&A
Attractive and growing earnings yield


NORFOLK SOUTHERN INTEREST RATE (weighted avg)

NORFOLK SOUTHERN MATURITY (weighted avg) (yrs)

NORFOLK SOUTHERN TRAIN SPEED

NORFOLK SOUTHERN TERMINAL DWELL

NORFOLK SOUTHERN MANAGEMENTS NEAR-TERM BUSINESS OUTLOOK

Well-positioned
for rising interest
rate environment
The outlook for coal is a key concern


Oracle (ORCL) Cap Re, Cap World, MFS, FMR, GMO, Harris, Eagle, T Rowe
Technology: Software & Programmi ng, Member of S&P 500 REDWOOD CITY CA www.oracle.com
Enterprise value: $128.3 billion Next quarter 0.69 0.69 35 P/E FYE 5/30/16 n/a
Insider ownership: 24% FYE 5/30/16 n/a n/a n/a P / tangible book 13.4x
Institutional ownership: 61% 6/20/13 $0.87 $0.87 LTM pre-tax ROC n/m

($ millions, except Fiscal Years Ended May 31, LTME FQE FQE
per share data) 2006 2007 2008 2009 2010 2011 2012 2/28/13 2/29/12 2/28/13
Revenue 14,380 17,996 22,430 23,252 26,820 35,622 37,121 37,149 26,205 8,958
Gross profit 11,145 13,805 17,449 18,458 21,056 27,224 29,263 29,818 20,233 7,202
R&D 1,872 2,195 2,741 2,767 3,254 4,519 4,523 4,726 3,084 1,100
Dividend 0.05 0.20 0.21 0.24 0.36 0.18 0.18
Shares out (avg) 5,196 5,170 5,133 5,070 5,014 5,048 5,015 4,945 5,037 4,735
Capex 236 319 243 529 230 450 648 684 142 116
Free cash flow 4,305 5,201 7,159 7,726 8,451 10,764 13,095 13,033 2,868 3,078
% of revenue:
Gross profit 77.5% 76.7% 77.8% 79.4% 78.5% 76.4% 78.8% 80.3% 77.2% 80.4%
R&D 13.0% 12.2% 12.2% 11.9% 12.1% 12.7% 12.2% 12.7% 11.8% 12.3%
Receivables 3,420 4,589 5,799 4,430 5,585 6,628 6,377 4,169 4,656 4,169
PP&E, net 1,391 1,603 1,688 1,922 2,763 2,857 3,021 3,034 2,936 3,034
Tangible assets 14,692 15,129 20,882 21,305 31,832 44,122 45,309 46,686 43,087 46,686
Payables 268 315 383 271 775 494 438 361 442 361
Short-term debt 159 1,358 1,001 1,001 3,145 1,150 2,950 1,250 0 1,250
Long-term debt 5,735 6,235 10,235 9,237 11,510 14,772 13,524 18,502 14,777 18,502
Tangible equity 675 -2,524 -3,361 -1,021 1,052 10,363 10,670 10,584 11,599 10,584
TBV / tangible assets 5% -17% -16% -5% 3% 23% 24% 23% 27% 23%


$0
$5
$10
$15
$20
$25
$30
$35
$40



BUSINESS OVERVIEW
Oracle provides enterprise software. It entered the hardware
business by buying Sun Microsystems for $7.4 billion in 2010.

Worlds #1 enterprise software provider. Oracle
has added to its strength in relational databases by
acquiring 50 companies for $40 billion since 2005.
The purchases of PeopleSoft and Siebel extended
Oracle into application software and boosted the
already high customer switching costs. Oracle
customers rely on the company for mission-critical
databases and applications, making any move to a
competitor an expensive and risky proposition.
Well-positioned in growth segments of IT. Oracle
has quickly grown cloud revenue, eclipsing SAP
and most other key competitors. The company is
also gaining share in engineered systems versus
IBMs P-Series, with related Oracle sales up 45% in
4Q13 while P-Series sales declined 32%. The Sun
acquisition, while risky, appears to be paying off.
Founder and CEO Larry Ellison (69) owns 23%
and has grown Oracle into one of the largest IT
companies since 1977. Despite a penchant for
M&A, Ellison has proven a shrewd capital allocator.
Strong balance sheet and shareholder-friendly
capital allocation. Oracle, which has $14 billion of
net cash, bought back $11 billion of stock and paid
$1+billion in dividends in FY13. The company has
doubled the quarterly dividend for FY14 to $0.12.
Open-source software and software-as-a-service
offerings may lead to less customer demand for
buying software licenses and/or lower profitability.
Vulnerability to technological change may have
increased due to hardware business entry. While
the Sun acquisition appears to have been a shrewd
deal, the longer-term impact is unclear. Hardware
sales represented 14% of Oracles revenue in FY13.
Competition includes technology heavyweights
IBM, HP, Microsoft, EMC, and SAP. Challenges
from best-in-class software firms, such as People-
Soft, also emerge over time. Oracle has skillfully
eliminated thorny competitors by acquiring them.
Key-man risk related to Ellison, who is undoubt-
edly the key driver behind Oracles success. Ellison
is in this regard not dissimilar from J obs at Apple.
MAJOR HOLDERS
CEO Ellison 23% | Cap Re 3% | Cap World 2% | MFS 2% |
FMR 2% | GMO 1% | Harris 1% | Eagle 1% | T Rowe 1%

FYE May 31 2008 2009 2010 2011 2012 2013
software revenue 26% 6% 9% 17% 9% 5%
services revenue 21% -5% -11% 19% 1% -7%
total revenue 25% 4% 15% 33% 4% 0%
assets 37% 0% 30% 19% 7% 7%
book value 36% 9% 23% 29% 10% 1%
BV per share 37% 10% 24% 28% 11% 8%
Revenue ($bn) 22.4 23.3 26.8 35.6 37.1 37.2
% of revenue by business:

Software 80% 81% 77% 67% 70% 74%
Hardware 0% 0% 9% 19% 17% 14%
Services 20% 19% 15% 13% 13% 12%

Americas 51% 51% 52% 52% 52% 53%
EMEA 35% 34% 33% 32% 31% 30%
Asia Pacific 14% 15% 15% 16% 17% 17%
Revenue growth by geography:

Americas 20% 5% 16% 33% 5% 3%
EMEA 32% 0% 12% 29% 1% -3%
Asia Pacific 26% 8% 19% 42% 10% 0%

Gross profit 78% 79% 79% 76% 79% 56%
R&D 12% 12% 12% 13% 12% 13%
EBIT (adjusted)
1
36% 37% 37% 35% 38% 39%
1
36% 35% 34% 34% 36% 37%
1
26% 25% 26% 26% 28% 29%
D&A 7% 8% 8% 8% 8% 8%
Capex 1% 2% 1% 1% 2% 2%
2
61% 62% 63% 61% 62% 62%
2
-1% 2% 3% 3% 1% 2%

Receivables 28% 21% 18% 15% 14% 9%
PP&E, net 8% 9% 9% 6% 7% 6%
ST debt 5% 5% 10% 3% 7% 3%
LT debt 49% 43% 36% 33% 30% 40%
Other LT liabilities 19% 18% 14% 11% 13% 12%
Tangible equity -16% -5% 3% 23% 24% 23%
Return on equity (ROE) 29% 24% 25% 26% 25% 25%
ROE industry median
2
9% 8% 10% 9% 7% 8%
Diluted EPS (cont.) ($) 1.06 1.09 1.21 1.67 1.96 1.46
Dividends per share ($) 0.05 0.20 0.21 0.24 0.30
Shares out (avg) (mn) 5,133 5,070 5,014 5,048 5,015 4,844
shares out (avg) -1% -1% -1% 1% -1% -4%
1
2010, -$575 million in 2011, -$351 million in 2012, and $29 million in 2013.
2
Software & Programming industry median.

RATINGS
THE BOTTOM LINE
Oracle is rivaled by only a handful of companies as a long-term software success story, thanks in large part to the execution
skill of CEO Larry Ellison. Oracle has ably leveraged its strength in relational databases into application software and
hardware, both via acquisitions. The company benefits from some of the highest switching costs in the IT industry, as
customers use complex Oracle solutions to power mission-critical applications. As a result, Oracle has become a predictable,
modestly growing FCF machine, with per-share value creation helped by friendly capital allocation policies. The recent
revenue growth disappointment provides an opportunity, as shares trade at an FCF yield, adjusted for net cash, of ~11%.


ORACLE EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive


ended February 28, 2013 and average

estimate for the fiscal year ending May
31, 2014

months ended February 28, 2013



multiplied by

minus

minus


Capex: $680 million
equals


equals

equals

multiplied by


divided by

multiplied by

8.0x


equals
equals

equals



Oracle: $107 billion


multiplied by
plus

multiplied by


Assumed ORCL multiple as a

minus


95%

90%

equals


equals

equals

equity of Oracle:


equity of Oracle:

equity of Oracle:







(*) Represents Software & Programming median.



ORACLE ANALYSIS OF SELECTED COMPARABLE COMPANIES

IBM / IBM -64% 10% 216,725 238,130 n/m 7% 7% 9% 9% 43% 238 -3% -5% 48% 6% 23%
Microsoft / MSFT -55% 13% 277,800 217,512 21% 10% 6% 8% 9% 35% 809 4% 18% 75% 13% 44%
Salesforce.com / CRM -86% 24% 22,595 22,189 3% 3% neg. 1% 2% 15% 331 32% 28% 77% 14% 0%
SAP / SAP -60% 16% 89,474 88,382 n/m 3% 4% 4% 4% 24% 335 96% 8% 71% 14% 28%
Oracle / ORCL -60% 21% 141,956 128,301 7% 9% 7% 10% 11% 29% 313 -31% -66% 80% 13% 37%

ORACLE CAPITAL ALLOCATION, FY2005-FY2013

Source: Company presentation dated October 2012, press release dated J une 20, 2013.

Cheap on forward EPS estimates
In the fiscal year ended May
31, 2013, Oracle repurchased
$11.0 billion of stock and paid
out $1.4 billion in dividends


ORACLE CALCULATION of ADJUSTED OPERATING INCOME and NET INCOME, FY2012-FY2013 ($ in millions)

ORACLE CALCULATION of FREE CASH FLOW, FY2012-FY2013

ORACLE SELECTED GROWTH RATES by GEOGRAPHY, FY2012-FY2013

Source for the above tables: Company press release dated J une 20, 2013.
Consistently
strong FCF
generation
Earnings growth continued in FY13, despite stagnant revenue
Asian growth is helping to offset weakness in Europe


Pfizer (PFE) Wellington, T Rowe, FMR, MFS, Cap World, Dodge & Cox, GMO
Heal th Care: Maj or Drugs, Member of S&P 500

NEW YORK NY www.pfizer.com

per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 4/1/12 3/31/13
Revenue 48,371 48,418 48,296 49,269 65,165 65,259 58,986 57,601 14,885 13,500
Gross profit 40,731 37,179 40,929 40,887 50,897 51,988 47,950 n/a 12,219 10,890
R&D 7,423 7,673 7,512 7,733 9,449 8,397 7,342 9,431 1,755 1,707
Dividend 0.96 1.16 1.28 0.80 0.72 0.80 0.88 0.90 0.22 0.24
Shares out (avg) 7,242 6,917 6,727 7,007 8,036 7,817 7,442 7,378 7,537 7,187
Capex 2,203 1,880 1,701 1,205 1,513 1,660 1,327 1,275 254 202
Free cash flow 15,391 11,473 16,537 15,382 9,941 18,580 15,727 15,246 2,520 2,039
% of revenue:
Gross profit 84.2% 76.8% 84.7% 83.0% 78.1% 79.7% 81.3% n/a 82.1% 80.7%
R&D 15.3% 15.8% 15.6% 15.7% 14.5% 12.9% 12.4% 16.4% 11.8% 12.6%
Receivables 9,392 9,843 8,958 14,645 13,380 13,058 12,378 12,735 14,182 12,735
Inventory 6,111 5,302 4,381 12,403 8,275 6,610 7,063 7,035 7,189 7,035
LT investments 3,892 4,856 11,478 13,122 9,747 9,814 14,149 15,392 10,632 15,392
PP&E, net 16,632 15,734 13,287 22,780 18,645 15,921 14,461 13,950 16,192 13,950
Tangible assets 70,320 73,388 71,963 102,558 93,531 92,249 95,113 99,537 87,630 99,537
Short-term debt 2,434 5,825 9,320 5,469 5,603 4,016 6,424 8,896 5,526 8,896
Long-term debt 5,546 7,314 7,963 43,193 38,410 34,926 31,036 31,481 33,543 31,481
Tangible equity 25,991 23,037 18,298 -20,438 -13,722 -13,608 -9,464 -5,649 -14,840 -5,649


$0
$5
$10
$15
$20
$25
$30
$35
$40
$45


BUSINESS OVERVIEW
Pfizer develops and markets branded medicines.

#1 position in cardiovascular and #2 in infectious
disease and central nervous system treatments,
and #4 in vaccines globally. Pfizer is the pharma
market leader in the U.S. (12% share), Europe (10%),
Asia (7%), J apan (6%), and Latin America (6%). It
possesses a strong global distribution platform.
Strategically active in an attempt to improve the
drug pipeline and optimize the portfolio. Pfizer
broadened its revenue sources by adding a focus on
vaccines and biologics via the $68 billion purchase
of Wyeth in 2009. Pfizer also bought pain treatment
pharma company King for $3 billion in 2011. In
February 2013, Pfizer took public its animal health
business, Zoetis (NYSE: ZTS). In late 2012, Pfizer
sold its nutrition business to Nestl for $12 billion.
Repurchased $18 billion of stock from 2010-2012
and another $6+billion YTD. The company also
returns $6+billion to shareholders annually in the
form of dividends (3.4% recent annualized yield).

Revenue and adjusted income down ~10% in Q1,
reflecting some loss of portfolio exclusivity (Lipitor
patent expired in 2011; Celebrex to expire in 2014).
Value creation is difficult under such circumstances,
despite managements best efforts on execution.
The firm has lowered 2013 adjusted EPS guidance
to $2.14-2.24, with expected sales of $55-57 billion.
A bright spot: Pfizer expects to grow revenue in
emerging markets in the high single digits in 2013.
Organic innovation a challenge. Pfizer has sought
to improve the productivity of internal pharma
discovery, apparently with some success. It is,
however, difficult for us to judge to what extent the
pipeline will translate into new blockbuster drugs.
While management is excited about the potential
of our mid-to-late stage pipeline, we are skeptical.
M&A cannot be long-term fix. Continued M&A
activity is tacit admission that Pfizers internal drug
efforts are not delivering sufficient value. However,
with high-ROIC internal pharma development at
scale, above-average value creation becomes tough.
Strategic sellers rarely leave money on the table.
Regulatory pressure. Pricing may come under
scrutiny as government programs try to save money.

MAJOR HOLDERS
Insiders <1% | Wellington 2% | T Rowe 2% | FMR 2% |
MFS 1% | Cap World 1% | Dodge & Cox 1% | GMO 1%

FYE December 31 2008 2009 2010 2011 2012 1Q13
revenue 0% 2% 32% 0% -10% -9%
gross profit 10% 0% 24% 2% -8% -11%
Employees (end) (000) 82 117 111 104 92 n/a
Revenue ($bn) 48.3 49.3 65.2 65.3 59.0 13.5

Primary care n/a 46% 36% 35% 26% 24%
Specialty care and oncology n/a 18% 25% 25% 26% 26%
Est. products, emerging mkts n/a 28% 29% 28% 34% 35%
Other n/a 8% 10% 12% 13% 14%
Pretax margin by segment (excl. corporate and other):

Primary care n/a 67% 68% 66% 62% 62%
Specialty care and oncology n/a 52% 64% 65% 68% 65%
Est. products, emerging mkts n/a 50% 54% 51% 56% 59%

U.S. 42% 43% 44% 41% 39% 40%
Developed Europe 27% 26% 25% 25% 23% 22%
Developed RoW 16% 16% 15% 17% 18% 16%
Emerging Markets 15% 14% 16% 17% 20% 22%

Gross profit 85% 83% 78% 80% 81% 81%
R&D 16% 16% 15% 13% 12% 13%
EBIT (adjusted)
1
37% 33% 26% 28% 31% 31%
1,2
34% 28% 24% 22% 26% 22%
D&A 11% 10% 13% 14% 13% 13%
Capex 4% 2% 2% 3% 2% 1%
3
76% 74% 73% 72% 70% 71%

+ special items 8.4 5.4 7.4 6.2 6.0 0.2
Adjusted EBIT 18.1 16.1 16.9 18.5 18.1 4.1
Current assets 45.0 52.4 61.3 60.9 61.1 63.1
+ Short-term debt 7.6 7.4 5.5 4.8 5.2 7.7
+ Net fixed assets 14.5 18.0 20.7 17.3 15.2 14.2

LT investments 16% 13% 10% 11% 15% 15%
ST debt 13% 5% 6% 4% 7% 9%
LT debt 11% 42% 41% 38% 33% 32%
Tangible equity 25% -20% -15% -15% -10% -6%
Shares out (avg) (mn) 6,727 7,007 8,036 7,817 7,442 7,187
shares out (avg) -3% 4% 15% -3% -5% -5%
1
Adjusted for unusual items of -$8.4 billion in 2008, -$5.4 billion in 2009, -$7.4 billion in
2010, -$6.2 billion in 2011, -$6.0 billion in 2012, and -$214 million in 1Q13.
2
Adjusted for nonrecurring items of $78 million in 2008, $114 million in 2009, -$30 million in
2010, $1.7 billion in 2011, $5.1 billion in 2012, and $4.0 million in 1Q13.
3
Major Drugs industry median.

RATINGS
THE BOTTOM LINE
Pfizer has sought to improve the drug pipeline and pursue strategic deals in order to mitigate the impact of patent expirations,
including those of Lipitor (2011), Viagra (2012), and Celebrex (2014). Despite the efforts, revenue fell 10% in 2012 and 9%
in 1Q13, indicating that the retrenchment continues. A near-term fix is not in sight, although sales should decline a more
modest 3-7% in 2013. Longer term, Pfizer appears capable of returning to growth in line with the pharma industry, as the
company continues to have a strong team and global platform. The trailing FCF yield of 7-8% is decent but not compelling.


PFIZER EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive

December 31, 2014




multiplied by

minus

minus


Capex: $1.3 billion
equals


equals

equals

multiplied by


divided by

multiplied by

7.5x


equals
equals

equals



Pfizer: $131 billion


multiplied by
plus

multiplied by


Assumed PFE multiple as a

plus


130%

120%

discount of 25%: $12 billion


equals
minus

equals



equity of Pfizer:
equals

equity of Pfizer:



equity of Pfizer:






(*) Represents Major Drugs industry median multiple.


PFIZER ANALYSIS OF SELECTED COMPARABLE COMPANIES
GlaxoSmithKline / GSK -45% 22% 121,127 131,051 n/m 2% 5% 8% 9% 31% 407 33% -3% 72% 13% 37%
Merck / MRK -57% 31% 141,922 146,725 9% 6% 4% 7% 8% 31% 564 -4% -9% 76% 17% 44%
Novartis / NVS -52% 9% 189,191 204,100 3% 6% 6% 7% 8% 28% 453 -2% 2% 67% 16% 21%
Sanofi / SNY -53% 9% 136,887 147,759 n/m 0% 4% 7% 8% 31% 412 -3% -9% 70% 14% 24%
Pfizer / PFE -59% 9% 201,873 206,942 n/m 8% 5% 8% 8% 28% 630 -28% -9% n/m 16% 47%

PFIZER REVENUE by SEGMENT and GEOGRAPHY, 2010-2012
Source: Company financial report 2012.

Pfizers revenue
challenges reflect
patent expirations,
especially that of
Lipitor


PFIZER SALES of TOP TEN DRUGS, 2010-2012

Source: Company financial report for the year 2012.

PFIZER ACTUAL PERFORMANCE versus PRIOR FINANCIAL GUIDANCE for 2012
(1) (2)

(1) At mid-J anuary 2013 exchange rates. (2) Does not assume the completion of any business development transactions not completed as of December 31, 2012, including any one-time
upfront payments associated with such transactions, and excludes the potential effects of the resolution of litigation-related matters not substantially resolved as of December 31, 2012.
Reflects a full-year contribution fromZoetis. EPS guidance includes a $0.02 unfavorable impact for Zoetis-related interest expense and certain duplicative and other costs given its potential
separation. Reported diluted EPS guidance includes an additional $0.02 unfavorable impact for costs related to the establishment of Zoetis corporate and manufacturing support functions,
and certain costs that Zoetis expects to incur related to the potential separation. (3) Adjusted for items deemed to be non-recurring. Source: Presentation dated J anuary 29, 2013.

PFIZER MANAGEMENTS FINANCIAL GUIDANCE for 2013
(1) (2)

(1) At exchange rates that reflect a blend of the actual exchange rates in effect during the first three months of 2013 and the mid-April 2013 exchange rates for the remainder of the year.
(2) Does not assume the completion of any business development transactions not completed as of March 31, 2013, including any one-time upfront payments associated with such
transactions, and excludes the potential effects of the resolution of litigation-related matters not substantially resolved as of March 31, 2013. Includes benefit of a full-year contribution from
Zoetis except that earnings attributable to the 19.8% divested interest have been excluded fromadjusted and reported diluted EPS guidance effective February 7, 2013. Reported diluted
EPS guidance includes the gain associated with the transfer of certain product rights to the Pfizer-Hisun J V and an impairment charge, both recorded in 1Q13.
(3) Adjusted for certain items deemed by management to be non-recurring. Source: Company presentation dated April 30, 2013.
Guidance for 2013
has been revised
down modestly
Management delivered
on guidance in 2012


Procter & Gamble (PG) Berkshire, Cap World, Pershing Square, Yacktman, GMO
Consumer Non-Cyclical: Personal & Household Products, Member of S&P 500 CINCINNATI OH www.pg.com
Institutional ownership: 60% 4/24/13 $0.99 $0.96
LTM pre-tax
ROC
62%

($ millions, except Fiscal Years Ended J une 30, LTME FQE FQE
per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 64,416 72,441 79,257 76,694 77,567 81,104 83,680 83,724 20,194 20,598
Gross profit 32,549 37,065 39,996 38,004 40,525 41,245 41,595 41,862 9,957 10,463
Dividend 1.15 1.28 1.45 1.64 1.80 1.97 2.14 2.25 0.53 0.56
Shares out (avg) 3,113 3,159 3,081 2,952 2,901 2,804 2,751 2,796 2,746 2,931
Capex 2,667 2,945 3,046 3,238 3,067 3,306 3,964 3,727 883 897
Free cash flow 8,708 10,465 11,962 11,681 13,064 10,024 9,320 10,727 2,933 2,965
% of revenue:
Gross profit 50.5% 51.2% 50.5% 49.6% 52.2% 50.9% 49.7% 50.0% 49.3% 50.8%
Receivables 5,725 6,629 6,761 5,836 5,335 6,275 6,068 6,669 6,200 6,669
Inventory 6,291 6,819 8,416 6,880 6,384 7,379 6,721 7,240 7,239 7,240
PP&E, net 18,770 19,540 20,640 19,462 19,244 21,293 20,377 21,191 20,384 21,191
Tangible assets 46,668 47,836 49,992 45,715 42,524 48,172 47,483 52,325 48,343 52,325
Short-term debt 2,128 12,039 13,084 16,320 8,472 9,981 8,698 11,098 11,771 11,098
Long-term debt 35,976 23,375 23,581 20,652 21,360 22,033 21,080 21,125 21,341 21,125
Preferred stock 1,451 1,406 1,366 1,324 1,277 1,234 1,195 1,143 1,202 1,143
Common equity 61,457 65,354 68,128 61,775 59,838 66,406 62,244 66,125 64,063 66,125
Tangible equity -27,570 -24,824 -25,872 -27,343 -25,810 -23,776 -22,517 -20,681 -22,199 -20,681


$0
$10
$20
$30
$40
$50
$60
$70
$80
$90


BUSINESS OVERVIEW
Procter & Gamble (P&G) provides branded consumer goods.
Strong presence in consumer product markets.
Globally, P&G has ~20% share of the $200 billion
household care market, ~13% share of the $300
billion beauty and grooming market, and ~5% share
of the $240 billion consumer healthcare market.
Owns 22 brands with $1+ billion in sales each,
comprised of Ariel, Tide, Gain, Dawn, Downy,
Charmin, Bounty, Pampers, Duracell, Olay, Head &
Shoulders, Pantene, Wella, Braun, Fusion, Gillette,
Mach3, Always, Crest, Oral-B, Iams, and Pringles.
Exploiting opportunities in developing markets.
The latter contribute one-third of revenue, up from
about 20% in 2000. P&G aims to reach five billion
consumers by 2015, up from four billion currently.
Aims to reach more consumers by extending core
brands vertically and horizontally. For example,
Gillette Fusion five-bladed razors are expanding the
category vertically into the premium-end, while
Febreze candles exemplify horizontal extension by
adding an adjacent product line to the odor remover.
Guiding for core EPS of ~$4.00 in FY13 (at high
end of prior guidance), with net sales expected to be
up ~3% versus the prior year, also an improvement.
The company is allocating $6 billion to repurchases
in FY13 and boosting the quarterly dividend by 7%.
Organic sales rose 3% in FY12, at the low end of
3-6% guidance. Management is pursuing $10 billion
in savings to offset macro weakness. P&G, while
consistently earning high ROIC, is finding it hard to
reinvest capital at high rates, making organic growth
above the rate of GDP growth a challenge.
Competition from branded and private-label
products. Wal-Mart accounts for 16% of revenue.
Barriers to entry have come down in some niches,
as consumer preferences for natural and organic
products create an opportunity for new entrants (less
the case in markets with low buying power).
P&Gs brands may hold less appeal in emerging
markets due to cultural differences. Potentially
higher marketing needs could reduce profitability.
That said, P&Gs management talent and execution
are likely to trump those of most local competitors.

MAJOR HOLDERS
Insiders <1% | FMR 2% | Berkshire 2% | T Rowe 1% | Cap
World 1% | Pershing Square 1% | Yacktman 1% | GMO <1%
FYE June 30 2008 2009 2010 2011 2012
YTD
3/31/13
revenue 9% -3% 1% 5% 3% 0%
gross profit 8% -5% 7% 2% 1% 2%
Revenue ($bn) 79.3 76.7 77.6 81.1 83.7 63.5
% of revenue by segment (ex. eliminations):

Beauty 25% 25% 25% 24% 24% 24%
Grooming 10% 10% 10% 10% 10% 9%
Health care 15% 15% 15% 15% 15% 15%
Snacks and pet care 4% 4% 4% 4%
33% 32%
Fabric and home care 30% 30% 30% 30%
Baby and family care 18% 18% 19% 19% 20% 20%
Net margin by segment:

Beauty 14% 14% 14% 13% 12% 14%
Grooming 20% 18% 19% 20% 22% 24%
Health care 17% 16% 16% 15% 15% 16%
Snacks and pet care 8% 8% 10% 8%
11% 12%
Fabric and home care 14% 13% 14% 12%
Baby and family care 12% 13% 14% 13% 13% 14%

Gross profit 50% 50% 52% 51% 50% 51%
EBIT (adjusted)
1
20% 20% 20% 19% 19% 19%
1,2
14% 14% 14% 14% 14% 15%
D&A 4% 4% 4% 3% 4% 3%
Capex 4% 4% 4% 4% 5% 4%
3
51% 50% 49% 49% 50% 48%
3
7% 8% 6% 7% 5% 7%

Adjusted EBIT 16.0 15.4 15.7 15.5 15.9 11.8
Current assets 24.3 23.2 20.3 20.4 21.9 23.1
+ Short-term debt 12.6 14.7 12.4 9.2 9.3 9.9
+ Net fixed assets 20.1 20.1 19.4 20.3 20.8 20.8

PP&E, net 41% 43% 45% 44% 43% 40%
ST debt 26% 36% 20% 21% 18% 21%
LT debt 47% 45% 50% 46% 44% 40%
Preferred stock 3% 3% 3% 3% 3% 2%
Tangible equity -52% -60% -61% -49% -47% -40%
Shares out (avg) (mn) 3,081 2,952 2,901 2,804 2,751 2,805
shares out (avg) -2% -4% -2% -3% -2% 2%
1
Adjusted for unusual items of -$2.6 billion in 2012.
2
Adjusted for nonrecurring items of
$784 million in 2008, $2.8 billion in 2009, $2.0 billion in 2010, $229 million in 2011, and $1.6
billion in 2012.
3
Personal & Household Products industry median.

RATINGS
THE BOTTOM LINE
P&G is home to many of the worlds best-selling branded consumer products, including Gillette, which has 70+% share of
the global mens blades and razors market. While other products may not have the attributes of the razor-and-blades model,
they generally have high and defensible market share. P&Gs brand and distribution strength, coupled with a tradition of
recruiting and grooming brand management talent from top universities, makes it likely that the company will retain market
leadership in key consumer product categories for a long time to come. That said, we do not consider the shares cheap at the
recent trailing FCF yield of 5% and would wait for the inevitable performance hiccup before becoming shareholders.


PROCTER & GAMBLE EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive

estimate for the fiscal year ending J une
30, 2014




multiplied by

minus

minus


Capex: $3.7 billion
equals


equals

equals

multiplied by


divided by

multiplied by

10.0x


equals
equals

equals



Procter & Gamble: $165 billion


multiplied by
plus

multiplied by


Assumed PG multiple as a

minus


90%

115%

equals


equals

equals

equity of Procter & Gamble:










(*) Represents Personal & Household Products median.



PROCTER & GAMBLE ANALYSIS OF SELECTED COMPARABLE COMPANIES

Clorox / CLX -45% 9% 10,873 13,011 n/m 5% 5% 5% 6% 43% 669 4% 1% 43% 17%
Colgate Palmolive / CL -53% 10% 52,989 57,250 n/m 5% 4% 5% 6% 30% 456 2% 3% 58% 22%
Johnson & Johnson / JNJ -44% 8% 233,699 227,923 7% 5% 4% 7% 7% 30% 538 6% 8% 67% 32%
Kimberly-Clark / KMB -55% 11% 36,837 42,756 3% 6% 5% 6% 6% 49% 364 0% 1% 33% 14%
Unilever / UN -56% 11% 117,145 122,719 n/m 1% 5% 6% 6% 55% 389 101% 140% n/m 14%
Procter & Gamble / PG -49% 7% 212,218 239,708 n/m 5% 5% 5% 6% 35% 664 0% 2% 50% 18%

PROCTER & GAMBLE MANAGEMENTS UPDATED OUTLOOK for FY2013

* Initial guidance did not include Venezuelan Bolivar devaluation. Source: Company presentation dated J une 2013.
P&G continues to
execute well amid
unimpressive top-
line growth


PROCTER & GAMBLE ORGANIC SALES GROWTH EXPECTATIONS for FY2013

PROCTER & GAMBLE MANAGEMENTS CALCULATION of PROJECTED CORE EPS

PROCTER & GAMBLE COMPARATIVE EXPOSURE to DEVELOPING MARKETS

PROCTER & GAMBLE COMPARATIVE BREAKDOWN of SALES into DEVELOPED versus DEVELOPING MARKETS

* Expected sales at the end of FY2013. ** Excludes food businesses. Source for the above tables and charts: Company presentation dated J une 2013.
Unilever and Colgate
may have more potential
for incremental emerging
markets growth than
does P&G
P&Gs relatively large exposure
to emerging markets is not quite
evident from the companys
overall growth figures
Core EPS should
keep growing in the low
to mid single digits
P&G: Struggling to match global GDP growth


Republic Services (RSG) Cascade, Sentry, Franklin, Sasco, Cap Re, Artisan
Services: Waste Management Servi ces, Member of S&P 500 PHOENIX AZ republicservices.com

per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 3,071 3,176 3,685 8,199 8,107 8,193 8,118 8,135 1,982 1,999
Gross profit 1,146 1,172 1,268 3,355 3,342 3,328 3,113 3,109 779 776
D&A 296 306 354 870 834 844 849 1,058 214 210
Adjusted operating income 520 536 369 1,695 1,584 1,553 1,332 1,414 327 279
Adjusted pretax income 444 468 245 1,104 1,083 1,117 948 915 223 190
Dividend 0.40 0.55 0.72 0.76 0.78 0.84 0.91 0.93 0.22 0.24
Shares out (avg) 198 190 197 380 383 376 367 366 371 363
Cash from operations 511 661 512 1,397 1,434 1,767 1,514 1,599 334 420
Capex 327 293 387 826 795 937 904 844 274 215
Free cash flow 185 369 125 570 639 830 610 755 60 205
% of revenue:
Gross profit 37.3% 36.9% 34.4% 40.9% 41.2% 40.6% 38.3% 38.2% 39.3% 38.8%
D&A 9.6% 9.6% 9.6% 10.6% 10.3% 10.3% 10.5% 13.0% 10.8% 10.5%
Capex 10.6% 9.2% 10.5% 10.1% 9.8% 11.4% 11.1% 10.4% 13.8% 10.7%
Receivables 318 322 996 922 944 949 945 874 852 874
LT investments 0 10 57 45 34 32 78 69 91 69
PP&E, net 2,164 2,164 6,738 6,658 6,699 6,792 6,910 6,947 6,813 6,947
Tangible assets 2,836 2,886 8,836 8,373 8,355 8,495 8,568 8,599 8,405 8,599
Debt 1,547 1,568 7,703 6,963 6,744 6,922 7,071 7,033 6,905 7,033
Tangible equity -172 -278 -3,804 -3,603 -3,260 -3,375 -3,345 -3,308 -3,300 -3,308


$0
$5
$10
$15
$20
$25
$30
$35
$40



BUSINESS OVERVIEW
Republic provides waste management services, including
collection and disposal of non-hazardous solid waste.

#2 garbage hauler in the U.S. with ~14% market
share of the $55 billion non-hazardous solid waste
services industry. Leader Waste Management has
about 23% share. Municipal authorities and private
firms control about 22% and 19% of the market.
RSG is especially strong in small- and mid-size
(35% of revenue) and franchise markets (26%), in
which it is either the leader or exclusive provider.
Vertically integrated national platform, with a
modern fleet, long-lived landfill network (80% of
sites have lives of 10+years), and an expanding
recycling infrastructure. Republic owns or operates
196 transfer stations, 191 active landfills, and 70
recycling facilities. Commercial, residential/
municipal, and industrial customers accounted for
40%, 35%, and 25% of collection revenue in 2012.
Ongoing efficiency improvements. Only 9% of the
fleet uses natural gas, with incremental fuel savings
likely as conversion continues. 63% of residential
routes have been converted to an automated fleet,
raising productivity by 800-1,000 homes per truck.
Non-discretionary service, performed under multi-
year contracts. Garbage is collected in all times,
though there is less of it in bad times. 80% of
revenue has an annuity-type profile. Population
growth and business formation are key drivers of
volume. Financially strapped municipalities may
increasingly favor privatization opportunities.
Strong, predictable free cash flow. Management
expects adjusted FCF of $675-700 million in 2013,
of which $320 million and $340 million will be
allocated to repurchases and dividends, respectively.
Adjusted EPS is estimated at $1.86-1.91 in 2013.

Low-growth business. Volume growth is in the
low-single digits in normal times. Flat landfill
volumes are helped by recycling and other volumes.
Commercial and industrial volumes are cyclical.
Contractual pricing restrictions apply to one-half
of revenue, limiting RSGs ability to raise prices.
Index-based price increases may hurt margins in an
inflationary environment, as price adjustments lag
by 12-18 months and CPI may understate inflation.
Limited margin expansion potential. EBITDA
margin approaches that of Waste Management.
$1.6 billion of environmental liabilities. Republic
has responsibility for about 128 closed landfills.
*
FYE December 31 2008 2009 2010 2011 2012 1Q13
revenue 16% 122% -1% 1% -1% 1%
gross profit 8% 164% 0% 0% -6% 0%
Employees (end) (000) 35 31 30 30 30 n/a
Revenue ($mn) 3,685 8,199 8,107 8,193 8,118 1,999
% of net revenue by major segment:

East 33% 32% 31% 31% 30% 30%
Central 31% 30% 29% 30% 30% 29%
West 36% 38% 38% 38% 39% 40%
Operating margin by major segment:

East 5% 23% 23% 22% 19% 19%
Central 17% 22% 23% 22% 20% 19%
West 17% 27% 24% 23% 22% 22%
% of net revenue by service line:

Collection 78% 77% 76% 75% 77% 78%
Transfer 6% 6% 5% 5% 5% 5%
Landfill 12% 12% 12% 12% 12% 11%
Sale of recyclables, other 4% 5% 6% 7% 6% 6%

Gross profit 34% 41% 41% 41% 38% 39%
EBIT (adjusted)
1
10% 21% 20% 19% 16% 14%
1
4% 9% 9% 10% 9% 7%
D&A 10% 11% 11% 10% 11% 11%
Capex 10% 10% 10% 11% 11% 11%
2
28% 32% 36% 30% 29% 24%
2
2% 6% 7% 2% -1% 0%

Adjusted EBIT 369 1,695 1,584 1,553 1,332 279
Current assets 870 1,295 1,256 1,256 1,249 1,227
+ Short-term debt 253 524 711 457 27 22
+ Net fixed assets 4,451 6,698 6,678 6,745 6,851 6,929

PP&E, net 76% 80% 80% 80% 81% 81%
ST debt 6% 6% 11% 0% 0% 0%
LT debt 81% 77% 70% 81% 82% 81%
Tangible equity -43% -43% -39% -40% -39% -38%
Shares out (avg) (mn) 197 380 383 376 367 363
shares out (avg) 3% 93% 1% -2% -2% -2%
* The company acquired Allied Waste Industries effective December 2008.
1
2010, -$211 million in 2011, -$124 million in 2012, and -$6.7 million in 1Q13.
2
Waste Management Services industry median.

MAJOR HOLDERS
Mgmt <1% | Cascade 24% | FMR 3% | Sentry 2% | Franklin
2% | Sasco 2% | Cap Re 2% | Artisan 1% | Sound Shore 1%

RATINGS
THE BOTTOM LINE
Republic Services became the second-largest waste management company in the U.S. following the acquisition of Allied
Waste in late 2008. The larger Republic has benefited from industry consolidation, barriers to entry, and non-discretionary
nature of services provided. Major U.S. waste management firms are rightly regarded as good businesses, run in a clean,
shareholder-friendly manner. Nonetheless, the lack of growth makes the current period FCF yield of 5-6% un-compelling.


REPUBLIC SERVICES EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive

December 31, 2014




multiplied by

minus

minus


Capex: $840 million
equals


equals

equals

multiplied by


divided by

multiplied by

10.0x


equals
equals

equals



Republic Services: $14 billion


multiplied by
plus

multiplied by


Assumed RSG multiple as a

minus


95%

110%

equals


equals

equals

equity of Republic Services:










(*) Represents Waste Management Services median.



REPUBLIC SERVICES ANALYSIS OF SELECTED COMPARABLE COMPANIES
Waste Connections / WCN -66% 3% 4,978 7,187 n/m 6% 3% 4% 5% 24% 263 12% 20% 43% 20% -9%
Waste Management / WM -45% 8% 18,616 28,318 n/m 5% 4% 5% 6% 48% 315 1% 1% 64% 28% -3%
Republic Services / RSG -55% 9% 12,106 19,009 n/m 6% 5% 6% 6% 43% 271 -1% 1% 38% 17% -38%

REPUBLIC SERVICES CALCULATION of ADJUSTED EPS and FREE CASH FLOW, 2012-2013E

FCF is expected to
decline modestly in
2013 even as EPS
creeps higher


REPUBLIC SERVICES REVENUE by BUSINESS, 2012

REPUBLIC SERVICES REVENUE by MARKET TYPE, 2012

REPUBLIC SERVICES PROFIT SENSITIVITY to CHANGES in COMMODITY and FUEL PRICES

REPUBLIC SERVICES COMPANY VOLUME versus SINGLE FAMILY UNITS (one year lag; percentage change)

As housing picks up,
Republic Services
should see
increasing volumes


Stratasys (SSYS) Kornitzer, Primecap, Samson, Tiger Tech, Turner, Wells
Technology: Computer Peri pherals

REHOVOT, Israel www.stratasys.com
Price: $82.15 (as of 6/21/13) Month #of P/E FYE 12/31/12 >99x

per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 104 112 125 99 118 156 215 268 45 97
Gross profit 51 60 66 46 56 82 110 125 23 37
R&D 7 8 9 8 10 14 20 26 4 11
Adjusted operating income 16 18 21 6 13 30 27 12 7 -17
Adjusted net income 11 14 14 4 9 21 18 10 5 -16
Adjusted diluted EPS 0.55 0.69 0.68 0.20 0.46 1.00 0.79 0.37 0.21 -0.41
Shares out (avg) 20 21 21 20 21 21 23 27 21 38
Cash from operations 12 21 15 26 22 23 2 -18 7 -12
Capex 8 14 11 4 9 17 15 17 3 5
Free cash flow 5 7 4 22 13 5 -14 -35 4 -18
% of revenue:
Gross profit 49.5% 53.2% 53.3% 46.9% 47.5% 52.9% 51.2% 46.5% 51.1% 38.5%
R&D 6.5% 6.7% 7.2% 7.8% 8.3% 9.2% 9.2% 9.8% 9.8% 11.1%
Adjusted operating income 15.0% 16.4% 16.9% 5.9% 11.4% 19.0% 12.4% 4.5% 16.2% -17.2%
Receivables 25 26 27 19 20 25 76 72 28 72
Inventory 10 13 20 15 18 23 68 66 22 66
LT investments 14 22 20 10 57 38 10 10 35 10
PP&E, net 20 27 30 26 30 40 62 64 42 64
Intangible assets 6 8 8 8 6 51 1,333 1,320 50 1,320
Tangible assets 112 141 139 145 172 171 399 395 178 395
Debt 0 0 0 0 0 0 0 0 0 0
Tangible equity 92 116 114 122 146 133 239 246 139 246
TBV per share 4.55 5.57 5.53 6.02 7.09 6.27 10.47 6.39 6.54 6.39
EBIT/capital employed 40% 44% 41% 12% 29% 50% 17% 2% 51% -37%


$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100



BUSINESS OVERVIEW
Stratasys provides 3D printers and production systems for
rapid prototyping and manufacturing applications.

Leader in professional 3D printing systems, with
31,000 units sold through 1Q13 (cumulative). The
company has 1,200 employees, 260 resellers and
agents, and 8,000+customers. Stratasys enables
designers and manufacturers to create concept
models and prototypes cost-effectively. Sales
outside of North America are one-half of the total.
Large professional market opportunity, as there
are five million 3D mechanical computer-aided
design (CAD) seats, and growing. 3D printing is an
underpenetrated market, with ~50,000 commercial
3D systems sold. Management sees opportunity for
20%+top line with bottom-line leverage. Unit
sales rose 29% while sales grew 30% in 2012.
Attractive model, with strong cash generation.
As unit sales grow, Stratasys grows high-margin,
recurring consumables and service revenue. The
company has 550+patents and patents pending.
Merger with Objet brings together complementary
3D printing products and technology. The two
companies have cross-trained 112 resellers,
representing 54% of dealers and 80% of sales.
Guiding for adjusted EPS of $1.80-1.95 in 2013,
based on revenue of $430-445 million (up from
$1.49 and $359 million, respectively, in 2012).
Adjusted income excludes stock comp, intangibles
amortization, and merger expenses. Managements
long-term targets include 20+% revenue growth, 20-
25% operating margin, and 16-21% net margin.

Uncertain evolution of 3D printing market.
While Stratasys appears well-positioned at present,
it is impossible to forecast how the competitive
landscape will evolve. In this innovation-driven
market, Stratasys may become less competitive over
time. The financial attractiveness of the long-term
business model is also highly uncertain.
Reporting GAAP losses, even as adjusted EPS is
positive. Management projects stock comp of $20-
23 million, amortization of $60 million, and M&A
expenses of $7-9 million in 2013. These items push
GAAP net income to a loss of $6-16 million in 13.
NOTABLE HOLDERS
CEO Reis 2% | Chairman Crump 1% | Samson 11% | AGM
8% | FMR 2% | Primecap 1% | Tiger Tech 1% | Kornitzer 1%
FYE December 31 2008 2009 2010 2011 2012 1Q13
product revenue 15% -25% 32% 31% 41% 118%
services revenue 16% -1% 1% 12% 25% 108%
total revenue 11% -20% 19% 32% 38% 116%
gross profit 11% -30% 21% 47% 34% 63%
Revenue ($mn) 125 99 118 156 215 97
% of revenue by type:

Products 79% 75% 79% 82% 84% 84%
Services 21% 25% 21% 18% 16% 16%
Gross margin by type:

Products 52% 44% 48% 52% 52% 40%
Services 59% 56% 55% 58% 48% 30%

North America 54% 56% 53% 53% 53% n/a
Europe 30% 27% 28% 32% 29% n/a
Asia Pacific 15% 16% 17% 14% 16% n/a
Other 1% 1% 2% 1% 1% n/a

Gross profit 53% 47% 48% 53% 51% 38%
R&D 7% 8% 8% 9% 9% 11%
EBIT (adjusted)
1
17% 6% 11% 19% 12% -17%
1
11% 4% 8% 14% 8% -16%
D&A 6% 8% 8% 7% 9% 30%
Capex 9% 4% 8% 11% 7% 5%

Reported operating income 21 6 13 29 17 -17
+ non-recurring items 1 0 0 1 10 0
Adjusted EBIT 21 6 13 30 27 -17
Current assets 88 97 95 89 208 320
- Current liabilities -25 -24 -24 -27 -62 -89
+ Short-term debt 0 0 0 0 0 0
+ Net fixed assets 28 28 28 35 51 63
= Return on capital employed 42% 12% 29% 51% 27% -47%

Receivables 19% 13% 12% 14% 19% 18%
Inventory 14% 10% 10% 13% 17% 17%
LT investments 14% 7% 33% 22% 2% 2%
PP&E, net 21% 18% 17% 23% 16% 16%
Deferred revenue, other 13% 13% 10% 12% 15% 15%
Total current liabilities 18% 16% 14% 17% 24% 21%
Debt 0% 0% 0% 0% 0% 0%
Tangible equity 82% 84% 85% 77% 60% 62%
Shares out (avg) (mn) 21 20 21 21 23 38
shares out (avg) 0% -2% 2% 3% 8% 81%
1
Unusual items of -$0.5 million in 2008, -$0.6 million in 2011, and -$9.5 million in 2012.

RATINGS
THE BOTTOM LINE
Stratasys has become the leader in 3D printing, as the company came from behind to unseat 3D Systems. It did so by building
a distribution network that became more valuable as 3D equipment prices fell over time, fueling share gains. Stratasys also
found ways to create a recurring stream of consumables revenue, similar to the ink cartridge franchises in traditional printing.
With 3D printing applications on the rise in both enterprise and consumer markets, Stratasys appears well-positioned to take
advantage of industry growth. However, as the industry remains immature, it is difficult to forecast how the moat will evolve.
As a result, we find that the markets value appraisal (2-3% adjusted EPS yield) fully reflects the positive outlook.


STRATASYS EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive


December 31, 2013

December 31, 2014

December 31, 2014



minus

minus

minus




equals

equals

equals


multiplied by

multiplied by

multiplied by


equals

equals

equals


$960 million ($25 per share)


multiplied by

multiplied by

multiplied by
Assumed SSYS multiple as a




165%

175%

250%


equals

equals

equals


equity of Stratasys:










(*) Represents Computer Peripherals industry median multiple.

STRATASYS MANAGEMENTS FINANCIAL OUTLOOK for 2013



STRATASYS 3D PRINTING PRODUCT SPECTRUM

STRATASYS THREE DISTINCT and COMPLEMENTARY 3D PRINTING TECHNOLOGIES



Tyco (TYC) Citadel, ClearBridge, Dodge & Cox, Iridian, MFS, Threadneedle
Congl omerates: Conglomerates, Member of S&P 500 SCHAFFHAUSEN, Switzerland www.tyco.com
Price: $32.41 (as of 6/21/13) Month #of P/E FYE 9/30/12 n/m

($ millions, except Fiscal Years Ended September 28, LTME FQE FQE
per share data) 2006 2007 2008 2009 2010 2011 2012 3/29/13 3/30/12 3/29/13
Revenue 17,066 18,477 19,733 16,882 11,020 10,557 10,403 10,591 2,542 2,608
Gross profit 5,844 6,260 6,953 6,012 3,616 3,667 3,777 3,837 908 935
Adjusted operating income 1,419 1,484 2,129 1,413 670 836 881 1,088 248 145
Adjusted pretax income 1,186 1,020 1,622 1,149 427 618 690 231 189 104
Adjusted net income 881 692 1,295 1,074 437 471 317 9 154 96
Dividend 1.60 1.60 0.65 0.84 0.86 0.99 0.90 0.71 0.25 0.16
Shares out (avg) 503 495 484 473 485 474 463 464 463 466
Cash from operations 5,278 3,574 -890 2,421 2,709 2,449 2,156 2,157 -132 242
Capex 929 1,075 1,098 1,245 378 404 434 440 102 108
Free cash flow 4,349 2,499 -1,988 1,176 2,331 2,045 1,722 1,717 -234 134
% of revenue:
Gross profit 34.2% 33.9% 35.2% 35.6% 32.8% 34.7% 36.3% 36.2% 35.7% 35.9%
Cash, investments 2,193 1,894 1,519 2,354 1,775 1,229 844 430 1,086 430
Receivables 2,748 2,900 2,986 2,544 2,493 1,547 1,711 1,649 2,441 1,649
Inventory 1,619 1,783 1,877 1,370 1,443 539 634 654 1,543 654
PP&E, net 3,501 3,526 3,493 3,437 4,156 1,609 1,670 1,668 4,150 1,668
Total assets 63,011 32,815 28,804 25,553 27,128 26,702 12,365 11,958 27,062 11,958
Tangible assets 48,988 18,663 14,504 14,119 14,105 21,719 7,208 6,878 13,187 6,878
Payables 1,557 1,637 1,608 1,198 1,340 782 897 783 1,326 783
Debt 9,624 4,462 4,264 4,274 4,188 4,106 1,491 1,492 4,140 1,492
Common equity 35,387 15,624 15,494 12,941 14,084 14,149 4,994 4,714 14,562 4,714
Tangible equity 21,364 1,472 1,194 1,507 1,061 9,166 -163 -366 687 -366
TBV / tangible assets 44% 8% 8% 11% 8% 42% -2% -5% 5% -5%
EBIT/capital employed 4% -10% 35% -30% 11% 11% 3% 24% 19% 24%


$0
$5
$10
$15
$20
$25
$30
$35
$40


BUSINESS OVERVIEW
Tyco provides building fire and security solutions. The
company spun off its North American residential security
and flow control businesses, ADT Corporation (NYSE:
ADT) and Pentair (NYSE: PNR), on September 28, 2012.
Leading pure play fire and security company,
with 70,000 employees and $10+billion in revenue.
New Tyco leads a $100 billion fragmented market
growing in excess of GDP. The company owns
leading technologies and enjoys scale advantages.
Key brands include Tyco, Sensormatic, Simplex,
Grinnell, and ADT (outside North America).
Attractive model and market. Tyco derives 20%
of revenue from products, with 35% from systems
installation and 45% services. 65% of the latter is
recurring. Tyco has 9% share in products (#1-2),
10% in installation (#1), and 15% in services (#1).
Installation and services are fragmented markets, as
local and regional players have 65-80% share. With
50% of revenue from outside North America, Tyco
is well-positioned to benefit from global growth.
Optimizing cost structure of ~$9.3 billion, with a
goal of achieving ~$100 million in net cost savings.
As 45% of costs relate to purchased materials and
services, sourcing is a key focus. Infrastructure and
administration account for another 40% of costs,
making branch in a box a key management tool.
Friendly capital allocation. Management has
pursued value-accretive M&A and aims to return
excess capital via buybacks ($200 million YTD)
and dividends (~$300 million annually, with payout
of 30-35%). New Tyco has generated adjusted
FCF of ~$650 million per year over three years.
Targeting adjusted operating margin expansion
to 15-16% in 2015, up from 12.7% in 2012, based
on revenue growing from $10.4 billion in 2012 to
$12.0 billion in 2015. The result would be an EPS
CAGR of 15% over the three-year period. FY12
GAAP EPS, EPS ex. items, and normalized EPS
were -$0.72, $1.35, and $1.60, respectively. The
latter includes cost savings and interest reductions.
M&A growth strategy may not yield satisfactory
financial returns and may make it difficult to grow
while maintaining a cohesive culture and processes.
No tangible book value. Tyco has net debt of $1.1
billion and other long-term liabilities of $2.4 billion,
including $600 million in pension liabilities. There
is little room for value creation through leverage.
*

FYE September 28 2008 2009 2010 2011 2012 1H13
Revenue ($bn)
*
19.7 16.9 11.0 10.6 10.4 5.2
% of revenue by segment (new Tyco):

N.A. installation and services n/a n/a 34% 38% 38% 37%
RoWinstallation and services n/a n/a 39% 42% 42% 42%
Global products n/a n/a 14% 17% 20% 21%
Corporate and other n/a n/a 13% 3% 0% 0%
Operating margin by segment (excl. corporate and other):

N.A. installation and services n/a n/a 9% 11% 9% 10%
RoWinstallation and services n/a n/a 9% 9% 11% 10%
Global products n/a n/a 16% 17% 17% 7%
% of revenue by geography (new Tyco):

North America n/a n/a 54% 51% 51% n/a
Latin America n/a n/a 5% 4% 4% n/a
EMEA n/a n/a 27% 27% 27% n/a
Asia Pacific n/a n/a 15% 17% 19% n/a

Gross profit 35% 36% 33% 35% 36% 36%
EBIT (adjusted)
1
11% 8% 6% 8% 8% 8%
1,2
7% 6% 4% 4% 3% 5%
D&A 6% 7% 4% 4% 4% 4%
Capex 6% 7% 3% 4% 4% 4%

Adjusted EBIT 2.1 1.4 0.7 0.8 0.9 0.4
Current assets 10.5 8.2 7.7 12.8 11.3 4.1
+ Short-term debt 0.5 0.4 0.4 0.3 0.0 0.0
+ Net fixed assets 3.5 3.5 3.8 2.9 1.6 1.7

Receivables 21% 18% 18% 7% 24% 24%
PP&E, net 24% 24% 29% ~25% 23% 24%
ST debt 4% 2% 4% 0% 0% 0%
LT debt 26% 29% 26% 19% 21% 22%
Tangible equity 8% 11% 8% 42% -2% -5%
Shares out (avg) (mn) 484 473 485 474 463 466
shares out (avg) -2% -2% 3% -2% -2% 1%
* Data for 2010-1H13 reflects newTyco, i.e., without the ADT and Pentair businesses.
1
Adjusted for unusual items of -$233 million in 2008, -$2.9 billion in 2009, -$142 million in
2010, $146 million in 2011, -$649 million in 2012, and -$50 million in 1H13.
2
Adjusted for nonrecurring items of $491 million in 2008, $47 million in 2009, $835 million in
2010, $1.1 billion in 2011, $804 million in 2012, and $2.0 million in 1H13.

NOTABLE HOLDERS
CEO Oliver <1% | Chairman Breen 1% | MFS 4% | Dodge &
Cox 3% | ClearBridge 3% | Iridian 2% | Threadneedle 1%

RATINGS
THE BOTTOM LINE
New Tyco is a smaller, more focused company following the September 2012 separation of the fire and security businesses
from the spun-off North American residential security and flow control businesses (ADT and Pentair). Tyco holds leading
market share in the $100 billion market for building fire and security systems, with 35% of revenue coming from installation
and 45% from mostly recurring services. Tyco has embraced shareholder-friendly capital allocation, with a 30-35% dividend
payout and material share repurchases. Opportunities remain to improve the cost structure and grow in fragmented global
markets. However, at a trailing FCF yield of less than 5%, we do not find the shares compelling from a valuation standpoint.


TYCO EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive
September 28, 2013

September 28, 2014




minus

minus

minus


Capex: $440 million


equals
equals

equals



divided by
multiplied by

multiplied by



equals
equals

equals





multiplied by
multiplied by

multiplied by

Assumed TYC multiple as a

Assumed TYC multiple as a



95%
80%

110%



equals
equals

equals



equity of Tyco International:










(*) Represents Conglomerates industry median multiple. () The FY13 consensus EPS estimate of $1.84 has been revised upward by 1% from$1.82 three months ago.

TYCO ANALYSIS OF SELECTED COMPARABLE COMPANIES
General Electric / GE -75% 80% 241,545 549,105 16% 6% 6% 7% 8% 27% 483 2% 0% 42% 12%
Honeywell International / HON -71% 4% 61,566 64,138 n/m 5% 5% 6% 7% 59% 286 1% 0% 25% 13%
United Technologies / UTX -59% 7% 84,741 102,798 n/m 3% 6% 7% 8% 58% 274 8% 16% 27% 14%
Tyco International / TYC -77% 7% 15,038 16,100 n/m 11% -2% 6% 7% 66% 151 -32% 3% 36% 10%

OVERVIEW of NEW TYCO

Source for above charts and table on the right: Company presentation dated J une 2013.
TYCO CALCULATION of NORMALIZED EPS, 2012


TYCO MARKET POSITION


TYCO MANAGEMENTS FINANCIAL OUTLOOK by SEGMENT

The new Tyco remains a leader in several attractive market segments


Union Pacific (UNP) Cap World, Cap Re, T Rowe, Winslow, JPM, DFA, Primecap
Transportati on: Railroads, Member of S&P 500

OMAHA NE www.up.com

per share data) 2006 2007 2008 2009 2010 2011 2012 3/31/13 3/31/12 3/31/13
Revenue 15,578 16,283 17,970 14,143 16,965 19,557 20,926 21,104 5,112 5,290
Gross profit 10,854 11,323 12,059 10,736 12,643 13,971 15,175 15,348 3,660 3,833
Dividend 0.60 0.75 0.98 1.08 1.31 1.93 2.49 2.58 0.60 0.69
Shares out (avg) 539 532 511 503 498 486 473 472 478 468
Capex 2,778 3,117 3,142 2,454 2,482 3,261 4,012 3,990 804 782
Free cash flow 102 160 902 750 1,623 2,612 2,149 2,291 600 742
% of revenue:
Gross profit 69.7% 69.5% 67.1% 75.9% 74.5% 71.4% 72.5% 72.7% 71.6% 72.5%
D&A 7.9% 8.1% 7.6% 10.1% 8.8% 8.3% 8.4% 8.4% 8.4% 8.2%
Capex 17.8% 19.1% 17.5% 17.4% 14.6% 16.7% 19.2% 18.9% 15.7% 14.8%
Cash, investments 827 878 1,249 1,850 1,086 1,217 1,063 1,917 995 1,917
Receivables 679 632 594 666 1,184 1,401 1,331 1,512 1,327 1,512
LT investments 877 923 974 1,036 1,137 1,175 1,259 1,240 1,210 1,240
PP&E, net 32,873 34,158 35,701 37,202 38,253 39,934 41,997 42,376 40,309 42,376
Tangible assets 36,515 38,033 39,722 42,184 43,088 45,096 47,153 48,561 45,336 48,561
Debt 6,780 7,682 8,927 9,848 9,242 8,906 8,997 9,861 8,835 9,861
Tangible equity 15,312 15,585 15,447 16,801 17,763 18,578 19,877 20,144 18,755 20,144
TBV per share 28.41 29.30 30.25 33.40 35.65 38.25 42.01 43.06 39.25 43.06


$0
$20
$40
$60
$80
$100
$120
$140
$160
$180



BUSINESS OVERVIEW
Union Pacific provides freight rail transportation.
Operates one of the largest U.S. rail networks,
with 32,000 route miles connecting 23 states in the
western two-thirds of the U.S. UNP owns 26,000
track miles and operates the remainder under
trackage rights or leases. UNPs main competitor is
Berkshire Hathaways BNSF, which has parallel
routes in UNP corridors. Berkshires pricing and
capital allocation discipline are positive for UNP.
Revenue base diversified across six freight types:
coal (20% of 2012 freight revenue), industrial
(18%), agricultural (17%), chemicals (16%), auto
(9%), and intermodal, i.e., moving of containers
using multiple modes of transportation (20%).
Advantage in moving low value-per-ton goods,
such as coal, ores, and grains. Rail is more fuel-
efficient than trucking, which makes the former
attractive for long hauls. UNP sees up to 10 million
domestic truckload conversions, with a ~3 million
truckload opportunity originating from Mexico.
Economics have improved. ROIC has increased
from 5% in 2004 to 14% in 12, while EPS is up
from $1.42 to $8.27. Environmental concerns could
benefit railroads despite lower coal volumes. Trains
are three times cleaner than trucks on a ton-mile
basis. Each train can take 300 trucks off highways.
Declining operating ratio. This key expense ratio
has declined from 79.3% in 2007 to 67.8% in 2012,
with management targeting sub 65% by 2017.
Raised dividend from $0.75 in 2007 to $2.49 in
2012. Repurchases exceeded $6 billion from 2008-
1Q13. Future capital allocation should be tilted even
more toward return of capital, with replacement and
growth capex comprising one-half of the allocation.

Coal weakness affects 20% of revenue. Steel
industry weakness is having a near-term impact,
while natural gas substitution is likely to lower the
share of coal in the U.S. energy mix over time. On
the other hand, shale production exceeds pipeline
capacity, leading to growth in crude oil carloads.
Economically sensitive, as volume changes often
have a disproportionate effect on pricing and profit.
Capital-intensive business. Shareholders can
expect a high single digit to low teens return in a
normal environment, assuming a fair entry price.
Unionized workforce. 86% of UNPs 46,000 full-
time employees are represented by a rail union.
FYE December 31 2008 2009 2010 2011 2012 1Q13
revenue 10% -21% 20% 15% 7% 3%
assets 4% 6% 2% 5% 5% 7%
Employees (avg) (000) 48.2 43.5 42.9 44.9 45.9 46.4
Revenue ($bn) 18.0 14.1 17.0 19.6 20.9 5.3
% of revenue by commodity group:

Freight agricultural 18% 19% 18% 17% 16% 15%
Freight automotive 7% 6% 7% 8% 9% 9%
Freight chemicals 14% 15% 14% 14% 15% 17%
Freight coal 21% 22% 21% 21% 19% 18%
Freight industrial products 18% 15% 16% 16% 17% 17%
Freight intermodal 17% 18% 19% 18% 19% 19%
Other revenue 5% 5% 5% 5% 6% 6%
Train speed (avg) (miles/hour) 24 27 26 26 27 26
Terminal dwell time (avg) (hours) 25 25 25 26 26 27
Rail car inventory (avg) (000) 301 283 274 273 269 264
Gross ton-miles (bn)
2
1,020 847 931 978 959 228
Revenue ton-miles (bn) 563 479 520 544 521 124
Operating ratio (%) 77 76 71 71 68 69
Customer satisfaction index 83 88 89 92 93 94
Track miles (end):

Route 32,012 32,094 31,953 31,898 31,868 n/a
Other main line 6,510 6,584 6,596 6,644 6,715 n/a
Passing lines and turnouts 3,037 3,040 3,118 3,112 3,124 n/a
Switching/classif. yard lines 9,207 9,167 9,006 8,999 9,046 n/a

Gross profit 67% 76% 75% 71% 73% 72%
EBIT (adjusted)
1
23% 24% 29% 29% 32% 31%
1
13% 13% 17% 17% 19% 18%
D&A 8% 10% 9% 8% 8% 8%
Capex 17% 17% 15% 17% 19% 15%
3
18% 17% 18% 21% 17% 21%

Adjusted EBIT 4.1 3.4 5.0 5.7 6.7 1.6
/ Capital employed 33.8 35.6 37.2 38.6 40.5 41.8

PP&E, net 90% 88% 89% 89% 89% 87%
Tangible equity 39% 40% 41% 41% 42% 41%
Shares out (avg) (mn) 511 503 498 486 473 468
shares out (avg) -4% -1% -1% -3% -3% -2%
1
Adjusted for unusual items of -$21 million in 2010, -$5.0 million in 2011, and -$6.0 million in
2012.
2
Weight of freight multiplied by tariff miles.
3
Railroads industry median.

MAJOR HOLDERS
Mgmt 1% | Cap World 7% | FMR 4% | Cap Re 3% | T Rowe
3% | Winslow 2% | J PM 1% | DFA 1% | Primecap 1%

RATINGS
THE BOTTOM LINE
Union Pacific has executed well on all fronts, taking advantage of improving industry economics to deliver impressive
improvement in ROIC and EPS over the past decade. The company should continue to enjoy favorable economics alongside
key competitor BNSF, as rational pricing and high barriers to entry combine to produce a strong margin profile. That said,
the business remains capital-intensive and subject to price competition should volumes decline materially below capacity. As
a result, we find trailing FCF of roughly $2.5 billion, implying a 3-4% FCF yield, insufficient to entice us to invest in UNP.


UNION PACIFIC EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive

December 31, 2014




multiplied by

minus

minus


Capex: $4.0 billion
equals


equals

equals

multiplied by


divided by

multiplied by

10.0x


equals
equals

equals



Union Pacific: $53 billion


multiplied by
plus

multiplied by


Assumed UNP multiple as a

minus


115%

110%

equals


equals

equals

equity of Union Pacific:










(*) Represents Railroads industry median multiple.



UNION PACIFIC ANALYSIS OF SELECTED COMPARABLE COMPANIES
Can. Nat. Railway / CNI -69% 10% 40,169 47,227 26% 4% 6% n/a n/a 20% 406 7% 5% 53% 37% 41%
Can. Pacific Railway / CP -79% 18% 20,777 25,095 25% 1% 3% n/a n/a 22% 368 5% 9% 50% 30% 36%
CSX Corp. / CSX -71% 15% 23,985 32,331 39% 4% 8% 8% 9% 36% 367 -1% 0% 68% 30% 31%
Norfolk Southern / NSC -63% 11% 22,970 30,768 44% 3% 8% 8% 9% 36% 355 -3% -2% 36% 28% 33%

UNION PACIFIC LONG-TERM FINANCIAL TRACK RECORD

* 2004 adjusted for asbestos charge of $247 million. Source: Company presentation dated J une 2013.

Major improvement in
key financial metrics
reflects strong
management execution
as well as improving
industry economics


UNION PACIFIC CAPITAL ALLOCATION

UNION PACIFIC GEOGRAPHIC OVERVIEW of RAIL FRANCHISE



Wal-Mart (WMT) Berkshire, Cap World, Eagle, Franklin, GMO, Markel
Services: Retai l (Department & Di scount), Member of S&P 500 BENTONVILLE AR walmartstores.com

($ millions, except Fiscal Years Ended J anuary 31, LTME FQE FQE
per share data) 2007 2008 2009 2010 2011 2012 2013 4/30/13 4/30/12 4/30/13
Revenue 348,368 377,023 404,254 408,085 421,849 446,950 469,162 470,331 113,010 114,187
Gross profit 84,389 92,886 100,313 103,979 106,903 111,823 116,674 117,002 27,832 28,160
Dividend 0.67 0.88 0.95 1.09 1.21 1.46 1.59 3.07 1.59 1.88
Shares out (avg) 4,164 4,066 3,939 3,866 3,656 3,460 3,374 3,356 3,409 3,301
Capex 15,666 14,937 11,499 12,184 12,699 13,510 12,898 13,491 2,375 2,968
Free cash flow 4,569 5,705 11,648 14,065 10,944 10,745 12,693 11,560 3,059 1,926
% of revenue:
Gross profit 24.2% 24.6% 24.8% 25.5% 25.3% 25.0% 24.9% 24.9% 24.6% 24.7%
Receivables 2,840 3,642 3,905 4,144 5,089 5,937 6,768 6,191 5,574 6,191
Inventory 33,685 35,159 34,511 32,713 36,437 40,714 43,803 43,138 41,284 43,138
PP&E, net 88,440 96,867 95,653 102,307 107,878 112,324 116,681 116,431 113,472 116,431
Tangible assets 137,828 147,635 148,169 154,281 164,019 172,755 182,608 182,453 176,097 182,453
Short-term debt 8,283 11,269 7,669 4,919 6,022 6,348 12,719 12,533 8,630 12,533
Long-term debt 30,735 33,402 34,549 36,401 43,842 47,079 41,417 44,551 45,996 44,551
Tangible equity 47,814 48,729 50,025 54,342 51,779 50,664 55,846 50,515 47,961 50,515
TBV per share 11.49 11.98 12.70 14.06 14.16 14.64 16.55 15.30 14.07 15.30


$0
$10
$20
$30
$40
$50
$60
$70
$80
$90



BUSINESS OVERVIEW
Retail giant Wal-Mart operates through three segments:
Walmart U.S. (~75% of EBIT): 4,000+stores, walmart.com.
Wal-Mart owns 87% of stores and 80% of 133 distribution
sites. 79% of stores are supercenters (avg 181,000 sq ft), with
the rest smaller discount and neighbor-hood stores. Groceries
are 55% of revenue; the rest splits roughly evenly into
entertainment, health, hardlines, apparel, and home goods.
International (~20% of EBIT): ~6,200 stores (32% owned),
38% in Mexico, 6-10% each in Brazil, U.K., J apan, Canada.
Store size is ~55,000 sq ft (50% supermarkets/discount stores).
Sams Club (~5% of EBIT) runs 600+U.S. warehouse clubs
(82% owned, 133K sq ft. average store size); samsclub.com.

Worlds largest retailer and one of the largest
private employers in the U.S., Mexico and Canada,
with 1.4 million employees in the U.S. and 0.8
million internationally, including part-time staff.
Valuation implies little to no growth expectation
at an 8% forward earnings yield, based on
consensus EPS of $5.82 for the year to J anuary 2015.
Global reinvestment opportunity. If Wal-Mart can
replicate its U.S. model abroad (evidence to date
appears favorable), the recent equity valuation may
not reflect the value of global growth opportunities.
Price leadership through scale and supply-chain
expertise results in a sustainable moat. Everyday
low prices marketing (versus changing promotions)
reinforces the pricing strategy in customers minds.
Downside protection due to real estate ownership
(~85% of U.S. and ~30% of non-U.S. stores) and
FCF generation, despite ~$50 billion of net debt.
Disciplined capital allocation by incentivized
chairman and founders son Rob Walton (68).

Stagnant to declining Walmart U.S. same-store
sales. Without a pickup in SSS, Walmart U.S. may
find it difficult to maintain ROI over time.
Directly exposed to U.S. consumer spending.
Structural issues such as record consumer debt and
high unemployment may be future headwinds. Wal-
Marts low-cost positioning, however, is a plus.
Challenges to international expansion include
bigger or more favored incumbents (with local
support) and other, non-economic considerations.

NOTABLE HOLDERS
Walton family ~50% | Non-Walton insiders <1% | Berkshire
Hathaway 2% | Markel Gayner <1% | Eagle Capital <1%
FYE January 31 2009 2010 2011 2012 2013 1Q14
SSS Walmart U.S. 3% -1% -2% 0% 2% -2%
SSS Sams Club 5% -1% 4% 8% 4% -1%
revenue 7% 1% 3% 6% 5% 1%
gross profit 8% 3% 3% 5% 4% 1%
BV per share 4% 10% 3% 10% 10% 5%
Stores Walmart U.S. 3,703 3,755 3,804 3,868 4,005 4,043
Stores Walmart Intl 3,595 4,099 4,557 5,651 6,148 6,194
Stores Sams Club 611 605 609 611 620 620
Revenue ($bn) 404 408 422 447 469 113

Walmart U.S. 64% 64% 62% 60% 59% 59%
Walmart International 24% 24% 26% 28% 29% 29%
Sams Club 12% 12% 12% 12% 12% 12%
Revenue growth by segment:

Walmart U.S. 8% 1% 0% 2% 4% 0%
Walmart International 6% 1% 12% 15% 7% 3%
Sams Club 1% 0% 3% 9% 5% 0%
EBIT margin by segment (ex. corporate ~-0.5%):

Walmart U.S. 7.1% 7.4% 7.7% 7.7% 7.8% 8.0%
Walmart International 5.0% 5.0% 5.1% 4.9% 5.0% 3.8%
Sams Club 3.4% 3.2% 3.5% 3.4% 3.4% 3.8%

Gross profit 25% 25% 25% 25% 25% 25%
EBIT (adjusted)
1
6% 6% 6% 6% 6% 6%
1,2
3% 4% 4% 4% 4% 3%
D&A 2% 2% 2% 2% 2% 2%
Capex 3% 3% 3% 3% 3% 3%
3
34% 36% 36% 36% 36% 33%
3
1% 3% 4% 6% 7% 7%
Tangible assets ($bn) 148 154 164 173 183 183

Inventory 23% 21% 22% 24% 24% 24%
PP&E, net 65% 66% 66% 65% 64% 64%
Debt 28% 27% 31% 31% 30% 31%
Tangible equity 34% 35% 32% 29% 31% 28%
Return on tang. equity 27% 28% 29% 31% 32% 7%
ROE industry median
3
4% 6% 12% 15% 16% 16%
Diluted EPS (cont.) ($) 3.35 3.73 4.18 4.54 5.02 1.14
Dividends per share ($) 0.95 1.09 1.21 1.46 1.59 1.88
Shares out (avg) (mn) 3,939 3,866 3,656 3,460 3,374 3,301
shares out (avg) -3% -2% -5% -5% -2% -3%
1
Adjusted for unusual items of -$260 million in 2010.
2
Adjusted for nonrecurring items of $146 million in 2009, -$79 million in 2010, $1.0 billion in
2011, and -$67 million in 2012.
3
Retail (Department & Discount) industry median.

RATINGS
THE BOTTOM LINE
Despite a ~50% rise in Wal-Marts share price over the last two years, the valuation remains undemanding at an 8% forward
earnings yield. Stagnant to declining same-store sales in the U.S. have justifiably muted expectations for growth. However,
Wal-Mart has a defensible U.S. market position (supported by its everyday low prices strategy and real estate ownership)
and its incentivized and capable leadership is successfully replicating the high-return operating model in large markets abroad.
The result should produce decent EPS growth in the long term, which makes the risk-reward attractive, although not compelling.


WAL-MART EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive


ended April 30, 2013 and average EBIT
margin for past seven fiscal years

J anuary 31, 2015

months ended April 30, 2013



multiplied by

minus

minus


Capex: $13 billion
equals


equals

equals

multiplied by


divided by

multiplied by

8.0x


equals
equals

equals



Wal-Mart: $221 billion


multiplied by
plus

multiplied by


Assumed WMT multiple as a

minus


95%

110%

equals


equals

equals

equity of Wal-Mart:


equity of Wal-Mart:

equity of Wal-Mart:







(*) Represents Retail (Department & Discount) median.



WAL-MART ANALYSIS OF SELECTED COMPARABLE COMPANIES

Costco Wholesale / COST -72% 7% 47,446 45,823 22% 3% 4% 4% 5% 229% 1,093 10% 8% 13% 3% 35%
Target / TGT -64% 6% 44,168 56,563 37% 9% 6% 6% 8% 129% 203 -16% -1% 31% 8% 37%
Wal-Mart / WMT -43% 9% 240,869 289,098 21% 5% 7% 7% 8% 163% 214 3% 1% 25% 6% 28%

WAL-MART FREE CASH FLOW, FY2007-FY2013 ($ in billions)


Wal-Mart has generated $60 billion of
free cash flow over the last five years
(~25% of recent market value),
implying an average 5% FCF yield
However, capex during the period
totalled $63 billion (1.7x D&A)


WAL-MART RETURN of CAPITAL to SHAREHOLDERS; FY2004-FY2013


WAL-MART MANAGEMENTS CALCULATION of ROI and ROA, 2012-2013

Source: Company annual report for the fiscal year ended J anuary 31, 2013.
Wal-Mart has managed to maintain high rates of return despite stagnating same-store sales in the
U.S. and continued investment to expand its international store base
Wal-Mart has returned nearly $100 billion to shareholders over the past ten
years, consisting of a steadily growing dividend stream as well as steady and
opportunistic share repurchases
The return of capital over the past decade amounts to more than one-third of
recent equity market value


Walt Disney (DIS) Childrens, Davis, FMR, Markel, Tiger Global, T Rowe
Services: Broadcasti ng & Cabl e TV, Member of S&P 500 BURBANK CA disney.go.com

($ millions, except Fiscal Years Ended September 29, LTME FQE FQE
per share data) 2006 2007 2008 2009 2010 2011 2012 3/30/13 3/31/12 3/30/13
Revenue 33,747 35,510 37,843 36,149 38,063 40,893 42,278 43,765 9,629 10,554
Gross profit 5,355 6,855 7,443 5,697 6,726 7,781 8,863 9,271 1,687 2,195
Dividend 0.31 0.35 0.35 0.35 0.35 0.40 0.60 0.60
Shares out (avg) 2,005 2,004 1,890 1,856 1,915 1,878 1,794 1,797 1,793 1,804
Capex 1,292 1,566 1,578 1,753 2,110 3,559 3,784 2,792 1,477 574
Free cash flow 4,766 3,855 4,123 3,566 4,468 3,435 4,182 4,932 335 1,586
% of revenue:
Gross profit 15.9% 19.3% 19.7% 15.8% 17.7% 19.0% 21.0% 21.2% 17.5% 20.8%
Receivables 4,707 5,032 5,373 4,854 5,784 6,182 6,540 7,154 6,283 7,154
Inventory 694 641 1,124 1,271 1,442 1,595 1,537 1,403 1,503 1,403
LT investments 1,815 1,566 3,050 3,779 3,788 4,118 4,368 2,566 2,484 2,566
PP&E, net 17,167 17,433 17,532 17,597 17,806 19,695 21,512 21,650 20,842 21,650
Tangible assets 29,351 31,226 33,210 34,062 35,252 38,501 40,232 41,542 40,383 41,542
Short-term debt 2,682 3,280 3,529 1,206 2,350 3,055 3,614 3,556 3,447 3,556
Long-term debt 11,135 12,166 11,351 11,721 10,354 11,210 10,981 13,381 12,582 13,381
Tangible equity 1,173 1,051 3,036 4,679 3,565 3,762 5,093 2,273 3,199 2,273


$0
$10
$20
$30
$40
$50
$60
$70
$80



BUSINESS OVERVIEW
Media company Disney operates through five segments:
Media Networks: owns cable, broadcasting and radio assets,
including ABC, Disney, 80% of ESPN, and 50% of A&E.
Parks & Resorts: owns venues in California, Florida, Hawaii,
Paris (51%), Hong Kong (48%), and Shanghai (43%); licenses
a venue in Tokyo; owns the Disney Cruise Line.
Studio: owns film banners, including Walt Disney Pictures,
Pixar, Marvel, Lucasfilm, and UTV. Music banners include
Walt Disney Records, Hollywood Records, and Lyric Street.
Consumer Products: licenses character-based merchandise.
Interactive: produces games and owns online media assets.

One-of-a-kind content, production and distribution
assets with universal and timeless appeal. Assets
include sports network ESPN (98 million U.S.
subscribers), ABC (one of only four U.S. television
networks), and a valuable content libraryincluding
Mickey Mouse, Disney Princess, Winnie the Pooh,
Spider-Man, Iron Man, Lion King, Toy Story, Cars,
Star Wars and many other leading franchises.
Growth in theme park attendance suggests
enduring brand relevance, durability of moat. In
the six months to March, attendance is up 6% at
U.S. parks, continuing the growth of recent years.
Attractive reinvestment opportunities. Disneys
brands have universal appeal that may be exploited
in international markets, which still represent only
~25% of company revenue. Shanghai Disneyland,
due to open in 2015, is one of many examples.
Inflation protection due to proven pricing power
and generally low-capital-intensity business model.

Valuation. The forward earnings yield is only 6%,
based on consensus EPS of $3.94 for the year to
September 2014. Even with expected y-y EPS
growth of ~13%, the valuation is hardly compelling.
Media segment, mainly ESPN, represents ~65%
of EBIT. Despite diversified assets, profits are
vulnerable to programming cost rises. So far, these
have been offset by higher affiliate fees and ad rates.
Relying on acquisitions for part of the growth.
Disney spent a total of $16+billion on Pixar (06),
Marvel (09), Playdom(10), and Lucasfilm (12).
$13 billion of net debt and significant minority
interest due to 20% minority stake in ESPN.

NOTABLE HOLDERS
Insiders <1% | Steve J obs estate 7% | Childrens Investment
Fund <1% | Markel Gayner <1% | Tiger Global <1%

FYE September 29 2008 2009 2010 2011 2012 1H13
revenue 7% -4% 5% 7% 3% 7%
U.S. parks attendance 2% 2% -1% 2% 3% 6%
U.S. parks spend/guest 3% -6% 3% 7% 7% 8%
employees 9% -4% 3% 5% 6% n/a
BV per share 11% 6% 8% 2% 11% 10%
Employees (end) (000) 150 144 149 156 166 n/a
Revenue ($bn) 37.8 36.1 38.1 40.9 42.3 21.9

Media networks 42% 45% 45% 46% 46% 46%
Parks and resorts 30% 30% 28% 29% 30% 31%
Studio entertainment 19% 17% 18% 16% 14% 13%
Consumer products 6% 7% 7% 7% 8% 8%
Interactive 2% 2% 2% 2% 2% 2%
EBIT margin by segment (ex. corporate: -1%):

Media networks 31% 29% 30% 33% 34% 31%
Parks and resorts 16% 13% 12% 13% 15% 14%
Studio entertainment 15% 3% 10% 10% 12% 12%
Consumer products 32% 25% 25% 27% 29% 31%
Interactive -36% -41% -31% -31% -26% -9%
% of revenue by major geography:

U.S./Canada 75% 76% 74% 75% 75% n/a
Europe 18% 17% 17% 16% 15% n/a
Asia Pacific 5% 5% 6% 6% 7% n/a
Revenue growth by major geography:

U.S./Canada 4% -4% 3% 9% 3% n/a
Europe 15% -12% 9% -1% -4% n/a
Asia Pacific 5% 3% 25% 8% 19% n/a
EBIT margin by major geography:

U.S./Canada 21% 16% 18% 21% 22% n/a
Europe 21% 19% 19% 24% 27% n/a
Asia Pacific 21% 23% 27% 25% 28% n/a

Gross profit 20% 16% 18% 19% 21% 20%
EBIT 20% 16% 17% 20% 22% 20%
Net income 12% 9% 10% 12% 13% 13%
D&A 4% 5% 5% 5% 5% 5%
Capex 4% 5% 6% 9% 9% 5%

LT investments 9% 11% 11% 11% 11% 6%
PP&E, net 53% 52% 51% 51% 53% 52%
ST debt 11% 4% 7% 8% 9% 9%
LT debt 34% 34% 29% 29% 27% 32%
Tangible equity 9% 14% 10% 10% 13% 5%
Return on tang. equity 222% 93% 103% 133% 129% 89%
Diluted EPS (cont.) ($) 2.28 1.76 2.03 2.52 3.13 1.60
Dividends per share ($) 0.35 0.35 0.40 0.40 0.60
Shares out (avg) (mn) 1,890 1,856 1,915 1,878 1,794 1,791
shares out (avg) -6% -2% 3% -2% -4% 0%

RATINGS
THE BOTTOM LINE
Disney owns entertainment content with timeless appeal and one-of-a-kind media production and distribution assets. While
many investors will associate Disney mainly with cartoon characters such as Mickey Mouse, it actually generates about two thirds
of operating profit from media networks, predominantly from an 80% stake in ESPN. Although we like Disneys moat and
global reinvestment opportunities, the valuation at a 6% forward earnings yield leaves us waiting for a better margin of safety.


WALT DISNEY EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative

Base Case

Aggressive



September 29, 2014



multiplied by

minus

minus

Capex: $2.8 billion

equals

equals



equals
multiplied by

divided by



multiplied by
10.0x

equals

equals


equals


Walt Disney: $84 billion

multiplied by

plus


multiplied by


Assumed DIS multiple as a
minus

90%



125%
equals

equals



equals
equity of Walt Disney:










(*) Represents Broadcasting & Cable TV industry median multiple.


WALT DISNEY COMPOSITION of FREE CASH FLOW, FY2010-FY2012 ($ in millions)

Source: Company annual report for the fiscal year ended September 30, 2012.

Disneys FCF is
underwhelming
relative to its recent
market value of
~$115 billion
This trend has
continued in 1H13,
as Disney generated
$3.3 billion of net
cash from
operations and
spent $1.1 billion on
capex. It also spent
$2.3 billion on M&A


WALT DISNEY OVERVIEW of PARKS and RESORTS

(a) Includes theme parks, hotels, dining and entertainment areas and surrounding land.
(b) Includes only hotels and Disney Vacation Club properties owned and operated by The Walt Disney Company; Oriental Land Co., Ltd.; Euro Disney S.C.A.; and Hongkong International
Theme Parks Limited.
(c) Total acreage, including undeveloped land.
(d) Includes Disneys Fort Wilderness Resort & Campground, but does not include Disney Vacation Club properties.
(e) Excludes the approximately 800 campsites at Disneys Fort Wilderness Resort & Campground.
(f) Total acreage including 461 Company-owned acres and 49 acres under long-termlease in Anaheim, CA.
(g) Represents hotel rooms only. The resort is also home to a 481 unit Disney Vacation Club facility that is being constructed in phases.
(h) The Walt Disney Company has an indirect investment in Euro Disney S.C.A., a publicly held French entity that owns Disneyland Paris. A subsidiary of The Walt Disney Company
manages the resort and another subsidiary earns royalties on Disneyland Paris revenues.
(i) The Walt Disney Company owns a 48% interest in the Hong Kong Disneyland Resort through Hongkong International Theme Parks Limited. A separate Hong Kong subsidiary of the
Company is responsible for managing Hong Kong Disneyland Resort.
(j) The Walt Disney Company has a majority stake in the management company and 43% ownership of Shanghai Disney Resort, which is under construction.
(k) A subsidiary of The Walt Disney Company earns royalties on revenues generated by the Tokyo Disney Resort, which is owned and operated by Oriental Land Co., Ltd., a J apanese
corporation not affiliated with The Walt Disney Company.
(l) Includes the seven Disney Vacation Club properties at the Walt Disney World Resort, one property at Disneyland Resort, and three beach resorts including Aulani, a Disney Resort & Spa,
Ko Olina, Hawaii.
(m) Adventures by Disney provided 24 specialized excursion packages during 2012.
Source: Company fact book for the year 2012.

Disneys world-renowned destinations keep the brand alive with customers
and give the company proprietary distribution channels worldwide


10 Essential Screens for Value Investors
Magic Formula, Based on Trailing Operating Income
Companies with high returns on capital employed, trading at high trailing EBIT-to-enterprise value yield

Move To Trailing EBIT/ Price/
Insiders

Price
52-Week
MV EV EV/
EBIT/ Capital
Tax
Tangible
% Buys/
Company Ticker ($)
Low High
($mn) ($mn) Sales EV Employed Rate Book Own. Sells
1 Bridgepoint Edu. BPI 12.07 -33% 84% 653 225 .2x 86% infinite 38% 1.3x <1% - / -
2 Argan AGX 15.88 -17% 24% 222 53 .2x 71% infinite 38% 2.1x 3% 2 / 1
3 Digital River DRIV 18.27 -30% 2% 644 308 .8x 66% infinite n/m 2.7x 5% 6 / 4
4 ITT Educational ESI 23.54 -50% 180% 550 490 .4x 77% 1166% 39% 3.5x 2% 16 / 7
5 Orbitz Worldwide OWW 7.65 -73% 14% 807 1,037 1.3x 38% infinite n/m n/m 2% 16 / 14
6 Apollo Group APOL 19.24 -17% 99% 2,167 1,405 .4x 51% 428% 42% 2.7x 3% 2 / 5
7 Harte-Hanks HHS 8.96 -43% 9% 560 606 .8x 64% 340% n/m n/m 3% 17 / 9
8 Education Management EDMC 6.22 -54% 29% 775 1,887 .7x 101% 280% n/m n/m <1% - / -
9 Engility Holdings EGL 27.79 -50% 2% 477 773 .5x 73% 273% n/m n/m 4% 16 / 4
10 InterDigital IDCC 44.16 -43% 10% 1,817 1,384 2.2x 30% infinite 33% 5.8x 1% 16 / 12
11 PDL BioPharma PDLI 7.74 -18% 9% 1,084 1,209 3.1x 30% infinite 35% n/m <1% 7 / -
12 WellCare WCG 53.11 -16% 29% 2,308 1,286 .2x 28% infinite 35% 2.2x <1% 15 / 11
13 Perion Network PERI 11.56 -66% 29% 139 131 2.7x 27% infinite 37% >9.9x <1% - / -
14 QuinStreet QNST 7.80 -31% 30% 334 318 1.0x 31% 455% n/m 4.8x <1% 1 / -
15 DG FastChannel DGIT 6.48 -11% 97% 180 536 1.4x 52% 210% n/m n/m 8% 4 / 2
16 Hewlett-Packard HPQ 24.15 -53% 7% 46,575 60,126 .5x 49% 236% n/m n/m <1% 16 / 10
17 Unisys UIS 20.31 -27% 22% 896 728 .2x 38% 266% 47% n/m 1% 20 / 12
18 Gentiva Health GTIV 10.37 -42% 24% 325 1,075 .6x 37% 270% n/m n/m 4% 8 / 9
19 Callwave CALL 14.66 -26% 89% 272 227 1.4x 23% infinite n/m n/m 8% 1 / 1
20 PMC-Sierra PMCS 6.03 -23% 14% 1,230 1,138 2.2x 25% 1119% n/m 4.5x <1% 10 / 9
21 Endo Pharma ENDP 37.81 -34% 5% 4,244 6,981 2.3x 29% 392% n/m n/m <1% 9 / 6
22 USA Mobility USMO 12.99 -20% 10% 281 210 1.0x 25% 1090% 42% 3.0x 2% 15 / 10
23 Boston Scientific BSX 9.14 -48% 7% 12,331 16,317 2.3x 38% 225% n/m n/m <1% 20 / 15
24 ZaZa Energy ZAZA 1.40 -22% 252% 144 251 1.2x 100% 161% 43% n/m 4% 7 / 6
25 Neutral Tandem IQNT 5.33 -61% 165% 173 136 .5x 95% 157% n/m 1.6x 3% 9 / 5
26 SciClone Pharma SCLN 4.90 -25% 55% 265 182 1.2x 33% 221% n/m 2.4x <1% 1 / -
27 * Ascent Media ASCMA 74.09 -35% 5% 1,043 1,916 5.3x 21% 1066% n/m n/m 2% 2 / 4
28 Northern Tier Energy NTI 24.96 -48% 33% 2,295 2,405 .5x 33% 207% 2% 5.0x 51% - / 5
29 Central Euro. Media CETV 3.45 -25% 130% 430 1,480 2.0x 36% 188% n/m n/m <1% 11 / -
30 CRA International CRAI 18.33 -27% 26% 187 158 .6x 61% 156% n/m 1.4x 3% 6 / 5
31 * Ebix EBIX 9.52 -14% 162% 354 388 1.9x 20% 994% 9% n/m 10% 5 / 5
32 GameStop GME 40.78 -62% 2% 4,797 4,551 .5x 28% 231% n/m 6.2x 2% 16 / 5
33 * Constellium CSTM 15.32 -13% 2% 1,548 1,535 .3x 26% 243% 25% n/m <1% - / -
34 TeleComm Systems TSYS 2.20 -50% 23% 129 246 .5x 59% 136% n/m >9.9x 5% 10 / 5
35 Sealed Air Corp. SEE 23.47 -51% 7% 4,596 8,578 1.1x 31% 170% n/m n/m 2% 23 / 15
36 * Logitech LOGI 6.84 -9% 59% 1,190 856 .4x 32% 161% n/m 3.2x <1% - / -
37 * Terra Nitrogen TNH 209.70 -7% 22% 3,880 3,645 4.5x 17% 1313% n/m >9.9x <1% 3 / 3
38 Quicksilver Resource KWK 1.82 -11% 224% 321 2,420 3.7x 100% 111% n/m n/m 11% 13 / 9
39 Amedisys AMED 12.76 -31% 25% 402 473 .3x 43% 127% n/m 2.0x 2% 8 / 6
40 * PBF Energy PBF 24.84 -2% 71% 2,399 2,723 .1x 44% 122% 1% 5.7x <1% 5 / 3
41 Daily Journal DJCO 107.33 -24% 13% 148 37 1.1x 16% infinite 31% 1.9x <1% - / -
42 Vonage VG 2.79 -42% 13% 592 565 .7x 16% infinite 41% 2.0x 12% 14 / 7
43 * Comverse CNSI 29.00 -14% 9% 644 376 .5x 16% infinite 84% n/m <1% - / 2
44 Lender Processing LPS 31.72 -33% 8% 2,694 3,674 1.9x 17% 403% 45% n/m 2% 14 / 7
45 Kulicke and Soffa KLIC 10.88 -26% 19% 818 320 .4x 51% 113% 8% 1.4x <1% 8 / 7
Company website SEC Y! Price Charts Proxy Y!

* New additions are highlighted. Screening criteria: Market value > $100 million ADRs and banks excluded China RTOs excluded


Magic Formula, Based on This Years EPS Estimates
Companies with high returns on capital employed, trading at high earnings yields (based on this FY EPS estimates)

Move To This FY EBIT/ Price to
Insiders

Price
52-Week
MV EV EV/
EPS Capital Tax Tangible
% Buys/
Company Ticker ($)
Low High
($mn) ($mn) Sales Yield Employed Rate Book Own. Sells
1 SandRidge Miss. SDT 13.43 -10% 119% 376 375 4.4x 18% infinite n/m 1.5x <1% - / -
6 * PBF Energy PBF 24.84 -2% 71% 2,399 2,723 .1x 16% 122% 1% 5.7x <1% 5 / 3
7 Oracle ORCL 30.14 -10% 21% 141,956 128,301 3.5x 10% infinite 21% >9.9x 24% 7 / 6
8 Apple AAPL 413.50 -7% 71% 388,131 348,994 2.1x 10% 3869% 26% 3.0x <1% 15 / 6
9 IDT Corp. IDT 19.55 -55% 9% 448 313 .2x 9% infinite n/m 5.1x 8% 4 / 7
10 Questcor Pharma QCOR 43.96 -61% 34% 2,618 2,482 4.5x 9% 1799% 33% >9.9x <1% 12 / 4
12 Magic Software MGIC 5.45 -31% 6% 208 169 1.4x 9% 604% n/m 5.3x <1% - / -
13 HollyFrontier HFC 41.53 -23% 43% 8,435 7,180 .4x 15% 89% 37% 2.2x <1% 10 / 4
14 VAALCO Energy EGY 5.56 -1% 73% 322 219 1.1x 18% 82% 97% 1.5x 3% - / 1
15 Cirrus Logic CRUS 17.48 -3% 160% 1,108 936 1.2x 12% 93% 32% 2.1x <1% 5 / 6
16 CF Industries CF 182.67 -7% 28% 10,830 10,225 1.7x 14% 88% 32% 3.0x <1% 8 / 6
18 Seagate Technology STX 42.25 -47% 7% 15,149 15,718 1.0x 13% 89% 2% 6.4x <1% 11 / 12
19 Western Refining WNR 27.75 -26% 42% 2,299 2,775 .3x 15% 79% 36% 2.6x 12% 8 / 10
20 CVR Refining CVRR 29.32 -16% 23% 4,328 4,355 .5x 21% 75% 0% 2.6x <1% 14 / 1
21 ZAGG ZAGG 5.11 -7% 129% 157 175 .7x 13% 80% 39% 2.5x 3% 7 / 3
22 Smith & Wesson SWHC 9.64 -30% 17% 619 604 1.1x 13% 80% 34% 4.1x <1% 6 / 2
23 Microsoft MSFT 33.27 -21% 8% 277,800 217,512 2.9x 8% infinite 23% 4.7x 5% 6 / 5
24 Brocade Comms BRCD 5.51 -19% 17% 2,443 2,278 1.0x 12% 80% 50% 4.8x <1% 9 / 2
25 Broadcom BRCM 33.25 -14% 14% 17,321 16,546 2.0x 9% 167% n/m 6.7x <1% 19 / 13
26 Cisco Systems CSCO 24.48 -39% 2% 130,835 99,695 2.1x 8% infinite 10% 4.1x <1% 15 / 15
27 Americas Car-Mart CRMT 42.13 -15% 20% 380 491 1.1x 9% 182% 36% 2.0x <1% 2 / 2
28 United Therapeutics UTHR 63.34 -30% 10% 3,146 2,753 2.9x 9% 98% 31% 2.7x <1% 7 / 7
29 Global Sources GSOL 6.65 -19% 28% 229 132 .6x 15% 70% 7% 1.6x <1% - / -
30 Bridgepoint Edu. BPI 12.07 -33% 84% 653 225 .2x 8% infinite 38% 1.3x <1% - / -
31 CTC Media CTCM 11.90 -40% 13% 1,882 1,744 2.2x 9% 163% 40% 5.3x <1% - / -
32 Nevsun Resources NSU 2.92 -8% 71% 592 257 .5x 10% 83% 39% .9x <1% - / -
33 Sturm, Ruger & Co. RGR 48.23 -25% 25% 932 886 1.7x 8% 182% 37% 8.3x 1% 14 / 11
34 PhotoMedex PHMD 15.53 -37% 10% 323 260 1.1x 9% 98% 21% 2.5x 8% 1 / 2
35 Western Digital WDC 60.19 -53% 8% 14,228 12,181 .7x 14% 65% 12% 2.4x <1% 11 / 12
36 * ValueClick VCLK 23.84 -42% 35% 1,817 1,768 2.6x 8% 330% 40% >9.9x 5% 9 / 9
37 * CVR Energy CVI 49.22 -50% 47% 4,274 3,910 .4x 12% 67% 34% 3.1x <1% 7 / 6
38 EMC EMC 24.33 -12% 16% 51,113 46,281 2.1x 8% 894% 22% 7.6x <1% 12 / 15
39 * Rentech Nitrogen RNF 28.89 -11% 70% 1,122 1,279 4.5x 8% 102% 0% >9.9x <1% 5 / 1
40 Lexmark LXK 30.45 -47% 6% 1,919 1,738 .5x 12% 62% 31% 2.9x 1% 19 / 8
41 ePlus PLUS 62.10 -51% 2% 506 495 .5x 8% infinite 41% 2.5x 9% 7 / 5
44 Natures Sunshine NATR 16.31 -21% 13% 259 179 .5x 8% 102% 32% 2.2x <1% 5 / -
45 * Korn/Ferry KFY 17.54 -28% 10% 854 610 .7x 7% infinite 35% 2.4x <1% 1 / 3

* New additions are highlighted. Criteria: MV > $100 million ADRs, banks excluded EV to MV < 1.5 China RTOs excluded


Magic Formula, Based on Next Years EPS Estimates
Companies with high returns on capital employed, trading at high earnings yields (based on next FY EPS estimates)

Move To Next FY EBIT/ Price to
Insiders

Price
52-Week
MV EV EV/
EPS Capital
Tax
Tangible
% Buys/
Company Ticker ($)
Low High
($mn) ($mn) Sales Yield Employed Rate Book Own. Sells
1 SandRidge Miss. SDT 13.43 -10% 119% 376 375 4.4x 16% infinite n/m 1.5x <1% - / -
4 * PBF Energy PBF 24.84 -2% 71% 2,399 2,723 .1x 21% 122% 1% 5.7x <1% 5 / 3
6 Questcor Pharma QCOR 43.96 -61% 34% 2,618 2,482 4.5x 11% 1799% 33% >9.9x <1% 12 / 4
7 Kulicke and Soffa KLIC 10.88 -26% 19% 818 320 .4x 13% 113% 8% 1.4x <1% 8 / 7
8 Oracle ORCL 30.14 -10% 21% 141,956 128,301 3.5x 11% infinite 21% >9.9x 24% 7 / 6
9 Apple AAPL 413.50 -7% 71% 388,131 348,994 2.1x 11% 3869% 26% 3.0x <1% 15 / 6
11 Nevsun Resources NSU 2.92 -8% 71% 592 257 .5x 27% 83% 39% .9x <1% - / -
13 VAALCO Energy EGY 5.56 -1% 73% 322 219 1.1x 21% 82% 97% 1.5x 3% - / 1
14 ZAGG ZAGG 5.11 -7% 129% 157 175 .7x 16% 80% 39% 2.5x 3% 7 / 3
15 Seagate Technology STX 42.25 -47% 7% 15,149 15,718 1.0x 13% 89% 2% 6.4x <1% 11 / 12
16 HollyFrontier HFC 41.53 -23% 43% 8,435 7,180 .4x 13% 89% 37% 2.2x <1% 10 / 4
17 CF Industries CF 182.67 -7% 28% 10,830 10,225 1.7x 13% 88% 32% 3.0x <1% 8 / 6
18 Western Refining WNR 27.75 -26% 42% 2,299 2,775 .3x 14% 79% 36% 2.6x 12% 8 / 10
19 CVR Refining CVRR 29.32 -16% 23% 4,328 4,355 .5x 15% 75% 0% 2.6x <1% 14 / 1
20 United Therapeutics UTHR 63.34 -30% 10% 3,146 2,753 2.9x 11% 98% 31% 2.7x <1% 7 / 7
21 Rentech Nitrogen RNF 28.89 -11% 70% 1,122 1,279 4.5x 11% 102% 0% >9.9x <1% 5 / 1
22 Brocade Comms BRCD 5.51 -19% 17% 2,443 2,278 1.0x 12% 80% 50% 4.8x <1% 9 / 2
23 Americas Car-Mart CRMT 42.13 -15% 20% 380 491 1.1x 10% 182% 36% 2.0x <1% 2 / 2
24 Microsoft MSFT 33.27 -21% 8% 277,800 217,512 2.9x 9% infinite 23% 4.7x 5% 6 / 5
25 Smith & Wesson SWHC 9.64 -30% 17% 619 604 1.1x 12% 80% 34% 4.1x <1% 6 / 2
27 Broadcom BRCM 33.25 -14% 14% 17,321 16,546 2.0x 9% 167% n/m 6.7x <1% 19 / 13
28 Western Digital WDC 60.19 -53% 8% 14,228 12,181 .7x 13% 65% 12% 2.4x <1% 11 / 12
31 * Pulte Homes PHM 18.81 -52% 30% 7,289 8,299 1.6x 9% infinite n/m 3.4x <1% 18 / 11
32 CTC Media CTCM 11.90 -40% 13% 1,882 1,744 2.2x 9% 163% 40% 5.3x <1% - / -
33 * Korn/Ferry KFY 17.54 -28% 10% 854 610 .7x 9% infinite 35% 2.4x <1% 1 / 3
34 * Meritage Homes MTH 43.06 -34% 23% 1,557 2,113 1.6x 9% infinite n/m 2.2x 2% 12 / 8
35 Cirrus Logic CRUS 17.48 -3% 160% 1,108 936 1.2x 10% 93% 32% 2.1x <1% 5 / 6
36 Cisco Systems CSCO 24.48 -39% 2% 130,835 99,695 2.1x 9% infinite 10% 4.1x <1% 15 / 15
37 * ValueClick VCLK 23.84 -42% 35% 1,817 1,768 2.6x 9% 330% 40% >9.9x 5% 9 / 9
38 PhotoMedex PHMD 15.53 -37% 10% 323 260 1.1x 10% 98% 21% 2.5x 8% 1 / 2
39 Lexmark LXK 30.45 -47% 6% 1,919 1,738 .5x 12% 62% 31% 2.9x 1% 19 / 8
40 EMC EMC 24.33 -12% 16% 51,113 46,281 2.1x 9% 894% 22% 7.6x <1% 12 / 15
41 * Rentech RTK 2.00 -12% 59% 452 524 1.8x 11% 71% 3% 7.2x 3% 14 / 8
42 LSI Corp. LSI 7.02 -20% 15% 3,855 3,197 1.3x 10% 76% 16% 9.0x <1% 14 / 6
43 PMC-Sierra PMCS 6.03 -23% 14% 1,230 1,138 2.2x 8% 1119% n/m 4.5x <1% 10 / 9
44 * M/I Homes MHO 22.67 -40% 28% 548 818 1.0x 8% infinite 4% 1.8x <1% 3 / 5
45 * Skyworks Solutions SWKS 21.80 -12% 44% 4,168 3,709 2.2x 12% 58% 18% 3.7x <1% 13 / 6

* New additions are highlighted. Criteria: MV > $100 million ADRs, banks excluded EV to MV < 1.5 China RTOs excluded


Contrarian: Biggest Losers over Past 52 Weeks (deleveraged & profitable)
Non-financial companies with no net debt, positive analyst estimates for next years EPS, and large price drop over past 52 weeks

Price Change Since 52-Week EV / Price to Next
Insiders

Price MV EV
December 31, Price TTM Tangible FY
% Buys/
Company Ticker ($) ($mn) ($mn) 2006 2011 2012 Change Revenue Book P/E Own. Sells
1 Harmony Gold Mining HMY 3.53 1,597 1,535 -78% -70% -61% -64% .8x .4x 6x <1% - / -
2 Gold Resource GORO 9.53 508 479 429% -55% -38% -64% 3.5x 5.7x 12x <1% 1 / 1
3 IAMGOLD IAG 4.36 1,653 1,530 -51% -72% -62% -63% 1.0x .5x 7x <1% - / -
4 Endeavour Silver EXK 3.54 357 317 -9% -64% -55% -59% 1.4x 1.1x 5x <1% - / -
5 Silvercorp Metals SVM 2.43 438 308 -83% -62% -53% -59% 1.6x 1.0x 4x <1% - / -
6 Skullcandy SKUL 5.37 149 115 n/m -57% -31% -59% .4x 1.4x 18x 3% 6 / 1
7 Compania de Minas BVN 15.98 4,519 4,480 14% -58% -56% -58% 2.9x 1.2x 7x <1% - / -
8 CafePress PRSS 6.12 105 81 n/m n/m 6% -58% .4x 3.6x 13x <1% 5 / -
9 Neutral Tandem IQNT 5.33 173 136 n/m -50% 107% -58% .5x 1.6x 61x 3% 9 / 5
10 ITT Educational ESI 23.54 550 490 -65% -59% 36% -58% .4x 3.5x 9x 2% 16 / 7
11 Active Network ACTV 6.92 427 324 n/m -49% 41% -57% .8x n/m 58x 3% 6 / 8
12 Rubicon Minerals RBY 1.39 406 263 74% -63% -45% -55% >99x .9x 7x <1% - / -
13 Glu Mobile GLUU 2.23 153 132 n/m -29% -2% -53% 1.5x 13.8x 40x <1% 1 / 1
14 * Zynga ZNGA 2.71 2,151 983 n/m -71% 15% -53% .8x 1.3x 678x <1% 14 / 9
15 Eldorado Gold EGO 6.24 4,473 4,238 16% -54% -52% -49% 3.5x .9x 13x <1% - / -
16 * Pain Therapeutics PTIE 2.40 109 54 -73% -37% -11% -49% 5.5x 8.1x 11x 11% 7 / 3
17 Volterra Semi VLTR 13.96 349 197 -7% -45% -19% -47% 1.2x 1.9x 15x <1% 8 / 3
18 SandRidge Miss. SDT 13.43 376 375 n/m -57% -18% -47% 4.4x 1.5x 6x <1% - / -
19 Emerald Oil EOX 6.63 282 300 -76% -63% 27% -46% 9.6x 2.5x 19x 5% 1 / 11
20 Aurico Gold AUQ 4.32 1,051 953 -73% -46% -47% -46% 4.9x .7x 12x <1% - / -
21 Brightcove BCOV 8.17 230 203 n/m n/m -10% -46% 2.2x 8.1x 314x 2% 4 / 3
22 JAKKS Pacific JAKK 10.02 224 211 -54% -29% -20% -44% .3x 3.7x 15x 3% 10 / 2
23 LivePerson LPSN 9.31 513 418 78% -26% -29% -44% 2.6x 4.3x 34x 9% 4 / 1
24 * Boingo Wireless WIFI 6.13 219 127 n/m -29% -19% -44% 1.2x 2.2x 44x <1% 2 / 3
25 Apollo Group APOL 19.24 2,167 1,405 -51% -64% -8% -42% .4x 2.7x 9x 3% 2 / 5
26 * Lan Airlines LFL 15.75 7,661 6,780 43% -32% -33% -42% .6x 39.2x 12x <1% - / -
27 Bridgepoint Edu. BPI 12.07 653 225 n/m -48% 17% -41% .2x 1.3x 22x <1% - / -
28 * Spectrum Pharma SPPI 8.01 481 393 45% -45% -28% -41% 1.6x 9.9x 51x 3% 2 / 2
29 Tellabs TLAB 2.01 713 141 -80% -50% -12% -40% .1x .8x 38x <1% 18 / 7
30 Vocus VOCS 10.51 222 259 -37% -52% -40% -40% 1.4x n/m 29x 7% 10 / 4
31 * Royal Gold RGLD 46.19 2,974 2,600 28% -31% -43% -39% 8.9x 1.3x 22x <1% 1 / 3
32 Cirrus Logic CRUS 17.48 1,108 936 154% 10% -40% -39% 1.2x 2.1x 10x <1% 5 / 6
33 Multi-Fineline MFLX 15.13 361 231 -25% -26% -25% -37% .3x .9x 19x 1% 10 / 6
34 Fusion-io FIO 13.01 1,279 924 n/m -46% -43% -37% 2.1x 3.0x 51x <1% 8 / 8
35 Procera Networks PKT 13.29 273 157 -39% -15% -28% -37% 2.6x 2.0x 30x 2% 8 / 1
36 Volcano Corp. VOLC 17.90 976 956 9% -25% -24% -37% 2.5x 3.2x 74x <1% 15 / 7
37 Vocera VCRA 15.70 385 258 n/m n/m -37% -37% 2.6x 3.3x 61x 2% 14 / 10
38 * Audience ADNC 13.21 278 163 n/m n/m 27% -36% 1.0x 1.8x 16x 2% 13 / 12
39 * Hecla Mining HL 2.93 836 690 -62% -44% -50% -35% 2.3x .7x 9x <1% 7 / -
40 Logitech LOGI 6.84 1,190 856 -76% -12% -9% -35% .4x 3.2x 21x <1% - / -
41 Liquidity Services LQDT 32.31 1,022 965 88% -12% -21% -33% 1.9x 28.2x 14x <1% 4 / 5
42 * Edwards Lifesciences EW 66.45 7,506 7,141 183% -6% -26% -33% 3.7x 6.5x 18x <1% 12 / 12
43 * VirnetX VHC 21.96 1,123 1,085 2424% -12% -25% -33% >99x 23.6x 21x 16% 6 / -
44 * MicroStrategy MSTR 84.27 952 622 -26% -22% -10% -32% 1.1x 3.6x 27x <1% - / -
45 Quality Systems QSII 17.94 1,068 950 -4% -52% 3% -32% 2.1x 5.5x 16x <1% 9 / 2
Company website SEC Y! Stock Price Charts Proxy Y!

* New additions are highlighted. Criteria: Positive net cash Positive next FY EPS MV >$100 million China RTOs excluded


Contrarian: Cheap Free Cash Flow Gushers
Companies that trade at a high free cash flow yield, using average FCF for the past five years

Move To
Est. P/E FCF Yield

Price 52-Week
MV EV EV/ This Next 5-Yr.
Div.
Insider Buys/
Company Ticker ($)
Low High
($mn) ($mn) Sales FY FY LTM Avg. Yield Own. Sells
1 * Lee Enterprises LEE 1.99 -45% 10% 104 958 1.4x 6x 6x 51% 87% - 1% - / -
2 McClatchy MNI 2.31 -35% 50% 199 1,710 1.4x - - 54% 61% - <1% -1 / -1
3 Cenveo CVO 2.17 -18% 44% 139 1,325 .7x 9x 4x 36% 55% - 12% -1 / -1
4 Supervalu SVU 5.99 -72% 19% 1,544 4,361 .3x 22x 14x 50% 45% - 18% 8 / 2
5 Global Geophysical GGS 4.12 -55% 58% 156 461 1.4x >99x >99x 65% 43% - 12% 12 / 6
6 Navistar NAV 26.99 -33% 44% 2,170 5,716 .5x n/m 14x 16% 37% - <1% - / -
7 Alliance Imaging AIQ 16.09 -78% 5% 171 685 1.5x - - 29% 33% - 2% -1 / -1
8 * Amedisys AMED 12.76 -31% 25% 402 473 .3x 26x 24x 11% 33% - 2% 8 / -
9 Xerium Technologies XRM 10.29 -74% 9% 158 559 1.0x 9x 8x 11% 32% - 2% 7 / 7
10 Republic Airways RJET 11.41 -64% 5% 561 2,352 .9x 8x 6x 42% 30% - 2% 12 / 6
11 Bridgepoint Edu. BPI 12.07 -33% 84% 653 225 .2x 12x 22x 14% 28% - <1% 5 / 5
12 DG FastChannel DGIT 6.48 -11% 97% 180 536 1.4x 43x 13x 31% 28% - 8% 5 / 7
13 Corinthian Colleges COCO 2.16 -19% 59% 186 173 .1x 12x 9x 25% 25% - <1% 11 / 3
14 Cloud Peak Energy CLD 17.18 -18% 30% 1,045 1,529 1.0x 18x 13x 17% 25% - <1% 10 / 7
15 Apollo Group APOL 19.24 -17% 99% 2,167 1,405 .4x 7x 9x 17% 24% - 3% 9 / 3
16 Petroleo Brasileiro PBR 13.80 -1% 80% 91,905 166,588 1.2x 7x 6x 28% 23% 4% <1% - / 1
17 Gentiva Health GTIV 10.37 -42% 24% 325 1,075 .6x 11x 10x 41% 23% - 4% -1 / -1
18 Entercom ETM 9.20 -43% 10% 356 912 2.4x 12x 10x 12% 22% - 13% 10 / 5
19 Pantry PTRY 12.53 -10% 31% 295 1,244 .2x 22x 11x 22% 21% - 4% -1 / -1
20 TeleComm Systems TSYS 2.20 -50% 23% 129 246 .5x 9x 10x 17% 21% - 5% 7 / 9
21 AmSurg AMSG 35.23 -29% 4% 1,127 1,708 1.8x 16x 14x 24% 20% - 3% 10 / 7
22 R.R. Donnelley RRD 13.05 -36% 4% 2,369 5,600 .5x 8x 8x 11% 20% 8% 2% 4 / 4
23 * Nortel Inversora NTL 15.15 -40% 25% 992 992 .2x - - 11% 20% % <1% 14 / 8
24 Global Cash Access GCA 5.89 -1% 44% 390 437 .8x 8x 7x 13% 19% - <1% 4 / 2
25 * Bon-Ton Stores BONT 17.68 -65% 28% 362 1,271 .4x 18x 10x 12% 19% 1% 11% 2 / -
26 Domtar UFS 69.14 -3% 26% 2,293 2,905 .5x 13x 10x 10% 18% 3% <1% 8 / 6
27 Radio One ROIAK 2.33 -71% 14% 115 909 2.2x - - 21% 18% - <1% 10 / 5
28 Exelis XLS 13.32 -32% 0% 2,506 2,970 .6x 9x 9x 18% 17% 3% <1% 11 / 8
29 Valassis Comms VCI 24.22 -21% 29% 940 1,427 .7x 8x 7x 13% 17% 5% 2% 20 / 11
30 TeleNav TNAV 5.13 -4% 64% 204 16 .1x 13x n/m 23% 16% - 6% -1 / -1
31 * Peabody Energy BTU 16.00 -1% 87% 4,314 9,826 1.3x >99x 14x 11% 15% 2% <1% - / -
32 Westmoreland Coal WLB 11.08 -37% 11% 160 476 .8x 21x 11x 27% 14% - 2% 20 / 16
33 * Cott Corp. COT 7.64 -5% 47% 724 1,235 .6x - - 11% 14% 3% 2% - / -
34 Hewlett-Packard HPQ 24.15 -53% 7% 46,575 60,126 .5x 7x 7x 19% 14% 2% <1% 9 / 2
35 Internet Initiative Japan IIJI 19.01 -49% 12% 1,563 1,663 1.6x - - 11% 14% 1% <1% 5 / 9
36 USA Mobility USMO 12.99 -20% 10% 281 210 1.0x - - 17% 14% 4% 2% - / -
37 EnergySolutions ES 4.14 -65% 0% 375 941 .5x 35x - 15% 14% - <1% 10 / 1
38 * PharMerica PMC 13.17 -25% 25% 391 655 .4x 9x 9x 23% 14% - 4% 11 / 5
39 Xerox XRX 9.28 -34% 4% 11,395 19,290 .9x 8x 8x 15% 14% 2% <1% - / -
40 Consolidated Graphics CGX 46.70 -53% 6% 450 562 .5x 14x 12x 14% 13% - 16% - / 3
41 SkyWest SKYW 13.61 -54% 20% 706 1,705 .5x 11x 9x 28% 13% 1% 2% 14 / 6
42 Skilled Healthcare SKH 6.71 -26% 19% 263 710 .8x 11x 9x 12% 13% - 10% 16 / 9
43 Lifetime Brands LCUT 13.25 -32% 4% 170 241 .5x 10x 9x 22% 13% 1% 10% 19 / 9
44 Journal Comms JRN 7.57 -37% 0% 385 622 1.5x 14x 10x 16% 13% - <1% 14 / 11
45 * Basic Energy BAS 12.46 -32% 33% 526 1,331 1.0x n/m 26x 15% 13% - 7% - / -

* New additions are highlighted. Criteria: LTM FCF yield >10% 5-yr FCF yield >10% MV > $100 million China RTOs excluded


Value with Catalyst: Cheap Repurchasers of Stock
Companies that may be creating value by reducing their shares outstanding at relatively cheap prices

Q-Q EV / Next Price to Net Cash
Insiders

Price MV EV
Change TTM FY Tangible as % of
% Buys/
Company Ticker ($) ($mn) ($mn) in Shares Revenue P/E Book MV Own. Sells
1 * Lan Airlines LFL 15.75 7,661 6,780 -15.2% .6x 12x 39.2x 11% <1% - / -
2 Charter Financial CHFN 9.98 227 n/m -12.8% n/m - 1.6x n/m <1% - / -
3 AXA AXAHY 19.67 46,715 n/m -11.5% n/m 7x 1.1x n/m <1% - / -
4 Celestica CLS 9.13 1,504 993 -9.0% .2x - 1.2x 34% <1% - / -
5 Aurico Gold AUQ 4.32 1,051 953 -8.1% 4.9x 12x .7x 9% <1% - / -
6 Coinstar CSTR 59.04 1,660 1,847 -6.5% .8x 10x 11.2x -11% 1% 13 / 12
7 RenaissanceRe RNR 83.39 3,712 n/m -6.4% n/m 9x 1.2x n/m 3% 21 / 11
8 Enterra Energy ENT 9.83 539 n/m -6.1% n/m 10x 3.4x n/m 28% 2 / -
9 Dun & Bradstreet DNB 95.69 3,823 n/m -6.0% n/m 12x n/m n/m <1% 18 / 8
10 * First Citizens Banc FCNCA 199.07 1,908 n/m -5.3% n/m - 1.1x n/m 14% 1 / 1
11 IAC/InterActiveCorp IACI 47.32 4,183 4,084 -4.9% 1.4x 10x n/m 2% 1% 15 / 5
12 Primus Guaranty PRSG 10.15 346 n/m -4.8% n/m - 1.5x n/m <1% - / -
13 DIRECTV DTV 61.73 34,479 51,165 -4.5% 1.7x 10x n/m -48% <1% - / -
14 * Lam Research LRCX 45.00 7,322 6,262 -4.5% 1.9x 12x 3.7x 14% <1% 16 / 7
15 Horace Mann HMN 24.73 982 n/m -4.3% n/m 11x .8x n/m 2% 17 / 7
16 United Capital UCAP 29.35 172 204 -3.8% 1.7x - 1.3x -19% <1% - / -
17 PartnerRe PRE 87.14 4,989 n/m -3.7% n/m 10x .8x n/m <1% 20 / 11
18 * Zimmer Holdings ZMH 76.38 12,860 13,361 -3.5% 3.0x 12x 5.2x -4% <1% 9 / 8
19 Conrad Industries CNRD 28.50 174 131 -3.4% .6x - 1.6x 24% <1% - / -
20 Wienerberger WBRBY 2.49 1,476 1,932 -3.4% .6x - 1.3x -31% <1% - / -
21 * Comtech Telecomm. CMTL 25.81 423 281 -3.3% .8x 24x 1.8x 34% <1% 2 / -
22 Lear LEA 58.08 5,370 4,826 -3.1% .3x 9x 2.1x 10% <1% 10 / 8
23 Aspen Insurance AHL 36.30 2,406 n/m -3.0% n/m 11x .7x n/m 1% 21 / 13
24 SimPlayer.com SMPL 14.80 122 43 -2.9% 1.1x 23x .9x 65% <1% 7 / -
25 Northrop Grumman NOC 81.85 19,249 20,003 -2.8% .8x 11x n/m -4% <1% 24 / 15
26 Am. Safety Insurance ASI 28.93 278 n/m -2.7% n/m 17x .9x n/m 6% 6 / 5
27 * Silicon Image SIMG 5.54 428 311 -2.7% 1.2x 12x 3.1x 27% 1% 8 / 7
28 * White Mountains WTM 575.00 3,497 n/m -2.5% n/m 21x .9x n/m 6% 15 / 6
29 Heritage Financial HBOS 14.25 112 n/m -2.5% n/m 9x 1.0x n/m <1% 1 / -
30 Northwest Bancorp NWBI 12.92 1,211 n/m -2.5% n/m 19x 1.2x n/m 2% 19 / 6
31 Computer Sciences CSC 44.35 6,663 7,341 -2.5% .5x 11x 24.5x -10% <1% 9 / 9
32 * Arch Capital ACGL 50.30 6,694 n/m -2.5% n/m 15x 1.3x n/m 3% 14 / 5
33 First Commonwealth FCF 6.97 682 n/m -2.5% n/m 13x 1.2x n/m 1% 11 / 1
34 Quality Distribution QLTY 9.25 249 655 -2.4% .7x 9x n/m -163% 4% 12 / 2
35 LIN TV Corp. TVL 14.22 772 1,701 -2.4% 2.9x 8x n/m -120% 5% 5 / 6
36 Bel Fuse BELFA 13.37 156 103 -2.3% .4x - .9x 34% <1% - / -
37 Crocs CROX 15.79 1,391 1,168 -2.3% 1.0x 10x 2.4x 16% 2% 11 / 4
38 * Legg Mason LM 30.53 3,819 n/m -2.3% n/m 12x 10.3x n/m <1% 5 / 4
39 * FBR & Co. FBRC 24.43 292 n/m -2.2% n/m - 1.1x n/m 8% 10 / 8
40 * Tellabs TLAB 2.01 713 141 -2.2% .1x 38x .8x 80% <1% 18 / 7
41 * First Keystone Corp. FKYS 25.24 139 n/m -2.2% n/m - 1.6x n/m <1% - / -
42 * Health Net HNT 30.34 2,407 n/m -2.2% n/m 11x 2.5x n/m 2% 21 / 13
43 * Yamana Gold AUY 9.49 7,154 7,671 -2.2% 3.3x 9x .9x -7% <1% - / -
44 * State Street STT 64.95 29,622 n/m -2.2% n/m 12x 2.5x n/m 1% 22 / 13
45 * Seacor Holdings CKH 79.11 1,591 1,929 -2.1% 1.4x 16x 1.3x -21% 4% 11 / 6
Company website SEC Y! Proxy Y!

* New additions are highlighted.
Criteria: MV < 2 * BV Next FY P/E < 12 Debt/equity < 0.4 MV > $100mn Q-Q shares <0


Profitable Dividend Payors with Decent Balance Sheets
Dividend-paying companies with no net debt and EPS estimates in excess of 75% of the indicated annual dividend

Move To
Dividend Yield Est. P/E
Price to
Insiders

Price
52-Week
MV EV Last 12 Annual This Next
Tangible
% Buys/
Company Ticker ($)
Low High
($mn) ($mn) Months Indicated FY FY Book Own. Sells
1 Whiting USA Trust II WHZ 13.15 -3% 66% 242 242 25% 22% 4x 4x 1.5x <1% - / -
2 SandRidge Miss. SDT 13.43 -10% 119% 376 375 21% 18% 6x 6x 1.5x <1% - / -
3 Chesapeake Granite CHKR 14.89 -12% 58% 696 695 13% 17% 5x 5x 1.9x <1% - / -
4 Am. Capital Mortgage MTGE 18.59 -2% 44% 1,096 785 19% 17% 6x 6x .8x <1% 11 / 1
5 Sandridge Miss. II SDR 13.20 -20% 61% 656 654 14% 17% 6x 6x 1.5x <1% - / -
6 SandRidge Permian PER 14.73 -9% 47% 773 771 16% 16% 6x 5x 1.6x <1% - / -
7 Invesco Mortgage IVR 17.69 -2% 26% 2,392 2,253 15% 15% 7x 7x .9x <1% 5 / -
8 Cypress Sharpridge CYS 9.34 0% 61% 1,631 1,690 18% 15% 10x 8x .7x <1% 11 / 3
9 * VOC Energy Trust VOC 13.98 -16% 48% 238 238 14% 14% 7x 7x >9.9x <1% - / -
10 Ellington Financial EFC 22.52 -8% 20% 572 509 13% 14% 6x 7x 1.1x <1% 1 / 1
11 Banc Santander-Chile SAN 6.57 -26% 35% 70,841 n/m 12% 12% 9x 10x 1.9x <1% - / -
12 PennyMac Mortgage PMT 20.09 -4% 44% 1,185 n/m 11% 11% 6x 6x 1.0x 2% 17 / 9
13 Apollo Commercial RE ARI 16.22 -7% 13% 598 n/m 10% 10% 11x 10x .9x <1% 5 / 1
14 Enduro Royalty NDRO 16.13 -6% 22% 532 532 3% 9% 11x 9x .9x <1% - / -
15 Australia and NZ ANZBY 25.34 -16% 31% 69,165 n/m 6% 9% 11x 11x 1.9x <1% - / -
16 CVR Partners UAN 22.51 -2% 33% 1,645 1,617 7% 8% 11x 14x 3.8x <1% 6 / 3
17 NY Community Banc. NYCB 13.63 -12% 10% 6,009 n/m 7% 7% 13x 14x 2.0x 2% 16 / 4
18 Westpac Banking WBK 127.90 -20% 37% 79,118 n/m 6% 7% 12x 12x 2.5x <1% - / -
19 Natl Australia Bank NABZY 26.65 -14% 33% 62,443 n/m 6% 7% 11x 11x 1.6x <1% - / -
20 KKR & Co. KKR 18.70 -35% 16% 12,883 n/m 7% 7% 7x 8x 6.9x <1% 5 / 4
21 First Financial Banc FFBC 14.70 -6% 22% 850 n/m 8% 7% 14x 14x 1.4x 1% 22 / 22
22 Banco Argentaria BBVA 8.34 -36% 27% 46,384 n/m 3% 6% 9x 8x 1.0x <1% - / -
23 CVR Energy CVI 49.22 -50% 47% 4,274 3,910 2% 6% 9x 11x 3.1x <1% 7 / 6
24 Chunghwa Telecom CHT 31.04 -6% 6% 24,433 23,091 6% 6% 17x 19x 2.0x <1% - / -
25 Mercury General MCY 42.48 -15% 11% 2,333 n/m 6% 6% 17x 16x 1.3x <1% 4 / 4
26 IAMGOLD IAG 4.36 -2% 287% 1,653 1,530 6% 6% 8x 7x .5x <1% - / -
27 Sumitomo Mitsui SMFG 8.87 -37% 12% 62,404 n/m 2% 6% 8x 11x 1.3x <1% - / -
28 CTC Media CTCM 11.90 -40% 13% 1,882 1,744 5% 5% 12x 11x 5.3x <1% - / -
29 Citizens & Northern CZNC 19.25 -9% 8% 237 n/m 5% 5% 12x 12x 1.4x 2% 19 / 1
30 Garmin GRMN 34.69 -6% 25% 7,218 5,979 5% 5% 15x 15x 2.1x <1% 5 / 7
31 GFI Group GFIG 3.91 -39% 14% 470 n/m 4% 5% 18x 11x 4.2x 41% 10 / 8
32 Bank of Montreal BMO 56.74 -7% 14% 36,779 n/m 5% 5% 10x 9x 1.7x <1% - / -
33 * James Hardie JHX 42.00 -12% 29% 3,672 3,519 2% 5% 20x 15x >9.9x <1% - / -
34 * Himax Tech HIMX 5.06 -71% 62% 858 792 2% 5% 12x 8x 2.2x <1% - / -
35 Safety Insurance SAFT 49.02 -19% 11% 757 n/m 5% 5% 15x 15x 1.1x 6% 11 / 9
36 World Wrestling Ent. WWE 9.84 -24% 3% 736 604 5% 5% 28x 22x 2.7x 3% 15 / 4
37 TrustCo Bank Corp NY TRST 5.35 -6% 12% 504 n/m 5% 5% 13x 12x 1.4x 1% 5 / 1
38 Sun Life Financial SLF 28.94 -32% 5% 17,414 n/m 5% 5% 12x 11x 1.8x <1% - / -
39 * Nevsun Resources NSU 2.92 -8% 71% 592 257 5% 5% 10x 4x .9x <1% - / -
40 NTT DoCoMo DCM 15.02 -8% 16% 65,652 62,789 4% 5% 12x 11x 1.4x <1% - / -
41 Calamos Asset Mgmt CLMS 10.51 -12% 17% 215 n/m 4% 5% 17x 17x 1.1x 3% 10 / 4
42 American Software AMSWA 8.44 -15% 7% 230 178 4% 5% 21x 16x 4.0x 1% 4 / 3
43 AXA AXAHY 19.67 -46% 10% 46,715 n/m 5% 5% 8x 7x 1.1x <1% - / -
44 United Bankshares UBSI 26.30 -14% 4% 1,324 n/m 5% 5% 15x 14x 2.2x 3% 9 / -
45 PetMed Express PETS 12.86 -29% 13% 259 225 12% 5% 15x 14x 4.1x 4% 1 / 2

* New additions are highlighted. Criteria: Positive net cash Positive EPS for this/next FY MV > $100 million China RTOs excl.


Deep Value: Lots of Revenue, Low Enterprise Value
Companies that trade at low multiples of net revenue

Move To
Est. P/E
Annual Price to
Insiders
Price 52-Week
MV EV EV/ This Next
Dividend Tangible
% Buys/
Company Ticker ($)
Low High
($mn) ($mn) Sales FY FY Yield Book Own. Sells
1 Tech Data TECD 46.97 -10% 16% 1,774 1,900 .07x 9x 8x - .9x 2% 8 / 10
2 World Fuel Services INT 39.31 -14% 15% 2,855 2,972 .07x 14x 12x .4% 3.3x 3% 10 / 7
3 Core-Mark CORE 63.75 -37% 1% 732 767 .09x 16x 14x 1.2% 2.0x 3% 16 / 10
4 Ingram Micro IM 18.63 -23% 8% 2,839 3,478 .09x 9x 8x - 1.0x 1% 23 / 16
5 Kelly Services KELYA 17.44 -35% 9% 649 637 .12x 12x 11x 1.1% 1.0x 12% 9 / 3
6 Insight Enterprises NSIT 17.56 -19% 22% 764 673 .13x 9x 8x - 1.2x 1% 16 / 13
7 * PBF Energy PBF 24.84 -2% 71% 2,399 2,723 .13x 6x 5x 4.8% 5.7x <1% 5 / 3
8 Tellabs TLAB 2.01 -5% 93% 713 141 .14x n/m 38x 4.0% .8x <1% 18 / 7
9 * CST Brands CST 32.32 -16% 5% 1,990 1,924 .15x 15x 14x - 1.5x 25% 14 / 1
10 Office Depot ODP 3.98 -62% 53% 1,139 1,629 .15x >99x 45x - 2.1x 2% 16 / 8
11 AmerisourceBergen ABC 54.34 -32% 5% 12,548 12,597 .16x 18x 15x 1.5% n/m <1% 5 / 8
12 SYNNEX SNX 42.11 -27% 5% 1,571 1,621 .16x 11x 10x - 1.4x 2% 13 / 6
13 Celestica CLS 9.13 -27% 9% 1,504 993 .16x - - - 1.2x <1% - / -
14 WellCare WCG 53.11 -16% 29% 2,308 1,286 .16x 11x 10x - 2.2x <1% 15 / 11
15 Delek US Holdings DK 29.16 -44% 42% 1,747 1,504 .17x 7x 8x 2.1% 2.1x 1% 9 / 10
16 Alon USA Energy ALJ 15.68 -51% 35% 983 1,352 .17x 8x 11x 1.5% 2.0x 61% 11 / 6
17 Cardinal Health CAH 47.23 -22% 4% 16,144 17,999 .18x 13x 13x 2.6% >9.9x <1% 9 / 9
18 Valero Energy VLO 35.39 -41% 26% 19,301 24,313 .18x 7x 6x 2.3% 1.1x <1% 16 / 12
19 Barnes & Noble BKS 18.97 -41% 25% 1,121 1,228 .18x n/m n/m - n/m 23% 14 / 11
20 Bunge BG 70.19 -17% 15% 10,323 11,495 .18x 10x 9x 1.7% 1.1x <1% 19 / 9
21 Susser Petroleum SUSP 28.55 -21% 17% 625 797 .19x 17x 16x 6.1% >9.9x 3% 3 / -
22 * hhgregg HGG 16.26 -64% 9% 512 463 .19x 20x 18x - 1.5x 9% 5 / 5
23 OfficeMax OMX 10.40 -60% 43% 905 1,325 .19x 18x 15x .8% .9x 2% 12 / 10
24 Sears Holdings SHLD 44.01 -13% 56% 4,683 7,967 .20x n/m n/m - n/m 24% 2 / 4
25 Tesoro TSO 54.13 -57% 21% 7,352 6,970 .21x 9x 8x 1.5% 1.7x <1% 5 / 10
26 Manpower MAN 54.84 -44% 8% 4,230 4,398 .22x 16x 14x 1.7% 3.7x <1% 16 / 12
27 Flextronics FLEX 7.45 -27% 6% 4,638 5,128 .22x 9x 7x - 2.4x <1% 7 / 6
28 Phillips 66 PSX 59.25 -47% 19% 36,690 38,908 .22x 7x 8x 2.1% 2.1x <1% 11 / 4
29 McKesson MCK 110.97 -24% 8% 25,147 27,564 .23x 14x 12x .7% n/m <1% 10 / 10
30 Nokia NOK 3.93 -59% 25% 14,936 8,519 .23x >99x 28x - 4.8x <1% - / -
31 Avnet AVT 33.05 -23% 12% 4,530 5,788 .23x 10x 8x - 1.7x <1% 12 / 10
32 Best Buy BBY 26.77 -58% 6% 9,098 9,876 .23x 12x 11x 2.5% 4.1x 1% 10 / 9
33 Insperity NSP 30.74 -22% 11% 785 506 .23x 20x 17x 2.2% 3.6x 3% 12 / 6
34 Susser Holdings SUSS 49.12 -33% 16% 1,048 1,388 .24x 23x 17x - >9.9x 3% 10 / 2
35 Owens & Minor OMI 33.71 -20% 5% 2,135 2,130 .24x 18x 16x 2.8% 3.2x 1% 17 / 15
36 Nortel Inversora NTL 15.15 -40% 25% 992 992 .24x - - .3% 1.0x <1% - / -
37 * Bridgepoint Edu. BPI 12.07 -33% 84% 653 225 .24x 12x 22x - 1.3x <1% - / -
38 Centene CNC 50.08 -42% 5% 2,725 2,385 .25x 19x 14x - 3.8x 5% 11 / 11
39 China Yuchai CYD 17.83 -32% 4% 664 578 .25x - - 2.2% .8x <1% - / -
40 Supervalu SVU 5.99 -72% 19% 1,544 4,361 .26x 22x 14x - n/m 18% 4 / 7
41 Safeway SWY 22.82 -35% 25% 5,502 11,379 .26x 10x 9x 3.5% 2.2x 1% 13 / 13
42 Sony SNE 20.38 -53% 15% 20,828 18,018 .26x 45x 15x 1.4% 2.7x <1% - / -
43 * Marathon Petroleum MPC 72.81 -45% 27% 23,648 22,327 .26x 7x 7x 1.9% 2.1x <1% 22 / 13
44 * Sims Metal SMS 7.97 -9% 46% 1,638 1,915 .26x 26x 10x 2.6% .9x <1% - / -
45 Alcatel-Lucent ALU 1.94 -53% 4% 4,502 5,095 .27x n/m n/m - n/m <1% - / -

* New additions are highlighted. Criteria: EV to TTM revenue < 0.5x MV < revenue MV > $500 million China RTOs excluded


Deep Value: Neglected Gross Profiteers
Companies that trade at low multiples of gross profit

Move To
Enterprise Value / Est. P/E
Price/
Insiders
Price
52-Week
MV EV
Gross This Next
Tang. %
Buys/
Company Ticker ($)
Low High
($mn) ($mn) Sales Profit EBIT FY FY Book Own. Sells
1 RealNetworks RNWK 7.40 -9% 19% 262 4 .0x .0x n/m - - .8x <1% 5 / 5
2 TeleNav TNAV 5.13 -4% 64% 204 16 .1x .1x .9x 13x n/m 1.1x 6% 5 / 9
3 Stewart Information STC 25.90 -49% 16% 581 440 .2x .2x 4.0x 11x 9x 1.5x 3% 15 / 4
4 Five Star Quality FVE 5.17 -42% 33% 249 280 .2x .2x 13.8x 22x 16x .9x 1% 7 / -
5 TravelCenters TA 10.50 -60% 19% 310 368 .0x .3x 8.3x 9x 7x 1.0x 5% 5 / -
6 Tellabs TLAB 2.01 -5% 93% 713 141 .1x .4x n/m n/m 38x .8x <1% 18 / 7
7 Telecom Argentina TEO 13.62 -33% 24% 2,077 1,329 .3x .4x 1.7x 5x 5x 1.2x <1% - / -
8 RadioShack RSH 3.17 -40% 36% 316 593 .1x .4x n/m n/m n/m .6x 2% 11 / 4
9 Kindred Healthcare KND 12.91 -32% 12% 698 2,244 .4x .4x 9.4x 10x 10x n/m 4% 22 / 14
10 Bridgepoint Edu. BPI 12.07 -33% 84% 653 225 .2x .4x 1.2x 12x 22x 1.3x <1% - / -
11 Blyth BTH 13.76 -8% 235% 220 320 .3x .4x 4.5x - - 6.0x 33% 9 / 2
12 Systemax SYX 9.40 -11% 38% 345 218 .1x .5x n/m - 8x .8x <1% 3 / -
13 American Equity AEL 16.01 -36% 4% 1,025 702 .4x .5x 2.1x 8x 7x .6x 4% 17 / 7
14 ArcelorMittal MT 11.53 -3% 56% 19,242 37,244 .5x .5x 15.5x 32x 9x .5x <1% - / -
15 Office Depot ODP 3.98 -62% 53% 1,139 1,629 .2x .5x 8.0x >99x 45x 2.1x 2% 16 / 8
16 Avid Technology AVID 6.30 -7% 59% 245 174 .3x .5x n/m n/m 22x 2.4x 1% 4 / 6
17 Heidrick & Struggles HSII 16.76 -34% 10% 303 257 .6x .6x 14.9x 38x 23x 3.2x 1% 8 / 2
18 * AEGON AEG 6.69 -40% 6% 14,073 18,285 .3x .6x 4.0x 9x 8x .7x <1% - / -
19 Apollo Group APOL 19.24 -17% 99% 2,167 1,405 .4x .6x 2.2x 7x 9x 2.7x 3% 2 / 5
20 Natures Sunshine NATR 16.31 -21% 13% 259 179 .5x .6x 5.6x 12x 11x 2.2x <1% 5 / -
21 First American FAF 21.33 -24% 28% 2,308 1,810 .4x .6x 3.7x 10x 11x 1.6x 2% 15 / 6
22 Citi Trends CTRN 14.31 -32% 15% 221 141 .2x .6x n/m n/m 39x 1.1x 4% 10 / 6
23 hhgregg HGG 16.26 -64% 9% 512 463 .2x .6x 10.5x 20x 18x 1.5x 9% 5 / 5
24 Barnes & Noble BKS 18.97 -41% 25% 1,121 1,228 .2x .7x n/m n/m n/m n/m 23% 14 / 11
25 ITT Educational ESI 23.54 -50% 180% 550 490 .4x .7x 1.7x 6x 9x 3.5x 2% 16 / 7
26 Cbeyond CBEY 8.00 -26% 27% 243 230 .5x .7x 32.9x n/m n/m 1.6x 5% 13 / 7
27 Kelly Services KELYA 17.44 -35% 9% 649 637 .1x .7x 8.9x 12x 11x 1.0x 12% 9 / 3
28 * Pacific Sunwear PSUN 2.96 -54% 22% 203 265 .3x .7x 2.0x n/m n/m 5.0x 3% 6 / 7
29 Steel Partners SPLP 13.57 -25% 5% 406 185 .2x .7x 2.7x - - 1.2x <1% 5 / -
30 Sony SNE 20.38 -53% 15% 20,828 18,018 .3x .7x 8.0x 45x 15x 2.7x <1% - / -
31 Zale ZLC 8.56 -72% 15% 278 719 .4x .7x 24.0x 50x 22x 2.8x 10% 2 / 3
32 American Greetings AM 18.38 -32% 1% 583 784 .4x .7x 7.5x 10x - .9x 2% 15 / 10
33 Amedisys AMED 12.76 -31% 25% 402 473 .3x .7x 11.4x 26x 24x 2.0x 2% 8 / 6
34 * OfficeMax OMX 10.40 -60% 43% 905 1,325 .2x .8x 13.2x 18x 15x .9x 2% 12 / 10
35 Vanguard Health VHS 12.37 -38% 43% 963 3,435 .6x .8x 11.5x 16x 15x n/m <1% - / 2
36 * Nevsun Resources NSU 2.92 -8% 71% 592 257 .5x .8x .8x 10x 4x .9x <1% - / -
37 Nokia NOK 3.93 -59% 25% 14,936 8,519 .2x .8x n/m >99x 28x 4.8x <1% - / -
38 * Korn/Ferry KFY 17.54 -28% 10% 854 610 .7x .8x 9.1x 13x 12x 2.4x <1% 1 / 3
39 * Sears Holdings SHLD 44.01 -13% 56% 4,683 7,967 .2x .8x n/m n/m n/m n/m 24% 2 / 4
40 Humana HUM 84.91 -29% 1% 13,374 6,733 .2x .8x 2.8x 10x 10x 2.8x <1% 10 / 11
41 Gordmans Stores GMAN 13.17 -16% 60% 256 206 .3x .8x 6.8x 16x 12x 2.9x <1% 1 / -
42 Unisys UIS 20.31 -27% 22% 896 728 .2x .8x 2.6x 12x 7x n/m 1% 20 / 12
43 SkyWest SKYW 13.61 -54% 20% 706 1,705 .5x .8x 10.6x 11x 9x .5x 2% 11 / 5
44 Ladenburg Thalmann LTS 1.70 -33% 2% 312 473 .7x .8x 23.4x n/m n/m n/m 1% 8 / -
45 * US Airways LCC 16.34 -40% 21% 2,676 5,042 .4x .8x 5.2x 6x 5x 8.7x 1% 8 / 6

* New additions are highlighted. Criteria: EV < TTM gross profit MV < 2x gross profit MV > $200 million China RTOs excluded


Activist Targets: Potential Sales, Liquidations or Recaps
Companies that may unlock value through a corporate event

Move To Price to Next
Insiders
Price
52-Week
MV EV Tangible
Net Cash NCAV EV/
FY
% Buys/
Company Ticker ($)
Low High
($mn) ($mn) Book (% of MV) (% of MV) Sales P/E Own. Sells
1 Trans World TWMC 4.92 -40% 0% 163 54 .9x 67% 104% .1x - 45% 5 / 4
2 Asanko Gold AKG 2.10 -6% 109% 171 (26) .7x 115% 104% n/m - <1% - / -
3 PennyMac Mortgage PMT 20.09 -4% 44% 1,185 (1,550) 1.0x 231% 103% n/m 6x 2% 17 / 9
4 Xyratex XRTX 10.45 -33% 32% 288 171 .8x 41% 103% .1x 48x <1% - / -
5 Richardson Electron. RELL 11.49 -8% 12% 173 32 .9x 81% 101% .2x - <1% - / -
6 STEC STEC 3.59 -8% 134% 168 35 .9x 79% 95% .3x n/m <1% - / -
7 Systemax SYX 9.40 -11% 38% 345 218 .8x 37% 95% .1x 8x <1% 3 / -
8 AVEO Pharma AVEO 2.58 -13% 446% 134 (32) .9x 124% 93% n/m n/m 2% 13 / 7
9 Imation IMN 4.19 -21% 45% 174 96 .7x 45% 89% .1x 16x 4% 12 / 6
10 EXFO Electro-Optical EXFO 4.10 -3% 45% 117 61 .6x 48% 89% .3x - <1% - / -
11 Westell Technologies WSTL 2.37 -27% 6% 140 27 1.1x 80% 87% .7x 28x 4% 9 / 5
12 RealNetworks RNWK 7.40 -9% 19% 262 4 .8x 98% 85% .0x - <1% 5 / 5
13 Tellabs TLAB 2.01 -5% 93% 713 141 .8x 80% 84% .1x 38x <1% 18 / 7
14 TeleNav TNAV 5.13 -4% 64% 204 16 1.1x 92% 83% .1x n/m 6% 5 / 9
15 QLT QLTI 8.33 -24% 9% 423 125 1.1x 71% 81% n/m - <1% 3 / -
16 STR Holdings STRI 2.55 -29% 89% 106 28 .9x 74% 80% .4x n/m 1% 7 / -
17 Benchmark Electron. BHE 19.92 -37% 2% 1,083 677 1.0x 38% 79% .3x 15x <1% 10 / 5
18 Rigel Pharma RIGL 3.75 -11% 205% 327 54 1.2x 83% 79% 36.2x n/m <1% 1 / -
19 West Marine WMAR 11.08 -16% 19% 268 245 1.0x 8% 76% .4x 12x 21% 4 / 5
20 ModusLink MLNK 2.89 -27% 37% 149 78 .9x 48% 74% .1x - 1% 11 / 1
21 Aviat Networks AVNW 2.82 -28% 38% 173 90 1.1x 48% 73% .2x 12x <1% 7 / -
22 Hurco HURC 27.10 -29% 13% 175 135 1.2x 23% 72% .7x 11x <1% 7 / -
23 Symmetricom SYMM 4.51 -4% 57% 185 115 1.0x 38% 72% .5x 16x 1% 10 / 5
24 Bel Fuse BELFA 13.37 -5% 49% 156 103 .9x 34% 72% .4x - <1% - / -
25 CSS Industries CSS 25.33 -29% 24% 240 153 1.2x 36% 71% .4x - 1% 4 / 4
26 Axcelis Technologies ACLS 1.70 -58% 9% 184 142 1.0x 23% 71% .7x - <1% 2 / 4
27 Silver Standard SSRI 6.33 -3% 167% 503 187 .4x 63% 69% .7x n/m <1% - / -
28 Kulicke and Soffa KLIC 10.88 -26% 19% 818 320 1.4x 61% 69% .4x 7x <1% 8 / 7
29 Orbotech ORBK 12.11 -47% 6% 526 335 1.2x 36% 68% .9x 16x <1% - / -
30 Enstar Group ESGR 127.58 -29% 9% 2,121 (3,759) 1.4x 277% 68% n/m 11x <1% - / 2
31 * Cutera CUTR 8.64 -27% 64% 127 41 1.5x 67% 67% .5x 45x 5% 3 / 4
32 Aware AWRE 5.06 -11% 36% 114 41 1.3x 64% 67% 2.0x - 2% 1 / -
33 * Targacept TRGT 4.60 -16% 25% 155 47 .9x 70% 66% 1.2x n/m 3% 5 / -
34 AVX Corp. AVX 11.85 -23% 4% 1,998 951 1.2x 52% 66% .7x 14x <1% 9 / 5
35 Alpha & Omega Semi AOSL 7.64 -13% 37% 195 110 .7x 43% 66% .3x - 18% 6 / 6
36 Skullcandy SKUL 5.37 -11% 212% 149 115 1.4x 23% 65% .4x 18x 3% 6 / 1
37 Miller Industries MLR 15.60 -10% 10% 175 128 1.2x 27% 65% .4x - 1% 5 / -
38 Intevac IVAC 5.10 -20% 57% 121 54 .9x 56% 64% .7x n/m <1% 5 / 4
39 Flexsteel Industries FLXS 23.37 -21% 12% 166 154 1.1x 7% 61% .4x - 6% 4 / 3
40 Pericom Semi PSEM 7.18 -15% 28% 165 72 .8x 56% 60% .5x 30x 4% 5 / 3
41 Rubicon Technology RBCN 7.69 -37% 50% 174 138 .8x 21% 60% 2.1x >99x 22% 5 / 2
42 Kimball KBALB 10.16 -26% 30% 304 215 .8x 29% 59% .2x 18x <1% 1 / 1
43 Oplink Comms OPLK 18.35 -35% 2% 349 176 1.3x 50% 59% 1.0x 19x <1% - / 1
44 * Electro Scientific ESIO 10.78 -14% 29% 321 176 1.3x 45% 59% .8x 13x 4% 12 / 5
45 * Key Tronic KTCC 10.85 -34% 13% 114 111 1.2x 2% 59% .3x - <1% 1 / -

* New additions are highlighted. Criteria: TBV > 50% of MV ST assets - liabilities >50% of MV MV > $100mn China RTOs excl.



About THE MANUAL OF I DEAS

2008-13 by BeyondProxy LLC. All rights reserved.
All content is protected by U.S. and international
copyright laws and is the property of BeyondProxy and
any third-party providers of such content. The U.S.
Copyright Act imposes liability of up to $150,000 for
each act of willful infringement of a copyright.

THE MANUAL OF IDEAS is published monthly by
BeyondProxy. Subscribers may download content to their
computer and store and print materials for their individual
use only. Any other reproduction, transmission, display or
editing of the content by any means, mechanical or
electronic, without the prior written permission of
BeyondProxy is strictly prohibited.

Terms of use: Use of this newsletter and its content is
governed by the Terms of Use described in detail at
www.manualofideas.com. See a summary of key terms
below.

Contact information: For all customer service,
subscription or other inquiries, please visit
www.manualofideas.com, or contact us at BeyondProxy,
427 N Tatnall St #27878, Wilmington, DE 19801-2230;
telephone: 415-412-8059.

Editor-in-chief: J ohn Mihaljevic, CFA.

Annual subscription price: varies by type of
subscription; visit www.manualofideas.com

To subscribe, visit www.manualofideas.com

General Publi cation Information and Terms of
Use

THE MANUAL OF IDEAS is published by BeyondProxy. Use
of this newsletter and its content is governed by the Terms
of Use described in detail at
www.manualofideas.com/terms.html. For your
convenience, a summary of certain key policies,
disclosures and disclaimers is reproduced below. This
summary is meant in no way to limit or otherwise
circumscribe the full scope and effect of the complete
Terms of Use.

No Investment Advice
This newsletter is not an offer to sell or the solicitation of
an offer to buy any security in any jurisdiction where such
an offer or solicitation would be illegal. This newsletter is
distributed for informational purposes only and should not
be construed as investment advice or a recommendation
to sell or buy any security or other investment, or
undertake any investment strategy. It does not constitute a
general or personal recommendation or take into account
the particular investment objectives, financial situations,
or needs of individual investors. The price and value of
securities referred to in this newsletter will fluctuate. Past
performance is not a guide to future performance, future
returns are not guaranteed, and a loss of all of the original
capital invested in a security discussed in this newsletter
may occur. Certain transactions, including those involving
futures, options, and other derivatives, give rise to
substantial risk and are not suitable for all investors.

Disclaimers
There are no warranties, expressed or implied, as to the
accuracy, completeness, or results obtained from any
information set forth in this newsletter. BeyondProxy will
not be liable to you or anyone else for any loss or injury
resulting directly or indirectly from the use of the
information contained in this newsletter, caused in whole
or in part by its negligence in compiling, interpreting,
reporting or delivering the content in this newsletter.

Related Persons
BeyondProxys officers, directors, employees and/or
principals (collectively Related Persons) may have
positions in and may, from time to time, make purchases
or sales of the securities or other investments discussed or
evaluated in this newsletter.

J ohn Mihaljevic, Chairman of BeyondProxy, is also a
principal of Mihaljevic Capital Management LLC
(MCM), which serves as the general partner of a private
investment partnership. MCM may purchase or sell
securities and financial instruments discussed in this
newsletter on behalf of the investment partnership or
other accounts it manages.

It is the policy of MCM and all Related Persons to allow a
full trading day to elapse after the publication of this
newsletter before purchases or sales of any securities or
financial instruments discussed herein are made.

Compensation
BeyondProxy receives compensation in connection with
the publication of this newsletter only in the form of
subscription fees charged to subscribers and reproduction
or re-dissemination fees charged to subscribers or others
interested in the newsletter content.

The Manual of Ideas research team is gratified to have won high praise for our investment idea
generation process and analytical work.

I highly recommend MOI the thoroughness of the product coupled with the quality
of the content makes it an invaluable tool for the serious investor.
TIM DAVIS, MANAGING DIRECTOR, BLUESTEM ASSET MANAGEMENT

Wonderful.
THOMAS S. GAYNER, CHIEF INVESTMENT OFFICER, MARKEL CORPORATION

We do similar work ourselves.
GLENN GREENBERG, MANAGING DIRECTOR, BRAVE WARRIOR CAPITAL

The Manual of Ideas is a tremendous effort and very well put together.
MOHNISH PABRAI, MANAGING PARTNER, PABRAI INVESTMENT FUNDS

Outstanding.
JONATHAN HELLER, CFA, EDITOR, CHEAP STOCKS

Very useful.
MURAT OZBAYDAR, SOROS FUND MANAGEMENT

Very impressive.
SHAI DARDASHTI, MANAGING PARTNER, DARDASHTI CAPITAL MANAGEMENT

The best institutional-quality equity research to come along in a long time.
PAVEL SAVOR, ASSISTANT PROFESSOR OF FINANCE, THE WHARTON SCHOOL

An extremely valuable resource.
GUY SPIER, AQUAMARINE CAPITAL MANAGEMENT

You are quickly becoming one of my must-read sources.
CORY JANSSEN, FOUNDER, INVESTOPEDIA.COM

FIND OUT WHAT THE BUZZ IS ABOUT.

WWW.MANUALOFIDEAS.COM

Value-Oriented Equity Investment Ideas For Sophisticated Investors

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Value-Oriented Equity Investment Ideas For Sophisticated Investors

Uploaded by

Copyright:

Available Formats

Value-oriented Equity Investment Ideas for Sophisticated Investors

A Monthl y Publication of BeyondProxy LLC Subscribe at manualofideas.com

You might also like