Post New

Berkshire has been a big buyer of alcoholic beverage company Constellation Brands. Its main product are Mexican beers like Corona and Modelo which contribute 80% of revenue. Wine and spirits contribute the remaining 20%.

Consumption and with that the profitability of beer companies have been on a multi-year decline.

THE 5-year average ROE for STZ is 8.2%, ROTC is 8.5%. For competitor BUD the numbers are in the 5 - 5.5% range.

Liquor companies like Diageo and Brown Forman have ROEs in the mid 30s.

Likewise non alcoholic beverage companies like Coke and Pepsi sport even higher returns on capital.

Projected 3-5 year EPS growth for STZ is only 2.4%, so that too doesn’t explain the attraction.

At a FWD PE of 15 and dividend yield of 2.2%, valuation is reasonable but not dirt cheap.

So what attracts Buffett (assuming it is his pick) to STZ? Is high return on equity or total capital not important to Buffett in selecting companies to buy?

My data is from Seeking Alpha.

" So what attracts Buffett (assuming it is his pick) to STZ? Is high return on equity or total capital not important to Buffett in selecting companies to buy?"

It's highly unlikely this is a Buffett purchase. Once again investor's MIGHT be getting conned into believing it is. It would take Buffett one minute to disclose HIS trades, but he prefers to give T and T the benefit of the Buffett bounce, which hasn't helped. The financial reporting on these trades is embarrassing, to be kind.

Technically, ROE doesn't really matter much. It's the return on incrementally allocated capital that matters. (the two correlate, and ROIIC is hard to estimate, explaining the use of ROE as a short hand)

But ROIIC doesn't matter for a firm that isn't allocating much new capital...maybe they view it as a cash cow paying out all earnings?

The only other explanations are that they expect better returns on assets in future, or it's so cheap it doesn't really have to have that great an economic profile.

Beats me.

Jim

Hi Jim,

I am surprised by your statement that ROE does not matter much. I have read many of your “mechanical investing” stock selection posts where you use a minimum ROE to filter for “high quality” stocks.

I know ROE can be very distorted after huge stock repurchases, as equity can even become negative. But surely a consistently low ROE can’t be good.

Another supposedly steady growing recession proof company, Becton Dickinson too sports single digit ROEs, unlike most medical device/ supplies company. And stock is at multi year lows - up only 22% in 10 years.

Thanks.

young people stops drinking wine, whiskey etc but will still drink beers? Beer is also fairly addictive to many people. Also, beer is cheap, and maybe recession-proof?

BD acquired Baxter back in 2016 (?) and that's pretty much ruined the company as they are now selling off their previously treasured biopharma business in order to be a medical/health company.

Not unlike the McDonnell Douglas/Boeing situation, BD is now controlled by Baxter people.

BD did not acquire Baxter. Baxter is still an independent company and is being sued by BD.

You are probably referring to C.R. Bard acquired in 2017.

It's the return on incrementally allocated capital that matters. (the two correlate, and ROIIC is hard to estimate, explaining the use of ROE as a short hand)

This one of the most astute observations for good investing. It also closely associates with evidence of the extent of an economic moat.

What matters, for a really good business, is not so much what past deployed equity can produce in current earnings (ROE) but whether you can take those earnings and continue to get a high return on them (RIIC).

A pure example of the converse, a high ROE without strong RIIC opportunity, is Buffett’s purchase of Seas Chocolate. It produced huge cash flows but it couldn’t be reinvested back at the same high rate of ROE. Their expansion attempts were geographically sensitive. Nevertheless such a business can be marvelous investment, even without the high RIIC opportunity, if the cash flow can be taken out and reallocated to another business at a higher return than the business producing those earnings can achieve incrementally. That is also exactly what Buffett did of course.

An example of companies with great RIIC includes firms that have powerful network effects such a Meta or Google. They can produce a new product (or feature) at very low cost, relatively for peanuts, and then apply that produce to their existing network to get a phenomenal return on the investment (such as the increased advertising revenue).

Brookfield Corporation alao had elevated ROIIC as they can adjust the asset class and geography to the higher return situation that happens to be available at the time (esp. where there is a dearth of capital), in which to direct new capital (being gushed out as present earnings). This form of high ROIIC relies on good capital allocation though, for which there are precious few managers who can do that well continuously. Thus my usual preference for business than inherently have a high ROIIC such as the the software firms with massive public reach.

- Manlobbi

Manlobbi posted:
"What matters, for a really good business, is not so much what past deployed equity can produce in current earnings (ROE) but whether you can take those earnings and continue to get a high return on them (RIIC).

A pure example of the converse, a high ROE without strong RIIC opportunity, is Buffett’s purchase of Seas Chocolate. It produced huge cash flows but it couldn’t be reinvested back at the same high rate of ROE. Their expansion attempts were geographically sensitive. Nevertheless such a business can be marvelous investment, even without the high RIIC opportunity, if the cash flow can be taken out and reallocated to another business at a higher return than the business producing those earnings can achieve incrementally. That is also exactly what Buffett did of course."


Amen, AMEN, AMEN!!!!
Thank you Manlobbi for these examples and explanations. It gets at the core reason why so many folks today are Berkshire millionaires. We own a small company and while it has been a good business now for going on five decades, unfortunately our business does not provide many opportunities for re-investing profits into high ROIC situations. Thus, we invest what we can to improve the business and invest the remainder in public companies demonstrating good capital allocation skills.

Note: there are pitifully few publicly traded companies with good capital allocation skills. Buffett's long-running philosophy of bringing divisional profits back to Omaha to invest in high ROE/high ROIC investments has been the key to why we Berkshire investors have done so well over the years. Too many companies throw away money on poorly timed business expansions, ill-advised acquisitions, repurchase of their company stock at high PE valuations, and inflated C-suite pay arrangements.

Uwharrie

“Too many companies throw away money on poorly timed business expansions, ill-advised acquisitions, repurchase of their company stock at high PE valuations, and inflated C-suite pay arrangements.”

Amen to your comments as well! Buffett and Berkshire are one of the case studies where the more I read and dig about its history and journey, the more I appreciate the brilliance and trailblazing nature of Buffett. The benefits of disciplined allocation, compounding Retained earnings, enormous growth of Negative cost float, building Long-tail float, ownership of investees within Insurance division, and acting with honesty and integrity not only because it’s the right thing to do but it makes for a great business with very high quality owners. Appreciate he made room for us less gifted folks to ride on he & Charlie’s rocket ship and enjoy the same returns with zero fees.

A pure example of the converse, a high ROE without strong RIIC opportunity, is Buffett’s purchase of Seas Chocolate. It produced huge cash flows but it couldn’t be reinvested back at the same high rate of ROE. Their expansion attempts were geographically sensitive. Nevertheless such a business can be marvelous investment, even without the high RIIC opportunity, if the cash flow can be taken out and reallocated to another business at a higher return than the business producing those earnings can achieve incrementally. That is also exactly what Buffett did of course.

This is an excellent observation @Manlobbi! See's in the hands of Buffett & Berkshire is worth a lot more than it is as a standalone company because Buffett could take all the cash See's produced & reinvest it elsewhere inside Berkshire. The same thing goes for a more recent acquisition of Berkshire, Allegheny. It is also worth more as a part of Berkshire than as an independent company for a similar reason.

And herein lies the problem with losing Warren and Charlie, they're irreplaceable😐

rnam: Jim, I am surprised by your statement that ROE does not matter much. I have read many of your “mechanical investing” stock selection posts where you use a minimum ROE to filter for “high quality” stocks.

I’m not Jim and I don’t pretend to be as knowable about investing but. . . .From running a large number of Machine Learning algorisms with different methods that measure different fundamental feature importances ROE always comes out as one of the top 7 or 8 factors if only looking to maximize 3 month gain. But it’s obvious that no one feature defines the whole investment opportunity and some gifted individuals like mungofitch and Manlobbi can solve the puzzle better than I.

algorisms ?? sorry >> algorithim

You are right. Thanks for the correction!

Post New

The Walt Disney Company FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.