Superinvestor (2) Thomas Russo

Thomas Russo presenting his investment case - Weetabix

Thomas Russo Investing Rules

Thomas Russo was very early on investing not only in American headquartered businesses but as well in abroad companies. While he was studying Business & Law at Stanford, he was listening to a lesson from Warren Buffet in 1982! That was where his journey started and now his investment approached is build on some of Buffett's (or Grahams's) principles

His "Global Value" Equity Investing approach is as followed:

• Value Investing - 50  Cent Dollar Bills

• Capacity to Reinvest - Global brands, population growth, Reinvest the right amount

• Capacity to Suffer - Long-term over short-term, family-controlled, long runways

• Invest for Longterm - Concentrate, few great ideas - tax efficiency

• Ability to do nothing - Sit on your ass

The Weetabix(Uneatable British Sponge" as he calls it) investment goes under the "Capacity to Suffer" approach

• Familly-controlled company
• Incapacity to reinvest
• Lack of share repurchase

Let's start with the EBITDA (Russo) Valuation Model, i.e. EBITDA Multiple valuation model!

EBITDA, is Earnings Before Interest, Taxes, Depreciation & Amortization is used as an alternative to operating earnings (EBIT - my favorite) and net income. According to Buffett and Munger, they do dislike this measure, as it takes out the Capex like the fixed assets, e.g. property, plant, etc.

The EBITDA multiple, in this case 8x, puts a value on the Enterprise Operations of the company and you hear it several times in Russo presentations! 

So here is the deal - on the far right, in the row Actual market value/share, GBP 5.95, was less than the half of the intrinsic value - if we use 8 time EBITDA and then netted the debt from the cash we got an Implied intrinsic value/share of GBP 13.09!!!

It was a family-controlled company, they had the ability to say no if somebody wanted to buy them and they were pressured several times to make acquisitions, they knew the existing business and they innovated instead around the existing business!

The upside was, that cash just grew all the time, and it grew from GBP 7.1 million to GBP 105.3 million, a Compound Annual Growth Rate (CAGR) of over 21%!

The EBITDA grew fast from 1989 to 1998-1999 (CAGR > 14%) where it flattened out. During that timeframe, the share price went up 5 times and during the Internet bubble it went down again - see graph below, which shows per share Intrinsic Value and market share price 

Even though the share price went down, the intrinsic value continued to develop for the better and they had mountains of cash in the firm.

According to Russo, it was very hard, went the stock went down and owning a company with an unbeatable product to keep on - all credibility on Wallstreet went down!

If we go back again to the Valuation model table above on Weetabix and check the row Number of  A equivalent shares. The business was thriving but the family did not give away stock option and the number of share outstanding was 11.876 millions - which is a big plus!
On the other hand, according to Russo, unfortunately the thing they did not do was to take the GBP 105 million of cash to buy-back shares at the end - according to Russo, this could end up that the share price would have been doubled i.e. around GBP 100!

What a great investment example - thank you Thomas Russo!