How Ted Weschler & Todd Combs Returned More Than 26% In 2012

The year 2012 showed us that Warren Buffett is as excellent at picking people as he is at picking stocks. In the 2013 annual letter to shareholders, one piece of good news shared by Warren Buffett was the overall performance of his new two managers, Ted Weschler and Todd Combs. Both managers were able to outperform the S&P 500 by margins in the double digits, said Buffett – which tells us that the 16% return made by the S&P in 2012 was topped by at least 26%. They both managed to beat their boss as well.

Now that they did such a fantastic job in their first year with Berkshire Hathaway, Buffett increased the amount of assets they manage to the tune of $5 billion each. And for the very first time, one of their holdings – DirecTV – showed up on the official list of common stock owned by Berkshire Hathaway, and it is a holding whose market value exceeds $1 billion. The combined holding of both men was worth $1.154 billion at the end of 2012, which you can compare to the original value of $1.057 billion.

Both of these managers were able to achieve such large returns due to the way their top stock holdings performed: DaVita HealthCare Partners, DirecTV and Viacom Inc.

DaVita HealthCare Partners

DaVita is continually in the news for Berkshire Hathaway’s constantly expanding holding of this company, which as of the last purchase on February 27, has ballooned to 15.52% of its outstanding shares. They opened this position in the fourth quarter of 2011, and Berkshire has increased this holding 10 times since November 26, 2012.

The market value of the company has risen by over 40% over the last year.

DaVita is a kidney patient care and kidney dialysis company, and they have grown quite rapidly over recent years. Over the past five years, the average annual growth rates for revenue are 10%, EBITDA is 10.4%, for free cash flow they are 39.6% and book value is 7.2%.

The company reported very strong earnings in the fourth quarter and the year-end of 2012 results on a year-over-year basis. The company’s adjusted net income was $173.3 million, which works out to $1.68 per share, during the fourth quarter, and $612.4 million, and $6.25 per share throughout 2012. You can compare these results to $148.1 million, or $1.56 per diluted share, and $492.4 million, or $5.11 per share, for the quarterly figure and year-end figure that ended December 31, 2011.

Each of these fourth-quarter results have excluded the expenses in relation to the acquisition of HealthCare Partners Holdings LLC, one of the largest national operators of physician networks and medical groups, which they obtained in November of 2012.

The total fourth-quarter revenue was $2.48 billion as opposed to $1.79 billion comparatively and $8.19 billion for the full year in 2012, as opposed to $6.37 billion in 2011 comparatively.

The company purchased 22 dialysis centers in the United States of America, and opened up 22 more in the United States of America during the fourth quarter of 2012 alone, while also purchasing 10 dialysis centers and opening up two more outside of the United States.

At Peninsula Capital, Ted Weschler’s previous company, he had purchased between 20% and 40% of his entire portfolio in DaVita between the years 2001 and 2011.

DirecTV

Berkshire first started picking up shares of this company during the third quarter of 2011, and continued to do so throughout the fourth quarter of 2012. Berkshire now owns over 34 million shares of DirecTV, and currently has a 5.6% ownership of the entire company. Prior to becoming a member of Berkshire Hathaway, Ted Weschler owned 18.45% of his total managed assets in this company. DirecTV’s stock has earned over 5% in the past year, and as of the time of this writing, the share price is $49.28.

DirecTV is a company that is growing rapidly, and they have particularly done so over the last five years. The average annual growth rate over the last five years is 27.7% in revenue, 28.7% in EBITDA, and their free cash flow has grown by 20.3%.

Throughout the fourth quarter, DirecTV increased their revenue by 8% to the tune of $8.05 billion, and the net income increased to $942 million. Compare that to $718 million in the fourth quarter of 2011. For the full year statistics, they saw an increase in revenue to $29.7 billion from $27.23 billion during 2011. The company net income increased to $2.95 billion, from the 2011 amount of $2.61 billion.

The increase of 31% in the company’s net income during the fourth quarter was a primary result of higher operating profit, and 18% pretax gain for selling the Game Show Network, plus a lower effective tax rate. The 9% increase in the full year’s revenue was largely in part due to higher subscriber growth at DTVLA and DirecTV in the United States, plus higher ARPU at DirecTV US.

The revenue from the companies DTVLA increased by 23% to the amount of $6.24 billion specifically because of strong subscriber growth of 26%, which was a four-year record of 4.42 million, and they saw very strong growth in Argentina, Brazil, Colombia and Venezuela.

GuruFocus points out that DirecTV has been issuing new debt over the last three years, in the amount of $8.8 billion, although the debt level is very acceptable. The P/E ratio is 10.6, which is close to their ten-year low, and the P/S ratio is 1.05, which is also very close to their ten-year low.

Viacom Inc.

Berkshire Hathaway first started acquiring shares of Viacom during the first quarter of 2012, and currently owns around 7.6 million shares. They did not make any new purchases during the fourth quarter. The market price of Viacom gained about 23% over the past year. The company is currently trading at $63.70 at the time of this writing. The company recently surpassed its 52-week high of $60.84 over the last few days.

Viacom is a company focused on entertainment, and they have two main segments in which they operate – filmed entertainment and media networks – and they own such brands as MTV Films, Nickelodeon Movies, and Paramount Pictures just to name a few for you.

Over the last five years, Viacom has seen an average annual growth rate of 6.5% for revenue, EBITDA is 22.3%, free cash flow is 19% and the book value growth rate is 8.7%.

The company’s results in the fourth quarter saw a 16% decrease to $3.31 billion. This is primarily due to a loss of 37% of their filmed entertainment revenue through a mix of releases and inopportune timing. The net earnings increased from $212 million – $470 million.

During the fourth quarter, Viacom repurchased 13.3 million shares to the tune of $700 million in aggregate. They still have $3.85 billion remaining on the $10 billion stock repurchase program. The company has a dividend yield of 1.84%. Over the past three years, Viacom has issued $1.5 billion of new debt, although the overall debt level is currently acceptable. However, the operating margin of Viacom has been expanding.

One of Viacom’s measurements is very close to its ten-year high, and one recently surpassed it: the P/S ratio of 2.36 is near the ten-year high, and the current share price of $63.70 recently surpassed the 10 year high of $60.84 per share.

Some of Viacom’s upcoming film projects to potentially increase earnings and revenue include Star Trek Into Darkness, World War Z, Pain & Gain and G.I. Joe: Retaliation.

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