Value-oriented Equity Investment Ideas for Sophisticated Investors

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

Investing In The Tradition of

Graham, Buffett, Klarman

BERKSHIRE
Year VIII, Volume V
May 2015

When asked how he became so

THE

HATHAWAY I
successful, Buffett answered:
“We read hundreds and hundreds
of annual reports every year.”

Top Ideas In This Report SSUE

General Motors
(NYSE: GM) ……………………… 42 ► 20 BRK Holdings Profiled by The Manual of Ideas Team
Lee Enterprises
(NYSE: LEE) ……………………... 54 ► Selection of Top Three Candidates for Investment
Suncor Energy ► William Green: Buffett’s Influence on Great Minds of Investing
(NYSE: SU) ……………………… 86
► Larry Cunningham: Shareholder Showdowns at Berkshire?
Also Inside
► Buffett & Munger Lessons, by Henrik Andersson, Jeff Auxier,
Editorial Commentary ………………. 3 Martin Conder, Jeremy Deal, Dominic Fisher, Tom Gayner, Daniel
William Green: Buffett’s Influence … 6 Gladiš, Arko Kadajane, Paul Lountzis, Allan Mecham, Jonathan
Berkshire: Member Learnings ……. 9
Mills, Philip Ordway, Dave Sather, Adrian Warner, Keith Weissman
Larry Cunningham: Activism ……….18
Ideas from Asian Investing Summit 21 ► 10 Essential Screens for Value Investors
20 Berkshire Holdings Analyzed …. 26
10 Essential Value Screens ……… 106
Berkshire Hathaway holdings analyzed in this issue include
About The Manual of Ideas Charter Communications (CHTR), Coca-Cola Co. (KO), Costco (COST),
General Electric (GE), General Motors (GM), Johnson & Johnson (JNJ),
Our goal is to bring you investment
ideas that are compelling on the Kraft (KRFT), Lee Enterprises (LEE), MasterCard (MA), Media General (MEG),
basis of value versus price. In our National-Oilwell Varco (NOV), Phillips 66 (PSX), Precision Castparts (PCP),
quest for value, we analyze the top
Procter & Gamble (PG), Sanofi-Aventis (SNY), Suncor Energy (SU),
holdings of top fund managers. We
also use a proprietary methodology UPS (UPS), USG (USG), Verizon (VZ), WABCO Holdings (WBC).
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
New Exclusive Content in MOI Members Area
investment management. We bring a (log in at manualofideas.com or email [email protected])
“buy side” mindset to the idea
generation process, cutting across
industries and market capitalization
ranges in our search for compelling  Three Idea Presentations from Asian Investing Summit 2015
equity investment opportunities.
 Lauren Templeton and Scott Phillips on Global Value Investing

 PREMIUM: Dave Sather on Investing in Community Banks

REPLAY at ValueConferences.com

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Table of Contents
EDITORIAL COMMENTARY ..........................................................................3
BUFFETT’S INFLUENCE ON THE GREAT MINDS OF INVESTING ............6
MEMBERS SHARE LESSONS FROM BUFFETT AND MUNGER................9
POST-BUFFETT BERKSHIRE: WILL ACTIVISM FLY? ............................. 18
HIGHLIGHTS FROM ASIAN INVESTING SUMMIT 2015 ........................... 21
PROFILING TWENTY HOLDINGS OF BERKSHIRE HATHAWAY ............ 26
CHARTER COMMUNICATIONS (CHTR) ..................................................................................... 26
COCA-COLA (KO).................................................................................................................. 30
COSTCO W HOLESALE (COST) ............................................................................................... 34
GENERAL ELECTRIC (GE) ...................................................................................................... 38
GENERAL MOTORS (GM) ....................................................................................................... 42
JOHNSON & JOHNSON (JNJ) .................................................................................................. 46
KRAFT FOODS (KRFT)........................................................................................................... 50
LEE ENTERPRISES (LEE) ....................................................................................................... 54
MASTERCARD (MA)............................................................................................................... 58
MEDIA GENERAL (MEG) ........................................................................................................ 62
NATIONAL OILWELL VARCO (NOV) ......................................................................................... 66
PHILLIPS 66 (PSX) ................................................................................................................ 70
PRECISION CASTPARTS (PCP) ............................................................................................... 74
PROCTER & GAMBLE (PG) ..................................................................................................... 78
SANOFI (SNY)....................................................................................................................... 82
SUNCOR ENERGY (SU) .......................................................................................................... 86
USG CORPORATION (USG) ................................................................................................... 90
UNITED PARCEL SERVICE (UPS) ............................................................................................ 94
VERIZON (VZ) ....................................................................................................................... 98
WABCO HOLDINGS (WBC) ................................................................................................... 102

TEN ESSENTIAL SCREENS FOR VALUE INVESTORS ......................... 106

“MAGIC FORMULA,” BASED ON TRAILING OPERATING INCOME ................................................. 106
“MAGIC FORMULA,” BASED ON THIS YEAR’S EPS ESTIMATES ................................................. 107
“MAGIC FORMULA,” BASED ON NEXT YEAR’S EPS ESTIMATES ................................................ 108
CONTRARIAN: BIGGEST YTD LOSERS (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
 Value-oriented Equity Investment Ideas for Sophisticated Investors

Editorial Commentary
The 50th anniversary of Buffett’s leadership at Berkshire is here—and what an
incredible five decades it has been! Many of us have not even been alive for this
entire period, let alone had the fortitude to join Buffett as shareholders early on. To
the “younger” generation, of which I am a self-declared member, even the 33-year
period in which Tom Russo has been a Berkshire shareholder seems incredibly long.
A large part of Buffett and Munger’s success, in addition to their obvious brilliance,
is quite simply endurance—the ability to stay focused, disciplined, and to keep doing
that at which one excels long after the financial reason for doing so has faded into
the background. No doubt that wealth and investment returns are irreplaceable
scorekeeping measures, but I would argue that a love of “the game” and a love of the
impact of investment success on the lives of fellow shareholders are what has kept
Buffett going. Each additional year of his leadership is truly a gift.
In this issue, in addition to an analysis of twenty holdings of Berkshire Hathaway,
we are pleased to bring you three exclusive “goodies”:
 Tom Gayner, Allan Mecham, and selected other MOI members share some
of the lessons they have learned from Buffett and Munger over the years.
 William Green, who so ably collaborated with Guy Spier on The Education
of a Value Investor and authored the forthcoming book, The Great Minds of
Investing, shares exclusive highlights from his interviews with investing
greats Russo, Hawkins, Greenblatt, Miller, and Pabrai.
 Larry Cunningham, author of such instant classics as The Essays of Warren
Buffett and Berkshire Beyond Buffett, opines on the scenario of activist
investors targeting post-Buffett Berkshire.

We highlight the following three investment ideas as worthy of closer consideration:

General Motors (NYSE: GM, $35 per share; MV $56 billion)

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0
May 11 May 12 May 13 May 14 May 15

GM has re-emerged as a credible competitor on the global auto scene in recent years,
with a much-improved balance sheet, a refreshed product portfolio, strong pipeline,
and a management team that appears focused on business execution as well as value-
enhancing capital allocation. While cyclicality and the intense competitiveness of the
auto industry remain legitimate concerns, we find GM shares too cheap to ignore at a
mid-teens forward EPS yield. We are not sure whether the attractive valuation or the
improved industry dynamics have attracted Berkshire, but we agree that GM offers
unusual value. Repurchases could help close the gap between price and value.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Lee Enterprises (NYSE: LEE, $3.30 per share; MV $200 million)

$50

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

Newspaper company Lee has been out of bankruptcy for three years, looking for
ways to leverage the large audiences it reaches via fifty daily newspapers in midsize
U.S. markets. The newspapers have circulation of 1.1 million daily and 1.4 million
on Sundays. Buffett’s interest in newspapers likely reflects an assessment that a
viable model exists for the industry, although the customer value proposition needs
to be vastly different than in the past. Lee could grow intrinsic value by becoming a
“champion” of the local communities in which it operates, reporting on the local
news rather than rehashing information available elsewhere.
Given the weak balance sheet, FCF generation and debt reduction are priorities. Here
the news is good: Lee continues to generate unlevered FCF of $150+ million
annually, amounting to roughly one-fifth of debt. This should enable management to
reduce debt and grow equity value. The company has prioritized deleveraging,
cutting debt from $1.7 billion in 2005 to $865 million in 2013 and $785 million in
2014. At an enterprise value of less than $1 billion, we find the equity market
quotation too low. The 15+% unlevered FCF yield is attractive in its own right. The
levered FCF yield on the equity recently amounted to roughly 40%, implying a
highly attractive risk-reward tradeoff given low near-term refinancing risk.

Suncor Energy (NYSE: SU, $31 per share; MV $45 billion)

$80

$70

$60

$50

$40

$30

$20

$10

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

Oil price weakness has created bargains in the oil and gas sector, and Suncor appears
to be one of them. The company is Canada’s largest integrated oil company, with
large oil sands reserves, refining operations, and smaller offshore reserves along
Canada’s East Coast and in the North Sea. As a heavily oil-weighted, cost-efficient
producer, Suncor generates strong cash flow, even in an environment of weak oil
prices. Suncor’s refining business enables the company to capture global-based
pricing for ~97% of production—unusual for an oil sands producer. If we adjust for
growth capex of $3.2 billion, Suncor generated FCF of roughly $5.8 billion in 2014,
implying an attractive ~12% adjusted FCF yield.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

A look back: Top three ideas highlighted in The Manual of Ideas, May 2014:
DaVita HealthCare Partners (NYSE: DVA, $67 per share; MV $14 billion)
Roughly a year later, DaVita is a trusted scale provider in the duopolistic U.S. dialysis industry. As such,
DaVita traded at $82
it enjoys a protected economic moat, throwing off steady cash flow by providing an
per share
essential, non-cyclical service to ~165,000 patients suffering from chronic kidney
failure. The ~$4.5 billion acquisition of Healthcare Partners in 2012 added a growth
opportunity in the $100+ billion fragmented market for operators of medical groups
and physician networks. While DaVita faces ongoing regulatory uncertainty and
continued downward pressure in some of its commercial payment rates, the high
single digit free cash flow yield is attractive despite some financial leverage. On
balance, we view DaVita as a long-term beneficiary of growth in dialysis and other
health care services, which does not appear fully reflected in the market price.

Lee Enterprises (NYSE: LEE, $3.90 per share; MV $210 million)

Roughly a year later, Warren Buffett’s renewed interest in the newspaper business reflects the assessment
Lee traded at $3.30
that a viable model exists for the industry, although the customer value proposition
per share
needs to be vastly different than in the past. Lee could grow intrinsic value if it
becomes a “champion” of the local communities in which it is present, reporting on
the local news rather than rehashing information available elsewhere. Given Lee’s
relatively weak balance sheet, free cash flow generation and debt reduction are
priorities. Here the news is good: Lee continues to generate unlevered FCF of
$150+ million annually, amounting to roughly 20% of debt. This high level of cash
flow should enable management to reduce debt and grow equity value.
In addition to the upside embedded in gradual improvement of the balance sheet,
shareholders stand to benefit from potential improvement in the business model
over time. Here the upside will depend heavily on the degree to which Lee’s
newspapers can regain mind share among audiences in their local communities.

Verisign (Nasdaq: VRSN, $48 per share; MV $6.3 billion)

Roughly a year later,
Verisign has been granted a regulated monopoly to serve as the registry service
Verisign traded at
$63 per share provider for “.com” and selected other top-level domains. This task is vital to the
operation of the Internet, making Verisign an “important” company. However, just
as Verisign is important to the Internet, so is the applicable registry agreement to
the company (term runs through late 2018). Regulated pricing and long-term deal
risks are a concern, but Verisign may drive value elsewhere. Specifically, the firm
is leveraging its trusted position to provide services for less regulated domain
names and to expand into network intelligence and security services, which
generate growing, high-margin revenue.
With free cash flow of $500+ million and growing, the shares offer a high single
digit FCF yield, an attractive quotation given the quality of the business.


We plan to be at the London Value Investor Conference on May 20th and will host a
small group dinner for members of The Manual of Ideas at the conclusion of the
event. Space is extremely limited, so if you wish to join us, please let me know as
soon as possible at [email protected].
We also look forward to being at Ciccio Azzollini’s incomparable Value Investing
Seminar in Trani, Italy in July. If you plan on attending, please let me know—it
would be a pleasure to spend some time with you there.

Sincerely,

John Mihaljevic, CFA

and The Manual of Ideas research team

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Buffett’s Influence on the Great Minds of Investing

BY WILLIAM GREEN
We thank our friend William Green for sharing the following insights with
members of The Manual of Ideas. We look forward to his forthcoming book.

Over the last year, I’ve had the privilege of interviewing many superb investors
for my new book, The Great Minds of Investing, to be published on May 29. It
features profiles and portraits of 33 renowned investors, including Warren
Buffett, Charlie Munger, Irving Kahn, Howard Marks, Bill Ackman, Marty
Whitman, Donald Yacktman, Mohnish Pabrai, Jean-Marie Eveillard, Bill Miller,
Thomas Russo, and Joel Greenblatt. My partner in this project was Michael
O’Brien, one of America’s preeminent photographers, who has spent the last
five years creating stunning portraits of the legendary investors in this book.
What struck me again and again as I worked on the book was the profound
influence that Buffett has had on many of the most successful investors of our
time. By now, his influence may even have eclipsed that of Ben Graham. Here,
then, are some of the many insights about Buffett that the investors in this book
shared with me during our interviews. The goal, of course, is not merely to
celebrate Buffett, but to learn from his extraordinary success.

THOMAS RUSSO:
In 1982, Thomas Russo was studying law and business at Stanford when Buffett
“Russo, who has owned came to address his business class. Russo was dazzled by the speed of Buffett’s
Berkshire Hathaway for mind, his “quirky delivery,” and his “deeply thought” ideas. From that day on,
about 33 years, favors he has followed in Buffett’s footsteps, building a formidable investment record
managements that invest on the foundation of three crucial ideas from that revelatory lecture.
heavily for future returns First, Buffett explained one of the great benefits of buy-and-old investing: You
even when this expense hurts don’t pay taxes on your gains until you sell. The lesson, says Russo, was that
their earnings in the short you should “stretch your time horizon” to take advantage of this tax deferral.
term. He describes this trait Second, assume that you will have only 20 great investment ideas in your
as ‘the capacity to suffer.’” lifetime—and, if that’s likely to be the case, bet big on your best ideas. Third,
said Buffett, “You can’t make a good deal with a bad person.” In other words,
—WILLIAM GREEN
take care to partner with managements that truly seek to serve their
shareholders’ best interests.
Russo, who has owned Berkshire Hathaway for about 33 years, favors
managements that invest heavily for future returns even when this expense hurts
their earnings in the short term. He describes this trait as “the capacity to suffer.”
No CEO embodies this quality more than Buffett. For example, he invested
aggressively to expand Berkshire’s GEICO unit, even though it produced a
reported loss of about $250 to bring each new policyholder onboard. His
willingness to stomach these short-term losses enabled GEICO to attract
millions of new policyholders, boosting Berkshire’s intrinsic value by about $20
billion.
As Russo told me, we tend to benefit in life when we “sacrifice something
today” to “gain something tomorrow.” Buffett, the most patient and rational of
investors, understands this principle perfectly.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

MASON HAWKINS:
Mason Hawkins, the Chairman and CEO of Southeastern Asset Management,
told me that he and Buffett — an old friend of his — have undergone a similar
evolution. Inspired by Ben Graham, they were both “quantitatively focused in
the early part of our investing history.” That meant buying stocks only when
they traded for much less than a conservative estimate of their value. “In the
second half of our investment journey, the qualitative factors have become more
important,” says Hawkins. “And that same evolution has occurred at Berkshire.”
This shift toward a more qualitative approach meant that Hawkins and Buffett
increasingly focused on less tangible factors such as whether a CEO is
“capable,” “shareholder-friendly,” and “honorable in the way he’s treated his
employees, his family and society.” However, Hawkins concedes that these
personal appraisals are “the hardest thing”—a problem that was vividly
illustrated when Dell Computer underwent its controversial privatization. “We
misassessed Michael Dell,” admits Hawkins, who was outraged that the business
was “taken from us at a subterranean price.”
When I asked Hawkins what he had learned from Buffett’s example beyond the
world of investing, he replied: “The thing I admire most about him is his passion
in knowing where his strengths are and keeping his focus on those strengths. I
think a good example is turning over his assets to Bill and Melinda Gates, so he
can continue investing and managing Berkshire. I think his discipline and his
clarity of thinking is most exceptional.”

JOEL GREENBLATT:
When Joel Greenblatt was an undergraduate at Wharton, he was unconvinced by
his professors’ insistence that markets are efficient. Then, in his junior year, he
“Greenblatt says it took him read a magazine story about Ben Graham that changed his life. Greenblatt told
‘a little while to get’ Buffett’s me that Graham gave him an intellectual framework that was “so simple and
twist, ‘but luckily I got it clear that it got me very excited.” The key message: investors should value
early enough to supercharge businesses in a disciplined way and invest only when they trade at a hefty
Ben Graham’s overarching discount. Greenblatt told me that Buffett then added one vital “twist” that “made
framework.’” him one of the richest people in the world: Buying cheap is great—and if I can
—WILLIAM GREEN buy good businesses cheap, even better.”
Greenblatt says it took him “a little while to get” Buffett’s twist, “but luckily I
got it early enough to supercharge Ben Graham’s overarching framework.”
Armed with these insights, Greenblatt founded Gotham Capital in 1985. In its
first 10 years, Gotham returned 50 percent annually after expenses, before fees.
Years later, in The Little Book That Beats The Market, Greenblatt laid out in
simple terms what works when it comes to investing. He recommended
investing in companies with a high earnings yield and a high return on capital.
As he explains it, these two metrics provide a practical way of picking stocks
that are both “cheap and good”—a powerful fusion of Graham and Buffett.

BILL MILLER:
During my interview with Bill Miller in his offices in Baltimore, our
conversation turned to the subject of what it takes to be a successful investor.
Miller recalled what Buffett had written in 2007 about the qualities he sought in
selecting a chief investment officer. Buffett observed: “Independent thinking,

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

emotional stability, and a keen understanding of both human and institutional

behavior is vital to long-term investment success.”
“Buffett had it exactly right,” Miller told me. “That’s what it takes to be a good
investor. And the hardest thing is probably emotional stability, and the second
hardest is independent thinking.”
Intriguingly, Miller surmises that value investors are “wired differently” so that
the part of their brain that registers financial loss doesn’t react in the same way
as it would for the average investor. In his own case, he says, “I’m very
emotionless. I’m contrary in the sense that paper losses, quotational losses, just
leave me to think there’s more opportunity.” He sees a similar lack of emotion
in fellow value investors such as Buffett, Hawkins, and Chris Davis.
This idea came up again and again in my interviews with great investors. For
example, Howard Marks recalled investing about $500 million a week as the
market crashed during the financial crisis. Marks told me that he didn’t find it at
all stressful to go against the crowd, noting: “To be the person who steps onto
the exchange floor in 1929 and says, ‘I buy,’ you have to be unemotional.” Like
Miller, he sees “being unemotional” as a central ingredient in Buffett’s success.

MOHNISH PABRAI:
Few investors have studied Buffett as obsessively as Mohnish Pabrai. After
discovering Buffett in 1994, he quickly concluded that this “simple approach” to
“For Pabrai, the greatest investing was “so powerful” that “it’s really the only way you should be doing
lesson from the [Buffett] things.” Pabrai told me: “I thought about Warren as putting down what I call the
lunch grew out of their laws of investing.” As Pabrai sees it, these laws include the idea that you should
discussion of Rick Guerin, a “think about a stock not as a stock but as a business”; “you should buy it when
once-famous investor who it’s cheap”; and you should let the mood swings of the market “serve you.”
was badly mauled when the What puzzled Pabrai was that almost no fund managers followed Buffett’s
market crashed in 1973-74. approach. “Most professionals still don’t get it,” he marvels. “What a country,
The moral of the story, says what a beautiful place, where you have the entire set of physicists who don’t
Pabrai, was that ‘you should believe in gravity!” By contrast, he was determined to follow Buffett’s model
be very afraid of leverage.’” faithfully as he embarked on a 30-year game with the goal of transforming $1
—WILLIAM GREEN million into $1 billion. To achieve such high returns, Pabrai says, you have to
search relentlessly for “wide mispricing,” typically in “places that people hate.”
In 2008, Pabrai teamed up with Guy Spier to bid $650,100 for a charity lunch
with Buffett. Pabrai was struck not just by Buffett’s remarkable intellect, but his
generosity in sharing his wisdom, so that his lunch guests would “feel they got a
tremendous bargain.” For Pabrai, the greatest lesson from the lunch grew out of
their discussion of Rick Guerin, a once-famous investor who was badly mauled
when the market crashed in 1973-74. The moral of the story, says Pabrai, was
that “you should be very afraid of leverage.”
As Buffett’s own career proves, enduring investment success depends as much
on temperament as on I.Q. “Charlie and I always knew we would become very
wealthy, but we weren’t in a hurry,” Buffett told Pabrai and Spier. After all, “If
you’re even a slightly above average investor who spends less than you earn,
over a lifetime you cannot help but get very wealthy—if you’re patient.”

William Green is the author of The Great Minds of Investing, which will be
published on May 29. He has written for Time, The New Yorker, Fortune,
Forbes, Money, Bloomberg, and The Economist.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Members Share Lessons from Buffett and Munger

We asked some of our members to share one or two things they have learned
from the great investors at the helm of Berkshire Hathaway over the years.
Selected responses are included below—enjoy!

(The following contributions may be edited for space and clarity.)

HENRIK ANDERSSON — Manager, D&G Global; Co-founder, InvestingByTheBooks.com

As a student at University of Nebraska – Lincoln in the mid 1990s, I listened to
Warren Buffett speak at a seminar in front of about 100 students. Being from
“My twenty year-old self that Sweden and just having dipped my toe into investing a few years prior, I had
jotted down [during Buffett’s barely heard of this dry-humorist who made companies and stocks sound so
speech], ‘Why is [Buffett] common-sensical and simple. I sometimes bring out my notes from that
praising his managers so occasion, smiling at the brilliance of his words and at my youthful exclamation
much, shouldn’t he be marks and scribbles (Buffett: “Even though I do spend a fair amount of time on
tougher and more numbers, there are other qualities in an investment I value more”. My note:
demanding,’ has now come “Ask professor about what ‘qualities’). Fast forward exactly twenty years and I
to appreciate the fuller circle am fascinated daily by the impact these two gentlemen have had on not only the
that this line of thinking world of investing but business-wide. Well-deserved for sure, but still amazing.
represents.” Is there another line of work with the same focus on “one source”? Babe Ruth
and baseball?
—HENRIK ANDERSSON
Of all the wisdom in how one ought to go about the job of trying to compound
capital at a satisfactory rate, it is the “personalization” of investing that has
grabbed me the most. The fact that it is nothing wrong with saying “too hard”,
“outside my circle of competence” and “not going outside your spots of
smartness” is just one part of it. The more important part, I think, is to learn
what works best in my hands. That in order to be a good long-term owner I must
respect and really believe in a company´s business model, its leadership and
future opportunities. Yes, the value must be there at the start of the ownership,
but without these other attributes it is nigh impossible to enjoy the fruits of long-
duration investing.
In my opinion, some of the best books – apart from the usual suspects - in order
to understand Buffett’s psyche are Dale Carnegie’s How To Win Friends and
Influence People and Fred Schwed’s Where Are The Customers’ Yachts. My
twenty year-old self that jotted down “why is he praising his managers so much,
shouldn’t he be tougher and more demanding”, has now come to appreciate the
fuller circle that this line of thinking represents.

JEFF AUXIER — President, Auxier Asset Management

Back in the fall of 1982, just starting in the investment business, I was on a
mission to interview America’s greatest investors. I actually called Warren
“Back in the fall of 1982… I Buffett at his office on a Saturday and he picked up the phone. He was
called Warren Buffett at his extremely generous with his time and recommendations of books and other
office on a Saturday and he investors who he thought were worthy of study. I was hooked. His systematic,
picked up the phone… I was low-risk approach to business ownership has been invaluable in navigating the
hooked.” numerous crashes, panics and economic downturns over the past thirty plus
—JEFF AUXIER years. I have been attending the Berkshire meetings since the 1980s. To enjoy
the fruits of compounding, I believe the teachings of Warren Buffett and Charlie
Munger are unmatched for their value.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

MARTIN CONDER — Director, Novum Capital

It would be so easy to repeat some of my favorite Buffett and Munger quotations
(I do keep a list), but this would rather miss the point. We have heard these
“The other essential learning many times and even then it doesn’t mean that we would be able to encapsulate
from Buffett and Munger is all of them into an investment process and follow it on a daily basis.
the importance of certainty. It has taken me many years to understand the Buffett/Munger philosophy in such
So often investors are a complete and deep way that it survives the daily onslaught of advice, comment
looking for opportunities as a and other investment ideas which I am subject to. Doing what you can to avoid
quick way to make money all the noise is part of the answer. But traditionally we learn that investment is
and higher returns. Instead, about analyzing companies, their financials, their business models, strengths and
to look for certainty is a weaknesses etc. This of course is still necessary, although Buffett and Munger
much easier path to follow!” do seem to have worked out a way to hone down their analysis to focus on what
they see as being the relevant features rather than try and understand everything.
—MARTIN CONDER
More importantly, investment is about taking good decisions, and here you have
to deal with your own psychology and avoid bias and the madness of the
crowds. Of course, we don’t start with all the potential best investment ideas laid
out in front of us from which to choose. That would probably be too easy.
Instead, new ideas come at us “one by one” and have to be evaluated as such.
This requires a strict discipline, rigorous mental framework and ability to keep
saying “no”.
The other essential learning from Buffett and Munger is the importance of
certainty. So often investors are looking for opportunities as a quick way to
make money and higher returns. Instead, to look for certainty is a much easier
path to follow! There is one quote in my mind, although I am not sure if it came
from Buffett or Munger exactly in this form: “better to be confident of a good
result than hopeful of the great one.” Put simply investment is more likely to be
successful by investing in situations where the outcome is more certain (and
which incorporates a strong compounded return on capital) than by trying to
identify the next “big thing,” and furthermore which company will be most
successful with that.

JEREMY DEAL — Managing Partner, JDP Capital Management

My journey with Berkshire began shortly after college when I read The Warren
Buffett CEO by Robert Miles. The book profiles Berkshire’s wholly owned
“Buffett’s story had a businesses and their founders/CEOs, the transaction history selling to Buffett,
profound impact on me. I and the resulting estimated contribution to Berkshire’s net worth over time. The
identified with the idea of essence of the book is the success and unconventional nature of Berkshire’s
analyzing stocks as whole “hands-off” ownership culture.
businesses, and buying whole At the time I was working for a successful entrepreneur in the electronic security
businesses…” industry who I greatly admired. But I was more interested with investing than
—JEREMY DEAL my job, and was spending most of my spare time analyzing local private
companies for sale, and public stocks that I could understand. When it became
obvious that I was much more passionate about capital allocation than running a
traditional business, I started reading everything I could about the greatest
investors.
Buffett’s story had a profound impact on me. I identified with the idea of
analyzing stocks as whole businesses, and buying whole businesses with a
similar attitude to stock picking. I also identified with Buffett’s temperament

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

and read everything I could about his career, starting with the early Partnership
letters.
Like many value investors, my own career as money manager was conceived
after first being inspired by Buffett’s.
In 2003 I attended my first Berkshire shareholders meeting. I walked around the
convention center booths meeting CEO/founders of Berkshire subsidiaries and
asking what it was like being part by Berkshire. I remember being surprised at
how friendly and willing the CEOs were to talk about being owned by
Berkshire.
Some of the more memorable conversations I had were with Doris Christopher,
(Pampered Chef), Randy Watson (Justin Boots), David Sokol (Mid America
Energy) and Terry Piper (Precision Steel Warehouse). Each manager talked
about how much freedom they had, and that compensation was tied to returns on
invested capital. They all seemed very happy and aware of how lucky they were
to be part of the Berkshire family.
Today as a fund manager I continue to be as excited and curious about Berkshire
as ever. In fact the core principles that make up our strategy at JDP Capital
Management are rooted in Buffett-inspired wisdom such as the importance of
being concentrated, thinking independently, analyzing stocks as whole
companies, and having the courage to go against the consensus.

DOMINIC FISHER — Director, Thistledown Investment Management

The first lesson I learned early in my career: It’s possible to beat the market. The
firm I joined in 1988, Hambros Bank, paid for an induction course run by a
“I defy anyone to read “The training company in west London. Day 1 introduced us to the efficient markets
Superinvestors of Graham- hypothesis. By the end of that first day I was depressed – the objective of my
and-Doddsville” and not chosen career was unobtainable according to strong academic evidence. “What I
want to have at least some of am being paid to do cannot be done,” I thought as I went home. But, before
their money invested by giving up, I thought I’d check the academic position against reality. I bought
people from that ‘small Peter Lynch’s One Up on Wall Street, and, in Chapter 2, “The Wall Street
intellectual village.’” Oxymorons,” read of Warren Buffett, the greatest investor of them all. Then, if
—DOMINIC FISHER you wrote to Kiewit Plaza, Mr. Buffett’s assistant would send you a bound copy
of the letters from 1977 to 1986. I did, and I still have it. It showed me it was
possible to do what I hoped to be paid for, and to do it with integrity.
Second lesson: Value investing works. I defy anyone to read The Superinvestors
of Graham-and-Doddsville, Buffett’s appendix to The Intelligent Investor, and
not want to have at least some of their money invested by people from that
“small intellectual village.”

TOM GAYNER — Chief Investment Officer, Markel Corporation

Warren Buffett and Charlie Munger changed the arc of my life for the better and
not just financially. Their examples and clear teachings about integrity, quality,
“My simple message is to say,
time horizons, curiosity, and value and values, and so many other things, made
‘Thank You’…”
me a better person than I otherwise would be.
—TOM GAYNER
My simple message is to say, “Thank You,” and that I will continue to do the
best I can to help future generations in the way that they helped me.

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DANIEL GLADIŠ — Director, Vltava Fund

When I was a young and ambitious investor and believing myself to be clever, I
was often trying to be “creative” in my investments. I was a bit impatient, too. In
“One of the things I’ve retrospect, I must admit that more often than not my clever ideas did not end as I
learned from Warren Buffett had expected. One of the things I’ve learned from Warren Buffett is that beauty
is that beauty lies not in lies not in complexity but in simplicity. And it’s not just about beauty, because
complexity but in simplicity.” as complexity declines so, too, generally does risk. Some of the lessons the
—DANIEL GLADIŠ market taught me came at pretty high prices, and so Buffett has certainly saved
me a lot of money. He doesn’t know it, but I am very thankful to him.
Today I view stocks as I do trees. For number of years now, I have been planting
a few trees each spring with my kids. When you’ve planted a tree, from one day
to another you see no change. If you come back in several years, though, you are
usually surprised by how much the tree has grown. Buying good stocks is like
planting trees and then watching them grow. Simplicity and patience – these are
what I have learned from Warren Buffett.

ARKO KADAJANE — Portfolio Manager, Ambient Sound Investments

Warren Buffett cleared my thinking on two important aspects: intrinsic value
and business predictability. Basically being a value investor means for me that I
have to find companies which are more or less predictable in the long run and
available at a bargain price.

PAUL LOUNTZIS — President, Lountzis Asset Management

I first came across Mr. Buffett over 42 years ago when I was a teenager and
have followed him since that time, though more closely over the past 30 years.
“[Buffett’s] influence on my His enormous influence upon my life, both professionally and personally, has
life, both professionally and been profound. In fact, outside of my parents and my wife he has had the
personally, has been greatest impact on my life.
profound.” While Mr. Buffett is perhaps the greatest investor that has ever lived and his
—PAUL LOUNTZIS many lessons on investing available from his writings, lectures and interviews
have made me a far better investor, his impact upon me personally has been far
greater. The world is well aware of his investment greatness and when his name
is mentioned, people immediately respond with several comments; investment
genius, wealthiest man in the world, and a friend of Bill Gates, among others.
While I am certainly well aware of each of those comments, I tend to think of
several other things when Mr. Buffett’s name is mentioned:
1. Integrity as a way of life
2. Do what you love to do with people you respect and admire
3. Make a difference in lives of others: clients, shareholders, students…
4. Charity—giving back the majority of your wealth to society
5. Share your wisdom as an outstanding teacher
I thought I would share several of his quotes that have served to inspire and
educate me to becoming a better human being, which I believe is even more
important than being a great investor, though I certainly strive to be that as well.
Mr. Buffett’s quotes are listed below:
Someone’s sitting in the shade today because someone planted a tree a long
time ago.

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It takes 20 years to build a reputation and five minutes to ruin it. If you think
about that, you’ll do things differently.
Measure your success by how many of the people that you want to have love you
actually do love you… The trouble with love is that you can’t buy it.
People ask me where they should go to work, and I say work for whom you
admire the most. Do what you love, and work for whom you admire the most,
and you’ve given yourself the best chance in life you can.
All along I felt money was just claim checks that should be given back to society.
I am not an enthusiast for dynastic wealth, particularly when the alternative is
six billion people that have drawn much poorer hands in life than we have,
getting a chance to benefit from the money.
In teaching your kids, I think the lesson they’re learning at a very, very early
age is what their parents put the emphasis on. If all the emphasis is on what the
world’s going to think about you, forgetting about how you really behave, you’ll
wind up with an Outer Scorecard. Now my dad: He was a 100% Inner
Scorecard guy. He was really a maverick. But he wasn’t a maverick for the sake
of being a maverick. He just didn’t care what other people thought. My dad
taught me how life should be lived. I’ve never seen anybody quite like him.
It [money] could make me independent. Then I could do what I wanted to do
with my life. And the biggest thing I wanted to do was work for myself. I didn’t
want other people directing me. The idea of doing what I wanted to do every
day was important to me.

ALLAN MECHAM — Partner, Arlington Value Capital

As you know (I think) Warren Buffett’s story inspired me to start my fund, and
outside of my family, Buffett has probably had the largest positive impact on my
“…the biggest thing I’ve life to date. After observing and studying Buffett for close to 20 years I’d say the
learned is how to become a biggest thing I’ve learned is how to become a better thinker, and an independent
better thinker, and an thinker (granted the second part comes somewhat naturally for me). Buffett’s
independent thinker…” example and teachings have helped me hone my ability to think rationally and
—ALLAN MECHAM be intellectually honest with myself while listening to the “inner scorecard” as
opposed to the outer scorecard. Becoming a better thinker is obviously valuable
in business and picking stocks however, Buffett’s example and teachings go way
beyond financial advice, and perhaps that’s why his example has such strong
appeal/influence on me and scores of others around the world.

JONATHAN MILLS — Director, Metropolis Capital

Simon and I began our journey into value investing in 1994 when I picked up a
copy of Robert Hagstrom’s “The Warren Buffett Way” at a US Airport
bookstore. I read it, then passed it onto Simon. We both then read through the
Berkshire Hathaway “back catalogue” of annual letters and discussed them.
We were initially captivated by how successful Buffett had been at long-term
stock market investing, which is what he was best known for at that time. He
seemed to offer a one-person riposte to the efficient market hypothesis with its
rational expectations and random walk theories. We had both learned about
these, and been uncomfortable with them, while studying for Economics degrees
at different universities.
At the time we first heard of Buffett, I was in the early days of building my
media business and Simon was in the same position with his software business.

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Time was extremely scarce, but we were sufficiently inspired to form a share
club along with one other person. This was largely an analytical exercise to look
at listed UK equities through Buffett’s lens. We built a quality checklist and an
approach to valuation that followed his thinking and we met once every few
weeks to discuss stocks.
In 2001, things moved in a very different direction after I attended my first
Berkshire AGM. I returned to the UK with a new idea: we would build the
media business through acquiring other private businesses, using the same
approach that Buffett had applied to buying fully-owned companies. The plan
was to look for “unsexy” businesses which no one else wanted very much but
which nevertheless met our quality criteria.
By this time, I had also read Buffett’s partnership letters and several other books
about Ben Graham, Buffett, and value investing more generally. I felt that I
“In 2001, things moved in a better understood Buffett’s Munger-inspired journey towards quality. Buffett’s
very different direction after description of seeking businesses with wide moats really resonated with me (and
I attended my first Berkshire with Simon) because we realized that in building our own businesses we had
AGM. I returned to the UK naturally sought to invest in the long-term creation of barriers which put clear
with a new idea: we would blue water between us and our competition. Our checklist and valuation model
build the media business from the share club were repurposed to support the acquisition process.
through acquiring other Hunting for businesses to buy became much easier with this “quality first”
private businesses, using the framework. We completed our first acquisition in 2002, paying 3.5x free cash
same approach that Buffett flow for a small publishing business that had been founded 40 years earlier. It
had applied to buying fully- was effectively a little monopoly and its margins have remained at over 60%
owned companies.” every year since, during which period it has repaid its acquisition price several
—JONATHAN MILLS times.
Emboldened with this early success, we built a network of relationships within
the broker community and went on to complete over 30 similar deals in the next
decade. The vendors have either been large corporates disposing of “orphan”
businesses that no longer fit their strategy, or retirement sales by entrepreneurs.
In many ways, attempting to emulate the way in which Buffett interacts with
people has been as important as the analytical disciplines of investing. Our aim
is that in each deal we maintain a reputation for conducting business at the
highest level of integrity. There is no last minute tactical price chipping. Gaining
a reputation as someone who closes deals and is looking to run each business for
the long-term has helped to build great relationships with the entrepreneurs and
corporates from whom we are buying. Buffett taught me that the process of
buying is itself a sales process.
Primarily as a result of the acquisitions, the initial $50k equity invested in the
media company has grown into a business with $50m of revenue that makes
$10m of profit each year. None of the businesses we have bought have been
runaway successes, but with just a few exceptions they have been bought at
prices that represented a discount to the cash flows they have subsequently
generated. Using this excess cash flow to acquire more businesses has given us a
real life lesson in the power of long-term compounding.
After Simon sold his software business, we had the opportunity to go full circle
and establish a fund in 2008, applying the lessons from the private acquisitions
to investing in the public markets. Our now much longer checklist and more
sophisticated valuation model were once again re-purposed so that we could
apply them to the equity markets.

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My own personal desire to do this came from the fact that I had found the
process of analyzing and valuing potential acquisitions far more enjoyable than
the process of negotiating sale and purchase agreements, integrating new
businesses acquired, and running a company which now had 300 employees.
Running a fund instead would also give me the opportunity to manage my own
money in the way that I felt it should be managed. Once we had set up an open-
ended fund in 2011 I recruited a CEO for the media business and left him to run
it with four MDs reporting into him and minimal oversight from me.
The easy route to building a fund management business would have been to
establish a small cap fund. The simple marketing message of applying the
lessons learned from buying small private businesses to investing in under-
researched small cap stocks would have resonated well with investors and made
the huge challenge of raising money much easier.
However, we are inspired by Buffett and Munger’s ability to apply their craft
with pleasure well into their 80s. In our 40s, we cannot imagine doing anything
“Buffett’s discipline, else in our careers, so starting a 40 year journey with constraints which would
patience, integrity, long-term have prevented us from investing where we saw the best combination of quality
perspective and focus on and value was anathema. Buffett’s career advice to anyone who asks him at the
value are all key ingredients AGMs is consistent: do what you love doing, what you are passionate about.
of his success, but he also This was Buffett’s final and in many ways his most important lesson to us. In
has incredible skills in the long run, we know we will be better investors by doing what we love – to
persuasion—coming from a paraphrase Buffett, by ensuring that we “tap dance to work each morning”.
unique blend of style, quick Another lesson from Buffett is that one should never invest in something just
wittedness and self- because someone else has done so (even if that person is Warren Buffett!). You
deprecating humor.” have to do your own analysis and ultimately have your own independently
grounded views on the future cash generative capability of the business in
—JONATHAN MILLS
question. Without this, you have no way of interpreting new information that
comes out of the company or the industry in which it operates. In our case, this
has led us to invest in a number of stocks that we are comfortable with, but
which we know that Buffett would never consider, such as Apple, Google, Cisco
and Microsoft.
Every year we make the trip across the Atlantic at the start of May for the
Berkshire Hathaway shareholder meeting. 2015 will be my 15th consecutive
meeting. Every year, I probably learn a little less than I have the year before, but
I still learn something new. We now bring our team of Analysts with us so that
they can absorb some of the life and business lessons from the Oracle of Omaha.
Buffett’s discipline, patience, integrity, long-term perspective and focus on
value are all key ingredients of his success, but he also has incredible skills in
persuasion—coming from a unique blend of style, quick wittedness and self-
deprecating humor. He is the living embodiment of Dale Carnegie’s book How
to Win Friends and Influence People that so inspired him when he was young.
No other company has ever grown to Berkshire Hathaway’s size in one lifetime
without the luck of being an early entrant into an industry that became much
larger than anyone could have imagined. Only Berkshire Hathaway could be
said to have truly been built by the relentless application of the good judgement
and common sense of a single person. As such it is a fitting living embodiment
of Buffett’s business and investing genius.
But much more important than this, Buffett really is a wonderful example to
anyone engaged in capitalism because of the way he has built his fortune.

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Nobody’s reputation for fair dealing is higher and nobody has a word to say
against him. Long may it continue.

PHILIP ORDWAY — Managing Principal, Anabatic Investment Partners

Studying the lessons of Warren Buffett and Charlie Munger has taught me how
to think and how to learn, and for that I’ll forever be grateful.
“I discovered value investing I discovered value investing by way of Roger Lowenstein’s biography of
by way of Roger Warren Buffett, which I finally stumbled across in business school. That book
Lowenstein’s biography of was an awakening for me—it literally changed the path of my career and my
Warren Buffett, which I life. It started me on the road to learning all sorts of things that made the world
finally stumbled across in much clearer and more interesting.
business school. That book Buffett and Munger’s wisdom is also so profound that it never gets old. It’s
was an awakening for me—it always a good sign when I can read or hear something for the second, third, or
literally changed the path of thirtieth time and still learn something new, still walk away feeling energized.
my career and my life.” Over the past few years I’ve read several hundred books and articles about
—PHILIP ORDWAY business and investing, but there is no better education than Buffett and
Munger’s teachings.
In short, the Buffett and Munger way of thinking and their habit of continuous
learning showed me how to start filling in the gaps in my own education, and I’d
argue that “teach a man to fish” legacy is the most impressive one a person
could have.

DAVE SATHER — President, Sather Financial Group

Berkshire is far more “tax aware” than most people realize. Although Buffett
may make headlines stating that his secretary has a higher personal income tax
rate than he does—he will not pay any more taxes than he must. Buffett/Munger
recognize that taxes are a huge drag on wealth and performance. This has
become more and more evident the larger Berkshire has become.
Buffett/Munger are not afraid to trade in/out of positions to harvest tax losses,
use tax credits or swap assets to delay recognition of gains.
It is worth re-reading the letters Buffett wrote in the early days. With Berkshire
being a $350 billion market cap there are many things that are still logical and
worthwhile for smaller investors--but simply don’t move the needle at
Berkshire. As such, Buffett will not discuss them much today.
Read. In a world that is ever more complex and distracting, don’t overlook the
opportunity to quietly sit and read.
Focus on the long term. Whether Buffett/Munger, Klarman or Berkowitz or any
other great value investors—they credit a long term orientation to their success.
Long-term in the Buffett/Munger world is clearly decades. A long-term
orientation allows an investor to navigate around a short term hiccup. This long-
term orientation also increases tax efficiency.
Debt kills. Berkshire rarely uses debt and even subsidiaries, like Burlington
Northern Railroad, are so liquid they can guarantee their debt without any
backing from Berkshire, the parent. The 2008 decline should resonate strongly
in all of our minds that when you use leverage it can magnify returns and make
marginal decisions look fantastic--but it also puts you at risk for a total wipeout.
Berkshire is built and managed to be the last company left standing. Whether
managing money for myself or clients—we don’t want to have terrific

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performance for a five year period only to get too aggressive and ultimately
blow everyone up.
Become a good communicator. Buffett has mastered the art of taking very
complex topics and breaking them down so a 6th grader can understand them.
Although Munger’s command of the English language is different—often
blunt—it is an effective counter-dynamic to Buffett. While we have clients
nationwide, the majority come from relatively small communities in the Texas
area. Although it may be a bit unique to Texas, people all over want to deal with
other people who are honest, accountable and accessible. They want to
understand the logic in the process. What we do should not be “black box”
technology. If it can’t be easily explained, you probably shouldn’t do it. Buffett
doesn’t run a black box...and neither do we.
Function with a fiduciary mandate. Treat others as you want to be treated.
Although Berkshire may be very diverse in its employees and divisions, Buffett
“Buffett/Munger recognize and Munger still speak as if they are running it for “family and friends” that they
that taxes are a huge drag on must look in the eye at church, the grocery store or around town. Despite the
wealth and performance. size of Berkshire, and the carnival atmosphere to the annual meetings,
This has become more and Buffett/Munger still communicate as if in a one on one setting which reinforces
more evident the larger their mindset of treating shareholders like valued/trusted business partners.
Berkshire has become.” Ethics matter. Don’t do anything you wouldn’t want on the front page of the
—DAVE SATHER paper/It takes a lifetime to build a reputation and minutes to destroy it. There is
no way Buffett/Munger accrue the level of wealth/success they have without
attracting a variety of naysayers and negativity. It is instructive to read the
negative comments as they are generally ill-informed or simply sour grapes. In
giving guidance to their numerous division heads, it remains clear that Buffett
believes that reputation comes first. Although painful, we attempt to find our
mistakes upfront, determine how to fix mistakes and then communicate this to
the client. This is Business 101. In the process, if you put the needs of others
first, they are loyal and appreciative. Doing the right thing brings you more
success if you have a long term orientation. This approach has made Berkshire
the buyer of first choice for family run firms looking for a permanent home.
Be approximately right rather than precisely wrong. If it takes until line 247 of a
spreadsheet to run the math, you are making it too hard. If you are properly
applying a “margin of safety” then you probably only need simple math.
Bureaucracy kills. Hire the right people and then let them do their job. Buffett is
not a control freak. He knows he cannot run GEICO or Burlington. Hiring the
right people empowers stellar performers and allows an organization to scale up
their opportunities for success and growth.

ADRIAN WARNER — Managing Director, Avenir Capital

During the 18 years I worked in the private equity industry, my colleagues and I
spent most of that time patting ourselves on the back for how clever we were for
operating in the inefficient private market compared to those who toiled away in
the vain hope of beating the extremely efficient public market. I maintained the
view that institutional public market investing was essentially closet index
investing for which I had zero personal passion and even less belief in it as a
worthwhile undertaking.
While I had been aware of Buffett for many years, and had even seen him speak
in person as a student at Harvard Business School, it was not until I felt the

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private equity industry had become overly competitive and institutionalized, and
was looking for the next evolution in investing, that I decided to take a closer
look at what Buffett had to say.
After almost 20 years of investing, Buffett’s teachings opened my eyes, anew, to
the world of opportunity in the public market. He provided a framework for
“After almost 20 years of investing that allowed me to realize that while the public market is, indeed, very
investing, Buffett’s teachings efficient, one only needs to find a select few inefficiently priced opportunities
opened my eyes, anew, to the every now and then to deliver very rewarding returns at relatively low risk.
world of opportunity in the He also emphasized to me that a history of private equity investing provided a
public market. He provided a very sound backdrop to investing in the public market. In private equity we
framework for investing that learnt to focus on identifying valuable investment opportunities through deep
allowed me to realize that fundamental research at the company specific level. We learnt to worry about
while the public market is, the downside first and exercise extreme selectivity in allocating investment
indeed, very efficient, one capital. We learnt to focus on absolute, not relative or benchmark driven returns.
only needs to find a select We learnt to invest with a long term orientation and think of investing as buying
few inefficiently priced a stake in a productive business rather than simply buying a piece of paper with
opportunities every now and a price attached.
then to deliver very While I had seen each of these concepts as central to private equity investing, a
rewarding returns at closer review of what Buffett had been espousing for so many years highlighted
relatively low risk.” that they were equally applicable to investing in the public market. Despite
—ADRIAN WARNER having spent many years deeply embedded in the world of private equity
investing, this revelation allowed me to view the opportunity provided by the
public market in an entirely different light and to appreciate the extraordinary
potential of applying private equity style investing to the public market.

KEITH WEISSMAN — Senior Analyst, Sibilla Capital

A quote I read stuck with me: Buffett said that the investor of today does not
profit from yesterday’s growth. One of the key principles I employ is to not let
the past success of a company cloud my judgment of what the company can do
in the future. So, Buffett’s words rang true for me.

Post-Buffett Berkshire: Will Activism Fly?

BY LAWRENCE A. CUNNINGHAM

You know shareholder activists have made an impact when targeting Berkshire
Hathaway is taken seriously enough to warrant a question to Warren Buffett at
the annual meeting. Buffett scoffed at the idea by stressing a combination of
performance and size. He’s right and activists should look elsewhere if they
must. But there is a bit more to say than Buffett had time for.
Buffett is of course right to stress both performance and size. Berkshire is
among the largest, most diversified and profitable corporations in history. It
owns nine subsidiaries that, if they stood alone, would each be a Fortune 500
company, and boasts scores of diverse companies generating revenue from $1
billion to $8 billion apiece. At present, no sensible activist would target the firm,
since Buffett built, runs, and controls it with 34% of the voting power.
But just as the 84-year old conglomerate builder plans for Berkshire’s fate
beyond his lifetime, no doubt activists are planning too. After all, despite a

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whopping market capitalization of nearly $400 billion, most analysts agree that
Berkshire is worth more—that the sum of the parts is greater than the whole.
Citing criticisms of the conglomerate model, activists will urge management to
sell Berkshire’s struggling units, spin-off the mediocre, and install new
managers at any failing to meet publicized performance standards. In the
process, they would call for distributing the cash to shareholders. They would
explain how what they offer is worth more than Berkshire shares alone: cash
plus shares in spun-off subsidiaries along with the continuing Berkshire shares.
The counterargument, familiar to Berkshire’s stalwart shareholders, will stress
the value Berkshire has created from its unique business model. It pledges to
business sellers that it will hold them indefinitely and give managers autonomy.
Such commitments have great economic value not necessarily reflected in either
today’s stock price or the valuations of individual business units. The only way
to preserve that premium is sustaining the conglomerate. The value is amplified
by the capacity to reallocate capital across subsidiaries without taxes, interest,
covenants or hassle. Keeping the whole together reinforces the economic value
of these and other intangibles, including a culture of trust, thrift, and teamwork.
On the merits, activists will face an uphill fight to persuade Berkshire’s stalwart
owners. And Berkshire’s general takeover defense profile is strong. For one, it
would be extremely expensive to buy voting control of Berkshire, given not only
its market capitalization but the stated views of its shareholders that it would
take a significant premium above that to induce most to sell. (I document this in
my recent book, Berkshire Beyond Buffett.)
Berkshire owns numerous companies in regulated industries, including
insurance, energy, and rail, which would delay and maybe doom a hostile
“At present, no sensible change in control. It also owns significant equity interests in several financial
activist would target institutions, including Bank of America, Goldman Sachs, and Wells Fargo.
[Berkshire]…” Besides abundant capital, Berkshire’s charter also authorizes the board to issue
—LAWRENCE CUNNINGHAM blank check preferred, among the most flexible takeover defense devices.
In any event, tender offers are disfavored by today’s activists, who find it
cheaper and more promising to wage proxy fights for board seats—whether the
full slate or a portion. In a proxy battle, Berkshire’s dual class capital structure
provides a deterrent. Its Class A shares—where Buffett and other long-time
Berkshire shareholders vest most of their stakes—command a significant
multiple of the vote compared to the Class B. Buffett’s bloc, currently at 34% of
the vote, will gradually be transferred and sold during the decade after his death.
Power will thus remain under Buffett’s indirect control for many years while his
investment and operational successors gain their own footing.
During that time, another formidable defense against insurgents are Berkshire’s
stalwart shareholders. Buffett spent fifty years consciously attracting
shareholders who share his sense of the company as a partnership, a conception
scarcely associated with activists. Berkshire shareholders have historically been
unusual: they are loyal, attending the company’s annual meeting in droves;
informed, devouring annual reports with alacrity; long-term, with very low
turnover in Berkshire shares; and concentrate their portfolios in Berkshire stock.
We understand and value the business model. A large portion of such stalwarts
will therefore vote to continue rather than side with the activists.
Buffett has assembled an impressive and hand-picked board who likewise own
significant Berkshire shares and share its values. On one hand, half are of

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Warren’s generation (Munger, Gottesman, Murphy, Olson, Scott) and so are

unlikely to be on the board when the imagined showdown takes place. But the
other half consists of son Howard, whom Warren envisions as chairman, along
with Bill Gates, Steve Burke, Susan Decker, Charlotte Guyman, and Meryl
Witmer. As the elders depart while Buffett rules, count on replacements to be of
similar caliber and win the traditional deference Buffett’s picks have gotten
from shareholders. But if these or other seats begin opening afterwards, expect
much more scrutiny of the nomination process and particular individuals.
Berkshire’s charter provides for the annual election of every board seat, meaning
it is possible for an insurgent to gain control of a majority in a single year. To
check that, consideration might be given now to amending the charter, by board
and shareholder vote, to opt for a staggered board with three classes of directors
each serving three-year terms. That would promote continuity and independence
while demanding greater patience from activists. Another tool to consider: a
charter amendment providing that all director nominations are to be made by the
incumbent board rather than through the fashionable alternative that lets
shareholders adopt bylaws requiring the corporation to let certain large and
longer-term shareholders nominate directors.
There will also be grounds for compromise between successors adhering to
Berkshire’s traditional principles and activists seeking immediate cash payouts.
“Under no circumstances Berkshire’s decision point for paying dividends has been so restrictive that it has
should the policy of not paid a cash dividend since 1967. That deters some investors from buying the
permanent ownership of stock and leaves those who do thirsty for liquidity. The policy has related to
subsidiaries be altered—such whether Berkshire can generate at least one dollar of market value for each
radical change in Berkshire’s dollar retained. There is wiggle room in that test and Berkshire has stated that it
culture would be its death- will use cash to repurchase shares when priced at less than 120% of book value.
knell.” Paying dividends or expanding the repurchase program would be a show of
—LAWRENCE CUNNINGHAM strength rather than weakness for Berkshire boards beyond Buffett. The
battlefield over Berkshire will be about cash and the peace treaty will be in
terms of dividends and repurchases. A ready resolution will be found in payouts
that placate the activists and are acceptable to stalwarts, something that
preserves Berkshire culture and even gives management more breathing room in
the formidable task of capital allocation. Under no circumstances, however,
should the policy of permanent ownership of subsidiaries be altered—such
radical change in Berkshire’s culture would be its death-knell.
There is more to say on this topic. For those interested, please refer to chapter 14
of Berkshire Beyond Buffett. In short, however, the answer to activists is simple:
if you must target DuPont or Herbalife, so be it, but don’t waste your time or
effort taking a shot at Berkshire, now or post-Buffett.

Lawrence A. Cunningham is professor at George Washington University and

author, most recently, of Berkshire Beyond Buffett: The Enduring Value of
Values. Larry’s other well-known title is The Essays of Warren Buffett: Lessons
for Corporate America, which he self-published into an international bestseller
translated into a dozen languages.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Highlights from Asian Investing change the Board. Emeco needs to refocus on capital
management and potential industry consolidation. A public
Summit 2015 letter to the Chairman clearly outlines opposition to the
Asian Investing Summit 2015, the fully online conference acquisition. The letter is jointly signed by Black Crane and
featuring value-oriented investment ideas in Asia, hosted by one other shareholder with a combined stake of 24%.
ValueConferences, took place on April 7-8. The following
summary of selected ideas presented at the event has been
compiled by The Manual of Ideas research team.
SID CHORARIA, APS ASSET MANAGEMENT
Three session replays, slide presentations, and transcripts— SHENZHEN INTERNATIONAL (Hong Kong: 152):
Peter Kennan on Emeco (Australia: EHL), Sid Choraria on Multiple ways to win in current environment. Toll roads is
Shenzhen International (Hong Kong: 152), and Jiro Yasu recurring FCF business with attractive IRR in low-rate
on EM Systems (Tokyo: 4820)—are now available in the environment. Logistic parks offers growth tailwind due to
MOI Members Area at www.manualofideas.com/protected demand. 49% stake in domestic airlines benefits from low
fuel prices and tourism. Asset value and catalysts present,
yet trades at 10x P/E, not valuing growth.
PETER KENNAN, BLACK CRANE CAPITAL
Toll roads business is recurring FCF-generative business
EMECO (Australia: EHL) is the largest mining equipment with attractive IRR in current low-rate environment.
rental company in the world, formed in Western Australia
 Toll road operations span Shenzhen region,
in 1972 as a family-owned business. It was acquired by a
Guandong Province and other provinces through
syndicate of private equity investors in 2005 and then
investments in Longda, Wuhuang and Shenzhen
floated on the ASX in 2007. Emeco’s business is focused
Expressways. Long-term concession rights,
on the major mining houses and increasingly it is working
average of nearly 14 years remaining
in partnership with the major Caterpillar distributors to
service the equipment needs of the world’s major mining  Significant recurring FCF generation and attractive
houses. In October 2013, Emeco issued a US$355m 144A IRR in low interest rate environment. Future
bond with a 5 year term. The net proceeds were from the maintenance capex is minimal and management
bond were used to repay existing facilities. Emeco also has deploying excess cash flow into high growth
a A$75m asset backed facility which is currently un-drawn. logistic parks business
The notes do not include maintenance covenants, the asset  In 2014, Meiguan Expressway adjustment
backed facility has the following covenants (if drawn above agreement contributed one-off gain of HK$730mm
a specified level): liquidity ratio (net debt to net tangible to net profit to shareholders
assets of no greater than 65%), interest cover ratio  Stable revenue stream and catalysts, include
(operating EBITDA to interest expense of no less than 2.25 increasing traffic volume, toll revenue,
times). urbanization and auto ownership
Investment thesis: The downside is protected by asset Logistic parks has long growth tailwind witnessing strong
values and liquidity of the assets. Strong free cash flow is demand from e-commerce, warehouse and delivery
available if capital expenditures are curtailed. Equipment companies.
depreciation rate and disciplined supply of new equipment
 Existing 6 logistic parks witnessing strong demand
result in relatively quick re-balancing of supply and
from e-commerce, warehouse and 3PL companies
demand. Improving utilization drives earnings growth.
in China. High occupancy rates of 96% with
Surplus cash may be utilized to buy back bonds and equity.
increased economies of scale and consistent
Stock trading at 10-12¢ versus net assets backing of 47.5¢.
margin expansion over the last 5 years
Where did it go wrong? Management change post
 Upcoming integrated urban logistics hub with
investment by Black Crane Capital. Utilization was restored
planned site area of 2.55mm sq ft, provides long
but at the cost of margins. Cost control and reduction have
tailwind of growth due to strong demand, shortage
not the number one priority when they should have been.
of supply, strong SOE background, government
Management is pursuing a large, diversifying acquisition
policy and proven operational expertise
(Rentco) at the wrong time and wrong price (8-10x EBIT).
The acquisition uses most of the surplus cash and also  Shenzhen Qianhai land asset value recorded at
includes substantial issuance of shares. Black Crane is cost, conservatively worth multiples higher
pursuing an activist campaign to stop the acquisition and
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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Other financial investments include 49% stake in Shenzhen potential returns with capital allocation
Airlines benefits from low fuel prices and booming tourism. improvements; in 2014, the company increased
Stake disposal of CSG shares highlight shareholder- dividend by 120% from 2013.
oriented management and focus on logistics growth.  Attractive valuation: The company fell into
 49% stake in associate, Shenzhen Airlines benefits undervalued territory in 2014 after the price
from low fuel prices and tourism. dropped steeply due to a series of bad news. The
 CSG share disposals over last few years company offers a high margin of safety as it boasts
demonstrate focus on logistics growth and a strong balance sheet with no debt. The market
shareholder-oriented management cap is low compared to intrinsic value.

JIRO YASU, VARECS PARTNERS KOREA ALCOHOL INDUSTRIAL (Korea: 017890):

EM SYSTEMS (Tokyo: 4820):  Strong market position: The company is one of

Korea’s leading manufacturers of specialty
 Largest software provider for dispensing
chemicals, including ethyl alcohol and ethyl
pharmacies in Japan, 30% market share. EM
acetate. Despite the recent slump of the chemical
entered clinic software market in 2011. EM has a
industry, the company has maintained a steady
large office building in Shin‐Osaka.
income thanks to its market dominant position in
 EM’s building in Osaka could worth 66% to 100% the oligopolistic industry.
of EM’s market cap.
 Non-core assets: The company owns the
 EM’s core business is a high-quality business and controlling equity stake of ENF Technology (a
should be valued higher multiple. publicly traded company), a manufacturer of
 EM has been gaining market share by acquiring process chemicals used in making semiconductors
smaller competitors. and TFT-LCD displays. The value of the
company’s real estate property is worth nearly
 Clinic software business has not been profitable.
50% of the market cap. The company can improve
The loss should get smaller in the coming years.
the shareholder value by selling off its real estate
Separately, Jiro Yasu presented an update on the Japanese property and returning cash to shareholders.
animation industry.
 Attractive valuation: The company is a good
example of holdco discount opportunities in
CHAN LEE & ALBERT YONG, PETRA CAPITAL MANAGEMENT Korea. The value of non-core assets is not properly
Amid positive regulatory changes and new active demands reflected in the stock price. The company’s
from minority shareholders, Korean companies may be liquidation value far exceeds its market cap.
finally changing course to become more shareholder-
friendly. Chan Lee and Albert Yong have been looking for ORI EYAL, EMERGING VALUE CAPITAL MANAGEMENT
Korean companies that are likely to improve capital
allocation policy and return money to shareholders, which Why invest in Israel: (i) stable, capitalist, pro-business, pro-
will unlock the shareholder value. They present two ideas: investors, free-market democracy; (ii) healthy, growing
economy; (iii) human capital and innovation; (iv) natural
GS HOME SHOPPING (Korea: 028150):
resource discoveries; (v) wealth of investment
 Strong operation: The company is Korea’s leading opportunities; (vi) long-term stock market outperformance;
TV home shopping channel. The company (vii) cheap stocks.
possesses a strong brand and maintains superior
bargaining power over merchants. The company
GOLF & CO (Israel: GOLF) — retail turnaround:
can benefit from growth opportunities in mobile
and international.  Leading group of retail chain stores, all under the
umbrella brand “Golf & Co”. Main categories:
 Cash: The company holds excess cash equivalent
fashion clothing and home accessories. 330 stores
to 60% of its market cap. The home shopping
today across all brands (198 stores: fashion
business requires little incremental investments to
clothing, 132 stores: Home accessories).
grow. The company can deliver tremendous

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

 Profitable retail chain with multiple competitive fashion forward trends to Hong Kongers. For the last fifteen
advantages: well-recognized brand; economies of years, Bauhaus has focused on bringing those lifestyle
scale in operations, distribution, advertising, and products, with an especial focus on denim and hybrid
purchasing; excellent mall locations locked up. work/going out apparel, to consumers across Greater China,
 Operational issues in past few years: decline in including Taiwan and Mainland China. The stock sells for
operating margins; loss-making chain “Blue Bird” 9x PE, a 5.1% yield, and has net cash.
will be fixed or shrunk; currently losing about 10
million ILS per year; underinvestment in store JOSHUA KENNEDY, SONIAN CAPITAL
base; did not keep up with competition.
BOUSTEAD SINGAPORE (Singapore: F9D) is a small-
 New CEO Eliezer: consulting background; cap industrial conglomerate with an asset-light business
experienced in business strategy and business model cobbled together over the last twenty years by a
development; implementing new strategic plan. brilliant CEO, Mr. Wong Fong Fui, who would be right at
 Valuation: Value of business: 648 million ILS (8x home in William Thorndike’s recent book on CEO capital
operating income); add net cash: 150 million ILS; allocation, The Outsiders. It is an outstanding company at
total fair value in 2018: 798 million ILS; recent an attractive price, but the discussion will be timely because
market cap: 427 million ILS; upside to fair value: the company has announced plans to spin off its industrial
87%; collect 8% dividend yield while we wait. real estate business in 2015.

ISRAEL DISCOUNT BANK (Israel: DSCT) — hidden CARTER VENKAT, INOX GLOBAL CAPITAL MANAGEMENT
value to be unlocked: SUN ART RETAIL (HKSE: 6808) is a leading operator of
 #3 bank in Israel: incorporated in 1935; 218 hypermarkets in mainland China with 14% market share.
branches; major business lines: retail banking, The company trades at a FCF yield of 5.9% and is growing
corporate banking, financial management, capital its store count in the relatively underpenetrated Chinese
markets and private banking; market by approximately 15% per year.
 Operationally the least efficient bank in Israel: While pre-tax ROIC has been declining, it is still a
current ROE = 7%; working to increase relatively healthy 32%. The company has been hurt by flat
sustainable ROE. New CEO Lilach Topilsky same-store-sales and investors are fearful about Chinese
started in 1Q14; previously led operational consumer spending as well as competition from online
turnaround at Bank Hapoalim; announced multi- players. As a result, the stock has more than halved from its
year strategic turnaround plan. November 2014 high of HK$12.64 to the current price of
HK$6.08 and the P/E ratio has decreased from 37.7x in
 To unlock value by selling assets: Discount Bank
March 2013 to the current 16.6x.
New York (100%); Mercantile Bank (100%) –
focus on Arab and Haredi sectors; Visa Cal (72%). However, unlike many Chinese retailers, the company has
maintained its margins and has managed inventory levels
 Sum of parts valuation (right now): IDB-NY: 2.8
well. They have a clean balance sheet with a net cash
billion ILS (book value); Visa Cal: 1.5 billion ILS
position and are funding expansion from internally
(72% stake, 15x net income); core IDB bank: 7.7
generated cash.
billion (0.8x 9.6 billion core book value); total: 12
billion ILS (64% upside). There remains significant scope for expansion especially in
the lower-tier cities that Sun Art is currently focusing on.
 Value in two years: assumes no asset sales; book While these stores take longer to ramp up and have lower
vale up 14% (7% per year); ROE goes from 7% to productivity levels, returns on investment are still
9%; P/B goes from 0.55x to 0.9x; 87% upside. compelling. Although we think retailers in China will face a
more challenging future, due to slowing economic growth,
ISAAC SCHWARTZ, ROBOTTI & COMPANY increased capacity, and various other factors, Sun Art’s
BAUHAUS INTERNATIONAL (Hong Kong: 483) is an shares offer a compelling valuation for a leading, well-
exceptionally well-run specialty retailer and apparel design operated Chinese retailer.
business, whose shares are extremely undervalued. For the
last thirty years, Bauhaus has been focused on bringing

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

KRISHNARAJ (KIMI) VENKATARAMAN, KIMI & PARTNERS KB KEE, THE MOAT REPORT ASIA
GE SHIPPING (India BSE: 500620, India NSE: GESHIP) RECHI PRECISION (Taiwan: 4532), trading at P/B of
provides offshore oil and gas and shipping assets on hire, 1.6x, EV/EBITDA 7.2x, EV/EBIT 10.6x, dividend yield
while also trading in them. Shares are available at around 6.37%, is the world’s #4 compressor manufacturer with
1.8 to 2 times annual operating cash flow after interest 10% market share, up from 3.5% in 2000. Regionally,
payments plus cash on hand. The company’s large asset Rechi has 39% in Taiwan, 30% in North America, 3% in
purchases to build an offshore business have just been China, 12% in Europe, 9% in Japan, 13% in South
completed. This was seeded from the gains made by the America, 14% in ASEAN. Rechi also has niche dominance
shipping business in the boom, which lasted until 2008. The in compressor for the recreational vehicle (RV) market in
offshore business is steadier than the shipping business. It North America with 60% market share and over 90%
now brings in 2/3rds of the cash, having grown seven-fold market share in heat-pump dryer in Europe in partnership
in cash earnings over the past five years. With all offshore with Bosch. Despite being not profitable for as long as the
assets now put to use, the firm is likely to generate first ten years since it was established in 1989 due to the
significant free cash flow. Kimi Venkataraman values the lack of production scale, Rechi persisted in pursuing the
company 60+% over the recent market price (30-day aspiration of achieving technical independence in the heart
average of ₹ 351.7) even while applying adverse of the air-conditioner technology – the compressor – under
assumptions and with an adequate margin of safety. the leadership of its chairman CHEN Sheng-tien who is
also the chairman of parent Sampo Corp who owns a 25.4%
stake in Rechi. Led by Chen and CEO Liu Jin-hsi, Rechi
MAX HU, PORTFOLIO MANAGER, TEMPUS CAPITAL
showed grit and determination in breaking past the
JD.COM (Nasdaq: JD): A leading Chinese e-commerce milestone of an accumulative 100m units in 2014 and has
company growing revenue ~100%. We simply believe that plans to produce and sell another 100m units by 2020/21.
this is a great business on track to dominate its sector and to We think the perseverance and focus is rare in Asian firms
become one of the largest company in the world. The and this has attracted other strategic shareholders that
business has very wide moats and the moat is widening, include Taiwan steel giant China Steel Corp (2002 TT) with
built from its past ten years of hard work and dedication to 4.91% stake and Japan’s electronics giant Sharp (6753 JP)
customers. We believe the business will further take market 4.86%. Rechi’s open innovation business model to co-
shares from its larger and smaller competitors as it did in develop new products has also forged long-term
the past. Furthermore, we believe the business is at partnerships that include BLDC motor (China Steel Corp,
infection point at which its profitability will explode within Sanyo-Panasonic), air purifier (Sharp), heat-pump dryer
next two or three years. While this investment idea may not (Bosch). We think this is rare in Asian firms and Rechi
suit traditional deep value investors, it worth serious deserves a valuation premium.
consideration for any long-term GARP investor.

AMITABH SINGHI, SUREFIN INVESTMENTS

SCOTT PHILLIPS, TEMPLETON AND PHILLIPS CAPITAL
The following are three ideas highlighted by Amitabh
WH GROUP (Hong Kong: 288) represents the Singhi during the session:
combination of Shuanghui Development of China and
 Aro Granite Industries (India: AROGRANITE),
Smithfield Foods in the U.S. WH Group is the world’s
a granite processor based an hour from Bangalore.
largest processor of pork meat, with operations and sales
It has a processing capacity of over one million
focused on China (43% sales) and the U.S. (50% sales).
square meters a year. It buys granite from Asian
Despite its backdrop for secular growth opportunities in
quarries and cuts it up into tiles or slabs. It’s a
China, the firm’s valuation multiples are heavily discounted
simple business. The ten-year ROEs before the
versus its global peers. WH Group is a holding company
U.S. recession in 2008 were 20+%; the last seven
representing the 2013 combination of Shuanghui
years, the ROE has been ~10%. They actually
Development of China and Smithfield Foods in the U.S.,
never lost money. The U.S. was their largest
rather than capitalizing potential synergies, the market
customer, and they had tripled capacity in 2007 to
implies a reduced valuation for Smithfield from its takeover
cater to U.S. residential demand. If you go to an
(and pre-merger) value. In sum, an attractive long-term
American home and you see a granite kitchen top,
growth business with compelling value-creation
most probably it’s from Aro’s factory. Aro is the
opportunities on a bottom-up basis.
largest exporter of Indian granite.
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 Value-oriented Equity Investment Ideas for Sophisticated Investors

 TATA Motors DVR (India: TATAMTRDVR), a  “India’s got a lot of promise, a lot of traction. Lots
divisional voting right of people got interested in it. For the first time in a
 Tata Investment Corp. (India: TATAINVEST), a number of years, actually decades, there seems to
Tata-related investment holding company, be hope for a change. The problem here is the
including stakes in Tata Motors, Titan (jewelry, following: how much change and how quickly.”
watch, and spectacles company), Tata Chai (tea  “…in each market there’s a distribution of
company), Tata DOCOMO (telecom company), companies of how they run their businesses in
Tata Power (power and utilities business), TCS terms of governance, behavior.”
(information systems and outsourcing), Tata  Two ideas: “One is Guoco Group (Hong Kong:
Hotels, and other assets. 53) and the other is Strait’s Trading (Singapore:
STRTR). One is subject to Hong Kong rules; the
JEAN-MARIE EVEILLARD, FIRST EAGLE FUNDS other is subject to Singapore rules, which are not
hugely dissimilar… Both companies are controlled
The following are selected quotations from the Q&A
by families.”
session with Jean-Marie Eveillard:
 “Today, I’m particularly intrigued by the Tokyo
stock market where it seems to me that the DAVID O’NEIL, ASEAN INVESTMENT MANAGEMENT
government has taken steps.” Vietnam Domestic Economy Recovery, 2012-2018
 “China reminds me a little bit of India in the early Key Propositions: Middle class will double by 2020; young
1990s…” demographic profile; revival of credit: annual credit growth
 “I have two problems with India today… The of 20-25% from 2016-2018 @ 8-9% lending rates;
stock market is expensive, although not like Tokyo industrial production + exports + tourism > 10% growth
in 1988 and 1989. I’m sure there are opportunities 2013-2018; deposit and lending rates achieve sustained
here and there, but overall the stock market is very lows 2015-2017; monetary/fiscal stimulus 2013-2018
expensive…” Investment Thesis: Residential real estate prices to double
by 2020; residential real estate sales volumes to increase by
 “In Asia, I’m intrigued by the Philippines and by
200-300% from 2013 through 2018; construction volumes
Indonesia. Again, it seems to me that steps have
to increase by 150-200% from 2013 through 2018; and
been taken there in both countries. The
construction materials - cement and steel volume sales to
consequences for investors in equities could be
increase by 150-200% from 2013 through 2018.
quite positive.”
Opportunity Set — 30 listed construction and real estate
 “One should keep an eye on a country like Brazil,
developers in Vietnam:
because sometimes you have a combination of
stock markets going down and the currency going  Land bank-rich developers who will accelerate
down. At some point, it creates opportunities… conversion of land into saleable developments - at
That’s true of Australia as well. There are a the 2012 cycle bottom this opportunity set traded
number of countries involved in commodities.” at 90-95% discounts to NAV or 0.2-0.4x book;
currently this discount is 65-75%, implying upside
 “I love the [Korean] preferreds…”
of 200% plus through 2018 (Fair Value 20%
discount to NAV, 10-12x sustainable earnings).
AMIT WADHWANEY, formerly with THIRD AVENUE MGMT  Leading construction firms who are leveraged to
The following are selected quotations from the Q&A the revival in infrastructure deployment and real
session with Amit Wadhwaney: estate recovery - at the 2012 cycle bottom this
 “Asia is not one big ball of wax. It’s a very opportunity set traded 0.1-0.3x Book Value;
heterogeneous collection of countries and currently this valuation is 0.5-1.1x book, implying
markets.” upside of 200% plus through 2018 (Peer Fair
Value multiples in Thailand and Indonesia are
 “Japan is making its own tottering attempts at a
>16x Earnings and >3x Book value).
comeback and deep down I am mildly optimistic. I
think some degree of shock therapy has been
administered.”

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Profiling Twenty Holdings of Berkshire Hathaway

Charter Communications (CHTR)
Services: Broadcasting & Cable TV ST. LOUIS MO www.charter.com
Charter is a cable TV company, providing high-definition and on-demand entertainment, high-speed Internet, and advanced phone services. Charter serves more
than six million customers in 29 U.S. states and ranks as one of the largest cable entertainment and broadband communications companies in the U.S.
Trading Data Consensus EPS Estimates Valuation
Price: $187.44 (as of 5/1/15) Month # of P/E FYE 12/31/14 n/m
52-week range: $134.14–$199 Latest Ago Ests P/E FYE 12/31/15 171x
Market value: $21.0 billion This quarter $0.04 -$0.01 19 P/E FYE 12/30/16 59x
Enterprise value: $42.0 billion Next quarter 0.24 0.18 19 P/E FYE 12/30/17 33x
Shares outstanding: 112.1 million FYE 12/31/15 1.09 0.78 18 EV/ LTM revenue 4.6x
Ownership Data FYE 12/30/16 3.20 2.88 17 EV/ LTM EBIT 41x
Notable holders: Mgmt and directors 1.8% FYE 12/30/17 5.73 5.28 12 P / tangible book n/m
Liberty Bb. 26% | Comcast 24% | Spo 7%
LT growth 3.0% 3.0% 1 Greenblatt Criteria
Berkshire 6% | Lone Pine 3% | Blue Ridge 2%
Coatue 2% | JANA 2% | J.P. Morgan 2% EPS Surprise Actual Est. LTM EBIT yield 2%
Insider buys (last six months): 6 / sells: 7 2/5/15 -$0.48 $0.01 LTM pre-tax ROC 10%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 12/31/14 12/31/13 12/31/14
Revenue 6,479 6,755 7,059 7,204 7,504 8,155 9,108 9,108 2,148 2,360
Gross profit 3,672 3,846 2,573 2,640 2,644 3,298 3,664 3,664 882 956
D&A 1,310 1,316 1,524 1,592 1,713 1,854 2,102 2,607 500 534
Adjusted operating income 963 1,143 1,040 1,052 936 948 1,023 1,089 251 290
Adjusted pretax income -977 50 159 84 28 113 105 109 42 13
Adjusted net income -878 1,658 -136 -215 -229 -7 -131 -164 46 -35
Adjusted diluted EPS -2.35 14.79 -1.20 -1.97 -2.30 -0.07 -1.21 -1.51 0.44 -0.32
Shares out (avg) 373 112 113 109 100 102 108 109 104 110
Cash from operations 399 594 1,928 1,737 1,876 2,158 2,359 2,359 595 630
Capex 1,202 1,134 1,209 1,311 1,745 1,825 2,221 2,221 566 543
Free cash flow -803 -540 719 426 131 333 138 138 29 87
… % of revenue:
Gross profit 56.7% 56.9% 36.4% 36.6% 35.2% 40.4% 40.2% 40.2% 41.1% 40.5%
Adjusted operating income 14.9% 16.9% 14.7% 14.6% 12.5% 11.6% 11.2% 12.0% 11.7% 12.3%
D&A 20.2% 19.5% 21.6% 22.1% 22.8% 22.7% 23.1% 28.6% 23.3% 22.6%
Capex 18.6% 16.8% 17.1% 18.2% 23.3% 22.4% 24.4% 24.4% 26.4% 23.0%
Cash, investments 960 709 4 2 7 21 3 3 21 3
Tangible assets 6,400 7,909 7,325 7,655 7,932 8,472 16,017 16,271 8,720 16,271
Debt 21,741 13,322 12,306 12,856 12,808 14,181 21,023 21,023 14,181 21,023
Common equity -10,506 1,915 1,478 409 149 151 146 146 151 146
Tangible equity -17,988 -6,834 -6,934 -7,537 -7,515 -8,672 -8,387 -8,133 -8,424 -8,133
EBIT/capital employed -16% >100% 15% 15% 14% 12% 9% 10% 15% 8%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$250

$200

$150

$100

$50

$0
May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Among largest providers of cable services in the U.S., delivering History of net losses. Charter’s GAAP net losses have been mainly
content and communications services to residential and commercial attributable to insufficient revenue to cover operating expenses,
customers. Charter’s infrastructure consists of a hybrid of fiber and interest, depreciation of cable assets, amortization of customer
coaxial cable plant with ~13 million estimated passings, with 97% intangibles, and non-cash taxes resulting from increases in deferred
at 550+ MHz, 98% of plant miles two-way active, and 99% all- tax liabilities. While some of these items do not reflect economic
digital. A national IP infrastructure interconnects Charter markets. reality, the fact is that the cable business remains a capital-intensive
Charter serves ~6.2 million residential and commercial customers, business under long-term technological threat from Internet-related
selling video, Internet, and voice services on a subscription basis, services as well as competition from phone companies. As a result,
often in a bundle of two or more services. Bundled services are one of the industry’s favored financial metrics, EBITDA, paints an
available to 98% of passings, and 62% of customers subscribe to a incomplete picture of economic performance. While we accept that
bundle of services. Charter serves ~4.2 million residential video the valuation of a cable business cannot be based on GAAP income,
customers. The company completed an all-digital rollout in 2014 ignorance of non-cash expenses may also obscure long-term reality.
and now offers 200+ HD channels and faster Internet speeds in Impossible to predict how industry consolidation will proceed.
virtually all markets (launched Charter Spectrum brand). Digital The pending Charter transactions and Comcast/TWC merger, if
video enables customers to access advanced services such as HD completed, would likely alter the industry structure to the benefit of
television, video on demand programming, an interactive program shareholders. However, regulatory scrutiny could slow this process
guide, and digital video recorder service. Charter also serves ~4.8 or result in concessions that lower the financial benefits to the
million residential Internet customers, with download speeds of up remaining players. Investing in Charter at this time requires comfort
to 100+ Mbps. Four-fifths of Internet customers have 60+ Mbps not with a specific deal but with Charter leadership’s ability to
download speed. Charter provides voice service to ~2.4 million purse and execute potential future deals in a value-enhancing way.
residential customers. Voice services include unlimited local and
long distance calling to the U.S. and Canada, plus features such as SELECTED OPERATING DATA
voicemail, call waiting, and caller ID. The company also provides FYE December 31 2010 2011 2012 2013 2014
serves ~620,000 commercial primary service units, primarily small- ∆ revenue 5% 2% 4% 9% 12%
and medium-sized commercial customers. In 2014, Charter derived Employees (‘000) 16.6 16.8 17.8 21.6 23.2
Revenue ($mn) 7,059 7,204 7,504 8,155 9,108
83% of revenue from residential video, Internet, and voice services.
% of revenue by major product line:
Sales from residential “triple-play” customers and commercial Residential – video 52% 50% 49% 50% 49%
services have contributed the majority of recent revenue growth. Residential – internet 23% 24% 25% 27% 28%
Pending $10.4 billion Bright House acquisition to add ~2 million Residential – voice 12% 12% 11% 8% 6%
video customers to Charter in growing markets such as Florida. The Commercial 7% 8% 9% 10% 11%
price amounts to 7.6x pro forma 2014 Bright House EBITDA (less Paying subscriber units (thousands):
than 7x including synergies and tax benefits). Deal consideration Residential – video 4,278 4,144 3,989 4,177 4,160
Residential – internet 3,246 3,492 3,785 4,383 4,766
consists of $2.0 billion in cash, $2.5 billion of convertible preferred
Residential – voice 1,717 1,791 1,914 2,273 2,439
partnership units, and $5.9 billion of common units. The partnership Total residential 9,241 9,427 9,688 10,833 11,365
structure offers tax benefits; the 13-person board will include three Total commercial 441 412 467 567 619
people from Liberty Broadband and three from Advance/Newhouse. EBIT margin (adjusted)1 15% 15% 12% 12% 11%
Liberty, led by John Malone and Greg Maffei, plans to invest $700 D&A as % of revenue 22% 22% 23% 23% 23%
million into the deal, bringing pro forma net leverage to 3.9x. Capex as % of revenue 17% 18% 23% 22% 24%
Pending Comcast transactions are part of major transformation Adjusted EBIT1 ($mn) 1,040 1,052 936 948 1,023
/ Capital employed ($mn) 6,210 6,109 6,200 6,560 10,516
that includes Charter’s residential video customers going from 4.1
= Return on capital employed 17% 17% 15% 14% 10%
million to 10.1 million pro forma for the Comcast and Bright House 1
Adjusted for unusual items of -$101 million in 2010, -$154 million in 2011, -$75 million in
deals. The Comcast agreement, signed in April 2014 and contingent 2012, -$162 million in 2013, and -$52 million in 2014.
on Comcast’s merger with Time Warner Cable, includes an asset RATINGS
acquisition, transfer, and equity swap with a Comcast “SpinCo”. VALUE Intrinsic value higher than market quotation? 
Tax assets support operating growth and M&A. Charter has net SAFETY Low risk of permanent capital loss? 
operating loss carryforwards of $9.5 billion, mostly unrestricted, MOAT Able to sustain high returns on capital? 
and is not expected to be a significant income tax payer until after MANAGEMENT Capable and properly incentivized team? 
2020, with remaining NOLs becoming available over time. The CAPITALIZATION Strong, deleveraged balance sheet? 
pending strategic transactions preserve and enhance Charter’s tax PERFORMANCE Business fundamentals improving? 
assets, as they will be applied to a larger base of operating income. MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Charter, backed by John Malone’s Liberty Broadband, has emerged as a key driver of consolidation in the U.S. cable TV industry, agreeing
to acquire and swap assets with Comcast while also acquiring most of Bright House Networks. The deals involving Charter would see the
company more than double, with subscribers going from 4.1 million in 2011 to 10.1 million after the pending transactions, revenue rising
from $7.2 billion in 2011 to $15.2 billion pro forma for the deals, and adjusted EBITDA increasing from $2.7 billion to $5.8 billion. The
Charter deals are contingent on the completion of Comcast’s merger with Time Warner Cable, a deal that has been in making for more than
a year and that has encountered regulatory scrutiny. If the Comcast/TWC deal unravels, Charter may renew its bid for TWC, or the latter
could look to become an acquirer. In any case, it appears likely that the U.S. cable industry will continue along a path of consolidation,
improving industry economics. Berkshire’s stakes in both Charter and Liberty Media are not surprising given John Malone’s track record
of creating shareholder value through sophisticated financial and strategic transactions. Given the involvement of Liberty, Charter should
benefit from the major change currently underway in the U.S. cable industry. However, with Charter trading at an implied enterprise value
of roughly ten times pro forma EBITDA, it would be difficult to argue that this leveraged equity represents a “hidden value” opportunity.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

CHARTER – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Comcast / CMCSA 58.41 -84% 4% 147,728 191,450 n/m 6% 5% 6% 6% 36% 495 6% 5% 70% 22% -113%
DIRECTV / DTV 90.40 -88% 2% 45,567 61,744 n/m 7% 6% 7% 7% 54% 1,120 5% 4% 47% 17% -49%
DISH Network / DISH 68.52 -88% 18% 31,645 36,872 n/m -1% 3% 2% 3% 40% 771 -40% -74% 29% 12% -17%
Liberty Broadband / LBRDA 53.94 -21% 8% 5,575 5,893 44% 0% neg. 2% 2% 1% 3 -50% -77% 99% 150% 83%
Charter Comms / CHTR 187.44 -84% 6% 21,011 42,031 n/m 1% -1% 1% 2% 22% 393 -10% 10% 40% 12% -50%
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

CHARTER – THE TRANSFORMATION

Charter is not cheap on
GAAP financial measures

Charter is undergoing a major

transformation as the U.S.
cable industry consolidates

1
Represents 2014 projected New Charter revenue of $11.424 billion and adjusted EBITDA of $4.442 billion as per page 79 of Charter’s DEF 14A filed on February 17, 2015 plus 2014 Bright
House pro forma revenue of $3.759 billion and adjusted EBITDA of $1.374 billion. Revenue and adjusted EBITDA do not consolidate GreatLand Connections financial results except for the
4.25% annual management fee paid by GreatLand Connections to Charter. 2 Includes owned and serviced video customers, pro forma for the Comcast and Bright House transactions.

CHARTER – CALCULATION of ADJUSTED EBITDA ($ in millions)

1
Adjusted EBITDA is defined as net loss plus net interest expense, income taxes, D&A, stock compensation expense, loss on extinguishment of debt, (gain) loss on derivative instruments,
net, and other operating expenses, such as merger and acquisitions costs, special charges and (gain) loss on sale or retirement of assets. As such, it eliminates the non-cash D&A expense
that results from the capital-intensive nature of the businesses as well as other non-cash or non-recurring items, and is unaffected by the capital structure or investment activities.

BRIGHT HOUSE NETWORKS – CALCULATION of ADJUSTED EBITDA ($ in millions)

The Bright House deal

significantly adds to
Charter’s EBITDA

Source for the above three tables: Company presentation dated March 31, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

CHARTER COMMUNICATIONS – TAX BASIS and LOSS CARRYFORWARD AVAILABILITY

Large tax assets are crucial to
the Charter investment thesis

1
Excludes depreciation and amortization on capex in 2015 and beyond, and from any future mergers and acquisitions. Source: Company presentation dated February 5, 2015.

CHARTER COMMUNICATIONS – PRO FORMA DEBT STRUCTURE ($ in millions)

An additional cash infusion by

Liberty Broadband pushes
Charter’s pro forma leverage
ratio just below 4.0x

1
Includes $798M of intercompany notes and $85M in letters of credit and capital leases. Intercompany loan balances consolidate out at the applicable entities as follows: $47M owed by
CCO to Charter Communications Holding Company, LLC, $279M owed by CCO to CCH II and $472M owed by CCO to CCOH. Excludes Term Loan G at unrestricted subsidiary, CCO
Safari, LLC. 2 For CCOH, consists of $188M of minority interest of CC VIII (the “Liquidation Preference”), an indirect subsidiary of CCO, held by CCH I, LLC and Charter, less $472M owed
by CCO to CCOH. The Liquidation Preference is included in the leverage calculation shown for CCOH. The CCO leverage calculation shown is consistent with the CCO Credit Facility and
excludes the Liquidation Preference and excludes senior unsecured notes at CCOH Safari LLC. 3 Includes $279M of intercompany notes from CCO to CCH II, $47M of intercompany notes
from CCO to Charter Communications Holding Company, LLC and elimination of the Liquidation Preference. 4 Calculated using aggregate principal amount of debt at 12/31/14 divided by
LTM 4Q14 Adjusted EBITDA of $3,190M. 5 Calculated using New Charter Communication, Inc. debt – PF for Comcast transactions, divided by 2014 projected New Charter Adjusted
EBITDA of $4,442M as per page 79 of Charter’s DEF 14A filed on February 17, 2015. 6 Calculated using aggregate principal amount of debt at 12/31/14, including CCOH Safari and CCO
Safari debt and the incremental debt (estimated at $2.1B) to be issued to consummate the Bright House Networks transaction, less $700M in cash received from Liberty Broadband exercise
of its preemptive rights, divided by projected 2014 New Charter pro forma Adjusted EBITDA of $4,442M and Bright House pro forma Adjusted EBITDA of $1,374M.
Source: Company presentation dated March 31, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Coca-Cola (KO)
Consumer Non-Cyclical: Beverages (Non-Alcoholic), Member of S&P 500 ATLANTA GA thecoca-colacompany.com
Coca-Cola is the world’s largest beverage company, with 500+ sparkling and still brands. Led by Coca-Cola, one of the world’s most valuable and recognizable
brands, the portfolio features 17 billion-dollar brands. Globally, the company is the leading provider of sparkling beverages, ready-to-drink coffees, and juices and
juice drinks. Through the world’s largest beverage distribution system, consumers in 200+ countries drink 1.9 billion company-branded servings a day.
Trading Data Consensus EPS Estimates Valuation
Price: $40.91 (as of 5/1/15) Month # of P/E FYE 12/31/14 26x
52-week range: $39.06–$45.00 Latest Ago Ests P/E FYE 12/31/15 20x
Market value: $178.7 billion This quarter $0.60 $0.60 18 P/E FYE 12/30/16 19x
Enterprise value: $201.2 billion Next quarter 0.52 0.52 18 P/E FYE 12/30/17 18x
Shares outstanding: 4,368.5 million FYE 12/31/15 2.00 1.98 22 EV/ LTM revenue 4.4x
Ownership Data FYE 12/30/16 2.13 2.12 22 EV/ LTM EBIT 19x
Notable holders: Management and directors 1.5% FYE 12/30/17 2.29 2.28 13 P / tangible book 64.2x
Berkshire 9% | Cap World 3% | BlackRock 3%
LT growth 4.8% 4.9% 3 Greenblatt Criteria
FMR 2% | Columbia 2% | Wellington 1%
Northern Trust 1% | Yacktman 1% | Cap Re 1% EPS Surprise Actual Est. LTM EBIT yield 5%
Insider buys (last six months): 10 / sells: 11 4/22/15 $0.48 $0.42 LTM pre-tax ROC 63%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 4/3/15 3/28/14 4/3/15
Revenue 31,944 30,990 35,119 46,542 48,017 46,854 45,998 46,133 10,576 10,711
Gross profit 20,570 19,902 22,426 28,327 28,964 28,433 28,109 28,224 6,493 6,608
Adjusted operating income 8,796 8,544 8,891 10,806 11,196 11,105 10,553 11,096 2,504 2,421
Adjusted pretax income 7,856 9,259 14,088 11,552 11,949 11,854 10,202 9,879 2,333 2,106
Adjusted net income 6,157 7,137 11,668 8,678 9,159 8,961 7,975 7,814 1,747 1,682
Adjusted diluted EPS 1.33 1.54 2.53 1.90 2.03 2.02 1.82 1.78 0.40 0.39
Dividend 0.76 0.82 0.44 0.47 1.02 1.12 1.22 1.25 0.31 0.33
Shares out (avg) 4,630 4,628 4,616 4,568 4,504 4,434 4,387 4,382 4,401 4,365
Cash from operations 7,571 8,186 9,532 9,474 10,645 10,542 10,615 11,123 1,066 1,574
Capex 1,968 1,993 2,215 2,920 2,780 2,550 2,406 2,473 449 516
Free cash flow 5,603 6,193 7,317 6,554 7,865 7,992 8,209 8,650 617 1,058
… % of revenue:
Gross profit 64.4% 64.2% 63.9% 60.9% 60.3% 60.7% 61.1% 61.2% 61.4% 61.7%
Adjusted operating income 27.5% 27.6% 25.3% 23.2% 23.3% 23.7% 22.9% 24.1% 23.7% 22.6%
Cash, investments 4,979 9,213 11,337 14,029 16,551 20,268 21,675 20,049 19,433 20,049
LT investments 5,779 6,755 7,585 7,388 10,448 11,512 13,625 13,895 13,127 13,895
PP&E, net 8,326 9,561 14,727 14,939 14,476 14,967 14,633 14,346 14,860 14,346
Tangible assets 28,014 35,843 46,012 52,305 58,837 62,444 65,651 64,962 63,694 64,962
Short-term debt 6,531 6,800 9,376 14,912 17,874 17,925 22,682 16,423 19,801 16,423
Long-term debt 2,781 5,059 14,041 13,656 14,736 19,154 19,063 26,087 18,640 26,087
Tangible equity 7,967 12,518 4,094 3,966 5,453 5,562 3,948 2,783 5,059 2,783
TBV / tangible assets 28% 35% 9% 8% 9% 9% 6% 4% 8% 4%
TBV per share 1.72 2.71 0.89 0.87 1.21 1.25 0.90 0.64 1.15 0.64
EBIT/capital employed 93% 82% 67% 65% 63% 62% 60% 63% 73% 67%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$50

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Owns some of the world’s most valuable consumer brands. Growing health consciousness among consumers may reduce
Coca-Cola is the leader in sparkling beverages, ready-to-drink demand for sugary carbonated drinks, threatening the growth of
coffee, and juice drinks, number-two in sports drinks, and number- the key Coca-Cola brand. The company has dealt successfully with
three in packaged water and energy drinks. The company owns four this risk in the past, launching Diet Coke and Coca-Cola Zero. Diet
of the top five non-alcoholic sparkling brands — Coca-Cola, Diet brands are not without their own health concerns, however, as some
Coke, Fanta, and Sprite. Twenty brands record sales of $1+ billion argue that artificial sweeteners may have carcinogenic effects. Over
each, including Dasani, Fuze, Gold Peak, Minute Maid, Powerade, the long term, it seems likely that Coca-Cola will need to keep
Schweppes, Simply Orange, and Vitaminwater. Innovations and addressing health-related concerns through portfolio expansion,
investments include Coca-Cola Life, Monster Energy, Innocent fruit potentially moving the business mix toward healthier alternatives.
drinks, SmartWater, and Keurig Green Mountain. Beverage brands Management’s “long-term growth algorithm” cannot work
owned or licensed by the company account for 1.9 billion of 57 indefinitely. Coca-Cola continues to articulate targets for growth of
billion servings of all beverages consumed worldwide every day. mid-single digits in revenue, 6-8% in pretax profit, and high-single
Brand power and world’s largest beverage distribution system digits in EPS, driven by industry growth, share gains, margin
provide sustainable competitive advantage. The key Coca-Cola expansion, and capital efficiency. Perhaps most obviously among
brand has long been associated in the minds of consumers with the these drivers, margin expansion cannot be achieved consistently
experiences that make life enjoyable: celebrations and time with forever. Net income and revenue growth should converge over time.
family and friends, sports, and entertainment. Coca-Cola has also
carefully cultivated a mystique around its secret beverage formula, SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
instilling in consumers’ mind that Coca-Cola is somehow special.
∆ revenue 13% 33% 3% -2% -2%
On the distribution side, the company reaches into virtually all ∆ gross profit 13% 26% 2% -2% -1%
places around the world, even into geographies with lacking retail Employees (‘000) 140 146 151 131 129
infrastructure or major political instability. The company has 250 Revenue ($bn) 35.1 46.5 48.0 46.9 46.0
bottling partners, 23+ million outlets and ranks among the largest …from the U.S. 30% 40% 41% 42% 43%
private employers, with 700,000+ people employed in the system. % of revenue by segment (incl. eliminations):
Growth opportunity remains, particularly in emerging markets. Eurasia and Africa 7% 6% 6% 6% 6%
From 2015-2020, 700 million people are expected to join the global Europe 15% 12% 11% 11% 12%
Latin America 12% 10% 10% 11% 10%
“middle class,” contributing to growth of $20+ trillion in personal North America 32% 44% 45% 46% 47%
consumption expenditures and $300+ billion in retail value growth Pacific 15% 13% 13% 13% 12%
for the non-alcoholic ready-to-drink (NARTD) industry. Average Bottling Investments 24% 18% 19% 16% 15%
annual servings of carbonated non-alcoholic drinks average ~270 Pretax margin by segment:
per person in developed markets (~400 in the U.S.), compared to Eurasia and Africa 39% 38% 40% 40% 41%
~35 in emerging markets, including ~15 in India and ~40 in China. Europe 58% 57% 59% 55% 52%
Despite this remaining opportunity, still beverages are expected to Latin America 59% 60% 60% 59% 50%
outgrow sparkling drinks, forcing Coca-Cola to keep building the North America 14% 11% 12% 11% 8%
portfolio of non-carbonated beverages, such as water, tea, and juice. Pacific 39% 37% 40% 42% 43%
Overall NARTD industry value is projected to grow ~5% annually Bottling Investments 14% 10% 10% 9% 10%
Selected items as % of revenue:
from 2015-2020, enabling the company to meet growth targets.
Gross profit 64% 61% 60% 61% 61%
Aims to achieve mid-single digit revenue growth over the long EBIT (adjusted)1 25% 23% 23% 24% 23%
term by leveraging industry growth, market share gains, and price Adjusted EBIT1 ($bn) 8.9 10.8 11.2 11.1 10.6
realization. A dynamic brand portfolio, consistent marketing, and / Capital employed ($bn) 13.4 16.4 17.7 17.2 16.2
unrivaled distribution put the company in a good position to outpace = Return on capital employed 66% 66% 63% 65% 65%
industry growth. Management targets “economic profit” growth of Trailing P/E (end) 13x 19x 18x 22x 26x
10+% over time, with 70% coming from revenue growth and 30% Shares out (avg) (mn) 4,616 4,568 4,504 4,434 4,387
from a combination of margin expansion and capital efficiency. The ∆ shares out (avg) 0% -1% -1% -2% -1%
1
company is implementing a productivity program designed to save Adjusted for unusual items of $119 million in 2010, -$94 million in 2011, -$140 million in
2012, -$377 million in 2013, and -$877 million in 2014.
~$3 billion annually on a spend base of $36 billion, comprised one-
half of COGS, one-third of opex, and the remainder of marketing. RATINGS
Strong cash flow and return of capital to shareholders. Coca- VALUE Intrinsic value higher than market quotation? 
Cola generated cash from operations of $10.6 billion in 2014, with SAFETY Low risk of permanent capital loss? 
capex of $2.4 billion. The company has returned $31 billion of cash MOAT Able to sustain high returns on capital? 
to shareholders in the past four years alone, including repurchases MANAGEMENT Capable and properly incentivized team? 
of $12 billion. Management has raised the dividend during each of CAPITALIZATION Strong, deleveraged balance sheet? 
the past 53 years, a remarkable record (recent yield of ~3.2%). PERFORMANCE Business fundamentals improving? 
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Coca-Cola has dealt with some growth challenges over the past year, as the macro environment and currency headwinds have affected
revenue, forcing management to more aggressively pursue cost efficiencies and to keep optimizing the brand portfolio. These are relatively
minor adjustments, as the company’s long-term formula of mid-single digit sales growth driving high-single digit EPS growth remains
intact, at least for the foreseeable future. Carbonated soft drinks have been under the threat of healthier alternatives for some time, and this
risk is not going away. Balancing it, however, is continued growth in per-capita soft drink servings in developing and emerging markets.
With management focused on nurturing the product portfolio, which includes twenty $1+ billion brands, and with consistent return of
capital to shareholders, the company remains a long-term compounder. We find the shares modestly attractive at an FCF yield of ~5%.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

COCA-COLA – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Valuation methodology: Valuation methodology: Valuation methodology:
Based on revenue for the twelve months Based on median consensus EPS
Based on free cash flow for the twelve
ended April 3, 2015 and average EBIT estimate for the fiscal year ending
months ended April 3, 2015
margin for past seven fiscal years December 31, 2015
▼ ▼ ▼
TTM net sales: $46 billion Consensus FY15E EPS: $2.00 (‡) Operating cash flow: $11 billion
multiplied by minus minus
Average 7-year EBIT margin: 24.8% Assumed upside/downside to Capex: $2.5 billion
equals FY15 EPS estimate: 5% * $2.00 equals
Estimated EBIT: $11 billion equals Free cash flow: $8.7 billion
multiplied by Revised FY15 EPS estimate: $2.10 divided by
Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 2.5% (*)
12.0x Corresponding industry P/E: 21.5x (*) equals
equals equals Industry FCF yield-implied fair value:
Estimated fair enterprise value of Industry multiple-implied fair value: $349 billion ($80 per share)
Coca-Cola Co.: $137 billion $197 billion ($45 per share) multiplied by
plus multiplied by Assumed required FCF yield as a
Cash, ST investments: $20 billion Assumed KO multiple as a percentage of the industry FCF yield:
minus percentage of the industry multiple: 160%
Total debt: $43 billion 104% (4.0% required FCF yield)
equals (20.0x fair value P/E multiple) equals
Estimated fair value of the common equals Estimated fair value of the common
equity of Coca-Cola Co.: Estimated fair value of the common equity of Coca-Cola Co.:
$115 billion, or $26 per share equity of Coca-Cola Co.: $218 billion, or $50 per share
(based on 4.4 billion shares out) $205 billion ($47 per share) (based on 4.4 billion shares out)

36% downside from the recent (based on 4.4 billion shares out) 22% upside to the recent
stock price ($41 per share) 15% upside to the recent stock price ($41 per share)
(*) Represents Beverages (Non-Alcoholic) median. stock price ($41 per share)
(‡) The FY15 consensus EPS estimate of $2.00 has remained roughly flat over the past three months. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

COCA-COLA – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Dr Pepper Snapple / DPS 75.97 -84% 7% 14,566 17,090 n/m 6% 5% 5% 6% 36% 325 3% 4% 59% 19% -134%
Keurig Green Mtn / GMCR 116.23 -96% 37% 18,792 18,460 11% 1% 3% 4% 4% 26% 713 7% 0% 39% 20% 62%
Monster Beverage / MNST 141.13 -93% 3% 24,014 22,863 6% 2% 2% 2% 3% 11% 1,899 -10% 12% 54% 30% 78%
PepsiCo / PEP 95.56 -54% 5% 141,051 162,921 n/m 6% 4% 5% 5% 41% 245 0% -3% 54% 15% -31%
Coca-Cola Co. / KO 40.91 -54% 10% 178,715 201,176 2% 5% 4% 5% 5% 23% 357 -1% 1% 61% 24% 4%
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

COCA-COLA – RETURN of CAPITAL to OWNERS, 2011-2014 COCA-COLA – LONG-TERM GROWTH TARGETS *

$31+ billion
returned to Management
shareholders maintains fairly
over four ambitious
years long-term EPS
growth targets

* *
Received $900 million of cash related to the disposal of certain bottling operations. Comparable currency neutral. Source for these two charts: Presentation, Feb. 20, 2015.

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 Currency headwinds make 2015 Value-oriented Equity Investment Ideas for Sophisticated Investors
a comparatively challenging year

COCA-COLA – MANAGEMENT GUIDANCE, 2015

Source: Company presentation dated December 15, 2014.

COCA-COLA – PRODUCTIVITY PROGRAM

Cost reduction
has become a
focus amid weak
top-line growth

Source: Company presentation dated February 20, 2015.

INDUSTRY – GLOBAL NARTD VALUE GROWTH, by market type INDUSTRY – GLOBAL NARTD VALUE GROWTH, by beverage type

Modest growth
should continue
in the non-
alcoholic ready-
to-drink industry

*
NARTD = non-alcoholic ready-to-drink industry. Growth based on internal estimates. NARTD excludes white milk and bulk water. Source: Presentation dated February 20, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Costco Wholesale (COST)

Services: Retail (Specialty Non-Apparel), Member of S&P 500 ISSAQUAH WA www.costco.com
Club retailer Costco operates 671 warehouses, including 474 in the United States and Puerto Rico, 88 in Canada, 34 in Mexico, 26 in the United Kingdom, 20 in
Japan, 11 in Korea, 10 in Taiwan, seven in Australia and one in Spain. Costco also operates e-commerce websites.
Trading Data Consensus EPS Estimates Valuation
Price: $145.39 (as of 5/1/15) Month # of P/E FYE 8/31/14 31x
52-week range: $108.03–$154.23 Latest Ago Ests P/E FYE 8/31/15 28x
Market value: $64.0 billion This quarter $1.17 $1.17 25 P/E FYE 8/30/16 26x
Enterprise value: $61.5 billion Next quarter 1.68 1.68 24 P/E FYE 8/30/17 23x
Shares outstanding: 440.0 million FYE 8/31/15 5.23 5.23 20 EV/ LTM revenue 0.5x
Ownership Data FYE 8/30/16 5.70 5.71 28 EV/ LTM EBIT 18x
Notable holders: Management and insiders <1% FYE 8/30/17 6.33 6.36 12 P / tangible book 6.3x
Cap World 5% | FMR 3% | BlackRock 3%
LT growth 10.4% 10.4% 5 Greenblatt Criteria
Costco 401K 4% | Jennison 2% | Cap Re 2%
Northern Trust 2% | T. Rowe 1% | Davis 1% EPS Surprise Actual Est. LTM EBIT yield 6%
Insider buys (last six months): 23 / sells: 9 3/5/15 $1.25 $1.18 LTM pre-tax ROC 36%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended August 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 2/15/15 2/16/14 2/15/15
Revenue 72,483 71,422 77,946 88,915 99,137 105,156 112,640 115,637 26,306 27,454
Gross profit 8,980 9,087 9,951 11,176 12,314 13,208 14,182 14,764 3,263 3,557
Adjusted operating income 1,988 1,794 2,085 2,448 2,759 3,053 3,220 3,475 724 877
Adjusted pretax income 2,030 1,744 2,062 2,392 2,767 3,051 3,197 3,459 728 870
Adjusted net income 1,302 1,103 1,311 1,471 1,709 2,039 2,058 2,264 463 598
Adjusted diluted EPS 3.00 2.54 2.99 3.37 3.94 4.68 4.69 5.16 1.05 1.36
Dividend 0.61 0.68 0.77 0.89 1.03 8.17 1.33 6.42 0.31 5.36
Shares out (avg) 434 434 439 436 434 436 439 439 440 440
Cash from operations 2,206 2,092 2,780 3,198 3,057 3,437 3,984 4,360 713 900
Capex 1,599 1,250 1,055 1,290 1,480 2,083 1,993 2,139 447 612
Free cash flow 607 842 1,725 1,908 1,577 1,354 1,991 2,221 266 288
… % of revenue:
Gross profit 12.4% 12.7% 12.8% 12.6% 12.4% 12.6% 12.6% 12.8% 12.4% 13.0%
Adjusted operating income 2.7% 2.5% 2.7% 2.8% 2.8% 2.9% 2.9% 3.0% 2.8% 3.2%
Cash, investments 3,275 3,727 4,749 5,613 4,854 6,124 7,315 7,453 6,482 7,453
Receivables 748 834 884 965 1,026 1,201 1,148 1,287 1,244 1,287
Inventory 5,039 5,405 5,638 6,638 7,096 7,894 8,456 8,558 8,267 8,558
PP&E, net 10,355 10,900 11,314 12,432 12,961 13,881 14,830 14,872 14,348 14,872
Tangible assets 20,609 21,908 23,744 26,687 27,140 30,283 33,024 33,600 31,566 33,600
Debt 2,346 2,226 2,167 2,153 1,381 5,194 5,100 5,030 4,985 5,030
Total liabilities 11,490 11,955 12,986 14,759 14,779 19,450 20,721 23,394 20,051 23,394
Tangible equity 9,118 9,953 10,758 11,928 12,361 10,833 12,303 10,206 11,515 10,206
TBV / tangible assets 44% 45% 45% 45% 46% 36% 37% 30% 36% 30%
TBV per share 20.99 22.94 24.53 27.35 28.51 24.86 28.04 23.18 26.18 23.18
EBIT/capital employed 25% 22% 25% 28% 29% 31% 31% 36% 30% 49%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Second-largest retailer globally, with revenue of $105 billion Vigorous and widespread competition from a wide range of
(~$150 million per warehouse), 2.3+ million transactions per day, global, national and regional wholesalers and retailers, including
square footage of 94+ million (144,000 sq. ft per warehouse), and supermarkets, supercenter stores, and department and specialty
195,000 employees. Costco operates 672 warehouses, including 474 stores, gasoline stations, and Internet-based retailers. Sam’s Club
in the U.S. and Puerto Rico, 89 in Canada, 34 in Mexico, 26 in the (Wal-Mart) is Costco’s most formidable direct competitor in North
U.K., twenty in Japan, eleven in Korea, ten in Taiwan, seven in America, although Costco has managed to cultivate a reputation for
Australia, and one in Spain. The company plans to open up sixteen a higher-quality merchandise assortment. The greatest long-term
new warehouses (including one relocation) prior to the end of the threat to Costco may come from Amazon.com, the Internet retailer
fiscal year ending August 2015. Costco warehouses exhibit a that keeps innovating and expanding. Amazon’s Prime Pantry
“treasure hunt” atmosphere that makes shopping more enjoyable. service lets U.S. customers ship 45 pounds of groceries for a $6 fee.
The company began operations in Seattle, Washington, in 1983. Traditional, bricks-and-mortar competitors include Wal-Mart,
Membership-based model provides stream of high-margin Target, Lowe’s, Home Depot, Office Depot, PetSmart, Staples,
recurring revenue, with related cash fees of $2.6+ billion. The Kroger, Trader Joe’s, Whole Foods, Walgreens, and Best Buy.
model boosts loyalty and encourages consumption as customers Dependent on U.S. consumer spending, as nearly three-fourths of
seek to amortize the membership fee ($55-110 per year) across a revenue still comes from the U.S. Costco has gained share steadily
greater volume of goods. The number of cardholders has risen from over time, especially when consumers focus on saving money. Still,
50 million in 2007 to 79 million this year (43 million households), Costco’s volumes are not immune to downturns in retail spending.
supported by a 90+% renewal rate in the U.S. and Canada. The
membership model helps to lower shrinkage, which has amounted SELECTED OPERATING DATA
FYE August 31 2010 2011 2012 2013 2014 1H15
to less than 0.2% of sales in recent year. The company spends less
∆ comp sales – U.S. 4% 7% 7% 6% 5% 5%
on marketing and promotional activities than do many competitors.
∆ comp sales – ROW 19% 16% 6% 6% 3% -1%
Members view Costco as a pricing authority and consider price- ∆ comp sales – total 7% 10% 7% 6% 4% 3%
comparison shopping unnecessary. Costco offers low prices on a ∆ revenue 9% 14% 11% 6% 7% 6%
limited selection of nationally branded and private-label products, ∆ gross profit 10% 12% 10% 7% 7% 9%
resulting in high sales volumes and rapid inventory turnover. No- Full-time employees (‘000) 82 92 96 103 112 n/a
frills, self-service warehouses enable Costco to operate profitably at Part-time employees (‘000) 65 72 78 81 83 n/a
gross margin of only 10-11% (net sales less merchandise costs). Revenue ($bn) 77.9 88.9 99.1 105.2 112.6 54.3
Costco generally sells inventory before it is required to pay % of revenue by segment:
U.S. 76% 73% 72% 72% 71% 72%
merchandise suppliers, creating a favorable working capital cycle.
Canada 15% 16% 16% 16% 16% 15%
Steady expansion has continued in good times and bad, with Rest of world 8% 11% 12% 12% 13% 13%
Costco opening 27, 31, 26, 16, 13, 20, 16, 26, and 29 warehouses in Operating margin by segment:
the fiscal years 2006-2014, respectively. Capex has increased from U.S. 2% 2% 2% 2% 2% 3%
$1.3 billion in FY11 to $2.6 billion in FY15E, suggesting that Canada 5% 4% 4% 4% 4% 5%
Costco continues to find high-return reinvestment opportunities Rest of world 4% 4% 4% 4% 4% 4%
around the world, perhaps even at an accelerating rate (although the Membership (mn) 58 64 67 71 76 79
latter is likely tied more to improvement in global consumer Adjusted ≈ GAAP EBIT ($bn) 2.1 2.4 2.8 3.1 3.2 1.6
/ Capital employed ($bn) 8.3 8.8 9.4 9.9 10.5 9.6
spending rather than a fundamental shift in the market opportunity).
= Return on capital employed 25% 28% 29% 31% 31% 34%
Returning capital to shareholders. Costco authorized a four-year, Trailing P/E (end) 24x 24x 25x 25x 30x 19x
$4 billion repurchase plan in April. The company has bought back Forward P/E (end) 21x 21x 21x 25x 26x 25x
shares fairly consistently, spending ~$7 billion and reducing the Shares out (avg) (mn) 439 436 434 436 439 440
share count by ~10% over the past decade. Costco recently raised ∆ shares out (avg) 1% -1% -1% 0% 1% 0%
the quarterly dividend from $0.355 to $0.40 per share (~1% yield).
RATINGS
Reinvestment of capital in the business has been a priority for
VALUE Intrinsic value higher than market quotation? 
management, as high-ROIC store opening opportunities remain
SAFETY Low risk of permanent capital loss? 
available, especially outside the U.S. Capex is expected to increase
MOAT Able to sustain high returns on capital? 
from an average of $2.1 billion in FY13-14 to $2.6 billion in FY15. MANAGEMENT Capable and properly incentivized team? 
Costco has a strong balance sheet, with cash of $7.5 billion and debt CAPITALIZATION Strong, deleveraged balance sheet? 
of $3.8 billion, giving the company strategic flexibility to pursue PERFORMANCE Business fundamentals improving? 
expansion opportunities or accelerate return of capital to investors. MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Costco has executed steadily in the past year, with comparable store sales rising in the mid- to high-single digits in constant currency terms
and with the number of warehouses creeping up as planned. The company is one of the highest-quality retail businesses, operating a low-
cost membership warehouse model that establishes the company as a pricing authority and creates high member loyalty. The company has
done all the right things in bricks-and-mortar retailing, focusing on the winning combination of good merchandising and low prices while
avoiding unnecessary frills and minimizing dependence on short-term promotions. Costco retains a large growth opportunity outside the
U.S., giving management a long runway of high-ROIC reinvestment in new warehouses. The biggest threat to Costco’s model may come
from Amazon.com, which relentlessly leverages the technology and scale advantages of online retailing leadership. Costco has largely
avoided head-to-head competition against Amazon due to the high shipping cost content of certain products, the perishable nature of some
products, and the large average customer purchase size (which makes a trip to a physical store worthwhile). While investors cannot afford
to ignore this long-term threat, Costco generated FCF of $2.2 billion (or higher if adjusted for growth capex) in the past twelve months, and
with FCF likely to grow, the business continues to create shareholder value. The shares appear fairly valued at an FCF yield of roughly 4%.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

COSTCO – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on LTM revenue and average Based on median consensus EPS Based on median consensus EPS
EBIT margin for past seven fiscal years estimate for FYE August 31, 2015 estimate for FYE August 30, 2016
▼ ▼ ▼
TTM net sales: $116 billion Consensus FY15E EPS: $5.23 (‡) Consensus FY16E EPS: $5.70 (§)
multiplied by minus minus
Average 7-year EBIT margin: 2.7% Assumed upside/downside to Assumed upside/downside to
equals FY15 EPS estimate: 5% * $5.23 FY16 EPS estimate: 20% * $5.70
Estimated EBIT: $3.2 billion equals equals
multiplied by Revised FY15 EPS estimate: $5.49 Revised FY16 EPS estimate: $6.84
Assumed fair value multiple of EBIT: multiplied by multiplied by
12.0x Corresponding industry P/E: 17.3x (*) Corresponding industry P/E: 15.5x (*)
equals equals equals
Estimated fair enterprise value of Industry multiple-implied fair value: Industry multiple-implied fair value:
Costco Wholesale: $38 billion $42 billion ($95 per share) $47 billion ($106 per share)
plus multiplied by multiplied by
Cash, ST investments: $7.5 billion Assumed COST multiple as a Assumed COST multiple as a
minus percentage of the industry multiple: percentage of the industry multiple:
Total debt: $5.0 billion 129% 161%
equals (20.0x fair value P/E multiple) (25.0x fair value P/E multiple)
Estimated fair value of the common equals equals
equity of Costco Wholesale: Estimated fair value of the common Estimated fair value of the common
$41 billion, or $92 per share equity of Costco Wholesale: equity of Costco Wholesale:
(based on 440 million shares out) $54 billion ($123 per share) $75 billion ($171 per share)
37% downside from the recent (based on 440 million shares out) (based on 440 million shares out)
stock price ($145 per share) 16% downside from the recent 17% upside to the recent
(*) Represents Retail (Specialty Non-Apparel) median. stock price ($145 per share) stock price ($145 per share)
(‡) The FY15 consensus EPS estimate of $5.23 has remained roughly flat over the past three months. (§) The FY16 consensus EPS estimate of $5.70 has remained roughly flat over the
past three months. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

COSTCO – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Amazon.com / AMZN 422.87 -92% 7% 196,923 191,399 4% 2% neg. 0% 1% 48% 597 18% 15% 30% 0% 16%
PriceSmart / PSMT 80.79 -87% 57% 2,439 2,424 21% 0% 4% 4% 4% 109% 390 -13% -41% 16% 5% 54%
Sears Holdings / SHLD 40.52 -55% 108% 4,318 7,868 n/m -38% neg. neg. neg. 397% 159 -14% -24% 23% -4% -31%
Target / TGT 79.65 -69% 5% 50,906 61,492 27% 5% 5% 6% 6% 118% 209 -31% 4% 29% 7% 34%
Wal-Mart / WMT 78.60 -45% 16% 253,525 295,116 25% 6% 6% 6% 7% 165% 221 2% 1% 25% 6% 34%
Costco Wholesale / COST 145.39 -80% 6% 63,968 61,545 16% 3% 4% 4% 4% 188% 1,032 7% 4% 13% 3% 30%
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

COSTCO – LOCATIONS COSTCO – CUSTOMERS

The number of
warehouses Renewal rate
outside North reflects high
America remains customer loyalty
relatively low

COSTCO – DIVIDENDS COSTCO – CAPITAL EXPENDITURES

Costco continues
Long-term to find high-ROIC
dividend growth reinvestment
appears assured opportunities
given Costco’s around the globe
positive outlook

Source for the above four tables: Company presentation dated March 17, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

COSTCO – FIVE-YEAR FINANCIAL HIGHLIGHTS

Sales productivity
improves steadily
over time

Source: Company annual report for the year 2014.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

General Electric (GE)

Capital Goods: Misc. Capital Goods, Member of S&P 500 FAIRFIELD CT www.ge.com
General Electric is one of the world’s largest industrial conglomerates.

Trading Data Consensus EPS Estimates Valuation

Price: $27.31 (as of 5/1/15) Month # of P/E FYE 12/31/14 18x
52-week range: $23.41–$28.68 Latest Ago Ests P/E FYE 12/31/15 21x
Market value: $274.9 billion This quarter $0.33 $0.39 12 P/E FYE 12/30/16 18x
Enterprise value: $497.3 billion Next quarter 0.33 0.48 12 P/E FYE 12/30/17 15x
Shares outstanding: 10,067.5 million FYE 12/31/15 1.29 1.73 11 EV/ LTM revenue 3.4x
Ownership Data FYE 12/30/16 1.55 1.82 12 EV/ LTM EBIT 50x
Notable holders: Management and insiders <1% FYE 12/30/17 1.78 1.89 7 P / tangible book 10.9x
BlackRock 3% | GE Savings 4% | Cap World 2% Greenblatt Criteria
LT growth 9.0% 7.4% 3
T. Rowe 1% | Northern Trust 1% | FMR 1%
Geode 1% | Norway 1% | GE Asset 1% EPS Surprise Actual Est. LTM EBIT yield 2%
Insider buys (last six months): 8 / sells: 5 4/17/15 $0.20 $0.30 LTM pre-tax ROC n/m

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 181,581 154,438 149,567 146,542 146,684 146,045 148,589 144,397 33,548 29,356
Gross profit 73,239 61,639 63,344 64,504 60,778 59,637 58,881 55,256 12,885 9,260
Adjusted operating income 20,958 10,683 15,214 20,821 18,192 17,000 18,314 10,047 3,319 -4,948
Adjusted pretax income 19,770 9,864 14,187 20,159 17,381 16,151 17,229 8,962 3,319 -4,948
Adjusted net income 17,952 10,475 12,291 13,069 14,605 15,160 15,324 3,953 2,747 -11,371
Adjusted diluted EPS 1.78 0.99 1.15 1.23 1.39 1.48 1.53 0.39 0.27 -1.13
Dividend 1.24 0.61 0.46 0.58 0.68 0.76 0.89 0.90 0.22 0.23
Shares out (avg) 10,080 10,614 10,661 10,591 10,523 10,222 10,045 10,051 10,045 10,067
Cash from operations 48,653 24,417 36,124 33,359 31,331 28,579 27,710 n/a 4,961 n/a
Capex 16,010 8,636 9,800 12,637 15,119 13,458 13,727 n/a 3,361 n/a
Free cash flow 32,643 15,781 26,324 20,722 16,212 15,121 13,983 n/a 1,600 n/a
… % of revenue:
Gross profit 40.3% 39.9% 42.4% 44.0% 41.4% 40.8% 39.6% 38.3% 38.4% 31.5%
Cash, investments 48,187 70,488 78,943 84,501 77,268 88,555 137,600 129,000 86,979 129,000
Receivables 400,018 349,761 329,204 307,957 19,902 21,388 23,200 20,500 20,975 20,500
LT investments 62,925 78,427 71,692 91,426 354,900 316,320 205,200 68,000 291,747 68,000
PP&E, net 78,530 68,970 66,212 65,739 68,633 68,827 66,200 61,200 67,743 61,200
Intangible assets 96,736 76,827 74,359 84,693 85,094 91,958 90,100 83,300 93,917 83,300
Tangible assets 701,033 705,074 673,434 633,496 599,905 564,602 556,900 534,300 558,335 534,300
Debt 523,762 503,443 478,598 453,443 413,799 383,040 364,500 351,400 380,580 351,400
Total liabilities 693,104 664,610 628,857 601,751 561,973 525,994 518,800 509,000 520,416 509,000
Common equity 104,665 117,291 118,936 116,438 123,026 130,566 128,200 108,600 131,836 108,600
Tangible equity 7,929 40,464 44,577 31,745 37,932 38,608 38,100 25,300 37,919 25,300
TBV / tangible assets 1% 6% 7% 5% 6% 7% 7% 5% 7% 5%
TBV per share 0.79 3.81 4.18 3.00 3.60 3.78 3.79 2.51 3.77 2.51

Ten-Year Stock Price Performance and Trading Volume Dynamics

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Global leader in industrial equipment and infrastructure, with Medium-term value creation dependent on favorable economic
revenue of nearly $150 billion (+2% in 2014), operating income of and financing environment, when easy credit drives up demand
$17 billion (-1%), cash from operations of $15 billion (+6%), and for big-ticket items and facilitates GE’s M&A strategy. The U.S.
305,000 employees. Industrial segment organic revenue and profit economy has once again been in such a stage, but this may not
grew 7% and 10%, respectively, at the high end of 2014 guidance. persist due to multiple macro risks, ranging from high indebtedness
With a large installed base and leading technical expertise, GE is to the potential for accelerating inflation expectations due to large
well-positioned to capitalize on demand for new equipment and monetary stimulus. Industry cyclicality aside, GE does appear to
related services. GE is a large supplier to the energy, transportation, have reduced the threat to equity holders by downsizing the GE
and healthcare sectors. The services business generates revenue of Capital business, including the spinoff of Synchrony Financial.
$45+ billion at ~30% margin, with backlog of nearly $190 billion Competitive, capital-intensive businesses expose GE to the risk of
providing multi-year visibility. The industrial equipment and margin compression due to potential raw material price increases or
services businesses have become the clear drivers of value for GE, competitive pricing actions. The company faces stiff competition,
likely accounting for two-thirds to three-fourths of intrinsic value. both in the industrial unit and at GE Capital. Leading industrial
The U.S. remains by far GE’s most important market, contributing economies are home to large, entrenched competitors, e.g., Siemens
48% of revenue in 2014, while Europe added 17% and Asia 16%. in Germany, Hitachi in Japan, and ABB in Switzerland. Price-based
Refocused and reduced the size of GE Capital, completing an competition from companies in low-cost countries remains a threat.
IPO of the retail finance business, Synchrony, and reducing ending
net investment by 5% in 2014. GE Capital’s bloated balance sheet SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
had threatened the health of GE during the crisis, but the business
∆ revenue -3% -2% 0% 0% 2%
has recovered and shrunk since then. From 2008-2014, ending net
Employees (end) (‘000) 273 301 305 307 305
investment at GE Capital fell from $513 billion to $363 billion, Revenue ($bn) 149.6 146.5 146.7 146.0 148.6
while adjusted debt to equity improved from 8.95 to 1 in 2008 to a …from the U.S. 50% 48% 48% 47% 48%
much healthier 3.15 to 1 in 2014. Long-term debt outstanding at GE % of revenue by segment:
Capital fell from $381 billion to $207 billion over the same period. Power and water 17% 18% 19% 17% 19%
The downsized GE Capital is expected to contribute one-fourth of Oil and gas 6% 9% 10% 12% 13%
operating earnings in 2016, down significantly from 42% in 2014. Energy management 3% 4% 5% 5% 5%
This proportion is expected to decline further to <10% by 2018. Aviation 12% 13% 14% 15% 16%
Targeting operating EPS of $1.70-1.80 in 2015, comprised of Healthcare 11% 12% 12% 12% 12%
Transportation 2% 3% 4% 4% 4%
$1.10-1.20 from the industrial business and $0.60 from GE Capital. Appliances and lighting 5% 5% 5% 6% 6%
Organic revenue growth in the industrial segments is expected to GE Capital 33% 33% 31% 30% 29%
slow to 2-5% in 2015, down from 7% growth in 2014 but better Corporate and eliminations 10% 2% -1% -1% -3%
than no growth in 2013. Margin expansion in industrial businesses Segment profit margin:
is expected to continue this year, from 16.2% in 2014, and to reach Power and water 23% 20% 19% 20% 19%
~17% in 2016, with industrial returns on tangible capital going from Oil and gas 15% 12% 13% 13% 14%
14% in 2014 to 17% in 2016. The near-term business environment Energy management 3% 1% 2% 1% 3%
remains favorable, with GE benefiting from strengthening of the Aviation 19% 19% 19% 20% 21%
Healthcare 16% 16% 16% 17% 17%
U.S. economy, supportive monetary policy, and low inflation. Transportation 9% 15% 18% 20% 20%
Geopolitical instability has not impacted results materially so far. Appliances and lighting 5% 3% 4% 5% 5%
Guiding for FCF of $10-12 billion in 2015, roughly in line with GE Capital 6% 13% 16% 18% 16%
$11.2 billion in 2014 and $10.6 billion in 2013. GE has adopted Shares out (avg) (bn) 10.7 10.6 10.5 10.2 10.0
reasonably shareholder-friendly capital allocation policies, growing ∆ shares out (avg) 0% -1% -1% -3% -2%
1
dividends roughly in line with earnings and paying out $24 billion Adjusted for nonrecurring items of -$969 million in 2010, $29 million in 2011, -$983 million
in 2012, -$2.1 billion in 2013, -$112 million in 2014, and -$2.2 billion in 1Q15.
from 2012-2014. Another $17.5 billion was spent on repurchases
over the three-year period, while $12.6 billion was allocated to RATINGS
M&A and nearly $12 billion was invested in plant and equipment. VALUE Intrinsic value higher than market quotation? 
On the acquisition front, GE has been in the process of acquiring SAFETY Low risk of permanent capital loss? 
Alstom’s power equipment business for ~$14 billion (roughly 8x MOAT Able to sustain high returns on capital? 
EBITDA), but the deal has been slowed by EU antitrust concerns. MANAGEMENT Capable and properly incentivized team? 
Continuing GE Capital-related asset divestitures could result in CAPITALIZATION Strong, deleveraged balance sheet? 
$90+ billion becoming available for capital return from 2015-2018. PERFORMANCE Business fundamentals improving? 
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Industrial infrastructure conglomerate GE could return as much as $30 billion to shareholders this year, depending on the progress of GE
Capital-related asset sales, up from dividends and buybacks of $11 billion last year. Despite management’s ability to assemble acquisitions
into a conglomerate that creates value, GE has not always delivered for shareholders, especially during economic downturns. GE Capital
has been strongly pro-cyclical, aiding equipment sales growth in good times but putting the equity at risk in bad times. This is why we
support the strategic downsizing of GE Capital, which appears on track to contribute only one-fourth or more of operating earnings in 2016
and beyond. With GE Capital a smaller part of the overall business, GE appears well-positioned to grow value consistent with improvement
in the scale-advantaged industrial equipment operations, which should be able to grow sales organically in the mid-single digits over the
long term. Margin expansion, M&A, and return of capital should enable GE to grow per-share value in the high single digits over time.
This will not occur without ebbs and flows, of course, as GE’s capital-intensive businesses remain cyclical. Taking this cyclicality into
consideration, we view the shares as fairly valued at the recent ~6% yield (based on guidance for operating EPS of $1.70-1.80 in 2015).

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

GENERAL ELECTRIC – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on median consensus EPS Based on median consensus EPS Based on median consensus EPS
estimate for FYE December 31, 2015 estimate for FYE December 31, 2015 estimate for FYE December 30, 2016
▼ ▼ ▼
Consensus FY15E EPS: $1.29 (‡) Consensus FY15E EPS: $1.29 (‡) Consensus FY16E EPS: $1.55 (§)
minus minus minus
Assumed upside/downside to Assumed upside/downside to Assumed upside/downside to
FY15 EPS estimate: -10% * $1.29 FY15 EPS estimate: 5% * $1.29 FY16 EPS estimate: 10% * $1.55
equals equals equals
Revised FY15 EPS estimate: $1.16 Revised FY15 EPS estimate: $1.35 Revised FY16 EPS estimate: $1.71
multiplied by multiplied by multiplied by
Corresponding industry P/E: 17.7x (*) Corresponding industry P/E: 17.7x (*) Corresponding industry P/E: 15.8x (*)
equals equals equals
Industry multiple-implied fair value: Industry multiple-implied fair value: Industry multiple-implied fair value:
$207 billion ($21 per share) $241 billion ($24 per share) $272 billion ($27 per share)
multiplied by multiplied by multiplied by
Assumed GE multiple as a Assumed GE multiple as a Assumed GE multiple as a
percentage of the industry multiple: percentage of the industry multiple: percentage of the industry multiple:
95% 114% 126%
(15.0x fair value P/E multiple) (18.0x fair value P/E multiple) (20.0x fair value P/E multiple)
equals equals equals
Estimated fair value of the common Estimated fair value of the common Estimated fair value of the common
equity of General Electric: equity of General Electric: equity of General Electric:
$196 billion ($19 per share) $275 billion ($27 per share) $344 billion ($34 per share)
(based on 10 billion shares out) (based on 10 billion shares out) (based on 10 billion shares out)
29% downside from the recent 0% downside from the recent 25% upside to the recent
stock price ($27 per share) stock price ($27 per share) stock price ($27 per share)
(*) Represents Misc. Capital Goods industry median multiple. (‡) The FY15 consensus EPS estimate of $1.29 has been revised down by 26% from $1.73 three months ago.
(§) The FY16 consensus EPS estimate of $1.55 has been revised down by 15% from $1.83 three months ago. Source: Company filings, The Manual of Ideas.

GENERAL ELECTRIC – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
3M / MMM 157.68 -74% 8% 100,023 103,805 6% 5% 5% 5% 6% 30% 352 2% -3% 49% 23% 25%
ABB / ABB 21.94 -58% 52% 50,732 51,655 7% 6% 5% 5% 6% 77% 284 -5% -9% 28% 10% 11%
Honeywell / HON 102.50 -78% 4% 80,125 80,881 3% 5% 5% 6% 7% 49% 314 1% -5% 29% 17% 9%
Philips Electronics / PHG 28.77 -52% 49% 26,638 28,928 1% 2% 1% 4% 6% 83% 227 0% 0% 38% 4% 2%
Siemens / SIEGY 109.85 -60% 45% 95,606 110,242 9% 7% 6% 6% 7% 74% 238 -18% 5% 29% 8% 9%
General Electric / GE 27.31 -79% 41% 274,943 497,343 9% 0% 0% 5% 6% 29% 473 -20% -12% 38% 7% 5%
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

GENERAL ELECTRIC – POTENTIAL RETURN of CASH to INVESTORS

GE Capital-related
strategic alternatives
have fueled return of
capital to shareholders—
and should continue to do
so in the near future

a b
Subject to regulatory approval. Excludes Synchrony exchange. Source: Company presentation dated April 10, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

GENERAL ELECTRIC – ORDERS, by SEGMENT, Q1 2015 GENERAL ELECTRIC – BACKLOG ($ in billions)

a
LEAP is a trademark of CFM International, a 50-50 JV between Snecma and GE
Source: Company presentation dated April 17, 2015.

GENERAL ELECTRIC – MANAGEMENT’S OPERATING FRAMEWORK, 2015

Significant return of cash

makes GE attractive to
investors, but long-term
earning power of the
industrial businesses may
be even more important

a b
Subject to regulatory approval. Taxes associated with dispositions included in net disposition proceeds. Source: Company presentation dated April 17, 2015.

GENERAL ELECTRIC – OPERATING EPS

GENERAL ELECTRIC – OPERATING INCOME MIX

2007 2014 PRIOR PLAN CURRENT PLAN

GE Capital will
become a much
smaller driver of
earnings in the future

Source for the above two charts: Company presentation dated April 10, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

General Motors (GM)

Consumer Cyclical: Auto & Truck Manufacturers, Member of S&P 500 DETROIT MI www.gm.com
General Motors and its partners produce vehicles in 30 countries. The company has leadership positions in the largest and fastest-growing automotive markets.
Trading Data Consensus EPS Estimates Valuation
Price: $35.42 (as of 5/1/15) Month # of P/E FYE 12/31/14 21x
52-week range: $28.82–$39.00 Latest Ago Ests P/E FYE 12/31/15 8x
Market value: $56.9 billion This quarter $1.17 $1.24 16 P/E FYE 12/30/16 7x
Enterprise value: $81.0 billion Next quarter 1.23 1.22 16 P/E FYE 12/30/17 6x
Shares outstanding: 1,607.2 million FYE 12/31/15 4.51 4.61 17 EV/ LTM revenue 0.5x
Ownership Data FYE 12/30/16 5.09 5.02 19 EV/ LTM EBIT 28x
Notable holders: Management and insiders <1% FYE 12/30/17 5.80 5.48 7 P / tangible book 1.9x
UAW Retirees 9% | Canada GEN 7% | Harris 5% Greenblatt Criteria
LT growth 18.2% 17.9% 3
CDIC 5% | BlackRock 3% | Berkshire 3%
Cap Re 2% | Franklin 2% | J.P. Morgan 2% EPS Surprise Actual Est. LTM EBIT yield 4%
Insider buys (last six months): 13 / sells: 14 4/23/15 $0.86 $0.97 LTM pre-tax ROC 8%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 148,979 104,589 135,592 150,276 152,256 155,427 155,929 154,233 37,408 35,712
Gross profit -278 -7,541 16,672 19,105 10,813 18,054 13,808 15,272 2,406 3,870
Adjusted operating income -20,620 106,008 5,108 6,942 -3,218 5,672 1,650 2,856 -535 753
Adjusted pretax income -28,904 102,493 5,541 10,445 -1,300 8,211 4,164 5,545 56 1,437
Adjusted net income -30,376 104,690 4,472 8,853 32,254 4,523 2,722 3,542 125 945
Adjusted diluted EPS -52.46 113.24 2.98 5.76 20.60 3.25 1.70 2.20 0.08 0.58
Dividend 0.50 – – – – – 1.20 1.20 0.30 0.30
Shares out (avg) 579 925 1,500 1,536 1,566 1,393 1,605 1,608 1,587 1,617
Cash from operations -12,065 -17,630 6,780 8,166 10,605 12,630 10,058 8,457 1,976 375
Capex 7,530 5,379 4,213 7,086 9,118 9,819 11,867 13,424 2,379 3,936
Free cash flow -19,595 -23,009 2,567 1,080 1,487 2,811 -1,809 -4,967 -403 -3,561
… % of revenue:
Gross profit -0.2% -7.2% 12.3% 12.7% 7.1% 11.6% 8.9% 9.9% 6.4% 10.8%
Adjusted operating income -13.8% 101.4% 3.8% 4.6% -2.1% 3.6% 1.1% 1.9% -1.4% 2.1%
Cash, investments 14,194 22,813 26,616 32,219 27,410 28,993 28,176 24,185 28,142 24,185
LT investments 2,189 9,720 16,726 12,701 13,837 22,448 24,356 25,936 23,613 25,936
PP&E, net 40,107 18,687 19,235 23,790 25,845 29,250 34,803 36,694 30,093 36,694
Tangible assets 90,774 91,076 95,238 105,570 140,640 159,116 171,267 173,621 166,601 173,621
Short-term debt 16,920 10,221 1,616 5,800 5,518 14,158 14,988 14,351 14,849 14,351
Long-term debt 29,018 5,562 9,974 8,033 10,532 22,025 31,853 33,907 22,918 33,907
Total liabilities 176,599 108,048 102,718 106,483 113,178 123,737 142,220 143,589 131,384 143,589
Tangible equity -85,825 -23,970 -17,871 -11,304 17,071 32,270 29,047 30,032 32,108 30,032
TBV / tangible assets -95% -26% -19% -11% 12% 20% 17% 17% 19% 17%
TBV per share -148.23 -25.92 -11.91 -7.36 10.90 23.16 18.10 18.58 20.24 18.58
EBIT/capital employed -184% >100% 81% >100% -211% 18% 5% 8% -6% 7%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0
May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Among largest auto makers worldwide, with retail vehicle sales Global automotive industry is highly competitive. Factors driving
of 9.9 million, 9.7 million, and 9.3 million, including sales by JVs consumer preferences include price, perceived quality, available
on a total vehicle basis, in 2014, 2013, and 2012, respectively. GM options, style, safety, reliability, fuel economy, and functionality.
North America develops, manufactures, and markets vehicles under Market leadership in individual countries varies widely, with local
the Buick, Cadillac, Chevrolet, and GMC brands. Brands outside competitors playing an important role in countries such as China.
North America include Buick, Cadillac, Chevrolet, GMC, Holden, Environmental regulations and concerns around the cost of gasoline
Opel, and Vauxhall. GM also holds various equity stakes, primarily and impact of fossil fuel emissions have spawned a new category of
in Asia, in companies that provide vehicles under the Alpheon, competition. While GM and other large automakers have sought to
Baojun, Buick, Cadillac, Chevrolet, Jiefang, and Wuling brands. In coopt this threat by launching their own electric cars, focused
addition to vehicles sold to dealers for consumer sales, GM also competitors, especially Tesla Motors, have created more compelling
sells products to fleet customers, including rental car companies, products on the high end. If Tesla proves successful in lowering the
commercial fleet customers, leasing companies, and governments. price point of electric cars and moving down-market, or if Tesla’s
Retail and fleet customers obtain aftersale vehicle services and direct sales model proves successful, GM and other traditional auto
products through the dealer network, including maintenance, light makers could suffer large declines in market share and profitability.
repairs, collision repairs, accessories, and extended warranties. GM Another emerging threat stems from technologies such as Google’s
had 20,500 dealers at the end of 2014, fairly steady from a year ago. self-driving car technology. If automakers such as GM are forced to
Growing market share in the key Asian market. While GM’s license technology or partner in auto design with Google or others,
share of vehicle shipments in North America has stayed steady at their economic profit model could be materially adversely affected.
16.9% from 2012-2014, declined from 7.9% to 6.7% in Europe, and Sizeable pension obligations remain. While GM has significantly
declined from 18.0% to 16.6% in South America, the company’s lowered pension-related cash obligations since 2007, the company
share of vehicle shipments in Asia grew from 9.7% to 10.2% over retains a total pension benefit obligation of $105 billion, down 22%
the same period. With Asia now accounting for nearly one-half of from 2011 to 2014. Obligations of $80 billion are backed by assets,
global vehicle shipments, GM’s success in this market appears to be with the remainder requiring incremental contributions over time.
the key to sustained sales and earnings growth. GM’s presence in
Asia leaves much room for improvement, as the company’s ex- SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
China market share remains below 5%. In China, GM has achieved
Employees (‘000) 202 207 213 219 216
nearly 15% market share, a strong showing in Asia’s largest market.
Revenue ($bn) 135.6 150.3 152.3 155.4 155.9
Early in product cycle. GM has placed priority on improving the …from the U.S. 54% 53% 56% 57% 60%
product portfolio since emerging from bankruptcy. New/refreshed % of revenue by segment:
vehicle designs accounted for ~23% of volume from 2010-2014, GMNA 59% 57% 59% 61% 65%
and this number is expected to increase to ~36% of vehicle volume GME 17% 17% 15% 14% 14%
from 2015-2019, fueled by a number of launches, including the GMIO 13% 14% 14% 12% 9%
GMSA 11% 11% 11% 11% 8%
Chevy Malibu and Cadillac CT6. GM is also making a push in
Automotive 100% 99% 99% 98% 97%
luxury cars, a category with strong margin and growth potential. Financial 0% 1% 1% 2% 3%
Finance business represents underappreciated opportunity, as Operating margin by segment:
management expects earning assets and pretax earnings to more GMNA 7% 8% 7% 8% 7%
than double over four years, from $41 billion and $800 million, GME -9% -4% -8% -4% -6%
respectively, in 2014. This growth is expected to be achieved GMIO 13% 11% 12% 7% 8%
without capital contributions, i.e., entirely from retained earnings. GMSA 5% 1% 3% 2% -1%
Automotive 5% 5% 5% 5% 4%
Management team appears focused on value creation. GM has Financial 46% 44% 38% 27% 17%
delivered six quarters of adjusted margin growth in North America. Vehicle sales: GMNA (‘000) 2,626 2,925 3,019 3,234 3,413
Internationally, it has exited Chevy Europe, exited manufacturing Vehicle sales: GME (‘000) 1,676 1,751 1,469 1,393 1,256
operations in Australia, Indonesia, and Russia, and restructured Vehicle sales: GMIO (‘000) 3,057 3,282 3,755 4,058 4,378
Thailand. The company was forced to announce an ignition switch Vehicle sales: GMSA (‘000) 1,025 1,066 1,051 1,037 878
recall in the U.S. recently but managed to do so without a material Total unit sales (‘000) 8,384 9,024 9,294 9,722 9,925
impact on market share due to fast and decisive management action. Authorized dealerships 20,215 20,876 20,754 20,706 20,512
1
Adjusted for unusual items of $196 million in 2010, -$1.3 billion in 2011, -$27 billion in
Adjusted EBIT margin appears on track for continued expansion in 2012, -$753 million in 2013, and $82 million in 2014 .
2015 and 2016, with income improving across major geographies.
Management actions have lowered breakeven in North America RATINGS
from 16 million vehicles in 2007 to 10-11 million vehicles today. VALUE Intrinsic value higher than market quotation? 
SAFETY Low risk of permanent capital loss? 
Transparent capital allocation framework. Management has
MOAT Able to sustain high returns on capital? 
articulated an ROIC hurdle of 20% for capital reinvestment, a
MANAGEMENT Capable and properly incentivized team? 
requirement to keep $20 billion in cash on hand, and a desire to
CAPITALIZATION Strong, deleveraged balance sheet? 
maintain an investment-grade balance sheet. As these targets are
PERFORMANCE Business fundamentals improving? 
met, management intends to return all available FCF to investors.
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
GM has reemerged as a credible competitor on the global auto scene in recent years, with a much-improved balance sheet, a refreshed
product portfolio, strong pipeline, and a management team that appears focused on business execution as well as value-enhancing capital
allocation. While cyclicality and the intense competitiveness of the auto industry remain legitimate concerns, we find GM shares too cheap
to ignore at a mid teens forward EPS yield. We are not sure whether the attractive valuation or the improved industry dynamics have
attracted Berkshire Hathaway, but we agree that GM offers unusual value. Repurchases could help close the gap between price and value.

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GENERAL MOTORS – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on LTM revenue and assumed Based on median consensus EPS Based on median consensus EPS
normalized EBIT margin estimate for FYE December 31, 2015 estimate for FYE December 30, 2016
▼ ▼ ▼
TTM net revenue: $154 billion Consensus FY15E EPS: $4.51 (‡) Consensus FY16E EPS: $5.09 (§)
multiplied by minus minus
Assumed operating margin: 4.0% Assumed upside/downside to Assumed upside/downside to
equals FY15 EPS estimate: 5% * $4.51 FY16 EPS estimate: 10% * $5.09
Est. operating income: $6.2 billion equals equals
multiplied by Revised FY15 EPS estimate: $4.73 Revised FY16 EPS estimate: $5.60
Assumed fair value multiple: multiplied by multiplied by
7.5x Corresponding industry P/E: 14.1x (*) Corresponding industry P/E: 10.7x (*)
equals equals equals
Estimated fair enterprise value of Industry multiple-implied fair value: Industry multiple-implied fair value:
General Motors: $46 billion $107 billion ($67 per share) $96 billion ($60 per share)
plus multiplied by multiplied by
Cash, ST investments: $24 billion Assumed GM multiple as a Assumed GM multiple as a
plus percentage of the industry multiple: percentage of the industry multiple:
Long-term investments at fair value 93% 131%
discount of 20%: $21 billion (10.0x fair value P/E multiple) (14.0x fair value P/E multiple)
minus equals equals
Total debt: $48 billion Estimated fair value of the common Estimated fair value of the common
equals equity of General Motors: equity of General Motors:
Estimated fair value of the common $100 billion ($62 per share) $126 billion ($79 per share)
equity of General Motors: (based on 1.6 billion shares out) (based on 1.6 billion shares out)
$43 billion, or $27 per share 75% upside to the recent 122% upside to the recent
(based on 1.6 billion shares out) stock price ($35 per share) stock price ($35 per share)
25% downside from the recent (*) Represents Auto & Truck Manufacturers industry median multiple. (‡) The FY15 consensus EPS estimate of $4.51
stock price ($35 per share) has remained roughly flat over the past three months. (§) The FY16 consensus EPS estimate of $5.09 has been
revised upward by 5% from $4.83 three months ago. Source: Company filings, The Manual of Ideas.

GENERAL MOTORS – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Fiat Chrysler / FCAU 14.65 -88% 17% 18,824 30,760 n/m 0% 3% 7% 11% 350% 464 13% 13% 13% 4% -12%
Ford Motor / F 15.81 -94% 20% 62,850 173,258 40% 11% 5% 10% 12% 82% 760 -4% -6% 13% 4% 12%
Honda / HMC 34.22 -49% 30% 61,801 106,416 91% -10% 7% 9% 9% 99% 530 6% 8% 25% 5% 37%
Toyota / TM 139.96 -60% 4% 236,523 360,102 58% 1% 8% 6% 7% 62% 655 6% 9% 20% 10% 35%
Volvo / VOLVY 13.66 -78% 45% 29,345 42,601 16% -4% 1% 5% n/a 79% 363 7% 1% 22% 3% 12%
General Motors / GM 35.42 -47% 18% 56,927 81,000 53% -9% 6% 13% 14% 190% 714 -20% -5% 10% 2% 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

GENERAL MOTORS – ADJUSTED EBIT TREND ($ in billions)

Management expects
continued growth in
operating income,
something that does
not appear to be priced
into GM shares

* **
Adjusted EBIT is a non-GAAP measure. Represents core operating performance, excluding recalls. Source: Company presentation dated April 1, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

GENERAL MOTORS – CALCULATION of RETURN on INVESTED CAPITAL ($ in billions)

Pre-bankruptcy GM would be
envious of the ROIC the company
is able to earn in its current form

*
Represents Core Operating Performance - excluding recalls. Note: ROIC average net assets over four quarters includes cash. Source: Company presentation dated March 9, 2015.

GM FINANCE – ADJUSTED PRETAX INCOME ($ in billions) GM FINANCE – ENDING EARNING ASSESTS ($ in billions)

GM’s finance arm should

become a greater contributor
to earnings going forward

*
GMF acquired in 2010 and reported in Form 10-K.
Source: Company presentation dated April 1, 2015.

GENERAL MOTORS – BREAKEVEN, as measured in unit sales, 2007 vs. today

GM remains a cyclical
business, but the downside
has been mitigated by
management’s ability to
reduce breakeven vehicle
production

*
As reported on Form 10-K filed in 2013, prior to implementation of country of sale reporting. ** Represents Core Operating Performance - excluding recalls.
***
Represents General Motors Corporation - aka “Old GM”. Source: Company presentation dated April 1, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Johnson & Johnson (JNJ)

Health Care: Biotechnology & Drugs, Member of S&P 500 NEW BRUNSWICK NJ www.jnj.com
Johnson & Johnson is one of the largest diversified health care products companies in the world.

Trading Data Consensus EPS Estimates Valuation

Price: $100.13 (as of 5/1/15) Month # of P/E FYE 12/31/14 18x
52-week range: $95.10–$109.49 Latest Ago Ests P/E FYE 12/31/15 16x
Market value: $278.4 billion This quarter $1.69 $1.72 15 P/E FYE 12/30/16 16x
Enterprise value: $264.1 billion Next quarter 1.46 1.54 15 P/E FYE 12/30/17 15x
Shares outstanding: 2,780.6 million FYE 12/31/15 6.14 6.19 19 EV/ LTM revenue 3.6x
Ownership Data FYE 12/30/16 6.42 6.50 18 EV/ LTM EBIT 12x
Notable holders: Management and insiders <1% FYE 12/30/17 6.79 6.92 13 P / tangible book 13.5x
BlackRock 3% | FMR 2% | Wellington 1% Greenblatt Criteria
LT growth 5.1% 6.0% 7
Northern Trust 1% | State Farm 1% | JPM 1%
MFS 1% | Cap World 1% | Geode 1% EPS Surprise Actual Est. LTM EBIT yield 8%
Insider buys (last six months): 7 / sells: 7 4/14/15 $1.56 $1.54 LTM pre-tax ROC >100%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 28, LTME FQE FQE
per share data) 2008 2010 2011 2012 2012 2013 2014 3/31/15 3/30/14 3/31/15
Revenue 63,747 61,897 61,587 65,030 67,224 71,312 74,331 73,590 18,115 17,374
Gross profit 45,236 43,450 42,795 44,670 45,566 49,653 52,339 51,017 12,660 12,092
R&D 7,577 6,986 6,844 7,548 7,666 8,187 8,494 8,562 1,831 1,899
Adjusted operating income 17,110 16,828 16,830 12,930 16,677 16,734 21,495 22,293 5,442 5,575
Adjusted net income 13,130 13,339 13,217 10,241 13,755 15,094 17,255 20,821 4,745 4,320
Adjusted diluted EPS 4.69 4.83 4.80 3.74 5.00 5.37 6.13 7.39 1.68 1.53
Dividend 1.80 1.93 2.11 2.25 2.40 2.59 2.76 2.80 0.66 0.70
Shares out (avg) 2,803 2,760 2,751 2,736 2,753 2,809 2,815 2,818 2,827 2,826
Cash from operations 14,972 16,571 16,385 14,298 15,396 17,414 18,471 n/a 3,923 n/a
Capex 3,066 2,365 2,384 2,893 2,934 3,595 3,714 n/a 630 n/a
Free cash flow 11,906 14,206 14,001 11,405 12,462 13,819 14,757 n/a 3,293 n/a
… % of revenue:
Gross profit 71.0% 70.2% 69.5% 68.7% 67.8% 69.6% 70.4% 69.3% 69.9% 69.6%
R&D 11.9% 11.3% 11.1% 11.6% 11.4% 11.5% 11.4% 11.6% 10.1% 10.9%
Adjusted operating income 26.8% 27.2% 27.3% 19.9% 24.8% 23.5% 28.9% 30.3% 30.0% 32.1%
Cash, investments 12,809 19,425 27,658 32,261 21,089 29,206 33,089 33,089 29,206 33,089
Receivables 9,719 9,646 9,774 10,581 11,309 11,713 10,985 10,985 11,713 10,985
PP&E, net 14,365 14,759 14,553 14,739 16,097 16,710 16,126 16,126 16,710 16,126
Intangible assets 27,695 31,185 32,010 34,276 51,176 50,745 49,054 49,054 50,745 49,054
Tangible assets 57,217 63,497 70,898 79,368 70,171 81,938 82,065 82,065 81,938 82,065
Short-term debt 3,732 6,318 7,617 6,658 4,676 4,852 3,638 3,638 4,852 3,638
Long-term debt 8,120 8,223 9,156 12,969 11,489 13,328 15,122 15,122 13,328 15,122
Total liabilities 42,401 44,094 46,329 56,564 56,521 58,630 61,367 61,367 58,630 61,367
Tangible equity 14,816 19,403 24,569 22,804 13,650 23,308 20,698 20,698 23,308 20,698
EBIT/capital employed 90% 82% 89% 63% 65% 69% 93% >100% >100% >100%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$120

$100

$80

$60

$40

$20

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Among largest healthcare product companies globally. J&J’s Stagnant top line. J&J expects sales to grow 1-2% on a currency-
pharmaceutical segment ($32 billion in sales in 2014) is the largest adjusted basis in 2015, while reported revenue is expected to
pharma business in the U.S. and the fastest-growing top ten pharma decline 5-6% to $70-71 billion. EPS adjusted for currency should
business globally. The medical device business ($27 billion) holds grow 4-6% this year as reported EPS declines 3-5% to $6.04-6.19.
leadership positions in surgery, orthopaedics, and consumer medical Even if we ignore currency headwinds, it is obvious that J&J’s
devices. The consumer unit ($14 billion) operates as a market- growth is subpar, especially on the top line. Reigniting growth
leading consumer healthcare company. Overall, J&J derives ~70% could prove challenging given J&J’s size and the competitive nature
of sales from businesses that hold the number-one or number-two of the markets in which it competes. Management may be tempted
market share position in their markets. Products launched in the past to use acquisitions to boost growth, raising the risk of overpayment.
five years account for one-quarter of sales. J&J sales have grown at
a CAGR of 8% over the past two decades, driven by $109 billion in SELECTED OPERATING DATA
FYE December 28 2010 2011 2012 2013 2014
internal and $85 billion in external investments in innovation. J&J
∆ revenue -1% 6% 3% 6% 4%
has 24 brands/platforms generating $1+ billion in annual sales each. ∆ gross profit -2% 4% 2% 9% 5%
Deep product pipeline in pharma. J&J focuses on five therapeutic Employees (‘000) 114 118 128 128 127
areas: immunology (e.g., rheumatoid arthritis, inflammatory bowel Revenue ($bn) 61.6 65.0 67.2 71.3 74.3
disease, psoriasis), infectious diseases (e.g., HIV, respiratory …from the U.S. 48% 44% 44% 45% 47%
infections, hepatitis, vaccines), neuroscience (e.g., Alzheimer’s, % of revenue by segment:
schizophrenia, pain), oncology (e.g., prostate cancer, myeloma, Consumer 24% 23% 21% 21% 20%
hematologic malignancies, lung cancer), and cardiovascular and Pharmaceutical 36% 37% 38% 39% 43%
metabolic diseases (e.g., thrombosis, diabetes). J&J utilizes a mix of Medical devices 40% 40% 41% 40% 37%
internal and external innovation and has launched 14 new products Operating margin by segment:
Consumer 16% 14% 12% 13% 13%
since 2009, driving cumulative sales of $27+ billion. Six products
Pharmaceutical 32% 26% 24% 33% 36%
launched in the past five years have achieved $1+ billion in sales in
Medical devices 34% 20% 26% 18% 29%
the past twelve months. The company has had above-average R&D
Selected items as % of revenue:
productivity, as measured by New Molecular Entity approvals per Gross profit 69% 69% 68% 70% 70%
dollar spent. In 2014, twenty line extensions were approved and R&D 11% 12% 11% 11% 11%
another twenty filed; the company initiated 23 Phase 3 studies. EBIT (adjusted)1 27% 20% 25% 23% 29%
Strong device leadership in orthopaedics, surgery, and vision. Net income (adjusted)1 21% 16% 20% 21% 23%
J&J is focused on growing key platforms in emerging markets, with D&A 5% 5% 5% 6% 5%
China sales growth of 15% in 2014. The company’s scale advantage Capex 4% 4% 4% 5% 5%
has allowed it to develop new go-to market models. 85% of device Calculation of return on capital employed ($bn):
Reported operating income 16.9 12.4 13.8 15.5 20.6
sales come from platforms that hold #1 or #2 market positions, with
+ non-recurring items -0.1 0.6 2.9 1.3 0.9
ten platforms generating $1+ billion in sales each. The company has Adjusted EBIT1 16.8 12.9 16.7 16.7 21.5
launched 50+ new products since 2012 and had 30+ approvals or Current assets 43.4 50.8 50.2 51.3 57.9
pending filings last year. Brands J&J, DePuy Synthes, Ethicon. - Cash, ST investments -23.5 -30.0 -26.7 -25.1 -31.1
Consumer business built on twelve megabrands, including - Current liabilities -22.4 -22.9 -23.5 -25.0 -25.4
Johnson’s, Neutrogena, Aveeno, Listerine, Band-Aid, Benadryl, + Short-term debt 7.0 7.1 5.7 4.8 4.2
Zyrtec, Tylenol, and Motrin. The segment is emerging from a + Net fixed assets 14.7 14.6 15.4 16.4 16.4
Capital employed 19.1 19.7 21.1 22.3 22.0
period of operating under a consent decree, signed in 2011 with the
= Return on capital employed 88% 66% 79% 75% 98%
FDA due to product quality issues at U.S. manufacturing facilities.
Tangible assets ($bn) 70.9 79.4 70.2 81.9 82.1
J&J returned 80% of SKUs to market in 2014. Tylenol and Zyrtec Tangible equity 35% 29% 19% 28% 25%
remain the leading doctor-recommended brands in their markets. Trailing P/E (end) 13x 19x 18x 19x 18x
Emerging markets still account for relatively low 21% of sales. Forward P/E (end) 18x 17x 15x 16x 17x
This explains in part why J&J’s overall growth has stagnated, but it Shares out (avg) (mn) 2,751 2,736 2,753 2,809 2,815
also points to a greenfield opportunity outside developed markets ∆ shares out (avg) 0% -1% 1% 2% 0%
1
Adjusted for unusual items of $117 million in 2010, -$569 million in 2011, -$2.9 billion in
(the U.S. still accounts for nearly one-half of sales). The company 2012, -$1.3 billion in 2013, and -$932 million in 2014.
appears to be placing a priority on growing in China ($3 billion in
sales in 2014) and elsewhere in Asia. Management has stated an RATINGS
intention to utilize acquisitions and partnerships with local players. VALUE Intrinsic value higher than market quotation? 
SAFETY Low risk of permanent capital loss? 
Returned ~70% of FCF to shareholders over the past ten years,
MOAT Able to sustain high returns on capital? 
with ~$50 billion in repurchases made and $50+ billion in dividends
MANAGEMENT Capable and properly incentivized team? 
paid over the decade. J&J generated FCF of nearly $15 billion in
CAPITALIZATION Strong, deleveraged balance sheet? 
2014. Management has raised the dividend for 52 consecutive years
PERFORMANCE Business fundamentals improving? 
to $2.80 per share on an annualized basis recently (~2.8% yield).
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Johnson & Johnson operates market-leading businesses in three healthcare product segments: pharma, devices, and consumer. J&J’s large
size and globally recognized brands belie the fact that the company remains heavily concentrated in developed markets, which accounted
for ~80% of sales in 2014. The company retains a long expansion runway in emerging markets; if it can execute on this opportunity, top-
line growth could improve, driving faster bottom-line growth and perhaps justifying a higher valuation. With ~70% of sales from products
that hold #1 or #2 market positions, high margins, and low capital intensity, J&J is a fundamentally strong company. Shareholder-friendly
capital allocation supports value creation. With the shares at trailing FCF and EPS yields of 5-6%, we find J&J modestly undervalued.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

JOHNSON & JOHNSON – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative Base Case Aggressive
Based on LTM revenue and average Based on LTM revenue and assumed Based on median consensus EPS
EBIT margin for past seven fiscal years normalized EBIT margin estimate for FYE December 28, 2015
▼ ▼ ▼
TTM net sales: $74 billion TTM net revenue: $74 billion Consensus FY15E EPS: $6.14 (‡)
multiplied by multiplied by minus
Average 7-year EBIT margin: 25.5% Assumed operating margin: 30.0% Assumed upside/downside to
equals equals FY15 EPS estimate: 10% * $6.14
Estimated EBIT: $19 billion Est. operating income: $22 billion equals
multiplied by multiplied by Revised FY15 EPS estimate: $6.75
Assumed fair value multiple of EBIT: Assumed fair value multiple: multiplied by
10.0x 15.0x Corresponding industry P/E: 22.5x (*)
equals equals equals
Estimated fair enterprise value of Estimated fair enterprise value of Industry multiple-implied fair value:
Johnson & Johnson: $188 billion Johnson & Johnson: $331 billion $422 billion ($152 per share)
plus plus multiplied by
Cash, ST investments: $33 billion Cash, ST investments: $33 billion Assumed JNJ multiple as a
plus plus percentage of the industry multiple:
Long-term investments at fair value Long-term investments at fair value 102%
discount of 25%: $0.0 million discount of 20%: $0.0 million (20.0x fair value P/E multiple)
minus minus equals
Total debt: $19 billion Total debt: $19 billion Estimated fair value of the common
equals equals equity of Johnson & Johnson:
Estimated fair value of the common Estimated fair value of the common $433 billion ($156 per share)
equity of Johnson & Johnson: equity of Johnson & Johnson: (based on 2.8 billion shares out)
$202 billion, or $73 per share $345 billion, or $124 per share 55% upside to the recent
(based on 2.8 billion shares out) (based on 2.8 billion shares out) stock price ($100 per share)
27% downside from the recent 24% upside to the recent
stock price ($100 per share) stock price ($100 per share)
(*) Represents Biotechnology & Drugs industry median multiple. (‡) The FY15 consensus EPS estimate of $6.14 has remained roughly flat over the past three months.
Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

JOHNSON & JOHNSON – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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 R&D EBIT Assets
GlaxoSmithKline / GSK 45.97 -41% 23% 112,896 135,088 n/m 5% 4% 6% 6% 26% 353 -13% -10% 69% 14% 29% -27%
Lilly / LLY 73.12 -63% 6% 81,237 84,466 13% 0% 3% 4% 5% 23% 500 -12% -1% 75% 24% 22% 33%
Merck / MRK 59.86 -67% 6% 169,311 174,995 9% 0% 6% 6% 6% 24% 591 -5% -8% 64% 17% 50% 24%
Novartis / NVS 103.35 -68% 2% 278,545 285,401 6% 4% 4% 5% 5% 19% 402 2% -2% 68% 17% 23% 24%
Novo Nordisk / NVO 57.16 -86% 1% 117,155 114,890 5% 3% 3% 3% 4% 12% 325 -39% -71% 84% 15% 39% 51%
Pfizer / PFE 34.08 -66% 4% 209,263 209,852 n/m 0% 4% 6% 7% 23% 627 -22% -4% 81% 18% 32% -6%
Sanofi / SNY 51.29 -53% 12% 134,587 142,661 2% -1% 4% 6% 6% 27% 337 3% 7% 68% 14% 20% 5%
Johnson & Johnson / JNJ 100.13 -54% 9% 278,417 264,088 7% 0% 6% 6% 6% 28% 582 2% -4% 69% 12% 30% 25%
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

JOHNSON & JOHNSON – MANAGEMENT GUIDANCE, 2015

Low growth
expected on an
operating basis
this year

*
Non-GAAP measure; excludes intangible asset amortization expense and special items. ** Euro Average Rate: January 2015 = 1.18.
Note: For comparison purposes, 2014 Adjusted EPS, restated to exclude intangible asset amortization is $6.39. Source: Company presentation dated January 20, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

JOHNSON & JOHNSON – FINANCIAL HIGHLIGHTS ($ in billions)

J&J throws
off more than
$1 billion in
FCF each
month

* ** ***
Excludes impact of currency translation. Non-GAAP measure. Non-GAAP financial measure; defined as operating cash flow less capital spending; estimated as of 1/20/15.

JOHNSON & JOHNSON – DRIVING GROWTH ($ in billions)

Large R&D and

M&A spending
have kept J&J
competitive and
sales growing

1
Includes licensing. Earnings grew at a respectable pace in 2014

JOHNSON & JOHNSON – CALCULATION of NET INCOME ($ in millions)

1
Non-GAAP measure; excludes special items. Source for the above tables and charts: Company presentation dated January 20, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Kraft Foods (KRFT)

Consumer Non-Cyclical: Food Processing, Member of S&P 500 NORTHFIELD IL kraftfoodscompany.com
Kraft Foods Group is one of North America’s largest consumer packaged food and beverage companies, with annual revenues of more than $18 billion.
Trading Data Consensus EPS Estimates Valuation
Price: $84.68 (as of 5/1/15) Month # of P/E FYE 12/31/14 49x
52-week range: $53.33–$91.32 Latest Ago Ests P/E FYE 12/31/15 26x
Market value: $50.1 billion This quarter $0.85 $0.87 14 P/E FYE 12/30/16 25x
Enterprise value: $59.0 billion Next quarter 0.76 0.77 13 P/E FYE 12/30/17 23x
Shares outstanding: 591.9 million FYE 12/31/15 3.22 3.24 15 EV/ LTM revenue 3.2x
Ownership Data FYE 12/30/16 3.45 3.47 12 EV/ LTM EBIT 32x
Notable holders: Management and insiders <1% FYE 12/30/17 3.76 3.75 7 P / tangible book n/m
Wellington 4% | Cap Research 4% | BlackRock 3% Greenblatt Criteria
LT growth 3.7% 4.4% 3
Federated 2% | Northern Trust 1% | Delaware 1%
Merrill Lynch 1% | Newton 1% | Sunamerica 1% EPS Surprise Actual Est. LTM EBIT yield 3%
Insider buys (last six months): 8 / sells: 8 4/28/15 $0.86 $0.81 LTM pre-tax ROC 41%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/28/15 3/29/14 3/28/15
Revenue 17,708 17,278 17,797 18,576 18,271 18,218 18,205 18,195 4,362 4,352
Gross profit 5,410 5,997 6,020 5,763 5,869 6,900 4,906 4,672 1,567 1,333
Adjusted operating income 2,411 2,966 2,957 2,826 2,973 4,881 1,997 1,914 918 740
Adjusted pretax income 2,425 2,979 2,994 2,874 2,756 4,380 1,513 1,344 802 633
Adjusted net income 1,697 1,943 1,882 1,773 1,940 2,993 1,145 1,049 525 429
Adjusted diluted EPS 2.87 3.29 3.18 3.00 3.28 5.04 1.93 1.77 0.88 0.73
Dividend – – – – 0.50 2.05 2.15 2.18 0.53 0.55
Shares out (avg) 591 591 591 591 591 594 593 592 596 588
Cash from operations 3,017 828 2,664 3,035 2,043 2,020 2,103 251 334
Capex 513 448 401 440 557 535 598 76 139
Free cash flow 2,504 380 2,263 2,595 1,486 1,485 1,505 175 195
… % of revenue:
Gross profit 30.6% 34.7% 33.8% 31.0% 32.1% 37.9% 26.9% 25.7% 35.9% 30.6%
Adjusted operating income 13.6% 17.2% 16.6% 15.2% 16.3% 26.8% 11.0% 10.5% 21.0% 17.0%
Cash, investments 2 0 1,255 1,686 1,293 1,178 1,482 1,178
Receivables 1,196 903 1,089 1,048 1,080 1,219 1,204 1,219
Inventory 1,773 1,943 1,928 1,616 1,775 1,886 1,909 1,886
PP&E, net 4,283 4,278 4,204 4,115 4,192 4,194 4,106 4,194
Intangible assets 13,968 13,946 13,827 13,734 13,638 13,551 13,699 13,551
Tangible assets 7,630 7,593 9,352 9,414 9,309 9,583 9,662 9,583
Debt 39 35 9,966 9,980 10,032 10,032 9,998 10,032
Total liabilities 4,559 4,951 19,607 17,961 18,582 18,617 18,054 18,617
Common equity 17,039 16,588 3,572 5,187 4,365 4,517 5,307 4,517
Tangible equity 3,071 2,642 -10,255 -8,547 -9,273 -9,034 -8,392 -9,034
EBIT/capital employed 57% 55% 58% >100% 46% 41% >100% 83%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$100

$90

$80

$70

$60

$50

$40

$30

$20

$10

$0
May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

A leading consumer packaged food and beverage company, with Mega retailers, above all Wal-Mart, have gained power. Wal-
sales of $18 billion and pretax income of $1.4 billion in 2014. Kraft Mart accounted for 26% of Kraft’s revenue in 2014, putting the
markets cheese, meats, refreshment beverages, coffee, packaged retailer in a strong position when it comes to merchandising and
dinners, refrigerated meals, snack nuts, dressings, and other grocery pricing negotiations. Just as Wal-Mart cannot afford to lose Kraft
products, primarily in the U.S. and Canada, under iconic brands, products, Kraft cannot afford to lose Wal-Mart. One could argue
such as Kraft, Oscar Mayer, Philadelphia, Velveeta, Maxwell that the balance of power may even have shifted in Wal-Mart’s
House, Capri Sun, Kool-Aid, JELL-O, Miracle Whip, Planters, and favor, as many customers may still shop at Wal-Mart if the retailer
Grey Poupon, and other recognized consumer brands. The portfolio decided to replace (some) Kraft products with alternative, higher-
includes seven brands with sales of more than $1 billion each, and margin products. It seems unlikely that a large percentage of Wal-
20+ brands with sales between $100 million and $1 billion each. In Mart customers would shop somewhere else solely to gain access to
the U.S., Kraft holds the number-one branded market share position Kraft products. Still, in the highly competitive world of grocery
in eleven of the company’s top seventeen categories and the retail, Wal-Mart would be loath to remove Kraft from the shelves.
number-two position in the other six categories (based on dollar
share in 2014). The eleven categories with the number-one position SELECTED OPERATING DATA
FYE December 27 2010 2011 2012 2013 2014
contributed 50+% of the company’s U.S. retail sales while the top
Revenue ($bn) 17.8 18.6 18.3 18.2 18.2
seventeen categories contributed 80+% of U.S. retail sales last year.
…from the U.S. 87% 87% 86% 86% 87%
Kraft brands enjoy 98% penetration in North American households.
% of revenue by segment:
Major strategic change even before pending Heinz merger. Cheese 20% 20% 21% 22% 22%
Kraft’s business mix and scope have been fundamentally reshaped Refrigerated meals 18% 18% 18% 18% 19%
in recent years. The company was the second-largest food producer, Beverages 18% 16% 15% 15% 14%
behind Nestle, following the purchase of U.K.-based Cadbury for Meals and desserts 12% 13% 13% 12%
24%
$18 billion (60% cash) and the sale of the frozen pizza business to Enhancers and nuts 12% 12% 12% 11%
Canada 11% 11% 11% 11%
Nestle for $4 billion in 2010. In October 2012, Kraft was spun off 20%
Other 11% 10% 10% 11%
from Mondelēz (formerly known as Kraft Foods), which kept the
Operating margin by segment:
faster-growing global snacks business with revenue of ~$32 billion. Cheese 17% 17% 16% 16% 16%
The tax-free spinoff turned the new Kraft into a more focused North Refrigerated meals 9% 10% 12% 10% 11%
American grocery products business. Kraft’s controversial pre-spin Beverages 18% 15% 10% 13% 15%
CEO Irene Rosenfeld, whom Buffett had criticized for the Cadbury Meals and desserts 32% 31% 29% 28%
29%
deal, remained CEO of Mondelēz. New Kraft is currently led by Enhancers and nuts 26% 27% 25% 28%
John Cahill, ex-CEO of Pepsi Bottling and ex-CFO of PepsiCo. Canada 15% 15% 18% 19%
13%
Other 9% 9% 12% 14%
Heinz merger would create 3 rd-largest food and beverage Selected items as % of revenue:
company in North America (behind PepsiCo and Nestle but ahead Gross profit 34% 31% 32% 38% 27%
of Coca-Cola) and the 5th-largest company worldwide, with sales of EBIT (adjusted)1 17% 15% 16% 27% 11%
$28 billion and eight brands with sales of $1+ billion each. Heinz Net income (adjusted)1,2 11% 10% 11% 16% 6%
generates $10+ billion in sales and is the most profitable large food D&A 2% 2% 2% 2% 2%
company, with products that hold number-one or number-two share Capex 3% 2% 2% 3% 3%
positions in more than fifty countries. The combined company Adjusted EBIT1 ($mn) 2,957 2,826 2,973 4,881 1,997
would be in a strong position to grow Kraft brands internationally / Capital employed ($mn) 2,615 5,108 4,576 4,049 4,127
by leveraging the Heinz platform and the fact that the Kraft brand = Return on capital employed 113% 55% 65% 121% 48%
already has 80+% awareness in fourteen key international markets. Shares out (avg) (mn) 591 591 591 594 593
∆ shares out (avg) 0% 0% 0% 1% 0%
On the cost side, management sees a cost efficiency and synergies 1
Adjusted for unusual items of $8.0 million in 2010, $2.0 million in 2011, -$303 million in
opportunity of $1.5 billion annually. Kraft shareholders will receive 2012, -$290 million in 2013, -$107 million in 2014. 2 Adjusted for $1.6 billion in 2010.
one share of Kraft Heinz for each Kraft share, plus $16.50 in cash RATINGS
for each Kraft share. The transaction is expected to be accretive to VALUE Intrinsic value higher than market quotation? 
EPS by 2017, while the dividend is expected to be maintained. SAFETY Low risk of permanent capital loss? 
Heinz shareholders, including Berkshire and 3G, will own 51% of MOAT Able to sustain high returns on capital? 
the combined entity. Heinz CEO Bernardo Hees will become CEO MANAGEMENT Capable and properly incentivized team? 
of the combined company. Heinz chairman Alex Behring, managing CAPITALIZATION Strong, deleveraged balance sheet? 
partner of 3G, will become chairman. Kraft Heinz will retain an PERFORMANCE Business fundamentals improving? 
investment-grade balance sheet. The deal should close in 2H15. MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Kraft is in the midst of a major transformation, as the merger with Heinz would not only create a food and beverage player with great scale,
but it would also put the management and board of Heinz in charge of the company. This is significant, as the capable and shareholder-
oriented team behind 3G Capital steers Heinz. 3G, while relatively unknown in the U.S., has had major successes, including Restaurant
Brands and Anheuser-Busch InBev. A major pillar of 3G’s management philosophy is zero-based budgeting, which scrutinizes every
expense line item from scratch, typically resulting in a lean organization focused on cash flow maximization. Management has identified
$1.5 billion in annual synergy opportunities at Kraft Heinz, and we have little doubt this goal will be met. Equally significantly, Kraft will
be able to leverage Heinz’s global platform to expand internationally over time, accelerating organic growth (Kraft currently derives 98%
of sales from North America). Berkshire Hathaway’s involvement on the board of Kraft Heinz will be another guarantor of shareholder-
friendly capital allocation policies, making us confident that the combined company will create value over time. That said, with Kraft
shares up nearly 50% since the deal announcement, we prefer to wait out completion of the deal in order to assess the valuation case.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

KRAFT FOODS – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on LTM revenue and average Based on median consensus EPS Based on LTM revenue and assumed
EBIT margin for past seven fiscal years estimate FYE December 27, 2015 normalized EBIT margin
▼ ▼ ▼
TTM net sales: $18 billion Consensus FY15E EPS: $3.22 (‡) TTM net revenue: $18 billion
multiplied by minus multiplied by
Average 7-year EBIT margin: 16.7% Assumed upside/downside to Assumed operating margin: 20.0%
equals FY15 EPS estimate: 5% * $3.22 equals
Estimated EBIT: $3.0 billion equals Est. operating income: $3.6 billion
multiplied by Revised FY15 EPS estimate: $3.38 multiplied by
Assumed fair value multiple of EBIT: multiplied by Assumed fair value multiple:
12.0x Corresponding industry P/E: 21.7x (*) 20.0x
equals equals equals
Estimated fair enterprise value of Industry multiple-implied fair value: Estimated fair enterprise value of
Kraft Foods: $36 billion $43 billion ($73 per share) Kraft Foods: $73 billion
plus multiplied by plus
Cash, ST investments: $1.2 billion Assumed KRFT multiple as a Cash, ST investments: $1.2 billion
minus percentage of the industry multiple: minus
Total debt: $10 billion 127% Total debt: $10 billion
equals (25.0x fair value P/E multiple) equals
Estimated fair value of the common equals Estimated fair value of the common
equity of Kraft Foods: Estimated fair value of the common equity of Kraft Foods:
$28 billion, or $47 per share equity of Kraft Foods: $64 billion, or $108 per share
(based on 590 million shares out) $55 billion ($93 per share) (based on 590 million shares out)
45% downside from the recent (based on 590 million shares out) 28% upside to the recent
stock price ($85 per share) 10% upside to the recent stock price ($85 per share)
(*) Represents Food Processing industry median. stock price ($85 per share)
(‡) The FY15 consensus EPS estimate of $3.22 has remained roughly flat over the past three months. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

KRAFT FOODS – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
ConAgra Foods / CAG 36.56 -63% 5% 15,613 23,846 n/m 6% neg. 6% 6% 68% 493 -2% -2% 20% -3% -58%
General Mills / GIS 55.70 -58% 4% 33,202 42,709 n/m 5% 4% 5% 5% 41% 410 -2% -1% 34% 17% -90%
Danone / DANOY 14.55 -42% 31% 46,220 52,036 n/m -2% 3% 4% 5% 46% 237 -46% 3% 48% 10% -29%
Mondelez / MDLZ 38.65 -65% 2% 63,379 80,249 n/m 3% 4% 4% 5% 42% 321 -5% -10% 37% 15% -77%
Kraft Foods / KRFT 84.68 -50% 8% 50,123 58,977 n/m 3% 2% 4% 4% 31% 823 1% 0% 26% 11% -94%
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

KRAFT FOODS – FOOD and BEVERAGE SALES in NORTH AMERICA, last fiscal year ($ in billions)

Kraft and Heinz will have the scale

to compete in North America as well
as around the world

Note: North America beverages reflects non-alcoholic beverages. a Nestlé sales data reflects 2014 financials converted from CHF to USD at average 2014 exchange rate.
b
Campbell’s and McCormick sales data reflect U.S. sales only. Source: Company presentation dated March 25, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

KRAFT FOODS – HIGHLIGHTS of PROPOSED TRANSACTION with HEINZ

3G Capital and Berkshire Hathaway

will continue to be the major
shareholders behind the expected
growth in intrinsic value over time

KRAFT FOODS – NORTH AMERICA BRAND PORTFOLIO

Kraft’s brands are

household names
in the U.S.

Note: Foodservice and Exports 13 together comprise 11% of sales.

KRAFT FOODS and HEINZ – GEOGRAPHIC BREAKDOWN of SALES

Heinz brings to the table

major sales synergy
opportunities due to its
ability to market Kraft
brands internationally
over time

Source for the above charts: Company presentation dated March 25, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Lee Enterprises (LEE)

Services: Printing & Publishing DAVENPORT IA www.lee.net
Lee Enterprises is a leading provider of local news and information, and a major platform for advertising, in its markets, with 46 daily newspapers and a joint
interest in four others, rapidly growing digital products and nearly 300 specialty publications in 22 U.S. states.
Trading Data Consensus EPS Estimates Valuation
Price: $3.28 (as of 5/1/15) Month # of P/E FYE 9/30/14 25x
52-week range: $2.74–$4.72 Latest Ago Ests P/E FYE 9/30/15 8x
Market value: $179 million This quarter -$0.01 n/a 1 P/E FYE 9/29/16 8x
Enterprise value: $947 million Next quarter 0.11 n/a 1 P/E FYE 9/29/17 n/a
Shares outstanding: 54.5 million FYE 9/30/15 0.39 n/a 1 EV/ LTM revenue 1.4x
Ownership Data FYE 9/29/16 0.43 n/a 1 EV/ LTM EBIT 9x
Notable holders: CEO Mary Junck 3% FYE 9/29/17 n/a n/a n/a P / tangible book n/m
Other insiders 5% | Wingspan 8%
LT growth n/a n/a n/a Greenblatt Criteria
Silver Point 6% | State Farm 4% | BlackRock 3%
Zelman 3% | Systematic 2% | J.P. Morgan 1% EPS Surprise Actual Est. LTM EBIT yield 11%
Insider buys (last six months): 5 / sells: 0 1/28/15 n/a n/a LTM pre-tax ROC 63%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended September 28, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 12/28/14 12/29/13 12/28/14
Revenue 1,029 842 748 723 707 675 657 656 177 176
Gross profit 925 770 697 667 655 631 619 619 167 167
Adjusted operating income 22 73 150 103 105 114 116 107 40 38
Adjusted pretax income -43 -17 78 39 17 32 17 14 20 17
Adjusted net income 190 123 48 59 25 94 10 20 12 10
Adjusted diluted EPS 4.24 2.76 1.08 1.31 0.52 1.81 0.19 0.37 0.23 0.18
Shares out (avg) 45 44 45 45 49 52 52 52 52 52
Cash from operations 128 74 107 103 81 90 82 92 12 22
Capex 21 12 9 7 8 10 14 15 2 4
Free cash flow 107 63 98 95 73 80 68 78 10 19
… % of revenue:
Gross profit 89.9% 91.4% 93.1% 92.3% 92.7% 93.6% 94.2% 94.5% 94.0% 95.0%
Adjusted operating income 2.1% 8.6% 20.0% 14.3% 14.8% 16.9% 17.7% 16.3% 22.7% 21.3%
D&A 8.9% 9.5% 9.6% 9.6% 9.2% 8.2% 7.4% 9.2% 6.8% 6.5%
Capex 2.0% 1.4% 1.2% 1.0% 1.1% 1.4% 2.1% 2.3% 1.3% 2.0%
Cash, investments 24 8 19 24 14 18 17 16 13 16
PP&E, net 293 263 235 202 184 169 157 156 166 156
Intangible assets 1,328 1,037 992 741 691 486 456 450 479 450
Tangible assets 688 479 448 417 370 342 355 360 341 360
Short-term debt 1,338 90 82 995 12 14 31 28 9 28
Long-term debt 0 1,080 1,001 0 914 820 773 756 812 756
Total liabilities 1,861 1,492 1,383 1,260 1,176 998 990 978 978 978
Common equity 156 24 57 -101 -115 -170 -178 -168 -158 -168
Tangible equity -1,173 -1,013 -935 -842 -805 -656 -635 -618 -637 -618
EBIT/capital employed -410% -67% 60% -45% 32% -32% 72% 63% >100% >100%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$50

$45

$40

$35

$30

$25

$20

$15

$10

$5

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Leading provider of local news, information and advertising in Internet has changed newspaper models for the worse. Readers
primarily midsize U.S. markets, with 46 daily newspapers and a in urban and rural regions now tend to have access to the Internet,
joint interest in four others, digital products, and ~300 specialty making it fast and free to consume an unprecedented array of news
publications in 22 states. Lee’s newspapers have circulation of 1.1 and information. Local papers are no longer de facto monopolies,
million daily and 1.4 million Sunday, reaching four million readers and companies like Google have found ways to deliver localized
daily. Lee’s digital sites attract ~28 million unique visits monthly ads that are more targeted and provide more measurable results.
(200+ million page views), and Lee’s weekly publications have Original local news and information is expensive to produce.
distribution of 4.5+ million households. Newspaper markets include While Lee has rationalized headcount, it retains 4,600 full-time
Madison, Wisconsin; Lincoln, Nebraska; Davenport, Iowa; St. equivalent employees. Unions represent ~500 people, comprised
Louis, Missouri; Billings, Montana; Bloomington, Illinois; Tucson, primarily of 70% of the employees of the St. Louis Post-Dispatch.
Arizona; and Napa, Calif. Lee derives two-thirds of revenue from In an age in which much local content is generated freely by the
advertising and marketing. Adjusted EBITDA and FCF amounted users themselves — albeit in an unstructured way on Facebook,
to $164 million and $155 million, respectively, in CY2014. Twitter, and personal blogs — it may no longer pay to produce
Emerged from bankruptcy with refocused operations and more some types of content. Winning content is increasingly community-
sustainable balance sheet. Lee made a “prepackaged” bankruptcy oriented and not replicable outside the specific local market. The
filing in late 2011 and emerged in January 2012. Lee completed challenge is to generate such content at a low enough cost that even
additional debt refinancings in 2014, extending debt maturities to relatively low readership numbers still result in a profitable model.
dates ranging from April 2017 to December 2022, substantially
reducing refinancing risk. As a result of past losses, Lee has state SELECTED OPERATING DATA
FYE September 28 2010 2011 2012 2013 2014
and federal NOL carryforwards in excess of $1 billion, the vast
∆ revenue -11% -3% -2% -5% -3%
majority of which is offset by valuation allowances. Lee’s sustained ∆ gross profit -9% -4% -2% -4% -2%
return to profitability could result in recognition of deferred tax Employees (end) 6,815 6,200 6,100 5,000 4,700
assets. Lee was founded in 1890 and listed on the NYSE in 1978. Revenue ($mn) 748 723 707 675 657
Competitive advantage in providing local news coverage. Lee % of revenue by type:
has more journalists than any other local news and information Advertising and marketing 72% 71% 70% 68% 67%
source in its markets. Lee’s recognized brands and the size of its Subscription 23% 24% 25% 26% 27%
news staff allow the company to provide more comprehensive Other 5% 5% 5% 6% 6%
coverage of local news than its competitors in the relevant markets. Readership (% over seven-day period) (all adults):
Several of Lee’s businesses operate in geographic “clusters,” which Print only 44 43 38 37 33
Print and digital 16 16 20 18 20
provide operational efficiencies and extend sales penetration.
Digital only 8 8 9 11 12
Digital revenue up 17% last year, with mobile ad growth of 28%. Selected items as % of revenue:
Digital has grown from 6% of revenue in 2007 to 15% in CY2014. Gross profit 93% 92% 93% 94% 94%
In 2011, Lee began implementing charges for digital access to its EBIT (adjusted)1 20% 14% 15% 17% 18%
content in certain markets using a metered model. That program has D&A 10% 10% 9% 8% 7%
been rolled out and is contributing subscription revenue. Lee has Capex 1% 1% 1% 1% 2%
also launched a “full access” subscription model, which is expected Adjusted EBIT1 ($mn) 150 103 105 114 116
/ Capital employed ($mn) 247 223 205 179 156
to reach all Lee markets by June. Lee’s digital presence should be
= Return on capital employed 61% 46% 51% 64% 74%
seen as a complement to its print presence rather than a promising
Shares out (avg) (mn) 45 45 49 52 52
growth opportunity in its own right. Lee will not differentiate itself ∆ shares out (avg) 0% 1% 10% 5% 1%
through an online presence but rather through fiercely local content. 1
Adjusted for unusual items of -$0.9 million in 2010, -$204 million in 2011, -$39 million in
Focused on five priorities: local news leadership, revenue, 2012, -$171 million in 2013, and -$3.0 million in 2014.

audience expansion, digital opportunities, and cost control. By

remaining relevant to readers, Lee retains a valuable platform for RATINGS
local advertising. In 11 of Lee’s top markets, the company delivers VALUE Intrinsic value higher than market quotation? 
unduplicated reach of print and digital readers and users of print SAFETY Low risk of permanent capital loss? 
products of 78% of all adults over a seven-day period. Among those MOAT Able to sustain high returns on capital? 
aged 18-29 years, Lee reaches an average of 73% of readers. The MANAGEMENT Capable and properly incentivized team? 
company’s non-daily print publications further expand the audience. CAPITALIZATION Strong, deleveraged balance sheet? 
Management’s focus on cost reduction has caused cash operating PERFORMANCE Business fundamentals improving? 
costs to decline to ~$500 million in CY2014, down 37% from 2007. MACRO Benefiting from economic and secular trends? 

THE BOTTOM LINE

Newspaper company Lee has been out of bankruptcy for three years, looking for ways to leverage the large audiences it reaches via fifty
daily newspapers in midsize U.S. markets. The newspapers have circulation of 1.1 million daily and 1.4 million on Sundays. Buffett’s
interest in newspapers likely reflects an assessment that a viable model exists for the industry, although the customer value proposition
needs to be vastly different than in the past. Lee could grow intrinsic value by becoming a “champion” of the local communities in which it
operates, reporting on the local news rather than rehashing information available elsewhere. Given the weak balance sheet, FCF generation
and debt reduction are priorities. Here the news is good: Lee continues to generate unlevered FCF of $150+ million annually, amounting to
roughly one-fifth of debt. This should enable management to reduce debt and grow equity value. The company has prioritized balance sheet
deleveraging, cutting debt from $1.7 billion in 2005 to $865 million in 2013 and $785 million in 2014. At an enterprise value of less than
$1 billion, we find the equity market quotation too low. The 15+% unlevered FCF yield is attractive in its own right. The levered FCF yield
on the equity recently amounted to roughly 40%, implying a highly attractive risk-reward tradeoff given low near-term refinancing risk.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

LEE ENTERPRISES – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on LTM revenue and assumed Based on median consensus EPS Based on free cash flow for the twelve
normalized EBIT margin estimate for FYE September 28, 2015 months ended December 28, 2014
▼ ▼ ▼
TTM net revenue: $660 million Consensus FY15E EPS: $0.39 (‡) Operating cash flow: $92 million
multiplied by minus minus
Assumed operating margin: 15.0% Assumed upside/downside to Capex: $15 million
equals FY15 EPS estimate: 5% * $0.39 equals
Est. operating income: $98 million equals Free cash flow: $78 million
multiplied by Revised FY15 EPS estimate: $0.41 divided by
Assumed fair value multiple: multiplied by Industry median FCF yield: 5.2% (*)
8.0x Corresponding industry P/E: 19.7x (*) equals
equals equals Industry FCF yield-implied fair value:
Estimated fair enterprise value of Industry multiple-implied fair value: $1.5 billion ($28 per share)
Lee Enterprises: $790 million $440 million ($8.10 per share) multiplied by
plus multiplied by Assumed required FCF yield as a
Cash, ST investments: $16 million Assumed LEE multiple as a percentage of the industry FCF yield:
plus percentage of the industry multiple: 291%
Long-term investments at fair value 74% (15.0% required FCF yield)
discount of 20%: $38 million (12.0x fair value P/E multiple) equals
minus equals Estimated fair value of the common
Total debt: $780 million Estimated fair value of the common equity of Lee Enterprises:
equals equity of Lee Enterprises: $520 million, or $9.50 per share
Estimated fair value of the common $330 million ($6.00 per share) (based on 54 million shares out)
equity of Lee Enterprises: (based on 54 million shares out) 189% upside to the recent
$56 million, or $1.00 per share 82% upside to the recent stock price ($3.30 per share)
(based on 54 million shares out) stock price ($3.30 per share)
69% downside from the recent (*) Represents Printing & Publishing industry median multiple.
stock price ($3.30 per share) Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

LEE ENTERPRISES – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Gannett / GCI 34.77 -95% 12% 7,921 12,298 n/m 0% 14% 7% 9% 49% 194 14% 5% 51% 20% -129%
McClatchy / MNI 1.37 -74% 836% 119 906 n/m 0% 315% n/a n/a 124% 194 -25% -7% 90% 16% -79%
New York Times / NYT 13.60 -75% 55% 2,254 2,091 27% 2% 2% 4% 4% 76% 443 -19% 0% 59% 10% 25%
News Corp. / NWSA 16.05 -11% 15% 9,294 7,396 72% 6% 3% 3% 4% 118% 395 -1% 2% n/m 4% 67%
Lee Enterprises / LEE 3.28 -93% 354% 179 947 n/m 43% 2% 12% 13% 69% 146 -23% -1% 94% 16% -172%
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

LEE ENTERPRISES – FREE CASH FLOW, UNLEVERED ($ in millions)

Lee continues to generate

significant FCF, enabling
the company to keep
reducing debt and lowering
the risk to equity holders

1
Adjusted EBITDA and unlevered free cash flow and are non-GAAP financial measures. Source: Company presentation dated February 23, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

LEE ENTERPRISES – TOTAL REVENUE, by Type LEE – ADVERTISING & MARKETING SERVICES REVENUE, by Type

Subscription Digital is
revenue has becoming a
become more greater
important contributor to
ad revenue

LEE ENTERPRISES – EBITDA, ADJUSTED EBITDA, and EBITDA MARGIN ($ in millions, except margin data)

Adjusted EBITDA has

eroded modestly but
remains quite strong

1
EBITDA, EBITDA margin, and adjusted EBITDA are non-GAAP financial measures.
Lee continues to throw off significant FCF

LEE ENTERPRISES – CALCULATION of FREE CASH FLOW ($ in millions)

Source for the above tables and charts: Company presentation dated February 23, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

MasterCard (MA)
Financial: Consumer Financial Services, Member of S&P 500 PURCHASE NY www.mastercard.com
MasterCard is a technology and marketing company in the global payments industry.
Trading Data Consensus EPS Estimates Valuation
Price: $91.25 (as of 5/1/15) Month # of P/E FYE 12/31/14 30x
52-week range: $69.64–$93.59 Latest Ago Ests P/E FYE 12/31/15 26x
Market value: $104 billion This quarter $0.86 $0.89 33 P/E FYE 12/30/16 22x
Enterprise value: ~100 billion Next quarter 0.92 0.96 33 P/E FYE 12/30/17 19x
Shares outstanding: 1,140.2 million FYE 12/31/15 3.45 3.48 35 EV/ LTM revenue n/m
Ownership Data FYE 12/30/16 4.12 4.17 34 EV/ LTM EBIT n/m
Notable holders: Management and insiders <1% FYE 12/30/17 4.89 4.94 8 P / tangible book 24.9x
MasterCard Foundation 10% | FMR 5% Greenblatt Criteria
LT growth 29.2% 16.7% 7
T. Rowe 3% | BlackRock 3% | Jennison 2%
Harris 2% | Lone Pine 2% | J.P. Morgan 1% EPS Surprise Actual Est. LTM EBIT yield n/m
Insider buys (last six months): 9 / sells: 12 4/29/15 $0.89 $0.80 LTM pre-tax ROC n/m

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 4,992 5,099 5,539 6,714 7,391 8,346 9,473 9,526 2,177 2,230
Adjusted operating income 1,948 2,260 2,752 3,506 3,986 4,622 5,193 5,362 1,285 1,351
Adjusted pretax income 2,111 2,218 2,757 3,541 3,982 4,619 5,166 5,225 1,281 1,340
Adjusted net income 2,241 1,454 1,843 2,699 2,808 3,235 3,704 3,854 870 1,020
Adjusted diluted EPS 1.72 1.12 1.41 2.11 2.24 2.67 3.18 3.32 0.73 0.89
Dividend 0.06 0.06 0.06 0.06 0.12 0.29 0.49 0.54 0.11 0.16
Shares out (avg) 1,301 1,300 1,310 1,279 1,253 1,211 1,165 1,161 1,185 1,148
Cash from operations 413 1,378 1,697 2,684 2,948 4,135 3,407 3,750 568 911
Capex 170 139 151 177 218 299 334 342 49 57
Free cash flow 243 1,239 1,546 2,507 2,730 3,836 3,073 3,408 519 854
… % of revenue:
Adjusted operating income 39.0% 44.3% 49.7% 52.2% 53.9% 55.4% 54.8% 56.3% 59.0% 60.6%
D&A 2.2% 2.8% 2.7% 2.9% 3.1% 3.1% 3.4% 3.5% 3.4% 3.9%
Capex 3.4% 2.7% 2.7% 2.6% 2.9% 3.6% 3.5% 3.6% 2.3% 2.6%
Cash, investments 2,431 3,326 4,691 5,585 5,816 7,206 7,255 6,749 7,475 6,749
Receivables 1,351 996 1,147 1,444 2,205 2,321 2,161 2,142 2,471 2,142
Intangible assets 692 724 1,207 1,679 1,764 1,794 2,236 2,117 2,009 2,117
Tangible assets 5,784 6,746 7,630 9,014 10,698 12,448 13,093 12,516 12,793 12,516
Payables 262 290 272 360 357 338 419 406 297 406
Debt 169 22 0 0 0 0 1,494 1,495 1,494 1,495
Common equity 1,927 3,504 5,205 5,868 6,917 7,484 6,790 6,301 6,567 6,301
Tangible equity 1,235 2,780 3,998 4,189 5,153 5,690 4,554 4,184 4,558 4,184
TBV / tangible assets 21% 41% 52% 46% 48% 46% 35% 33% 36% 33%
TBV per share 0.95 2.14 3.05 3.28 4.11 4.70 3.91 3.65 3.85 3.65
EBIT/capital employed n/m n/m n/m n/m n/m n/m n/m n/m n/m n/m

Ten-Year Stock Price Performance and Trading Volume Dynamics

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Leading global payments brand, ranking only behind Visa, with Emergence of alternative payment systems, driven by technology
1.4 billion active cards (+14%), 51 billion purchase transactions innovation. Regulatory scrutiny and litigation by merchants may
processed (+14%), and $4.5 trillion in gross dollar volume (+10%) provide openings for new entrants. On the other hand, MasterCard
in 2014. A typical MasterCard transaction involves four other continues to invest in technology and acquisitions that will likely
parties—the cardholder, the merchant, the card-issuing bank, and speed its own development of mobile and online services. On
the merchant’s bank. The company generates operating margin well balance, it seems possible that existing economics may not be
in excess of 50%, with average FCF of $3.2 billion over the past sustained in a world of greater payment processing alternatives.
three years. MasterCard, despite its near-universal global reach, “Open-loop” model relies on third-party merchant acquirers
employs “only” 10,300 people, including 5,700 outside the U.S. and card issuers. Neither Visa nor MasterCard control all activity
Combines best-in-class technology and marketing capabilities. within the system, relying on banks to make credit decisions and
MasterCard is fundamentally a technology company, connecting independent organizations to sign up merchants. By contrast,
consumers, financial institutions, merchants, governments, and American Express operates a closed-loop network that gives it more
businesses. As the operator of what management believes to be the revenue and control. The closed-loop system may be more valuable.
world’s fastest payments network, MasterCard facilitates payment Regulatory risks, as evident in scrutiny of “interchange” fees.
processing, including authorization, clearing, and settlement. The While MasterCard does not receive interchange fees—the bank
company also provides loyalty/reward programs and information partners do—the fees are an important driver of system volume.
services. The network supports the security of the global payments
system, including leading the migration to the EMV chip standard. SELECTED OPERATING DATA
Brands include MasterCard, Maestro, and Cirrus. The company FYE December 31 2010 2011 2012 2013 2014
spent nearly $900 million on advertising and marketing in 2014. ∆ revenue 9% 21% 10% 13% 14%
Employee (end) 5,600 6,700 7,500 8,200 10,300
Capital-light compounding machine. Similar to the company’s Revenue ($mn) 5,539 6,714 7,391 8,346 9,473
main rivals, Visa and American Express, MasterCard enjoys a wide % of revenue by type:
competitive moat. The business benefits from network effects due Domestic assessments 48% 47% 46% 44% 42%
to card acceptance at tens of millions of merchants. The MasterCard Cross-border volume fees 35% 31% 31% 33% 32%
brand is widely recognized and trusted by consumers and merchants Transaction processing fees 40% 39% 43% 43% 43%
alike. Unlike American Express, MasterCard does not extend credit, Other revenues 14% 15% 16% 16% 18%
significantly reducing the capital intensity and risks of the business. Rebates and incentives -36% -32% -35% -35% -35%
The business benefits from two major long-term drivers—growth in GDV of MasterCard-branded programs ($bn):
Consumer credit 1,990 2,115
personal consumption spending and a shift from cash and check- 1,770 1,942 2,120
Commercial credit 322 360
based payments to electronic payments. The latter enables gross Debit and prepaid 957 1,310 1,527 1,792 2,024
dollar volume on payment cards to exceed nominal GDP growth. Total gross dollar volume 2,727 3,252 3,647 4,104 4,499
Inflation-protected fee streams. MasterCard derives roughly 60% Selected items as % of revenue:
of revenue from volume-based fees paid by issuers and merchant EBIT (adjusted)1 50% 52% 54% 55% 55%
acquirers. Transaction processing fees account for another ~30% of Net income (adjusted)1,2 33% 40% 38% 39% 39%
revenue; the remainder comes from services. The vast majority of D&A 3% 3% 3% 3% 3%
fees are tied directly or indirectly to gross dollar volume on the Capex 3% 3% 3% 4% 4%
Adjusted EBIT1 ($bn) 2.8 3.5 4.0 4.6 5.2
company’s payment cards. This makes MasterCard revenue streams
Capital employed ($bn) -1.0 -1.3 -1.3 -1.3 -1.8
inflation-proof even in the absence of outright pricing increases. Trailing P/E (end) 16x 25x 22x 33x 28x
Favorable operating environment. MasterCard’s recent results Forward P/E (end) 15x 17x 19x 27x 25x
have benefited from macroeconomic improvement and low interest Shares out (avg) (mn) 1,310 1,279 1,253 1,211 1,165
rates, and this trend appears likely to continue in the near future. ∆ shares out (avg) 1% -2% -2% -3% -4%
1
Revenue generated in the U.S. was 39% of revenue in each of 2014, Adjusted for unusual items of -$793 million in 2011, -$49 million in 2012, -$119 million in
2013, and -$87 million in 2014.
2013, and 2012, with no other country generating 10+% of revenue.
As a result, performance is closely tied to U.S. economic growth. RATINGS
Strong balance sheet, with net cash of $5+ billion at December 31. VALUE Intrinsic value higher than market quotation? 
MasterCard repurchased $3.4 billion of stock in 2014, up from $2.4 SAFETY Low risk of permanent capital loss? 
billion in 2013 and $1.7 billion in 2012. The company also paid MOAT Able to sustain high returns on capital? 
$500+ million in dividends last year, up significantly from 2013, MANAGEMENT Capable and properly incentivized team? 
though the dividend yield remains below 1%. MasterCard’s solid CAPITALIZATION Strong, deleveraged balance sheet? 
balance sheet remains a source of potential increases in the amount PERFORMANCE Business fundamentals improving? 
of capital returned to shareholders via repurchases and dividends. MACRO Benefiting from economic and secular trends? 

THE BOTTOM LINE

MasterCard operates one of the world’s highest-quality businesses, utilizing a capital-light, high-margin, wide-moat business model to
generate strong cash flow that grows fairly predictably over time. The company benefits from continued adoption of electronic payments at
the expense of cash and check-based payments, and from steady growth in consumer spending worldwide. As such, the company is
dependent on continued economic growth and improvement in living standards around the world. At the same time, MasterCard is not a
cyclical business, as overall consumer spending fluctuates only modestly even in difficult economic times. Regulatory scrutiny and
potential threats from new technologies present risks to MasterCard’s superior economic model, but it appears unlikely that the company’s
strong position in the global payments industry will be altered for the worse any time soon. We view MasterCard, Visa, and American
Express as entrenched, trusted consumer brands that should grow value predictably over the long term. At an FCF yield of ~3%, we find
that the market quotation accurately reflects MasterCard’s intrinsic value. We do not see an unusually compelling investment opportunity.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

MASTERCARD – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on LTM revenue and average Based on free cash flow for the twelve Based on median consensus EPS
EBIT margin for past seven fiscal years months ended March 31, 2015 estimate for FYE December 31, 2015
▼ ▼ ▼
TTM net sales: $9.5 billion Operating cash flow: $3.8 billion Consensus FY15E EPS: $3.45 (‡)
multiplied by minus minus
Average 7-year EBIT margin: 49.9% Capex: $340 million Assumed upside/downside to
equals equals FY15 EPS estimate: 10% * $3.45
Estimated EBIT: $4.8 billion Free cash flow: $3.4 billion equals
multiplied by divided by Revised FY15 EPS estimate: $3.80
Assumed fair value multiple of EBIT: Industry median FCF yield: 12.3% (*) multiplied by
12.0x equals Corresponding industry P/E: 9.4x (*)
equals Industry FCF yield-implied fair value: equals
Estimated fair enterprise value of $28 billion ($24 per share) Industry multiple-implied fair value:
MasterCard: $57 billion multiplied by $41 billion ($36 per share)
plus Assumed required FCF yield as a multiplied by
Cash, ST investments: $6.7 billion percentage of the industry FCF yield: Assumed MA multiple as a
minus 28% percentage of the industry multiple:
Total debt: $1.5 billion (3.5% required FCF yield) 281%
equals equals (25.0x fair value P/E multiple)
Estimated fair value of the common Estimated fair value of the common equals
equity of MasterCard: equity of MasterCard: Estimated fair value of the common
$62 billion, or $55 per share $99 billion, or $86 per share equity of MasterCard:
(based on 1.1 billion shares out) (based on 1.1 billion shares out) $114 billion ($100 per share)
40% downside from the recent 5% downside from the recent (based on 1.1 billion shares out)
stock price ($91 per share) stock price ($91 per share) 10% upside to the recent
(*) Represents Consumer Financial Services industry median multiple. stock price ($91 per share)
(‡) The FY15 consensus EPS estimate of $3.45 has remained roughly flat over the past three months. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

MASTERCARD – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
American Express / AXP 77.68 -88% 24% 78,907 n/m 28% 0% 7% 7% 7% n/m 660 1% -3% 73% 26% 14%
Discover Financial / DFS 59.31 -92% 13% 26,245 n/m 41% 0% 8% 9% 10% n/m 524 7% 5% n/m 52% 13%
Visa / V 65.77 -84% 6% 161,505 n/m 3% 4% 3% 4% 5% n/m 1,361 -13% 7% n/m 68% 30%
MasterCard / MA 91.25 -88% 3% 104,047 n/m 4% 3% 4% 4% 5% n/m 925 11% 2% n/m 56% 33%
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

MASTERCARD – CALCULATION of ADJUSTED REVENUE and INCOME GROWTH

MasterCard
continues to find
ways to
maintain low
teens growth

1
Incremental accrual for U.S. merchant litigation of $95 million taken in Q4 2013. 2 Restructuring charge of $87M taken in Q4 2014. 3 Tax benefit of $139 million relating to a tax
reorganization. 4 Impact of acquisitions includes results of businesses acquired in 2014 and consolidation of majority-owned HomeSend. Source: Presentation dated January 1, 2015.

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 The continuing shift toward electronic payments, away from Value-oriented Equity Investment Ideas for Sophisticated Investors
cash and checks, benefits MasterCard’s growth profile

MASTERCARD – SELECTED OPERATING DATA, FULL-YEAR 2014

MASTERCARD – SELECTED OPERATING DATA, FULL-YEAR 2013

MASTERCARD – SELECTED OPERATING DATA, FULL-YEAR 2012

Source for the above tables: Company presentation dated January 30, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Media General (MEG)

Services: Printing & Publishing RICHMOND VA www.mediageneral.com
Media General is one of the largest cross-screen, multimedia companies that operates or services 71 television stations in 48 U.S. markets.
Trading Data Consensus EPS Estimates Valuation
Price: $16.87 (as of 5/1/15) Month # of P/E FYE 12/31/14 29x
52-week range: $12.45–$23.75 Latest Ago Ests P/E FYE 12/31/15 33x
Market value: $2.2 billion This quarter -$0.03 -$0.04 4 P/E FYE 12/30/16 13x
Enterprise value: $4.6 billion Next quarter 0.12 0.12 4 P/E FYE 12/30/17 19x
Shares outstanding: 130.3 million FYE 12/31/15 0.51 0.51 4 EV/ LTM revenue 6.8x
Ownership Data FYE 12/30/16 1.29 1.30 4 EV/ LTM EBIT 29x
Notable holders: Management 1% FYE 12/30/17 0.91 0.91 1 P / tangible book n/m
Std. General 15% | HM 9% | Hicks Muse 10% Greenblatt Criteria
LT growth 2.0% 2.0% 1
Oppenheimer 6% | Highland 6% | Neuberger 5%
Gamco 5% | NexPoint 4% | Berkshire 4% EPS Surprise Actual Est. LTM EBIT yield 4%
Insider buys (last six months): 12 / sells: 16 2/26/15 $0.07 $0.31 LTM pre-tax ROC 28%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 12/31/14 12/31/13 12/31/14
Revenue 797 658 305 616 228 270 675 675 36 217
Gross profit 604 503 187 476 159 175 453 453 36 151
Adjusted operating income 41 56 43 38 56 47 169 223 20 75
Adjusted pretax income -2 15 -22 -25 56 34 167 172 66 102
Adjusted net income 286 43 -32 -36 36 24 111 121 63 67
Adjusted diluted EPS 12.94 1.95 -1.43 -1.59 0.83 0.45 1.22 1.31 0.49 0.69
Shares out (avg) 22 22 22 22 44 53 91 92 131 97
Cash from operations 99 34 86 17 74 8 69 69 -11 25
Capex 32 19 27 19 31 30 212 212 7 111
Free cash flow 67 15 59 -2 43 -22 -144 -144 -18 -85
… % of revenue:
Gross profit 75.8% 76.5% 61.3% 77.3% 69.8% 64.7% 67.1% 67.1% 100.6% 69.6%
Adjusted operating income 5.1% 8.5% 14.0% 6.2% 24.3% 17.4% 25.1% 33.0% 55.2% 34.6%
D&A 9.0% 9.0% 9.4% 8.4% 11.0% 13.7% 13.1% 16.2% 53.8% 11.4%
Capex 4.0% 2.8% 8.7% 3.1% 13.6% 10.9% 31.5% 31.5% 19.4% 51.0%
Cash, investments 7 33 32 23 24 72 44 44 72 44
PP&E, net 454 421 399 177 101 286 495 495 286 495
Intangible assets 667 576 569 450 291 1,354 3,644 3,644 1,354 3,644
Tangible assets 668 660 611 636 192 567 1,099 1,099 567 1,099
Debt 730 712 663 658 154 918 2,428 2,428 918 2,428
Total liabilities 1,179 1,044 1,016 1,052 196 1,184 3,244 3,244 1,184 3,244
Common equity 155 192 164 34 287 737 1,499 1,499 737 1,499
Tangible equity -512 -383 -406 -416 -4 -617 -2,145 -2,145 -617 -2,145
EBIT/capital employed -178% -7% 8% 0% 19% 13% 19% 28% 12% 19%

Ten-Year Stock Price Performance and Trading Volume Dynamics

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Emerged through consolidation as second-largest local TV Local TV under attack by cable and the Internet. Not dissimilar
company in the U.S. Two years ago, Media General’s 18 stations from local newspapers, TV stations face growing competition from
reached 8% of all U.S. TV households, and they were located new media sources, including news websites and video sites like
mostly in the Southeast. With the closing of a merger with Young YouTube and Hulu. The time people spend on media consumption
Broadcasting in November 2013, the company grew to 31 stations is relatively constant, and the mix is becoming more fragmented as
reaching 14% of U.S. TV households. In March 2014, Media new cable channels, social media sites, and video websites gain
General agreed to merge with LIN Media. The deal has more than share of the media consumption time of local audiences. Still, local
doubled Media General’s size, from 31 to 71 stations, reaching 23% TV stations have a raison d’être, especially if they increase their
of U.S. TV households. The company is now the second-largest focus on the types of content that non-local providers do not deliver.
pure-play TV broadcaster in the U.S. behind Sinclair (SBGI), which On the revenue side, local TV stations appear well-positioned to
has ~170 stations reaching ~40% of U.S. TV households. The keep capturing significant media spending by political campaigns.
merger between Media General and LIN had an EV of $2.6 billion Networks still have negotiating leverage. While mergers have
(consideration mostly in Media General stock). The deal is accretive diversified Media General’s balance of network affiliations, the
to FCF per share, with management expecting to realize $70 million company still relies mostly on ABC, CBS and NBC for TV content.
of annualized synergies within three years. Pro forma net leverage Local providers are simply unable to produce content in sufficient
at yearend 2014 was ~5x forward pro forma adjusted EBITDA. volume and quality in house, boosting the negotiating leverage of
Former LIN Media CEO Vince Sadusky leads the combined firm. the networks. Still, the latter rely on local stations for distribution,
Management appears focused on value creation. In addition to resulting in a symbiotic relationship with two-way dependency.
the value-accretive Young and LIN transactions, Media General has
pursued other shareholder-friendly actions, including the sale of SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
LIN overlap stations at attractive valuations; the divestiture of non-
∆ revenue -54% 102% -63% 18% 150%
core and challenged newspaper assets; the completion of several
∆ gross profit -63% 155% -67% 10% 159%
tuck-in acquisitions, creating new duopoly markets (headroom
Employee (end) 4,650 4,200 1,600 2,600 5,300
remains under FCC national cap); and elimination of the dual class Revenue ($mn) 305 616 228 270 675
share structure. The company has also deleveraged the balance % of revenue by major category:
sheet, which had gross leverage of 8x before the Young deal. The Local n/a 69% 65% 77% 71%
recapitalized balance sheet features low-cost and long-dated debt, National n/a 29% 23% 27% 22%
with liquidity of $300+ million. Roughly $100 million in Young Political n/a 3% 22% 2% 11%
and LIN combination synergies appear on track for realization. Digital n/a 2% 3% 4% 5%
Barter n/a 2% 1% 2% 2%
Industry structure may be changing for the better, despite long- Other n/a 2% 2% 3% 2%
term threats. Bankruptcies have catalyzed cost rationalization. In Commissions n/a -16% -16% -13% -13%
addition, the ongoing consolidation trend puts firms like Sinclair Selected items as % of revenue:
and Media General in a better position to capture M&A-related Gross profit 61% 77% 70% 65% 67%
synergies, participate more fully in retransmission revenue growth, EBIT (adjusted)1 14% 6% 24% 17% 25%
and obtain more favorable syndicated programming arrangements. Net income (adjusted)1,2 -10% -6% 16% 9% 16%
M&A has made Media General less dependent on any one network. D&A 17% 8% 11% 14% 13%
A shift to more visible, contracted revenue as well as an opportunity Capex 9% 3% 14% 11% 31%
Calculation of return on capital employed ($mn):
to grow pay TV subscriber fees are improving the financial model.
Adjusted EBIT1 43 38 56 47 169
Pay TV fees contributed 21% of pro forma revenue in 2014, up / Capital employed 456 451 299 232 574
from 12% in 2013. Digital revenue grew to 12% of the mix in 2014. = Return on capital employed 9% 9% 19% 20% 29%
Industry retransmission revenue to grow to $7.6 billion in 2019, Tangible assets ($mn) 611 636 192 567 1,099
from $500 million in 2008 and $3.3 billion in 2013. Retransmission Tangible equity -66% -65% -2% -109% -195%
consent fees are paid by cable, satellite, and telecom companies to Shares out (avg) (mn) 22 22 44 53 91
take Media General’s signal and resell it. Local broadcast stations ∆ shares out (avg) 0% 1% 94% 22% 70%
1
Adjusted for unusual items of -$6.5 million in 2010, -$39 million in 2011, -$18 million in
deliver 35% of the audience to pay-TV providers yet receive only 2013, -$58 million in 2014. 2 Adjusted for nonrecurring items of $16 million in 2010.
~9% of programming fees. Channels like Discovery, ESPN, and
HBO receive higher fees than do local TV broadcasters, but this RATINGS
may be changing. An uplift in retransmission fees is likely to be a VALUE Intrinsic value higher than market quotation? 
major component of the $70 million in LIN-related deal synergies. SAFETY Low risk of permanent capital loss? 
Strong cash flow, with cumulative FCF of $540-600 million, or MOAT Able to sustain high returns on capital? 
~$4.50 per share, expected in 2015 and 2016. The company is able MANAGEMENT Capable and properly incentivized team? 
to significantly reduce cash taxes by utilizing NOL of $635 million. CAPITALIZATION Strong, deleveraged balance sheet? 
Media General also has valuable spectrum assets and expects to PERFORMANCE Business fundamentals improving? 
monetize some of them, with no or minimal impact on EBITDA. MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Media General became the second-largest local TV broadcaster in the U.S. upon completion of the LIN Media merger last December. The
deal follows on the heels of Media General’s merger with Young, boosting market presence and scale. The consolidation trend has been
positive for the local TV industry, which underwent a wave of restructuring due to the impact of high indebtedness and competition from
cable and the Internet. The industry model appears to have changed materially for the better—the growth in retransmission consent fees
captured by local TV companies attests to this. At an FCF yield in the low to mid teens (based on guidance for 2015 and 2016), we find
Media General shares meaningfully undervalued. Continued balance sheet deleveraging should drive near-term equity value realization.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

MEDIA GENERAL – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on median consensus EPS Based on median consensus EPS Based on median consensus EPS
estimate for FYE December 31, 2015 estimate for FYE December 30, 2016 estimate for FYE December 30, 2016
▼ ▼ ▼
Consensus FY15E EPS: $0.51 (‡) Consensus FY16E EPS: $1.29 (§) Consensus FY16E EPS: $1.29 (§)
minus minus minus
Assumed upside/downside to Assumed upside/downside to Assumed upside/downside to
FY15 EPS estimate: -5% * $0.51 FY16 EPS estimate: 5% * $1.29 FY16 EPS estimate: 20% * $1.29
equals equals equals
Revised FY15 EPS estimate: $0.49 Revised FY16 EPS estimate: $1.36 Revised FY16 EPS estimate: $1.55
multiplied by multiplied by multiplied by
Corresponding industry P/E: 19.7x (*) Corresponding industry P/E: 16.2x (*) Corresponding industry P/E: 16.2x (*)
equals equals equals
Industry multiple-implied fair value: Industry multiple-implied fair value: Industry multiple-implied fair value:
$1.3 billion ($9.60 per share) $2.9 billion ($22 per share) $3.3 billion ($25 per share)
multiplied by multiplied by multiplied by
Assumed MEG multiple as a Assumed MEG multiple as a Assumed MEG multiple as a
percentage of the industry multiple: percentage of the industry multiple: percentage of the industry multiple:
92% 111% 124%
(15.0x fair value P/E multiple) (18.0x fair value P/E multiple) (20.0x fair value P/E multiple)
equals equals equals
Estimated fair value of the common Estimated fair value of the common Estimated fair value of the common
equity of Media General: equity of Media General: equity of Media General:
$1.2 billion ($8.90 per share) $3.2 billion ($24 per share) $4.0 billion ($31 per share)
(based on 130 million shares out) (based on 130 million shares out) (based on 130 million shares out)
47% downside from the recent 45% upside to the recent 84% upside to the recent
stock price ($17 per share) stock price ($17 per share) stock price ($17 per share)
(*) Represents Printing & Publishing industry median multiple. (‡) The FY15 consensus EPS estimate of $0.51 has been revised down by 16% from $0.61 three months ago.
(§) The FY16 consensus EPS estimate of $1.29 has been revised down by 17% from $1.55 three months ago. Source: Company filings, The Manual of Ideas.

MEDIA GENERAL – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
E.W. Scripps / SSP 23.66 -98% 9% 1,992 2,031 11% 4% 1% 1% 7% 43% 181 -14% 11% 83% 6% 30%
Gray Television / GTN 13.51 -99% 12% 966 2,172 n/m 11% 6% 3% 11% 23% 187 47% 86% 44% 31% -289%
Grupo Televisa / TV 36.87 -71% 3% 22,391 25,782 15% 3% 0% 3% 4% 20% 134 6% 12% 46% 17% 25%
Liberty Media / LMCA 38.76 -31% 9% 13,190 18,162 n/m 7% 2% 2% 3% 25% 1,232 -7% 7% 64% 19% -225%
News Corp. / NWSA 16.05 -11% 15% 9,294 7,396 72% 6% 3% 3% 4% 118% 395 -1% 2% n/m 4% 67%
Scripps Networks / SNI 70.23 -74% 23% 9,015 10,516 n/m 8% 5% 6% 7% 25% 1,269 5% 2% 71% 38% -8%
Sinclair Broadcast / SBGI 30.62 -97% 22% 2,922 6,938 n/m 11% 7% 5% 9% 28% 257 45% 44% 65% 24% -236%
Tribune Media / TRCO 56.23 -22% 45% 5,508 7,547 n/m 5% 8% 2% 4% 26% 257 5% 85% 82% 16% -26%
Media General / MEG 16.87 -93% 61% 2,198 4,582 n/m -7% 3% 3% 8% 15% 127 175% 510% 67% 33% -195%
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

MEDIA GENERAL – EBITDA post-LIN DEAL MEDIA GENERAL – EXECUTION TIMETABLE FOR LIN SYNERGIES

1
On a run-rate basis, Media General expects to implement/take actions to achieve the ~$35 million of LIN synergies in 2015; however, the 2015 full-year realized cash impact is expected to
be approximately 50% of the $35 million. 2 See slide 8 for explanation of pro forma combined results. Source: Company presentation dated March 12, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

MEDIA GENERAL – PRO FORMA FINANCIALS, 2014 ($ in millions)

Local is the key to

Media General’s
financial performance

INDUSTRY – TIME SPENT with MAJOR MEDIA, by AVERAGE U.S. ADULT, 2010-2014 (hours and minutes per day)

TV has stubbornly held on to

U.S. consumers, but digital is
where the growth has been and
will continue to be in the future

Note: Ages 18+; time spent with each medium includes all time spent with that medium, regardless of multitasking; for example, 1 hour of multitasking online while
watching TV is counted as 1 hour for TV and 1 hour for online; * includes all Internet activities on desktop and laptop computers; ** offline reading only

INDUSTRY – REACH of U.S. TV BROADCASTERS Media General has fairly wide

audience reach within the U.S.

1
Based on current subscriber reach, excluding pro forma impact of any pending acquisitions. Source for the above tables and charts: Company presentation dated March 12, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

National Oilwell Varco (NOV)

Energy: Oil Well Services & Equipment, Member of S&P 500 HOUSTON TX www.nov.com
NOV provides equipment and components used in oil and gas drilling and production operations, as well as oilfield services to the upstream oil and gas industry.
Trading Data Consensus EPS Estimates Valuation
Price: $54.73 (as of 5/1/15) Month # of P/E FYE 12/31/14 10x
52-week range: $46.08–$86.55 Latest Ago Ests P/E FYE 12/31/15 17x
Market value: $21.6 billion This quarter $0.73 $0.96 33 P/E FYE 12/30/16 21x
Enterprise value: $22.8 billion Next quarter 0.65 0.84 33 P/E FYE 12/30/17 17x
Shares outstanding: 394.4 million FYE 12/31/15 3.15 3.69 37 EV/ LTM revenue 1.1x
Ownership Data FYE 12/30/16 2.66 3.21 37 EV/ LTM EBIT 7x
Notable holders: Management and insiders <1% FYE 12/30/17 3.19 3.82 14 P / tangible book 3.5x
Harris 5% | Dodge & Cox 3% | Bleichroeder 3% Greenblatt Criteria
LT growth -9.4% -7.0% 5
BlackRock 3% | Sands 3% | ClearBridge 2%
Northern Trust 2% | Cap World 2% | MFS 1% EPS Surprise Actual Est. LTM EBIT yield 15%
Insider buys (last six months): 3 / sells: 3 4/28/15 $1.14 $1.09 LTM pre-tax ROC 37%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 13,431 12,712 12,156 14,658 17,194 19,221 21,440 21,371 4,889 4,820
Gross profit 4,072 3,784 3,832 4,497 5,043 5,104 5,809 5,702 1,285 1,178
Adjusted operating income 2,918 2,462 2,447 2,937 3,389 3,199 3,717 3,592 799 570
Adjusted net income 1,952 1,616 1,667 1,994 2,383 2,180 2,554 2,316 548 310
Adjusted diluted EPS 4.91 3.88 4.00 4.73 5.61 5.12 5.97 5.48 1.28 0.76
Dividend – 0.10 0.41 0.45 0.49 0.91 1.64 1.84 0.26 0.46
Shares out (avg) 397 416 417 422 425 426 428 423 428 407
Cash from operations 2,294 2,095 1,542 2,143 620 3,397 2,614 n/a 488 n/a
Capex 379 250 232 483 569 614 699 n/a 131 n/a
Free cash flow 1,915 1,845 1,310 1,660 51 2,783 1,915 n/a 357 n/a
… % of revenue:
Gross profit 30.3% 29.8% 31.5% 30.7% 29.3% 26.6% 27.1% 26.7% 26.3% 24.4%
Adjusted operating income 21.7% 19.4% 20.1% 20.0% 19.7% 16.6% 17.3% 16.8% 16.3% 11.8%
Cash, investments 1,543 2,622 3,333 3,535 3,319 3,436 3,536 3,024 3,688 3,024
Receivables 3,136 2,187 2,425 3,291 4,320 4,896 4,416 4,024 5,310 4,024
PP&E, net 1,677 1,836 1,840 2,445 2,945 3,408 3,362 3,216 3,437 3,216
Intangible assets 9,525 9,541 9,893 10,224 11,915 14,104 12,983 12,799 13,828 12,799
Tangible assets 11,953 11,991 13,157 15,291 19,569 20,708 20,579 19,625 21,652 19,625
Debt 874 883 887 510 3,149 3,150 3,166 4,245 3,149 4,245
Total liabilities 8,851 7,419 7,302 7,896 11,245 12,582 12,870 13,387 12,783 13,387
Common equity 12,628 14,113 15,748 17,619 20,239 22,230 20,692 19,037 22,697 19,037
Tangible equity 3,102 4,572 5,855 7,395 8,324 8,126 7,709 6,238 8,869 6,238
TBV / tangible assets 26% 38% 45% 48% 43% 39% 37% 32% 41% 32%
TBV per share 7.81 10.99 14.04 17.52 19.59 19.07 18.01 15.33 20.72 15.33
EBIT/capital employed 70% 55% 53% 54% 43% 33% 39% 37% 37% 28%

Ten-Year Stock Price Performance and Trading Volume Dynamics

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Leading provider of technology and equipment to global oil and Cyclical business. When the upstream oil and gas sector goes
gas industry. National Oilwell Varco (NOV), in operation since through a period of positive commodity price fundamentals, as it
1841, manufactures equipment and components for oil and gas did prior to mid-2014, it is tempting to disregard the cyclicality of
drilling and production, and provides oilfield services to the the business. A review of NOV’s long-term stock performance
upstream oil and gas industry. NOV runs a well-balanced business, reveals several periods in which investors were able to acquire the
with four major segments contributing materially to cash flow and shares below fair value. The sharp cyclical downturn of the oil and
generating revenue and cost synergies: Rig Systems (42% of 2014 gas industry in late 2014 and continuing in 2015 requires NOV to
sales, 20% operating margin) provides land rigs, offshore drilling draw down on backlog and manage costs to the lower level of work.
equipment, and discrete rig components, with ~240 offshore rigs
delivered since 2005; Rig Aftermarket (14%, 27%) provides spares, SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
services, repair, and training, capturing customer spending needed
∆ revenue -4% 21% 17% 12% 12%
to keep depreciating equipment performing at high rates; Wellbore ∆ gross profit 1% 17% 12% 1% 14%
Technologies (24%, 18%) markets drilling equipment, technologies, Employees (‘000) 41 50 60 64 64
and services that optimize drilling performance; Completion and Revenue ($bn) 12.2 14.7 17.2 19.2 21.4
Production (20%, 15%) provides equipment for hydraulic fracture …from the U.S. 34% 37% 35% 27% 28%
stimulation, well intervention, and production, adding value by % of revenue by segment:
helping oil and gas companies keep projects on time and on budget. Rig systems n/a n/a 41% 44% 46%
Multiple competitive advantages even as NOV serves a cyclical, Rig aftermarket n/a n/a 12% 14% 15%
Wellbore technologies n/a n/a 30% 27% 27%
commodity-based industry. As the market leader, NOV leverages Completion and production n/a n/a 23% 22% 22%
scale to drive technological innovation and deliver products and Eliminations n/a n/a -7% -7% -9%
services efficiently to oil and gas companies. The company credibly Operating margin by segment:
claims low-cost production and service delivery. Switching costs Rig systems n/a n/a 24% 19% 20%
are quite high, making NOV’s large installed base a competitive Rig aftermarket n/a n/a 28% 27% 27%
advantage. The long operating track record of NOV brands (some Wellbore technologies n/a n/a 19% 18% 16%
going back more than one hundred years), the wide product range, Completion and production n/a n/a 17% 14% 15%
and technology leadership are additional positives. Management has Selected industry data:
utilized M&A skillfully to drive growth and build competitive Active drilling rigs – U.S. 1,541 1,875 1,919 1,761 1,862
Active drilling rigs – Canada 351 423 365 354 380
advantage, with 200+ closed acquisitions (mostly value-accretive). Active drilling rigs – ROW 1,094 1,168 1,234 1,296 1,337
NOV’s business model has been shown to be quite resilient. For Total active drilling rigs 2,986 3,466 3,518 3,411 3,579
example, when oil prices fell ~75% from 3Q08 to 1Q09 and rig WTI crude price ($/barrel) 79 95 94 98 93
count fell ~44%, NOV net income fell a comparably modest ~23%. Natural gas price ($/mmbtu) 4.39 4.00 2.75 3.72 4.38
Long-term growth prospects intact despite industry downturn. Selected items as % of revenue:
NOV appears well-positioned to benefit from four major industry Gross profit 32% 31% 29% 27% 27%
trends: (i) progression of unconventional technologies, with three- EBIT (adjusted)1 20% 20% 20% 17% 17%
Net income (adjusted)1,2 14% 14% 14% 11% 12%
fourths of U.S. land rigs drilling non-vertical wells and with D&A 4% 4% 4% 4% 4%
continued demand in other parts of the world; (ii) replacement of an Capex 2% 3% 3% 3% 3%
aging rig fleet, with 70% of the North American fleet mechanical Adjusted EBIT1 ($bn) 2.4 2.9 3.4 3.2 3.7
and 55% of the jackup fleet aged 25 years or more; (iii) buildout of / Capital employed ($bn) 4.6 5.4 7.8 9.7 9.2
the deepwater rig fleet, supported by thirty floater retirements since = Return on capital employed 53% 54% 43% 33% 40%
Q4 2014; and (iv) development of floating production systems, with Trailing P/E (end) 15x 13x 11x 14x 11x
300 deepwater discoveries yet to be developed. In the near term, Forward P/E (end) 13x 11x 12x 13x 21x
growth is challenged by the sharp industry downturn. NOV backlog Shares out (avg) (mn) 417 422 425 426 428
fell to $14.3 billion at yearend 2014, from $16.2 billion in 2013. ∆ shares out (avg) 0% 1% 1% 0% 0%
1
Adjusted for unusual items of -$104 million in 2014. 2 Adjusted for nonrecurring items of
Focused on value creation, in part through return of capital. $108 million in 2012, $147 million in 2013, and $52 million in 2014.
Management intends to utilize fairly steady U.S. cash flow to fund
RATINGS
dividend payments, while relying on volatile repatriated cash flow
VALUE Intrinsic value higher than market quotation? 
to fund opportunistic buybacks. NOV also intends to utilize balance
SAFETY Low risk of permanent capital loss? 
sheet capacity opportunistically for extraordinary share buybacks.
MOAT Able to sustain high returns on capital? 
Repurchases are a more recent focus for management, as it spent
MANAGEMENT Capable and properly incentivized team? 
$780 million in 2014 while focusing on debt reduction in previous
CAPITALIZATION Strong, deleveraged balance sheet? 
years. NOV also paid $700 million in dividends in 2014, amounting
PERFORMANCE Business fundamentals improving? 
to $1.84 per share going forward (implied dividend yield of ~3.5%).
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
We revisit NOV as the price has declined to the mid-$50s from the mid-$80s when we last analyzed the equity in late August 2014. We
concluded at the time that “we would be inclined to wait for a period of temporary demand weakness in the global oil patch (a cyclical
industry!) before allocating significant capital” to NOV. The downturn materialized much faster than we could have anticipated, punishing
the stocks of most companies serving the upstream oil and gas industry. We view NOV’s long-term opportunity as intact despite the
ongoing downturn, as the company’s scale, low-cost production methods, and technology leadership make it a preferred partner for oil and
gas companies. The downturn may even create some opportunities for NOV to gain share or acquire assets on the cheap, potentially aiding
long-term value creation. We do wonder why Berkshire reduced its stake in NOV during the fourth quarter (Q1 data is not yet available),
but Berkshire could have done so at prices materially above the recent quotation (the shares started Q4 in the mid-$70s). With NOV’s
“normalized” FCF perhaps approximating $2 billion, we find the ~10% potential FCF yield attractive but not yet entirely compelling.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

NATIONAL OILWELL VARCO – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative Base Case Aggressive
Based on LTM revenue and assumed Based on median consensus EPS Based on LTM revenue and average
normalized EBIT margin estimate for FYE December 31, 2015 EBIT margin for past seven fiscal years
▼ ▼ ▼
TTM net revenue: $21 billion Consensus FY15E EPS: $3.15 (‡) TTM net sales: $21 billion
multiplied by minus multiplied by
Assumed operating margin: 15.0% Assumed upside/downside to Average 7-year EBIT margin: 19.3%
equals FY15 EPS estimate: 5% * $3.15 equals
Est. operating income: $3.2 billion equals Estimated EBIT: $4.1 billion
multiplied by Revised FY15 EPS estimate: $3.31 multiplied by
Assumed fair value multiple: multiplied by Assumed fair value multiple of EBIT:
6.0x Corresponding industry P/E: 21.9x (*) 12.0x
equals equals equals
Estimated fair enterprise value of Industry multiple-implied fair value: Estimated fair enterprise value of
Nat.-Oilwell Varco: $19 billion $29 billion ($73 per share) Nat.-Oilwell Varco: $49 billion
plus multiplied by plus
Cash, ST investments: $3.0 billion Assumed NOV multiple as a Cash, ST investments: $3.0 billion
minus percentage of the industry multiple: minus
Total debt: $4.2 billion 98% Total debt: $4.2 billion
equals (20.0x fair value P/E multiple) equals
Estimated fair value of the common equals Estimated fair value of the common
equity of Nat.-Oilwell Varco: Estimated fair value of the common equity of Nat.-Oilwell Varco:
$18 billion, or $46 per share equity of Nat.-Oilwell Varco: $48 billion, or $122 per share
(based on 390 million shares out) $28 billion ($71 per share) (based on 390 million shares out)
17% downside from the recent (based on 390 million shares out) 123% upside to the recent
stock price ($55 per share) 29% upside to the recent stock price ($55 per share)
stock price ($55 per share)
(*) Represents Oil Well Services & Equipment industry median multiple. (‡) The FY15 consensus EPS estimate of $3.15 has been revised down by 17% from $3.78 three months ago.
Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

NATIONAL OILWELL VARCO – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Baker Hughes / BHI 69.02 -65% 32% 30,001 32,450 37% 4% 3% 0% 2% 72% 436 2% -20% 17% 12% 55%
Halliburton / HAL 49.11 -74% 51% 41,787 47,334 32% 1% 5% 3% 4% 69% 434 9% -4% 15% 17% 47%
Schlumberger / SLB 93.00 -62% 28% 118,085 124,008 15% 6% 4% 4% 4% 38% 397 1% -9% 23% 24% 39%
Technip / TKPPY 17.15 -70% 83% 7,719 5,754 66% 6% 6% 9% 9% 204% 363 -24% 17% 14% 8% 29%
Weatherford / WFT 14.63 -47% 242% 11,335 18,655 28% -1% neg. neg. 3% 76% 252 -6% -22% 23% 14% 22%
Nat.-Oilwell Varco / NOV 54.73 -71% 58% 21,585 22,806 29% 0% 9% 6% 5% 94% 392 8% -1% 27% 17% 32%
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

NATIONAL OILWELL VARCO – MANAGEMENT’S VIEW of CAPITAL RETURN PROSPECTS

Management’s thinking
about capital return
makes much sense

Source: Company presentation dated March 23, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INDUSTRY – OFFSHORE RIG ASSET LIFE

Equipment depreciation is a
reality in the oil and gas industry,
making NOV an important
partner to E&P companies

Source: Company presentation dated March 23, 2015.

NATIONAL OILWELL VARCO – HISTORICAL COMPARISON of NET INCOME to INDUSTRY RIG COUNT ($ in millions)

When rig count

declined sharply in
2009, NOV was able
to keep earnings at a
respectable level

Source: Company presentation dated March 23, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Phillips 66 (PSX)
Energy: Oil & Gas Operations, Member of S&P 500 HOUSTON TX www.phillips66.com
Phillips 66 is a diversified energy manufacturing and logistics company. With a portfolio of midstream, chemicals, refining, and marketing and specialties
businesses, the company processes, transports, stores, and markets fuels and products. Phillips 66 Partners, an MLP, is an integral asset in the portfolio.
Trading Data Consensus EPS Estimates Valuation
Price: $81.61 (as of 5/1/15) Month # of P/E FYE 12/31/14 12x
52-week range: $57.33–$87.98 Latest Ago Ests P/E FYE 12/31/15 13x
Market value: $44.3 billion This quarter $1.88 $1.96 17 P/E FYE 12/30/16 12x
Enterprise value: $47.7 billion Next quarter 1.83 1.86 16 P/E FYE 12/30/17 10x
Shares outstanding: 542.3 million FYE 12/31/15 6.52 6.78 19 EV/ LTM revenue 0.3x
Ownership Data FYE 12/30/16 7.07 7.33 19 EV/ LTM EBIT 14x
Notable holders: Management and insiders <1% FYE 12/30/17 8.42 8.66 7 P / tangible book 2.5x
BlackRock 3% | Barrow Hanley 3% | D.E. Shaw 3%
LT growth 9.2% 7.9% 2 Greenblatt Criteria
Waddell & Reed 2% | Robeco 2% | FMR 1%
Northern Trust 1% | J.P. Morgan 1% | Berkshire 1% EPS Surprise Actual Est. LTM EBIT yield 7%
Insider buys (last six months): 8 / sells: 1 4/30/15 $1.51 $1.43 LTM pre-tax ROC 19%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 12/31/14 12/31/13 12/31/14
Revenue 171,706 112,692 146,561 195,931 179,290 171,596 161,212 161,212 171,596 34,963
Gross profit 26,131 19,536 21,469 23,163 24,877 23,351 25,464 25,464 23,351 6,514
Adjusted operating income 3,021 -398 1,009 2,488 4,470 2,577 3,307 3,457 2,577 927
Adjusted pretax income 4,960 913 3,018 7,031 7,714 5,555 5,895 5,895 5,555 1,495
Adjusted net income 3,508 542 2,434 5,204 5,232 3,689 4,199 4,199 3,689 1,279
Adjusted diluted EPS 4.61 0.73 3.88 8.29 8.32 6.02 7.42 7.46 6.02 2.31
Dividend – – – – 0.45 1.33 1.89 1.89 1.33 0.50
Shares out (avg) 762 744 628 628 629 613 566 563 613 555
Cash from operations 2,876 946 2,092 5,006 4,296 6,027 3,529 3,529 897 872
Capex 2,573 2,461 1,150 1,016 1,701 1,779 3,773 3,773 623 1,126
Free cash flow 303 -1,515 942 3,990 2,595 4,248 -244 -244 274 -254
… % of revenue:
Gross profit 15.2% 17.3% 14.6% 11.8% 13.9% 13.6% 15.8% 15.8% 13.6% 18.6%
Adjusted operating income 1.8% -0.4% 0.7% 1.3% 2.5% 1.5% 2.1% 2.1% 1.5% 2.7%
D&A 0.5% 0.8% 0.6% 0.5% 0.5% 0.6% 0.6% 0.6% 0.6% 0.8%
Capex 1.5% 2.2% 0.8% 0.5% 0.9% 1.0% 2.3% 2.3% 0.4% 3.2%
Cash, investments 0 0 0 3,474 5,400 5,207 5,207 5,400 5,207
LT investments 9,751 10,319 10,306 10,471 11,220 10,189 10,189 11,220 10,189
PP&E, net 17,238 15,409 14,771 15,407 15,398 17,346 17,346 15,398 17,346
Tangible assets 38,454 40,545 39,147 44,005 46,004 44,567 44,567 46,004 44,567
Debt 428 417 391 6,974 6,155 8,684 8,684 6,155 8,684
Total liabilities 15,963 18,954 19,947 27,298 27,848 27,151 27,151 27,848 27,151
Tangible equity 22,491 21,591 19,200 16,707 18,156 17,416 17,416 18,156 17,416
TBV / tangible assets 58% 53% 49% 38% 39% 39% 39% 39% 39%
EBIT/capital employed -2% -4% 12% 20% 15% 18% 19% 79% 18%

Ten-Year Stock Price Performance and Trading Volume Dynamics

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Diversified, advantaged downstream firm, with major refining Exposed to volatility in refining and petrochemicals margins,
and marketing, midstream, and chemicals businesses. R&M which fluctuate based on commodity prices and other factors
includes 15 refineries with 2.2 million bbls per day capacity (65% outside the company’s control. Management is periodically in the
light-medium crudes). In midstream, the firm owns 50% of DCP position of responding to market conditions. The company has
Midstream Partners (DPM), one of the largest NGL producers and benefited recently from a favorable business environment across the
NGL pipeline operators in the U.S., with gas processing capacity of businesses, and the market quotation reflects this positive near-term
7.2 billion cubic feet per day. In chemicals, Phillips and Chevron outlook. Margins appear likely to compress—perhaps the only
each own 50% of CPChem, a leading producer of olefins and poly- question is timing. Factors affecting sales and margins include the
olefins, with 10+ billion pounds of worldwide ethylene capacity. supply and demand of oil, refined products, and petrochemicals, the
Phillips 66 Partners spinoff continues to create value for PSX, availability of feedstocks, local market factors, and even weather.
as evidenced by an agreement in 1Q15 to “drop down” certain PSX Capital-intensive business, with roughly $29 billion employed in
pipeline assets into PSXP at a 9.5x multiple of 2015E EBITDA, the various operations. Due to industry cyclicality, Phillips 66 may
generating $1.1+ billion in proceeds for PSX. The latter retains 73% not earn acceptable returns on existing capital or capital deployed
LP and 2% GP interests in PSXP, an MLP that went public in mid- incrementally in the business. A large portion of ~$4.6 billion in
2013 and generates annualized EBITDA of $180+ million. The forward annual capex is expected to be allocated to growth projects,
company expects strategic actions and execution on growth projects which may fall short of their cost of capital. Phillips 66 may also be
to boost PSXP EBITDA to $1.1 billion in 2018, driving an expected required by regulators to allocate capex based on environmental
30% CAGR in LP distribution per unit over five years from 4Q13. considerations, such as a potential requirement to reduce pollution.
PSXP recently traded at ~30x forward EPS, compared to ~12x for
PSX. Management estimates that the value of PSX’s GP and LP SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
interests in PSXP will grow to $15-20 billion by 2018, amounting to
∆ revenue 30% 34% -8% -4% -6%
$25-35 per PSX share (30-40+% of recent PSX market value).
∆ gross profit 10% 8% 7% -6% 9%
Commodity-based nature of the businesses notwithstanding, Revenue ($bn) 146.6 195.9 179.3 171.6 161.2
Phillips 66 creates economic value in the four major segments. …from the U.S. 69% 69% 67% 67% 69%
Each segment generates a respectable normalized FCF yield on …from the U.K. 14% 14% 12% 13% 12%
revenue, amounting to 5-10% in midstream, 20-25% in chemicals, % of revenue by product line:
5-15% in refining, and 15-25% in marketing and specialties. In Refined products 74% 75% 79% 82% 83%
midstream, roughly four-fifths of revenue is fee-based rather than Crude oil resales 20% 20% 16% 13% 12%
market-based, resulting in more predictable revenue generation. In NGL 6% 5% 5% 4% 4%
chemicals, the geographically advantaged producer CPChem Refining data (‘000 of barrels per day):
Crude oil capacity 2,657 2,365 2,230 2,238 2,246
generates industry-leading returns. The JV grew EBITDA 23% in
Crude oil processed 2,156 2,166 2,064 2,079 2,108
2014, and management expects it to generate incremental EBITDA Capacity utilization 81% 92% 93% 93% 94%
of $1.3-1.6 billion by 2018. In marketing, the PSX network of Refining margin ($ per barrel):
~8,600 branded sites in the U.S. and ~1,520 sites internationally Atlantic Basin/Europe 6.81 5.93 9.28 6.87 8.65
generates high returns, with adjusted EBITDA (incl. specialties) Gulf Coast 7.24 8.01 8.29 6.04 7.50
averaging $1.2 billion over the past six years (higher in 2013-2014). Central Corridor 7.96 19.87 26.37 18.62 15.26
Large reinvestment opportunities. Capital employed averaged Western/Pacific 8.10 9.13 11.04 8.20 8.22
~$29 billion in 2014, with 50+% of capital employed in the refining Transportation volumes (‘000 barrels per day):
Pipelines 3,073 2,981 2,880 3,144 3,206
segment and 75+% employed in North America. Capex grew from
Terminals 1,166 1,173 1,169 1,274 1,683
$3.7 billion in 2013 to ~$4.6 billion in 2014 and is expected to CPChem externally marketed sales volumes (mn pounds):
amount to ~$4.6 billion in 2015. Nearly three-fourths of capex is Olefins and polyolefins 12,585 14,305 14,967 16,071 16,815
allocated to growth projects, including an LNG facility, LPG export Specialties, aromatics, styrenics 6,318 6,704 6,719 6,230 6,294
terminal, pipelines, and terminal expansion. Phillips 66 achieves Olefins and polyolefins utilization 91% 94% 93% 88% 88%
some of the leading returns on capital in the industry, consisting of Shares out (avg) (mn) 628 628 629 613 566
13% in midstream, 27% in chemicals, and 12% in refining in 2014. ∆ shares out (avg) -16% 0% 0% -3% -8%
Returned $4.7 billion to shareholders in 2014, comprised of
dividends of $1.1 billion, buybacks of $2.3 billion, and an exchange RATINGS
of shares of flow improver business Phillips Specialty Products of VALUE Intrinsic value higher than market quotation? 
$1.3 billion (considered return of capital as it reduced the number of SAFETY Low risk of permanent capital loss? 
PSX shares outstanding). Repurchases and the PSPI share exchange MOAT Able to sustain high returns on capital? 
cut the PSX share count by 7% last year. Management raised the MANAGEMENT Capable and properly incentivized team? 
per-share dividend by 28% in 2014 to an annualized rate of $2 per CAPITALIZATION Strong, deleveraged balance sheet? 
share, implying a recent yield of ~2.6%. The company maintains a PERFORMANCE Business fundamentals improving? 
strong balance sheet, with debt of $8.7 billion and cash of $5.2 MACRO Benefiting from economic and secular trends? 
billion at yearend 2014, resulting in a 14% net debt-to-capital ratio.
THE BOTTOM LINE
Phillips 66 owns a collection of leading downstream assets in the U.S., both directly as well as through major stakes in public entities and
private JVs. Management has executed well following the spinoff from ConocoPhillips in 2012, highlighting the value of the asset portfolio
through strategic transactions, including the IPO of PSXP in 2013. The midstream assets have been revalued materially since the public
listing of the MLP. Assuming stable market conditions, Phillips appears poised to grow value across the board through 2018. However, at
an EPS yield of less than 10%, we find the shares only modestly undervalued given the cyclical nature of the core refining business.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

PHILLIPS 66 – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on median consensus EPS Based on median consensus EPS Based on median consensus EPS
estimate for FYE December 31, 2015 estimate for FYE December 31, 2015 estimate for FYE December 30, 2016
▼ ▼ ▼
Consensus FY15E EPS: $6.52 (‡) Consensus FY15E EPS: $6.52 (‡) Consensus FY16E EPS: $7.07 (§)
minus minus minus
Assumed upside/downside to Assumed upside/downside to Assumed upside/downside to
FY15 EPS estimate: -10% * $6.52 FY15 EPS estimate: 5% * $6.52 FY16 EPS estimate: 10% * $7.07
equals equals equals
Revised FY15 EPS estimate: $5.87 Revised FY15 EPS estimate: $6.85 Revised FY16 EPS estimate: $7.77
multiplied by multiplied by multiplied by
Corresponding industry P/E: 28.1x (*) Corresponding industry P/E: 28.1x (*) Corresponding industry P/E: 27.5x (*)
equals equals equals
Industry multiple-implied fair value: Industry multiple-implied fair value: Industry multiple-implied fair value:
$89 billion ($165 per share) $104 billion ($192 per share) $116 billion ($214 per share)
multiplied by multiplied by multiplied by
Assumed PSX multiple as a Assumed PSX multiple as a Assumed PSX multiple as a
percentage of the industry multiple: percentage of the industry multiple: percentage of the industry multiple:
37% 55% 65%
(10.0x fair value P/E multiple) (15.0x fair value P/E multiple) (18.0x fair value P/E multiple)
equals equals equals
Estimated fair value of Phillips 66: Estimated fair value of Phillips 66: Estimated fair value of Phillips 66:
$33 billion ($60 per share) $57 billion ($105 per share) $76 billion ($140 per share)
(based on 540 million shares out) (based on 540 million shares out) (based on 540 million shares out)
26% downside from recent price ($82) 28% upside to recent price ($82) 71% upside to recent price ($82)
(*) Represents Oil & Gas Operations industry median multiple. (‡) The FY15 consensus EPS estimate of $6.52 has been revised upward by 5% from $6.20 three months ago.
(§) The FY16 consensus EPS estimate of $7.07 has remained roughly flat over the past three months. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

PHILLIPS 66 – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Marathon Petroleum / MPC 102.66 -74% 6% 28,025 33,168 33% 6% 9% 10% 9% 296% 2,163 -2% -10% 7% 4% 32%
Plains All American / PAA 50.09 -77% 22% 19,898 29,884 25% 0% 5% 5% 5% 145% 8,201 -18% -11% 6% 4% 25%
Sunoco Logistics / SXL 44.59 -90% 18% 10,940 16,024 33% -17% 1% 4% 4% 113% 8,039 9% -10% 7% 5% 31%
Valero Energy / VLO 58.90 -78% 10% 30,276 32,973 68% 0% 12% 12% 11% 359% 11,775 -14% -37% 11% 5% 45%
DCP Midstream / DPM 40.02 -87% 46% 4,560 6,864 59% 4% 7% 6% 6% 53% 5,612 19% 7% 23% 12% 49%
Phillips 66 Partners / PSXP 75.85 -63% 8% 6,211 6,632 1% 0% 2% 3% 4% 3% n/m 56% 123% n/m 57% 12%
Phillips 66 / PSX 81.61 -65% 8% 44,259 47,736 39% -1% 9% 8% 9% 338% 11,515 -46% -80% 16% 2% 39%
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

PHILLIPS 66 – FREE CASH FLOW, by Segment ($ in millions)

The shares are not cheap any

more, but they are cheaper
than DPM or PSXP shares

Each major business segment

has contributed materially to
FCF over the past five years

Source: Company presentation dated March 5, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

PHILLIPS 66 – CASH SOURCES and USES, 2013-2014

Return of capital has been a

major focus for Phillips 66
management, driving major
per-share value creation

Debt-to-capital and net-debt-to-capital as of Dec. 31, 2014. Data includes discontinued operations.

PHILLIPS 66 – ADJUSTED CROCE, 2014 (average capital employed in billions of dollars)

The company is able to employ large amounts of capital at attractive rates of return

CROCE defined as Adjusted Net Income plus Depreciation and Amortization divided by Average Capital Employed.

PHILLIPS 66 – CHEMICALS: CALCULATION of RETURN ON CAPITAL EMPLOYED ($ in millions)

Source for the above tables and charts: Company presentation dated March 5, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Precision Castparts (PCP)

Basic Materials: Iron & Steel, Member of S&P 500 PORTLAND OR www.precast.com
Precision Castparts is a diversified manufacturer of complex metal components and products. It serves the aerospace, power, and general industrial markets.
Trading Data Consensus EPS Estimates Valuation
Price: $208.78 (as of 5/1/15) Month # of P/E FYE 3/31/14 17x
52-week range: $186.17–$275.09 Latest Ago Ests P/E FYE 3/31/15 16x
Market value: $29.6 billion This quarter $2.97 $3.22 14 P/E FYE 3/30/16 16x
Enterprise value: $33.3 billion Next quarter 3.21 3.41 11 P/E FYE 3/30/17 14x
Shares outstanding: 141.8 million FYE 3/31/15 12.72 12.89 16 EV/ LTM revenue 3.3x
Ownership Data FYE 3/30/16 13.42 14.08 21 EV/ LTM EBIT 12x
Notable holders: Management and insiders <1% FYE 3/30/17 15.00 15.56 14 P / tangible book 22.7x
Cap Re 10% | T. Rowe 8% | Janus 3% Greenblatt Criteria
LT growth 11.3% 11.6% 5
BlackRock 3% | Jennison 3% | Walter Scott 2%
Ruane Cunniff 2% | Waddell 2% | Berkshire 2% EPS Surprise Actual Est. LTM EBIT yield 9%
Insider buys (last six months): 1 / sells: 1 1/22/15 $3.09 $3.17 LTM pre-tax ROC 47%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended March 30, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 12/28/14 12/29/13 12/28/14
Revenue 6,719 6,771 5,459 6,209 7,202 8,361 9,616 10,039 2,338 2,459
Gross profit 1,845 1,979 1,790 1,891 2,262 2,692 3,299 3,475 805 830
Adjusted operating income 1,496 1,597 1,423 1,502 1,816 2,157 2,672 2,832 655 670
Adjusted net income 962 1,048 925 1,008 1,230 1,430 1,760 1,873 430 442
Adjusted diluted EPS 6.97 7.51 6.57 7.07 8.52 9.81 12.09 12.94 2.96 3.11
Dividend 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.03 0.03
Shares out (avg) 138 139 141 143 144 146 146 145 145 142
Cash from operations 914 1,103 910 1,038 1,038 1,459 1,882 1,699 714 501
Capex 225 204 170 120 192 320 355 380 85 107
Free cash flow 689 899 740 918 846 1,139 1,527 1,319 629 394
… % of revenue:
Gross profit 27.5% 29.2% 32.8% 30.4% 31.4% 32.2% 34.3% 34.6% 34.4% 33.8%
Adjusted operating income 22.3% 23.6% 26.1% 24.2% 25.2% 25.8% 27.8% 28.2% 28.0% 27.2%
Cash, investments 221 555 112 1,159 699 280 361 430 337 430
Receivables 1,013 906 925 999 1,194 1,512 1,574 1,725 1,479 1,725
Inventory 986 1,226 1,435 1,459 1,815 2,980 3,426 3,740 3,312 3,740
PP&E, net 1,106 1,143 1,207 1,195 1,322 2,077 2,307 2,424 2,257 2,424
Intangible assets 2,338 2,556 3,304 3,344 4,742 8,925 10,054 10,482 9,961 10,482
Tangible assets 3,712 4,165 4,356 5,612 5,816 7,971 8,532 9,169 8,371 9,169
Debt 354 305 250 237 208 3,806 3,571 4,146 3,621 4,146
Total liabilities 2,005 1,862 1,772 1,794 2,198 7,113 7,200 7,864 7,297 7,864
Common equity 4,045 4,860 5,889 7,162 8,361 9,783 11,386 11,787 11,035 11,787
Tangible equity 1,707 2,304 2,585 3,817 3,618 858 1,332 1,305 1,074 1,305
TBV / tangible assets 46% 55% 59% 68% 62% 11% 16% 14% 13% 14%
EBIT/capital employed 72% 71% 56% 55% 60% 50% 48% 47% 55% 50%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$300

$250

$200

$150

$100

$50

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Leader in manufacturing large, complex structural investment EPS guidance lowered in January, with management expecting
castings, airfoil castings, forged components, aerostructures, FY16 EPS to come in below the prior $15.50-16.50 guided range,
and highly engineered critical fasteners for aerospace markets. after the effects of cash deployment. As key culprits management
Precision Castparts is also a leading producer of airfoil castings for cited lower military demand, oil and gas demand, “single customer”
the industrial gas turbine market. The company produces extruded aerospace destocking, currency effects, and pension-related impact.
seamless pipe, fittings, forgings, and clad products for oil and gas In addition, the company recorded charges in the recent March
applications and power generation; airframe aerostructures; as well quarter, comprised of a non-cash impairment of $210-$220 million
as metal alloys for the casting, forging, and other industries. pre-tax related to a 50% ownership interest in Chengde as it pursues
Competitive advantages and barriers to entry. Differentiating a sale of that stake. Precision Castparts also recognized a non-cash
factors include leadership across markets served, the high degree of inventory and asset impairment of $125-135 million pre-tax in the
proprietary technology and technical expertise in the product lines, oil and gas, power pipe, and associated raw material operations.
and effective management of complex manufacturing processes. In Vast majority of revenue from cyclical aerospace and power
investment cast products, the company has supplied castings for jet generation markets. Demand from commercial aerospace depends
engines to Pratt & Whitney for 35+ years and to GE for 45+ years. on new aircraft orders, while military aerospace demand depends on
Opportunities to strengthen position in customer value chain. government funding. Power generation demand tends to be driven
As an example, trends in the design of aircraft jet engines should by current and perceived future economic strength. GE accounted
continue to increase Precision Castparts’ revenue per engine. As the for 15% of revenue in 2012 and 2013, and while no other customer
design of new engines has emphasized thrust, fuel efficiency, and contributed more than 10% of sales, Boeing, Airbus, Rolls-Royce,
reduction of noise and emissions, temperatures and pressures have and United Technologies are major customers. Precision Castparts’
increased. These conditions require the use of engine parts made of fortunes fluctuate based on those firms’ operating environment.
alloys that are able to withstand extreme operating conditions and
SELECTED OPERATING DATA
provide an optimum strength-to-weight ratio. Titanium, a metal YTD
with a lower melting temperature than stainless steel or superalloys, FYE March 30 2010 2011 2012 2013 2014 12/28/14
is used for structural castings in all but the hottest parts of the Employees (end) (‘000) 18 18 21 29 29 ~30
engine because of its weight savings. Titanium is an exceptionally Revenue ($mn) 5,459 6,209 7,202 8,361 9,616 7,509
difficult metal to cast because of its reaction with other elements. …from the U.S. 82% 83% 83% 82% 81% ~80%
Precision Castparts has developed the advanced technology and % of revenue by product segment:
manufacturing processes to cast large, complex investment castings Investment cast 34% 34% 32% 30% 26% 25%
in titanium alloys. New generation engines, which are expected to Forged 42% 45% 44% 43% 44% 43%
be built through the next decade, make significantly greater use of Airframe 25% 22% 24% 28% 30% 32%
the company’s products than did previous engine designs. Operating margin by segment:
Investment cast 30% 32% 33% 34% 35% 36%
Contractual pass-through of raw material price increases helps Forged 23% 19% 22% 22% 25% 25%
offset rising costs. The company has escalation clauses for nickel Airframe 32% 31% 29% 30% 30% 30%
and other metals in “certain long-term contracts” and employs Selected items as % of revenue:
price-in-effect metal pricing to lock-in alloy production cost. Gross profit 33% 30% 31% 32% 34% 34%
Acquisitions have contributed to growth and value creation. EBIT 26% 24% 25% 26% 28% 28%
Net income (adjusted)1 17% 16% 17% 17% 18% 19%
Precision Castparts has been active on the M&A front, typically
D&A 3% 3% 2% 3% 3% 3%
paying cash for tuck-in acquisitions that expand its capabilities and Capex 3% 2% 3% 4% 4% 4%
market presence. In March 2014, the firm acquired a machining Adjusted = GAAP EBIT ($mn) 1,423 1,502 1,816 2,157 2,672 2,112
business from the Marvin Group for $625 million. In June 2013, it / Capital employed ($mn) 2,552 2,748 3,049 4,354 5,608 6,058
acquired aerospace fluid fittings firm Permaswage for $600 million. = Return on capital employed 56% 55% 60% 50% 48% 46%
In 2012, Precisions Castparts agreed to acquire titanium products 1
Adjusted for nonrecurring items of -$3.3 million in 2010, $5.1 million in 2011, -$5.5 million in
maker Timet for $2.9 billion in cash, one of the firm’s larger deals. 2012, -$3.0 million in 2013, $17 million in 2014, and $1.0 million YTD 12/28/14.

Accelerating return of capital. While the firm pays a negligible RATINGS

dividend, repurchases have increased from zero in FY12 and prior VALUE Intrinsic value higher than market quotation? 
years to $1.1 billion in CY14. Nearly another $1 billion remained SAFETY Low risk of permanent capital loss? 
available under the current authorization as of January. Precision MOAT Able to sustain high returns on capital? 
Castparts had net debt and pension obligations of ~$4 billion as of MANAGEMENT Capable and properly incentivized team? 
December 31, but the company’s FCF generation of $1.5+ billion CAPITALIZATION Strong, deleveraged balance sheet? 
(after interest payments) gives management the flexibility to keep PERFORMANCE Business fundamentals improving? 
buying back stock while at the same time managing leverage ratios. MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Precision Castparts has built a surprisingly wide moat for a manufacturer of metal components. The company has done so by relentlessly
moving up the value chain into complex components and highly engineered products that require scale, domain expertise, and complex
manufacturing processes. Management has consistently filled gaps in the product portfolio through accretive acquisitions, including the
$2.9 billion purchase of titanium products maker Timet in 2012. The company has experienced challenges recently and is expected to
operate in a weak environment for the foreseeable future, largely due to lower military demand and lower oil and gas-related demand.
Pretax asset impairments of $300+ million in the March quarter reflect the challenging environment. Accordingly, the market quotation of
the shares has been negatively affected, providing a reason for value-oriented investors to reassess the long-term investment case. We view
the latter as intact and are therefore incrementally more positive on the investment opportunity. That said, we do not find the shares to be
deeply undervalued yet, as they offer an FCF yield in the mid single digits. We would view a high single-digit FCF yield as compelling.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

PRECISION CASTPARTS – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Valuation methodology: Valuation methodology: Valuation methodology:
Based on revenue for the twelve months Based on median consensus EPS Based on revenue for the twelve months
ended December 28, 2014 and average estimate for the fiscal year ending March ended December 28, 2014, and
EBIT margin for past seven fiscal years 29, 2016 assumed normalized EBIT margin
▼ ▼ ▼
TTM net sales: $10 billion Consensus FY16E EPS: $13.42 (§) TTM net revenue: $10 billion
multiplied by minus multiplied by
Average 7-year EBIT margin: 25.0% Assumed upside/downside to Assumed operating margin: 28.0%
equals FY16 EPS estimate: 5% * $13.42 equals
Estimated EBIT: $2.5 billion equals Est. operating income: $2.8 billion
multiplied by Revised FY16 EPS estimate: $14.09 multiplied by
Assumed fair value multiple of EBIT: multiplied by Assumed fair value multiple:
10.0x Corresponding industry P/E: 14.5x (*) 20.0x
equals equals equals
Estimated fair enterprise value of Industry multiple-implied fair value: Estimated fair enterprise value of
Precision Castparts: $25 billion $29 billion ($204 per share) Precision Castparts: $56 billion
plus multiplied by plus
Cash, ST investments: $430 million Assumed PCP multiple as a Cash, ST investments: $430 million
minus percentage of the industry multiple: minus
Total debt: $4.1 billion 138% Total debt: $4.1 billion
equals (20.0x fair value P/E multiple) equals
Estimated fair value of the common equals Estimated fair value of the common
equity of Precision Castparts: Estimated fair value of the common equity of Precision Castparts:
$21 billion, or $151 per share equity of Precision Castparts: $53 billion, or $370 per share
(based on 142 million shares out) $40 billion ($282 per share) (based on 142 million shares out)
28% downside from the recent (based on 142 million shares out) 77% upside to the recent
stock price ($209 per share) 35% upside to the recent stock price ($209 per share)
stock price ($209 per share)
(*) Represents Iron & Steel industry median multiple. (§) The FY16 consensus EPS estimate of $13.42 has been revised down by 5% from $14.12 three months ago.
Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

PRECISION CASTPARTS – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Alcoa / AA 14.15 -65% 216% 17,297 24,981 37% 5% 4% 7% 9% 97% 412 7% 7% 21% 16% 21%
Aluminum Corp. China / ACH 16.23 -56% 223% 17,204 29,688 13% 5% neg. neg. neg. 73% 285 -33% -22% 1% 4% 8%
Precision Castparts / PCP 208.78 -77% 32% 29,598 33,314 4% 4% 6% 6% 6% 30% 345 6% 5% 35% 28% 14%
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

PRECISION CASTPARTS – CHANGE in SELECTED PERFORMANCE FIGURES (except FCF, which is an absolute number)

Precision Castparts continues to

generate strong financial results,
although management lowered
EPS guidance in January

All data presented as % change vs. prior fiscal period, except free cash flow. FCF is defined as cash from operations, less capital expenditures.
Source: Company presentation dated December 4, 2014.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

PRECISION CASTPARTS – MANAGEMENT’S VALUE CREATION DRIVERS

The company has employed a

fairly simple formula to create
shareholder value, and it has
worked impressively over time

Source: Company presentation dated December 4, 2014.

PRECISION CASTPARTS – FACTORS AFFECTING MANAGEMENT’S OUTLOOK, FY2016

Several headwinds are slowing

growth in the foreseeable future

Aerospace is by far the most important

end market for the company
Source: Company presentation dated January 22, 2015.

PRECISION CASTPARTS – SALES by MARKET

INDUSTRY – AVERAGE MARKET PRICE of KEY METALS

1
Source: Bloomberg. Source for the above tables: Company annual report for the year 2014.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Procter & Gamble (PG)

Consumer Non-Cyclical: Personal & Household Products, Member of S&P 500 CINCINNATI OH www.pg.com
P&G serves nearly five billion people around the world with its brands. The company has one of the strongest portfolios of trusted, quality, leadership brands.
Trading Data Consensus EPS Estimates Valuation
Price: $80.29 (as of 5/1/15) Month # of P/E FYE 6/30/14 21x
52-week range: $77.29–$93.89 Latest Ago Ests P/E FYE 6/30/15 20x
Market value: $217.8 billion This quarter $0.95 $0.96 19 P/E FYE 6/29/16 19x
Enterprise value: $238.2 billion Next quarter 1.04 1.06 16 P/E FYE 6/29/17 18x
Shares outstanding: 2,713.0 million FYE 6/30/15 3.96 3.99 22 EV/ LTM revenue 3.0x
Ownership Data FYE 6/29/16 4.21 4.29 24 EV/ LTM EBIT 16x
Notable holders: Management and insiders <1% FYE 6/29/17 4.57 4.66 15 P / tangible book n/m
BlackRock 3% | FMR 2% | Berkshire 2% Greenblatt Criteria
LT growth 6.7% 7.5% 4
Cap World 2% | Northern Trust 1% | Yacktman 1%
Wellington 1% | Geode 1% | Norges 1% EPS Surprise Actual Est. LTM EBIT yield 6%
Insider buys (last six months): 30 / sells: 16 4/23/15 $0.92 $0.92 LTM pre-tax ROC 65%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended June 30, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 79,257 76,694 77,567 81,104 83,680 82,581 83,062 78,113 19,641 18,142
Gross profit 39,996 38,004 40,525 41,245 41,289 41,544 41,001 38,621 9,601 8,996
Adjusted operating income 15,979 15,374 15,732 15,495 14,868 15,583 16,060 16,649 3,306 3,454
Adjusted pretax income 14,885 14,413 14,868 14,997 14,361 15,945 15,657 14,604 3,175 3,396
Adjusted net income 11,115 10,488 10,522 11,335 10,489 12,220 12,084 11,353 2,447 2,700
Adjusted diluted EPS 3.61 3.55 3.63 4.04 3.81 4.46 4.44 4.18 0.90 1.00
Dividend 1.45 1.64 1.80 1.97 2.14 2.29 2.45 2.58 0.60 0.64
Shares out (avg) 3,081 2,952 2,901 2,804 2,751 2,743 2,720 2,718 2,713 2,712
Cash from operations 15,008 14,919 16,131 13,330 13,284 14,873 13,958 15,126 4,109 3,552
Capex 3,046 3,238 3,067 3,306 3,964 4,008 3,848 3,703 944 820
Free cash flow 11,962 11,681 13,064 10,024 9,320 10,865 10,110 11,423 3,165 2,732
… % of revenue:
Gross profit 50.5% 49.6% 52.2% 50.9% 49.3% 50.3% 49.4% 49.4% 48.9% 49.6%
Adjusted operating income 20.2% 20.0% 20.3% 19.1% 17.8% 18.9% 19.3% 21.3% 16.8% 19.0%
Cash, investments 3,541 4,781 2,879 2,768 4,436 5,947 10,686 13,160 9,752 13,160
Receivables 6,761 5,836 5,335 6,275 6,068 6,508 6,386 4,990 6,353 4,990
Inventory 8,416 6,880 6,384 7,379 6,721 6,909 6,759 5,893 7,227 5,893
PP&E, net 20,640 19,462 19,244 21,293 20,377 21,666 22,304 20,043 22,274 20,043
Intangible assets 94,000 89,118 85,648 90,182 84,761 86,760 84,547 73,764 87,532 73,764
Tangible assets 49,992 45,715 42,524 48,172 47,483 52,503 59,719 57,173 55,665 57,173
Debt 36,665 36,972 29,832 32,014 29,778 31,543 35,417 32,439 36,365 32,439
Total liabilities 74,498 71,734 67,057 70,714 68,805 71,199 75,052 68,204 73,916 68,204
Preferred stock 1,366 1,324 1,277 1,234 1,195 1,137 1,111 1,086 1,115 1,086
Tangible equity -25,872 -27,343 -25,810 -23,776 -22,517 -19,833 -16,444 -12,117 -19,366 -12,117
EBIT/capital employed 67% 67% 76% 73% 59% 66% 65% 65% 67% 72%

Ten-Year Stock Price Performance and Trading Volume Dynamics

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Owns ~25 consumer product brands with sales of $1+ billion, Operating in a slow-growth, highly competitive environment,
including Ace, Ariel, Dawn, Downy, Duracell, Febreze, Gain, Iams, which makes cost control a priority. Organic sales growth has
and Tide in the fabric care and home care segment (32% of revenue slowed to ~2% over the past year, including ~1% in the March 2015
and 26% of net income in FY14); Head & Shoulders, Pantene, SK- quarter. P&G, while consistently earning high returns on capital, is
II, Olay, and Wella in beauty (24%, 23%); Bounty, Charmin, and finding it difficult to reinvest capital at high rates, making organic
Pampers in baby and family care (25%, 25%); Always, Crest, Oral- growth in excess of the rate of global GDP growth a challenging
B, and Vicks in health care (9%, 9%); and Fusion, Gillette, Mach3, proposition, particularly in a strong-dollar currency environment.
and Prestobarba in grooming (10%, 17%). In total, P&G has ~20% Core EPS has eroded 6% in each of the past two quarters, reflecting
share of the $200 billion household care market, ~13% share of the some margin pressures, offset by the positive impact of cost actions
$300 billion beauty and grooming market, and ~5% share of the (currency-neutral core EPS did increase over the past six month).
$240 billion consumer healthcare market. The company sold its pet Competition from branded and private-label products. Wal-
care business to Mars for $2.9 billion last year and is in the process Mart accounts for ~14% of sales. Barriers to entry have come down
of eliminating 100 brands with a below-average financial profile in some niches, as consumer preferences for natural and organic
(~35 brands have been divested, discontinued, or consolidated). products create an opportunity for new entrants (this is less the case
P&G dates back to a business founded in 1837 by William Procter in emerging markets). Management’s statement that ~50% of sales
and James Gamble. The company has 118,000 employees globally. in the March quarter related to categories that held or grew market
Attractive vehicle for benefiting from long-term economic share implies that share eroded for the other half of P&G products.
growth in emerging markets. The latter contribute more than one- Some P&G brands may hold less appeal in emerging markets
third of revenue, up from about 20% in 2000. P&G serves nearly due to cultural differences. Potentially higher marketing spend
five billion consumers around the world, many of whom are in requirements could reduce profitability. That said, the company has
emerging markets. As income levels rise in those markets, local proven that the product portfolio can address cultural preferences.
consumers are predisposed to spend on P&G products due to the
high mindshare P&G brands enjoy around the world. The firm’s SELECTED OPERATING DATA
strong track record of capital allocation and fair treatment of share- YTD
holders makes it a better vehicle than many other companies, at FYE June 30 2010 2011 2012 2013 2014 3/31/15
which the management and board may make it more difficult for Revenue ($bn) 77.6 81.1 83.7 82.6 83.1 59.1
…from North America 42% 41% 39% 39% 39% ~40%
minority shareholders to benefit from the aforementioned trends.
% of revenue by major segment:
Aims to reach more consumers by extending core P&G brands Beauty 26% 25% 25% 24% 23% 24%
vertically and horizontally. For example, Gillette Fusion five- Grooming 10% 10% 10% 10% 10% 10%
bladed razors expand the company’s presence “vertically” into the Health care 15% 15% 9% 9% 9% 10%
premium end, while Febreze candles exemplify horizontal extension Fabric and home 31% 33% 31% 31% 31% 29%
via the addition of a complementary product to the odor remover. Baby, feminine, family 19% 19% 24% 25% 25% 26%
Pretax margin by segment:
Guiding for organic sales growth in the low single digits in FYE Beauty 19% 17% 16% 16% 18% 21%
June 2015, excluding currency effects of negative 6-7% and impact Grooming 26% 29% 29% 31% 32% 34%
of minor brand divestitures of negative 1% (reported sales should Health care 24% 23% 21% 21% 20% 24%
decline 5-6%). Management expects constant-currency core EPS to Fabric and home 21% 18% 18% 18% 18% 18%
increase in the double digits and reported EPS to decline 21-22%. Baby, feminine, family 22% 20% 22% 22% 21% 22%
Longer-term management targets include growing organic sales Adjusted EBIT1 ($bn) 15.7 15.5 14.9 15.6 16.1 11.6
modestly above market growth rates, delivering core EPS growth in / Capital employed ($bn) 20.7 21.3 22.4 21.9 23.6 23.4
the high single digits, and generating FCF productivity of 90+%. = Return on capital employed 76% 73% 66% 71% 68% 66%
∆ shares out (avg) -2% -3% -2% 0% -1% 0%
Shareholder-friendly capital allocation policies. P&G has bought 1
Adjusted for unusual items of -$1.6 billion in 2012, -$1.3 billion in 2013, -$772 million in
back stock consistently, spending $70+ billion on repurchases over 2014, and -$1.6 billion YTD 3/31/15.
the past decade. The company allocated $50+ billion to dividends
RATINGS
over the same period. In FYE June 2015, management expects to
VALUE Intrinsic value higher than market quotation? 
pay dividends of ~$7 billion and repurchase ~$5 billion of stock.
SAFETY Low risk of permanent capital loss? 
FCF productivity should approximate 100%, and capital spending
MOAT Able to sustain high returns on capital? 
should come in at 4-5% of sales. Further weakening of foreign
MANAGEMENT Capable and properly incentivized team? 
currencies versus the U.S. dollar could upset guidance modestly.
CAPITALIZATION Strong, deleveraged balance sheet? 
P&G’s FCF generation of ~$10 billion has been roughly in line with
PERFORMANCE Business fundamentals improving? 
Wal-Mart and Nestle, below J&J, and ahead of Coca-Cola/PepsiCo.
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
P&G’s organic growth has slowed, not solely due to near-term currency impacts but also due to competition. However, the shares remain a
classic example of an “equity bond”—a common stock that can be viewed as akin to a bond due to the stable and predictable nature of the
underlying business. P&G provides non-cyclical consumer products, many of which are well-known brands in homes around the world. As
a result, earnings and, ultimately, returns to investors (due to shareholder-friendly management) may be modeled in a way that is not unlike
the coupon payments on a bond. While the return of capital is not contractually stipulated as in the case of a bond, P&G’s equity has one
major advantage versus a bond: inflation protection. We do not expect fast growth in an environment of low inflation, but steady growth
that benefits from rising income levels in developing countries. Another positive is that P&G generates sales in many different countries,
protecting it from currency debasement in any one country (though the recent period of dollar strength shows the correlation of currency
fluctuations). On balance, the mid-single digit FCF yield appears modestly attractive in the current environment of low long-term interest
rates. However, P&G does, at least to some extent, represent a bet on rates staying low, a bet we are not comfortable with at this time.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

P&G – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on revenue for the twelve months Based on median consensus EPS
Based on free cash flow for the twelve
ended March 31, 2015 and average estimate for the fiscal year ending June
months ended March 31, 2015
EBIT margin for past seven fiscal years 29, 2016
▼ ▼ ▼
TTM net sales: $78 billion Consensus FY16E EPS: $4.21 (§) Operating cash flow: $15 billion
multiplied by minus minus
Average 7-year EBIT margin: 19.4% Assumed upside/downside to Capex: $3.7 billion
equals FY16 EPS estimate: 5% * $4.21 equals
Estimated EBIT: $15 billion equals Free cash flow: $11 billion
multiplied by Revised FY16 EPS estimate: $4.42 divided by
Assumed fair value multiple of EBIT: multiplied by Industry median FCF yield: 2.0% (*)
12.0x Corresponding industry P/E: 19.7x (*) equals
equals equals Industry FCF yield-implied fair value:
Estimated fair enterprise value of Industry multiple-implied fair value: $578 billion ($213 per share)
Procter & Gamble: $182 billion $236 billion ($87 per share) multiplied by
plus multiplied by Assumed required FCF yield as a
Cash, ST investments: $13 billion Assumed PG multiple as a percentage of the industry FCF yield:
minus percentage of the industry multiple: 175%
Total debt: $34 billion 112% (3.5% required FCF yield)
equals (22.0x fair value P/E multiple) equals
Estimated fair value of the common equals Estimated fair value of the common
equity of Procter & Gamble: Estimated fair value of the common equity of Procter & Gamble:
$161 billion, or $59 per share equity of Procter & Gamble: $330 billion, or $122 per share
(based on 2.7 billion shares out) $263 billion ($97 per share) (based on 2.7 billion shares out)
26% downside from the recent (based on 2.7 billion shares out) 52% upside to the recent
stock price ($80 per share) 21% upside to the recent stock price ($80 per share)
stock price ($80 per share)
(*) Represents Personal & Household Products industry median multiple. (§) The FY16 consensus EPS estimate of $4.21 has been revised down by 3% from $4.35 three months ago.
Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

P&G – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
Church & Dwight Co. / CHD 81.93 -72% 6% 10,709 11,382 n/m 4% 4% 4% 4% 29% 785 3% 5% 44% 20% -28%
Clorox / CLX 106.19 -57% 6% 13,930 15,783 n/m 5% 4% 4% 5% 35% 726 0% 3% 42% 18% -46%
Colgate Palmolive / CL 67.68 -60% 6% 61,375 66,644 n/m 4% 4% 4% 5% 26% 452 -2% -6% 59% 25% -32%
Energizer Holdings / ENR 140.80 -78% 1% 8,749 10,021 n/m 5% 4% 5% 5% 44% 446 0% -7% 48% 18% -21%
Johnson & Johnson / JNJ 100.13 -54% 9% 278,417 264,088 7% 0% 6% 6% 6% 28% 582 2% -4% 69% 30% 25%
Kimberly-Clark / KMB 111.04 -63% 7% 40,430 47,646 n/m 3% 3% 5% 6% 40% 445 0% -4% 34% 13% -10%
Spectrum Brands / SPB 93.01 -87% 6% 4,953 7,960 n/m 7% 4% 5% 5% 55% 328 2% -3% 35% 13% -108%
Unilever / UL 43.83 -61% 5% 131,186 142,295 n/m -1% 5% 5% 5% 38% 315 -60% -6% n/m 14% -33%
Procter & Gamble / PG 80.29 -51% 17% 217,826 238,191 n/m 5% 4% 5% 5% 33% 662 -3% -8% 49% 21% -21%
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

P&G – MANAGEMENT’S FINANCIAL GUIDANCE

P&G’s large reach and size make it

difficult for the company to grow
materially in excess of the growth in
consumer spending worldwide

Source: Company presentation dated February 19, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

P&G vs. SELECTED MAJOR U.S. CORPORATIONS – COMPARISON ($ in billions)

P&G matches Wal-Mart

and Nestle in terms of
FCF generation over
the past year

P&G – ESTIMATED CHANGE in CORE EPS, FY2015 vs. FY2014

The strength of the U.S. dollar has

created major headwinds for P&G,
at least in the short term

INDUSTRY – COMPETITIVE POSITIONING of P&G in LAUNDRY DETERGENTS

P&G laundry brands enjoy

premium positioning in the market

Source for the above charts: Company presentation dated February 19, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Sanofi (SNY)
Health Care: Biotechnology & Drugs PARIS, France www.sanofi-aventis.com
Sanofi discovers, develops and distributes therapeutic solutions focused on patients’ needs. Sanofi has core strengths in the field of healthcare with seven growth
platforms: diabetes solutions, human vaccines, innovative drugs, consumer healthcare, emerging markets, animal health, and Genzyme.
Trading Data Consensus EPS Estimates Valuation
Price: $51.29 (as of 5/1/15) Month # of P/E FYE 12/31/14 28x
52-week range: $43.57–$57.42 Latest Ago Ests P/E FYE 12/31/15 17x
Market value: $134.6 billion This quarter n/a n/a n/a P/E FYE 12/30/16 16x
Enterprise value: $142.7 billion Next quarter n/a n/a n/a P/E FYE 12/30/17 n/a
Shares outstanding: 2,624.0 million FYE 12/31/15 3.02 3.13 2 EV/ LTM revenue 3.7x
Ownership Data FYE 12/30/16 3.11 3.20 2 EV/ LTM EBIT 19x
Notable holders: Management and insiders <1% FYE 12/30/17 n/a n/a n/a P / tangible book 50.8x
Dodge & Cox 2% | Barrow 1% | Franklin 1%
LT growth 5.9% 5.7% 2 Greenblatt Criteria
Fisher <1% | Neuberger <1% | Hotchkis <1%
FMR <1% | Invesco <1% | Harris <1% EPS Surprise Actual Est. LTM EBIT yield 5%
Insider buys (last six months): 0 / sells: 0 4/30/15 n/a n/a LTM pre-tax ROC 41%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 12/31/14 12/31/13 12/31/14
Revenue 32,071 34,758 37,879 39,016 40,017 37,066 37,960 38,202 9,510 10,205
Gross profit 23,905 25,736 27,420 26,883 27,643 24,835 25,686 25,850 6,284 6,821
R&D 5,092 5,148 5,060 5,354 5,478 5,294 5,355 5,403 1,387 1,504
Adjusted operating income 7,271 8,778 9,295 7,998 8,453 7,559 7,265 7,779 2,587 1,895
Adjusted pretax income 7,021 8,448 8,899 7,604 7,974 6,999 6,807 6,847 2,472 1,742
Adjusted net income 6,675 7,478 8,113 8,021 6,961 6,013 5,314 5,314 2,280 1,510
Adjusted diluted EPS 2.55 2.86 3.11 3.03 2.64 2.27 2.02 2.02 0.86 0.57
Dividend 1.22 1.34 1.39 1.48 1.54 0.72 0.88 0.88 0.72 0.88
Shares out (avg) 2,619 2,612 2,611 2,643 2,639 2,646 2,632 2,632 2,642 2,632
Cash from operations 9,485 9,573 10,972 10,535 9,094 7,739 8,558 -1,977 6,026 6,305
Capex 1,787 2,032 1,850 1,983 1,794 1,556 1,733 -250 1,057 1,726
Free cash flow 7,698 7,541 9,123 8,552 7,300 6,183 6,825 -1,726 4,969 4,579
… % of revenue:
Gross profit 74.5% 74.0% 72.4% 68.9% 69.1% 67.0% 67.7% 67.7% 66.1% 66.8%
R&D 15.9% 14.8% 13.4% 13.7% 13.7% 14.3% 14.1% 14.1% 14.6% 14.7%
Adjusted operating income 22.7% 25.3% 24.5% 20.5% 21.1% 20.4% 19.1% 20.4% 27.2% 18.6%
Cash, investments 4,728 5,231 7,221 4,629 7,164 9,395 8,412 8,412 4,793 8,412
Receivables 7,803 8,845 9,261 11,337 10,688 9,854 10,027 10,027 9,119 10,027
PP&E, net 7,747 8,714 9,076 11,964 11,772 11,332 11,570 11,570 11,934 11,570
Intangible assets 48,326 48,389 49,425 69,246 64,843 58,460 59,808 59,808 68,401 59,808
Tangible assets 31,789 40,923 45,466 42,788 46,900 48,440 48,581 48,581 44,829 48,581
Debt 6,684 9,824 9,193 17,182 16,172 16,237 16,487 16,487 18,009 16,487
Total liabilities 30,183 35,534 35,799 49,485 47,932 43,571 45,932 45,932 50,676 45,932
Tangible equity 1,606 5,389 9,667 -6,697 -1,032 4,869 2,649 2,649 -5,847 2,649
EBIT/capital employed 41% 46% 36% 32% 37% 31% 40% 41% 34% 54%

Ten-Year Stock Price Performance and Trading Volume Dynamics

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Fourth-largest pharma company globally and second-largest in Growth remains quite slow, with Sanofi reporting constant-
Europe, organized around three main activities: pharma, currency sales growth of 4.9% and business EPS growth of 7.3% in
human vaccines (Sanofi Pasteur), and animal health (Merial). In 2014. These figures reflect improvement over stagnant or declining
pharma, Sanofi specializes in three therapeutic areas: (i) diabetes, results in prior years, but they are not yet at a level reflective of a
including Lantus, a long-acting human insulin analog which is the “growth business.” This is particularly true for the EPS figure, as
leading insulin brand (sales of €6.3 billion in 2014), Amaryl, an oral Sanofi had recorded a constant-currency drop of 9.8% in operating
once-daily sulfonylurea, and Apidra, a rapid-acting human insulin EPS in 2013, setting itself up for an easy comparison in 2014. The
analog; (ii) rare diseases, with enzyme replacement therapies company’s continued subpar growth reflects the offsetting impacts
including Cerezyme for Gaucher disease, Myozyme/Lumizyme for of growth areas and more mature parts of the business. It is unclear
Pompe disease, and Fabrazyme for Fabry disease; and (iii) multiple whether Sanofi can accelerate organic growth over the long term. In
sclerosis, including Aubagio, a once daily oral immunomodulator. 2015, Sanofi sees constant-fx EPS “stable to slightly growing.”
Major “legacy” products include Plavix (sales of €1.9 billion) and History of acquisition-driven growth, with doubtful per-share
Lovenox (€1.7 billion). Today’s Sanofi substantially took shape in value creation via M&A. Sanofi paid $20+ billion for biotech firm
2004 through the combination of Sanofi-Synthélabo (formed in Genzyme in 2011 despite the fact that the latter had yet to deliver a
1999 by the merger of Sanofi and Synthélabo) and Aventis (formed blockbuster drug. In 2014, Sanofi invested roughly €1 billion in
in 1999 by the combination of Rhône-Poulenc and Hoechst). The Regeneron (REGN) and €500+ million in Alnylam (ALNY),
company has ~114,000 employees (47% in Europe, 30% in sales). bringing its ownership in the two companies to 22% and 12%,
Taking advantage of growth opportunity in emerging markets, respectively (Regeneron is accounted for using the equity method).
which contributed 34% of sales in 2014, the same proportion as Sanofi has spent ~€25 billion on M&A since 2009. While the recent
sales generated in the U.S. Emerging markets are likely to be the stock price performance of Regeneron and Alnylam supports the
fastest-growing component of sales over time. Sanofi has pharma notion that strategic investments create value, Sanofi has not shied
market share of ~6% in emerging markets, including leading market away from paying a high price for businesses it considers attractive.
share in the so-called BRIC countries. The company also has one of
the largest emerging market salesforces, with ~23,000 employees. SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
Growth platforms recently contributed 77% of sales, up from ∆ revenue 9% 3% 3% -7% 2%
63% in 2012. Sanofi has put a multi-year “patent cliff” behind it. ∆ gross profit 7% -2% 3% -10% 3%
The company had struggled as key drugs came off patent. Major Employees (end) (‘000) 102 114 112 112 113
expirations continued through late 2013; annualization of the impact Revenue ($bn) 37.9 39.0 40.0 37.1 38.0
of expirations has positioned the business for renewed growth. …from Europe 38% 35% 32% 32% 31%
Business areas designated by management as growth platforms have …from North America 32% 31% 33% 33% 35%
grown sales at close to 10% on a constant-currency basis in recent % of revenue by segment:
quarters, a respectable showing. Nearly one-half of sales is from Pharmaceuticals 82% 84% 83% 83% 82%
biologics; related projects are ~80% of the development pipeline. Vaccines 12% 10% 11% 11% 12%
Animal health 6% 6% 6% 6% 6%
Returns from R&D are expected to improve substantially, as Operating margin by segment:
management has reprioritized pipeline productivity. The company Pharmaceuticals 41% 38% 33% 29% 29%
achieved ten product launches from 2007-2013, with potential Vaccines 36% 29% 30% 24% 25%
cumulative sales in the first five years of ~€7.5 billion. Management Animal health 16% 31% 31% 25% 24%
expects up to eighteen product launches from 2014-2020, with R&D as % of revenue 13% 14% 14% 14% 14%
potential cumulative sales in the first five years of €30+ billion. The EBIT margin (adjusted)1 25% 21% 21% 20% 19%
company allocates 14-15% of sales to R&D, an annual research Net margin (adjusted)1 21% 21% 17% 16% 14%
budget of ~€5 billion. Management has concentrated on reducing Adjusted EBIT1 ($bn) 9.3 8.0 8.5 7.6 7.3
internal fixed costs and devoting a higher portion of R&D to late- / Capital employed ($bn) 20.1 19.6 18.7 18.2 17.1
stage projects. On a company-wide basis, Sanofi’s €2 billion cost = Return on capital employed 46% 41% 45% 41% 43%
1
Adjusted for unusual items of -$2.0 billion in 2010, -$1.7 billion in 2011, -$1.4 billion in
reduction program was largely completed in 2014. The company is 2012, -$1.9 billion in 2013, and -$429 million in 2014.
reinvesting most of the savings in accelerating growth platforms.
RATINGS
Dividend of €2.85 per share in 2014 represents a ¢5 raise from the
VALUE Intrinsic value higher than market quotation? 
prior year, capping 21 consecutive years of dividend increases
SAFETY Low risk of permanent capital loss? 
(payout of 55% in 2014 and recent annualized yield of ~3.2%. The
MOAT Able to sustain high returns on capital? 
company spends the remaining FCF on organic growth, M&A, and
MANAGEMENT Capable and properly incentivized team? 
share repurchases, although the latter have been relatively modest.
CAPITALIZATION Strong, deleveraged balance sheet? 
Management boosted buyback activity in 2014, but to a large extent
PERFORMANCE Business fundamentals improving? 
repurchases still have the effect of offsetting option-related dilution.
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Sanofi has yet to return to growth mode, although the company finds itself in an improved strategic position than just a few years ago. With
a major patent cliff behind it, Sanofi should be able to return to mid-single digit growth in sales and earnings (at constant exchange rates)
over time. However, according to management, “taking into account the outlook for U.S. diabetes… 2015 business EPS is expected to be
stable to slightly growing” at constant exchange rates. This represents a setback on Sanofi’s path to growth and will need to be addressed
by new CEO Olivier Brandicourt. Sanofi is particularly strong in emerging markets, which contribute ~34% of sales. The company also
appears to have an attractive late-stage pipeline, as judged by management’s expectation of up to eighteen product launches from 2014-
2020, compared to ten launches from 2007-2013. The company’s biggest-selling drug, diabetes leader Lantus, retains a long-term growth
opportunity. Unfortunately, at a forward EPS yield of ~6% (lower FCF yield), we find the market quotation not sufficiently enticing.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

SANOFI – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on revenue for the twelve months Based on revenue for the twelve months Based on median consensus EPS
ended December 31, 2014 and average ended December 31, 2014, and estimate for the fiscal year ending
EBIT margin for past seven fiscal years assumed normalized EBIT margin December 31, 2015
▼ ▼ ▼
TTM net sales: $38 billion TTM net revenue: $38 billion Consensus FY15E EPS: $3.02 (‡)
multiplied by multiplied by minus
Average 7-year EBIT margin: 21.9% Assumed operating margin: 25.0% Assumed upside/downside to
equals equals FY15 EPS estimate: 5% * $3.02
Estimated EBIT: $8.4 billion Est. operating income: $9.6 billion equals
multiplied by multiplied by Revised FY15 EPS estimate: $3.17
Assumed fair value multiple of EBIT: Assumed fair value multiple: multiplied by
10.0x 18.0x Corresponding industry P/E: 22.5x (*)
equals equals equals
Estimated fair enterprise value of Estimated fair enterprise value of Industry multiple-implied fair value:
Sanofi-Aventis: $84 billion Sanofi-Aventis: $172 billion $187 billion ($71 per share)
plus plus multiplied by
Cash, ST investments: $8.4 billion Cash, ST investments: $8.4 billion Assumed SNY multiple as a
minus minus percentage of the industry multiple:
Total debt: $16 billion Total debt: $16 billion 103%
equals equals (20.0x fair value P/E multiple)

Estimated fair value of the common Estimated fair value of the common equals
equity of Sanofi-Aventis: equity of Sanofi-Aventis: Estimated fair value of the common
$76 billion, or $29 per share $164 billion, or $62 per share equity of Sanofi-Aventis:
(based on 2.6 billion shares out) (based on 2.6 billion shares out) $192 billion ($73 per share)

44% downside from the recent 22% upside to the recent (based on 2.6 billion shares out)
stock price ($51 per share) stock price ($51 per share) 43% upside to the recent
(*) Represents Biotechnology & Drugs industry median multiple. stock price ($51 per share)
(‡) The FY15 consensus EPS estimate of $3.02 has been revised down by 4% from $3.15 three months ago. Source: Company filings, The Manual of Ideas.

SANOFI – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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 R&D EBIT Assets
GlaxoSmithKline / GSK 45.97 -41% 23% 112,896 135,088 n/m 5% 4% 6% 6% 26% 353 -13% -10% 69% 14% 29% -27%
Johnson & Johnson / JNJ 100.13 -54% 9% 278,417 264,088 7% 0% 6% 6% 6% 28% 582 2% -4% 69% 12% 30% 25%
Lilly / LLY 73.12 -63% 6% 81,237 84,466 13% 0% 3% 4% 5% 23% 500 -12% -1% 75% 24% 22% 33%
Merck / MRK 59.86 -67% 6% 169,311 174,995 9% 0% 6% 6% 6% 24% 591 -5% -8% 64% 17% 50% 24%
Novartis / NVS 103.35 -68% 2% 278,545 285,401 6% 4% 4% 5% 5% 19% 402 2% -2% 68% 17% 23% 24%
Novo Nordisk / NVO 57.16 -86% 1% 117,155 114,890 5% 3% 3% 3% 4% 12% 325 -39% -71% 84% 15% 39% 51%
Pfizer / PFE 34.08 -66% 4% 209,263 209,852 n/m 0% 4% 6% 7% 23% 627 -22% -4% 81% 18% 32% -6%
Sanofi / SNY 51.29 -53% 12% 134,587 142,661 2% -1% 4% 6% 6% 27% 337 3% 7% 68% 14% 20% 5%
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

SANOFI – ISSUANCE vs. BUYBACK, 2012 SANOFI – ISSUANCE vs. BUYBACK, 2013 SANOFI – ISSUANCE vs. BUYBACK, 2014

Decent buyback
activity, though
issuance is
quite high, too

SBB = share buyback

1
Number of shares outstanding in million on December 31,
2012, December 31, 2013, and December 31, 2014.
Source: Company presentation dated March 18, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

SANOFI – PERFORMANCE of “GROWTH PLATFORMS”

We are a bit skeptical of the

company’s tendency to
emphasize “growth platforms,”
as it tends to obscure the
company’s weak overall growth;
today’s “growth platforms” are
likely to be tomorrow’s legacy
platforms, so what really matters
is the overall growth rate

1
FY 2014 Growth Platforms sales were €25,802m (76.4% of total sales) and up +10.7% at CER. Excluding Generics in Brazil, Growth Platforms grew +9.4% in FY 2014 at CER.
2
Excluding Generics in Brazil, Emerging Markets grew +6.5% in FY 2014 at CER and +7.6% in Q4 2014 at CER.
3
Some products recorded in prescription pharmaceuticals in 2013 were transferred as Consumer Healthcare products and totaled €68m in Q4 2013 and €273m in FY 2013. When excluding
this category change, sales of Consumer Healthcare grew +4.2% in Q4 2014 and +6.8% in FY 2014 at CER.
4
Includes products launched since 2009 which do not belong to the Growth Platforms listed above: Multaq®, Jevtana®, Auvi-Q®, Mozobil® and Zaltrap®.

SANOFI – CHANGE in QUARTERLY REVENUE of “GROWTH PLATFORMS”

5-10% growth is quite

modest for so-called
“growth platforms”

1 2
Growth at CER. Q1 2012 growth restated for Genzyme Q1 2011 (€396m). Growth at CER including Generics in Brazil was +2.5% in Q2 2013 and +14.5% in Q2 2014.

SANOFI – PRODUCT LAUNCH COMPARISON, 2007-2013 vs. 2014-2020

R&D productivity
seems to have
improved, providing a
cause for optimism
about future growth

1 2
At CER, 5 years for each product from and including the first full year of launch. Non-risk adjusted sales projections.
Source for the above charts: Company presentation dated March 18, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Suncor Energy (SU)

Energy: Oil & Gas - Integrated CALGARY AB, Canada www.suncor.com
Suncor Energy is Canada’s leading integrated energy company. Suncor’s operations include oil sands development and upgrading, conventional and offshore oil
and gas production, petroleum refining, and product marketing under the Petro-Canada brand.
Trading Data Consensus EPS Estimates Valuation
Price: $32.22 (as of 5/1/15) Month # of P/E FYE 12/31/14 21x
52-week range: $26.56–$43.49 Latest Ago Ests P/E FYE 12/31/15 60x
Market value: $46.5 billion This quarter $0.13 $0.16 5 P/E FYE 12/30/16 22x
Enterprise value: $53.0 billion Next quarter 0.22 0.23 5 P/E FYE 12/30/17 15x
Shares outstanding: 1,443.7 million FYE 12/31/15 0.54 0.39 11 EV/ LTM revenue 1.6x
Ownership Data FYE 12/30/16 1.46 1.38 8 EV/ LTM EBIT 9x
Notable holders: Management and insiders <1% FYE 12/30/17 2.10 1.84 4 P / tangible book 1.5x
RBC 5% | FMR 3% | TD 3% | BMO 3%
LT growth 7.0% 7.0% 1 Greenblatt Criteria
Cap World 2% | Cap Re 2% | Pyramis 2%
CIBC 2% | Walter Scott 2% | Berkshire 1% EPS Surprise Actual Est. LTM EBIT yield 11%
Insider buys (last six months): 0 / sells: 0 4/29/15 $0.10 $0.11 LTM pre-tax ROC 11%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 12/31/14 12/31/13 12/31/14
Revenue 23,668 20,674 27,127 32,276 32,054 33,528 33,688 33,303 8,482 7,564
Gross profit 7,918 8,386 14,787 17,528 17,871 19,140 19,190 18,970 4,994 3,875
DD&A 800 1,548 3,164 3,288 5,363 4,070 5,109 5,109 1,477 998
Adjusted operating income 2,571 1,223 4,870 6,017 4,197 5,317 3,819 5,688 833 226
Adjusted net income 1,756 856 3,250 3,717 2,330 3,267 2,246 2,246 370 70
Adjusted diluted EPS 1.88 0.71 2.08 2.37 1.51 2.18 1.54 1.54 0.25 0.05
Dividend 0.17 0.25 0.33 0.36 0.42 0.61 0.85 0.84 0.17 0.23
Shares out (avg) 932 1,198 1,562 1,571 1,545 1,501 1,462 1,458 1,483 1,447
Cash from operations 3,713 2,142 4,564 8,310 7,371 8,403 7,435 7,435 1,944 1,677
Capex 6,612 3,345 5,000 5,699 5,788 5,639 5,792 5,792 1,475 1,581
Free cash flow -2,900 -1,202 -436 2,611 1,583 2,765 1,643 1,643 468 96
… % of revenue:
Adjusted operating income 10.9% 5.9% 18.0% 18.6% 13.1% 15.9% 11.3% 17.1% 9.8% 3.0%
DD&A 3.4% 7.5% 11.7% 10.2% 16.7% 12.1% 15.2% 15.3% 17.4% 13.2%
Capex 27.9% 16.2% 18.4% 17.7% 18.1% 16.8% 17.2% 17.4% 17.4% 20.9%
Cash, investments 549 420 896 3,164 3,648 4,328 4,572 4,572 4,328 4,572
PP&E, net 24,030 45,094 44,862 47,544 48,854 49,956 51,625 51,625 49,956 51,625
Intangible assets 18 2,857 2,847 2,612 2,840 2,843 2,937 2,565 2,843 2,565
Tangible assets 27,046 55,173 54,235 59,604 60,727 62,316 63,351 63,722 62,316 63,722
Debt 6,561 11,550 10,260 8,967 9,172 9,533 11,090 11,090 9,533 11,090
Total liabilities 14,980 29,649 27,802 30,100 30,939 30,897 31,673 31,673 30,897 31,673
Tangible equity 12,066 25,524 26,433 29,504 29,788 31,419 31,677 32,049 31,419 32,049
TBV / tangible assets 45% 46% 49% 50% 49% 50% 50% 50% 50% 50%
TBV per share 12.95 21.31 16.93 18.78 19.28 20.94 21.67 22.15 21.18 22.15
EBIT/capital employed 11% 3% 11% 13% 8% 11% 7% 11% 7% 2%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$80

$70

$60

$50

$40

$30

$20

$10

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Canada’s leading integrated energy company, with growing oil Capital-intensive, volatile commodity business. Performance
sands operations and complementary upstream and downstream depends on crude oil prices in the upstream business and refined
businesses. Suncor owns large, long-life oil sands deposits, with product prices in the downstream business, and, to a lesser extent,
proved reserves of 4.7 billion barrels (24-year reserve life), 2P on natural gas prices in the upstream business, where gas is both an
reserves of 7.5 billion barrels (38-year reserve life), and estimated input and output of production processes. Due to low natural gas
contingent resources of 23.8 billion barrels. Almost all production production, Suncor is not leveraged to a potential rebound in gas.
consists of crude oil. Management expects oil sands production to Dependent on favorable government policy in Canada. As an oil
increase from 391,000 barrels per day in 2014 to ~425,000 in 2015 sands player, Suncor is regulated in terms of land tenure, royalties,
and ~570,000 from 2017-2019. Offshore production in the North taxes, government fees, environmental controls, safety, emissions
Sea and along Canada’s East Coast should average ~100,000 barrels reduction, and other matters. Potential increases in government fees
per day from 2014-2018. The company achieved an organic reserve and royalties constitute a non-negligible risk to future profit growth.
replacement ratio of 231% in 2014. Suncor’s 1P finding and
development costs averaged $17 per barrels from 2011-2013 and SELECTED OPERATING DATA
amounted to $14 per barrel last year, below industry averages. The FYE December 31 2010 2011 2012 2013 2014
company owns Canada’s largest refining and marketing business, ∆ revenue 31% 19% -1% 5% 0%
comprised of four refineries, 1,500+ retail sites, and other assets. Employees (end) (‘000) 12.1 13.0 13.9 13.9 14.0
Revenue ($bn) 27.1 32.3 32.1 33.5 33.7
Integrated model with secure market access. Suncor has been …from Canada 75% 81% 79% 79% 80%
leveraging midstream and downstream assets to capture ~97% of % of revenue by segment:
global-based prices for its oil products (~3% based on WTI). The Oil Sands 28% 31% 28% 31% 34%
company’s production mix has been roughly 80% oil sands and Exploration and production 18% 14% 13% 13% 10%
20% offshore and international. Oil sands production typically Refining and marketing 65% 65% 69% 67% 67%
captures WTI-based prices, but Suncor is able to use the majority of Corporate and eliminations -11% -10% -10% -11% -11%
production as feedstock for the refining business, with the refined Pretax margin by segment:
product marketed at global-based prices. The combination of Oil Sands 22% 29% 7% 22% 18%
offshore production and integrated oil sands production and refining Exploration and production 57% 29% 27% 44% 38%
Refining and marketing 5% 9% 11% 10% 9%
makes Suncor only minimally exposed to WTI-based oil pricing. Corporate and eliminations 18% 10% 2% 32% 40%
Strong operational execution. Suncor’s oil sands cash operating Average price realization ($/boe):
costs fell from C$37 per barrel in 2013 to C$34 per barrel in 2014 Oil Sands 71 90 82 83 87
and should decrease to C$30-33 per barrel in 2015, according to Exploration and production 59 80 84 91 103
management. Suncor is the only oil sands producer with integrated Refinery utilization:
mining and in situ bitumen production; the company targets 90+% Eastern North America 89% 94% 89% 91% 90%
facilities utilization by 2017. The company spends ~$175 million Western North America 95% 91% 100% 96% 95%
Refinery crude processed (mbbls/d) n/a 408 431 431 428
annually on R&D, focused on improving reservoir management. In
Selected items as % of revenue:
the near term, management is focusing attention on higher-return oil Gross profit 55% 54% 56% 57% 57%
sands debottleneck projects. Longer term, offshore, in situ, and EBIT (adjusted)1 18% 19% 13% 16% 11%
paraffinic froth treatment mines are expected to add to growth. Net income (adjusted)1 12% 12% 7% 10% 7%
Financially resilient company. Under a scenario of $60-per-barrel DD&A 12% 10% 17% 12% 15%
Brent prices and C$1=$0.80, cash flow from operations amount to Capex 18% 18% 18% 17% 17%
nearly $6 billion, sufficient to cover sustaining capital, dividends, Calculation of return on capital employed ($bn):
Adjusted EBIT1 4.9 6.0 4.2 5.3 3.8
and capitalized interest. Meanwhile, Suncor’s cash position and
/ Capital employed 45.3 46.8 49.0 50.0 51.2
undrawn credit facilities total nearly $10 billion, far more than the
= Return on capital employed 11% 13% 9% 11% 7%
company will need to complete the Hebron and Fort Hills growth Tangible assets ($bn) 54.2 59.6 60.7 62.3 63.4
projects. Total debt to cap of 24% is within management’s target of Tangible equity 49% 50% 49% 50% 50%
20-25%. Net debt amounts to less than 1x cash from operations. No Shares out (avg) (mn) 1,562 1,571 1,545 1,501 1,462
debt maturities are scheduled until 2018, with some pushed to 2039. ∆ shares out (avg) 30% 1% -2% -3% -3%
1
Repurchased $1.5+ billion of stock, on average, in each of the Adjusted for unusual items of -$64 million in 2010, -$136 million in 2011, -$50 million in
2012, and -$13 million in 2013.
past three years, reflecting management’s focus on shareholder
value. The company also spent $1.5 billion on dividends in 2014, RATINGS
with the shares recently trading at an annualized yield of nearly 3%. VALUE Intrinsic value higher than market quotation? 
The company generated operating cash flow of $9.1 billion and SAFETY Low risk of permanent capital loss? 
spent $6.5 billion on capex in 2014. As $3.2 billion of capex may be MOAT Able to sustain high returns on capital? 
considered growth-related spending, Suncor’s “true” FCF likely MANAGEMENT Capable and properly incentivized team? 
amounted to ~$5.8 billion. Suncor has funded capex entirely out of CAPITALIZATION Strong, deleveraged balance sheet? 
cash from operations over the past five years. Maintenance capital PERFORMANCE Business fundamentals improving? 
spending is allocated primarily to oil sands operations and refining. MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Oil price weakness has created bargains in the oil and gas sector, and Suncor appears to be one of them. The company is Canada’s largest
integrated oil company, with large oil sands reserves, refining operations, and smaller offshore reserves along Canada’s East Coast and in
the North Sea. As a heavily oil-weighted, cost-efficient producer, Suncor generates strong cash flow, even amid weak oil prices. Suncor’s
refining business enables the company to capture global-based pricing for ~97% of production—unusual for an oil sands producer. If we
adjust for growth capex of $3.2 billion, Suncor generated FCF of roughly $5.8 billion in 2014, implying an attractive ~12% FCF yield.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

SUNCOR ENERGY – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
BP / BP 43.23 -38% 80% 131,307 156,295 59% 4% 2% 5% 7% 202% 3,740 -16% -41% 12% 6% 31%
Canadian Natural / CNQ 32.86 -60% 66% 36,151 47,716 66% -7% 9% 1% 4% 33% 2,026 16% 11% 55% 30% 48%
Chevron / CVX 109.04 -49% 24% 205,047 219,650 73% -2% 9% 4% 6% 91% 3,090 -9% -23% 36% 12% 58%
EnCana / ECA 14.02 -25% 279% 11,767 19,242 58% 1% 33% neg. 2% 42% 2,563 37% 58% 83% 28% 31%
Imperial Oil / IMO 43.30 -45% 46% 36,663 42,218 50% -2% 8% 3% 6% 72% 5,528 11% -4% 20% 14% 55%
Exxon Mobil / XOM 88.85 -37% 18% 372,236 396,741 47% 0% 7% 4% 6% 91% 4,780 -14% -34% 39% 8% 50%
Suncor Energy / SU 32.22 -55% 131% 46,515 53,033 69% 4% 5% 2% 5% 63% 2,382 -20% -11% 57% 17% 50%
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

SUNCOR ENERGY – RESOURCE OVERVIEW SUNCOR ENERGY – PLANNED PRODUCTION (‘000 boe per day)

Suncor’s large liquids resource

base is fueling cash-generative
production growth even in an
environment of weak oil prices

1
Reserves and contingent resources are on a working interest before royalties. Contingent resources are sub-classified as follows: development pending (0.5%), development on hold
2
(2.5%), development unclarified (88.4%), and development not viable (8.6%). Assumes that 7.5 billion barrels of oil equivalent (boe) of proved plus probable reserves as at December
31, 2014 are produced at a rate of 535 mboe/d, Suncor’s average daily production rate in 2014. 3 Source: Sproule, “2013 Canadian Oil & Gas Reserves Chart” published July 2014.
4 5
Figures exclude Syncrude volumes. The figure for 2015 represents Suncor’s production guidance. The figure for 2017 to 2019 represents Suncor’s long-term business plan, including
volumes from certain projects that are subject to sanction and Board of Directors’ approval. Source: Company presentation dated March 4, 2015.

SUNCOR – CAPEX and CASH FLOW FROM OPERATIONS ($ billions) SUNCOR – CASH OPERATING COSTS ($ per boe)

Self-funded capex

Reduction in cash operating costs

reflects strong management execution

1 2
Cash flow from operations (CFOPs) and cash operating costs are non-GAAP measures. Capital & exploration expenditures excluding capitalized interest.
3
Figures for 2015 represent the mid-point of Suncor’s guidance. 2015 capital reductions of $1 billion are based on the difference between the mid-point of current guidance and the mid-point
of guidance issued on November 18, 2014. Source: Company presentation dated March 4, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors
Long-life reserves Organic grower

SUNCOR – RESERVE LIFE INDEX ORGANIC RESERVE REPLACEMENT 1P FINDING & DEVELOPMENT COSTS

1
Proved and Probable Reserves (2P) and Proved Reserves (1P). Assumes that the reserves as at December 31 of the particular year are produced at the average production rate for the
2 3
applicable year. See Reserve Life Index Peers in the Advisories. 3-year rolling averages of 1P additions due to discoveries, infill drilling, extensions, improved recovery and technical
4
revisions as a percent of production over the applicable period. See Finding & Development Costs in the Advisories.

SUNCOR ENERGY – ESTIMATED FUNDING PROFILE

Available balance sheet liquidity
Cash from operations is more than is more than sufficient to fund the
sufficient to fund maintenance remaining capex for the major
capex and dividend payments Hebron and Fort Hills projects

1
Cash Flow from Operations (CFOPs) is a non-GAAP measure. See Non-GAAP Measures in the Advisories. The figure represents an approximation of Suncor’s cash flow from operations
for the twelve months ended December 31, 2014 using actual financial and operational results but substituting the following key price inputs: $US60/bbl Brent, $US54/bbl WTI, $US37/bbl
WCS, $US16/bbl NYH 3:2:1 crack, and a CADUSD exchange rate of $0.80. 2 Figure for 2015 represents the mid-point of Suncor’s guidance for the Fort Hills and Hebron projects. Figure
for 2016 and 2017 represents the mid-point of Suncor’s business plan for the Fort Hills and Hebron projects. See Forward-Looking Statements in the Advisories.
3
The figure represents $1.64 billion, calculated as four quarterly dividend payments of $0.28 per share multiplied by 1.44 billion shares outstanding as at December 31, 2014. Any future
dividends are subject to Board of Directors approval and there can be no assurance that any additional dividends will be approved. See Forward-Looking Statements in the Advisories.
4
The figure represents $400 million, the estimated amount of capitalized interest Suncor expects to pay in 2015 assuming debt maturities and interest rates remain unchanged.

SUNCOR – R&M NET EARNINGS (US$ per barrel of capacity) SUNCOR – PRICES and CRUDE COSTS, 2014 (C$ per barrel)

SUNCOR – REFINERY FEEDSTOCK FROM INLAND CRUDES SUNCOR – CASH FLOW FROM OPERATIONS (C$ per share)
(% of refining capacity)

1
See R&M Peers in the Advisories. 2 Figure for 2015 H2 (second half) assumes inland crude being transported on Suncor’s planned rail and pipeline capacities, including the reversal of
Line 9 in 2015, which is still subject to final regulatory approval and construction being completed, and further assumes refinery utilization is 95% in each year.
3
See Prices and Crude Costs in the Advisories. 4 Cash flow from operations divided by average diluted shares outstanding. Cash flow from operations is a non-GAAP financial measure.
Source for the above charts: Company presentation dated March 4, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

USG Corporation (USG)

Capital Goods: Construction - Raw Materials CHICAGO IL www.usg.com
USG is a manufacturer and distributor of building materials. The company produces a range of products for use in new residential, new nonresidential, and
residential and nonresidential repair and remodel construction, as well as products used in certain industrial processes.
Trading Data Consensus EPS Estimates Valuation
Price: $27.12 (as of 5/1/15) Month # of P/E FYE 12/31/14 104x
52-week range: $24.53–$32.21 Latest Ago Ests P/E FYE 12/31/15 16x
Market value: $3.9 billion This quarter $0.46 $0.48 20 P/E FYE 12/30/16 13x
Enterprise value: $5.9 billion Next quarter 0.55 0.58 20 P/E FYE 12/30/17 9x
Shares outstanding: 145.4 million FYE 12/31/15 1.73 1.74 21 EV/ LTM revenue 1.6x
Ownership Data FYE 12/30/16 2.06 2.49 22 EV/ LTM EBIT 18x
Notable holders: Management and insiders 1.5% FYE 12/30/17 3.10 3.32 5 P / tangible book 11.1x
Berkshire 27% | Gates Capital 5% | Shapiro 5%
LT growth n/a n/a n/a Greenblatt Criteria
Sasco 4% | T. Rowe 4% | GR-NEAM 3%
TIAA-CREF 3% | Lord Abbett 3% | Causeway 2% EPS Surprise Actual Est. LTM EBIT yield 5%
Insider buys (last six months): 16 / sells: 13 4/23/15 $0.29 $0.26 LTM pre-tax ROC 14%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 4,608 3,130 2,834 2,910 3,224 3,570 3,724 3,783 850 909
Gross profit 192 119 137 158 395 581 654 664 143 153
Adjusted operating income -188 -167 -158 -131 91 261 315 497 66 76
Adjusted pretax income -257 -318 -337 -335 -111 62 172 190 23 41
Adjusted net income -139 -763 -300 -321 -124 52 164 189 18 43
Adjusted diluted EPS -1.40 -7.69 -2.99 -3.09 -1.17 0.48 1.16 1.33 0.13 0.30
Shares out (avg) 99 99 100 104 106 109 142 143 138 145
Cash from operations -165 139 -94 -194 78 78 172 194 -64 -42
Capex 238 44 38 54 86 141 132 127 34 29
Free cash flow -403 95 -132 -248 -8 -63 40 67 -98 -71
… % of revenue:
Gross profit 4.2% 3.8% 4.8% 5.4% 12.3% 16.3% 17.6% 17.6% 16.8% 16.8%
Adjusted operating income -4.1% -5.3% -5.6% -4.5% 2.8% 7.3% 8.5% 13.1% 7.8% 8.4%
Cash, investments 471 690 757 529 652 892 324 214 246 214
Receivables 482 377 330 324 328 372 407 459 422 459
Inventory 404 289 290 292 304 332 329 328 332 328
PP&E, net 2,562 2,427 2,266 2,104 2,100 2,103 1,908 1,849 1,998 1,849
Intangible assets 137 86 78 70 62 54 48 46 52 46
Tangible assets 4,582 4,011 4,009 3,649 3,661 4,067 3,946 3,860 4,018 3,860
Short-term debt 194 7 7 7 4 63 4 4 63 4
Long-term debt 1,642 1,955 2,301 2,297 2,305 2,292 2,205 2,202 2,280 2,202
Total liabilities 3,169 3,167 3,468 3,563 3,717 3,483 3,587 3,504 3,392 3,504
Tangible equity 1,413 844 541 86 -56 584 359 356 626 356
TBV / tangible assets 31% 21% 13% 2% -2% 14% 9% 9% 16% 9%
EBIT/capital employed -17% -7% -10% -9% 1% 11% 8% 14% 16% 10%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$140

$120

$100

$80

$60

$40

$20

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Leading wallboard producer in North America, with vertically Leveraged balance sheet, with cash of $240 million and debt of
integrated operations, accounting for more than a quarter of U.S. $2.2 billion as of March 31. The company also carries a pension
wallboard and gypsum panel sales. USG, founded in 1902 and listed liability of ~$500 million. USG has total liquidity of nearly $600
in 1931, has 75+ production facilities, 145+ distribution branches, million, more than sufficient in the current operating environment.
and holds the number-one or number-two market share position in However, USG remains overly leveraged in a scenario of major
all of its core businesses. In addition to U.S. leadership in gypsum housing market weakness. The company has $500 million of senior
wallboard, USG is also the largest manufacturer in Canada, Mexico, notes maturing in 2016. Another $500 million maturing in 2018 has
and Latin America. The company owns gypsum rock reserves with been pushed out to 2025 via a refinancing in February. We would
a thirty-year remaining life. The gypsum business contributed like to see management continue to deleverage the balance sheet
adjusted EBITDA of $434 million in 2014, more than two-thirds of before significant capital is allocated to M&A or repurchases.
the company total (not including Boral JV). In ceilings, USG is the
largest provider of ceiling grid and second-largest manufacturer of SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
acoustical ceiling tile in the Americas. The company’s L&W
∆ revenue -9% 3% 11% 11% 4%
Supply is the leading specialty building products distributor in the
Employees (end) 9,450 8,880 8,758 8,732 8,928
U.S., accounting for ~10% of all gypsum wallboard distribution. Revenue ($mn) 2,834 2,910 3,224 3,570 3,724
Growing internationally through the unconsolidated 50/50 joint % of revenue by segment:
venture USG Boral, which recently passed $1 billion in annualized Gypsum 56% 58% 62% 63% 65%
sales in Asia, Australasia, and the Middle East. The joint venture Ceilings 22% 20% 17% 16% 14%
delivered $35 million in adjusted equity income in 2014. USG Distribution 36% 36% 36% 35% 36%
finalized the JV in February 2014, aiming to diversify revenue and Eliminations -15% -15% -14% -14% -14%
improve long-term growth. The JV provides building products, Operating margin by segment:
mines raw gypsum, and sells natural and synthetic gypsum. It is Gypsum -10% -8% 5% 12% 7%
already the leading player in the geographies in which it operates. Ceilings 11% 14% 16% 17% 17%
Asia is expected to become the largest gypsum market this year Distribution -9% -6% -3% 0% 1%
% of revenue by geography:
even as gypsum per capita remains at ~17 sq. ft versus ~64 in the
U.S. 82% 84% 84% 85% 86%
U.S. USG management continues to look for strategic geographic Canada 12% 13% 13% 12% 11%
extension opportunities and to bring to market adjacent products Rest of world 12% 8% 9% 9% 8%
and systems that will keep diversifying USG’s earnings stream. Geographic transfers -6% -5% -5% -5% -5%
Another source of resilience is the fact that residential and non- Gross margin 5% 5% 12% 16% 18%
residential repair and remodel contribute nearly one-half of sales. EBIT margin (adjusted)1 -6% -5% 3% 7% 8%
Net margin (adjusted)1,2 -11% -11% -4% 1% 4%
Innovation a source of competitive advantage a pricing power
D&A as % of revenue 6% 6% 5% 4% 4%
despite the seemingly mundane nature of the business. Management Capex as % of revenue 1% 2% 3% 4% 4%
has sought to differentiate USG through greater focus on high- Calculation of return on capital employed ($mn):
performance products that improve energy efficiency, sustainability, Adjusted EBIT1 -158 -131 91 261 315
and speed of construction. The company secured 200+ new patents Current assets 1,434 1,338 1,283 1,514 1,426
in 2014, introduced adjacent product technologies into the Boral JV, - Cash, ST investments -724 -643 -591 -772 -608
and extended the UltraLight portfolio with a product introduction. - Current liabilities -511 -527 -538 -560 -566
Business operating at high level of profitability, with USG last + Short-term debt 7 7 6 34 34
+ Net fixed assets 2,347 2,185 2,102 2,102 2,006
year achieving the strongest annual adjusted net income of $168 Capital employed 2,554 2,361 2,263 2,317 2,292
million and adjusted EBITDA of $556 million since 2006. The = Return on capital employed -6% -6% 4% 11% 14%
operating model has improved due to new pricing policies and cost Shares out (avg) (mn) 100 104 106 109 142
reductions over the last few years (the company eliminated annual ∆ shares out (avg) 1% 3% 2% 2% 30%
costs of $500 million during the downturn). USG has been able to 1
Adjusted for unusual items of -$110 million in 2010, -$75 million in 2011, -$59 million in
generate adjusted EBITDA above the historical mid-cycle level on 2012, -$3.0 million in 2013, and -$126 million in 2014. 2 Adjusted for $5.0 million in 2010,
$6.0 million in 2011, $57 million in 2012, -$2.0 million in 2013, and -$1.0 million in 2014.
about two-thirds the level of U.S. housing starts, suggesting that
“normalized” cycle-average EBITDA has increased in recent years. RATINGS
Focused on improving the balance sheet. USG’s deleveraging VALUE Intrinsic value higher than market quotation? 
activities last year are expected to generate ~$14 million in annual SAFETY Low risk of permanent capital loss? 
interest savings on a go-forward basis. The company’s $1.9 billion MOAT Able to sustain high returns on capital? 
U.S. tax loss carryforward has a cash value of ~$1 billion, MANAGEMENT Capable and properly incentivized team? 
according to management, and will shield the next $1.9 billion in CAPITALIZATION Strong, deleveraged balance sheet? 
domestic earnings (valuation allowance may be released this year). PERFORMANCE Business fundamentals improving? 
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
USG remains leveraged to a U.S. housing recovery, but management has also taken steps to diversify the earnings stream. The company
entered into the USG Boral 50/50 joint venture in February 2014, expanding USG’s presence to Asia and the Middle East. USG Boral is
already the gypsum leader in those markets and has passed $1 billion in annualized revenue (not consolidated on USG’s income statement).
With Asia likely to become the largest gypsum market this year, USG’s presence could create significant value over time. On the cost side,
USG removed ~$500 million in expenses during the U.S. housing downturn, resulting in a much lower breakeven point and enabling the
company to generate roughly the same EBITDA on just two-thirds of the historical level of U.S. housing starts. Management also remains
focused on product innovation, a competitive differentiator. Debt reduction should remain the capital allocation priority in the near term.
With FCF low relative to earnings, and with the leveraged equity earnings yield in the high single digits, we find the shares fairly valued.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

USG – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on LTM revenue and assumed Based on median consensus EPS Based on median consensus EPS
normalized EBIT margin estimate for FYE December 31, 2015 estimate for FYE December 30, 2016
▼ ▼ ▼
TTM net revenue: $3.8 billion Consensus FY15E EPS: $1.73 (‡) Consensus FY16E EPS: $2.06 (§)
multiplied by minus minus
Assumed operating margin: 8.0% Assumed upside/downside to Assumed upside/downside to
equals FY15 EPS estimate: 5% * $1.73 FY16 EPS estimate: 10% * $2.06
Est. operating income: $300 million equals equals
multiplied by Revised FY15 EPS estimate: $1.81 Revised FY16 EPS estimate: $2.26
Assumed fair value multiple: multiplied by multiplied by
10.0x Corresponding industry P/E: 22.7x (*) Corresponding industry P/E: 17.7x (*)
equals equals equals
Estimated fair enterprise value of Industry multiple-implied fair value: Industry multiple-implied fair value:
USG: $3.0 billion $6.0 billion ($41 per share) $5.8 billion ($40 per share)
plus multiplied by multiplied by
Cash, ST investments: $214 million Assumed USG multiple as a Assumed USG multiple as a
minus percentage of the industry multiple: percentage of the industry multiple:
Total debt: $2.2 billion 79% 113%
equals (14.0x fair value P/E multiple) (20.0x fair value P/E multiple)
Estimated fair value of USG: equals equals
$1.0 billion, or $7.10 per share Estimated fair value of USG: Estimated fair value of f USG:
(based on 145 million shares out) $4.7 billion ($32 per share) $6.6 billion ($45 per share)
74% downside from recent price ($27) (based on 145 million shares out) (based on 145 million shares out)
(*) Represents Construction - Raw Materials median. 20% upside to recent price ($27) 67% upside to recent price ($27)
(‡) The FY15 consensus EPS estimate of $1.73 has been revised down by 2% from $1.77 three months ago. (§) The FY16 consensus EPS estimate of $2.06 has been revised down by
18% from $2.52 three months ago. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

EBITDA up
USG – CALCULATION of ADJUSTED EBITDA ($ in millions) in 2014

1
See discussion of changes to our reportable segments in footnote 1 on slide 4 of referenced presentation. 2 Interest, tax, and share-based compensation are not allocated to our
reportable segments; therefore, these items are reflected in the column Corp/Elim. 3 Depreciation, depletion and amortization excludes the amortization of deferred financing fees which is
4
included in interest expense. See USG Boral Building Products EBITDA reconciliation on slide 28. 5 USG’s equity income from UBBP, for the full year 2014, is comprised of USG’s
equity income from UBBP of $33 million and gain on deconsolidation of subsidiaries of $27 million. Source: Company presentation dated February 5, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

USG – SELECTED CASH FLOW INFORMATION ($ in millions)

Debt remains
quite high
relative to cash
generation

1
GAAP measure of net cash used for investing activities was $683 million and $157 million in the twelve months ended December 31, 2014 and 2013, respectively, and includes net
(purchases)/sales of marketable securities of ($14) million and ($11) million in the each of those respective periods. The net change in marketable securities was $12 million and includes the
net purchases of $14 million and $2 million of amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in other.

Numerous non-operating items continued to obscure USG’s underlying earning power in FY2014
USG – CALCULATION of ADJUSTED EPS

1
Adjusted earnings per average diluted common share for the year ended December 31, 2014 is based on $170 million of adjusted income available to shareholders, which represents
adjusted net income plus $2 million for the dilutive effect of the company’s 10% convertible senior notes that were outstanding for a portion of 2014.
Source for the above tables: Company presentation dated February 5, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

United Parcel Service (UPS)

Transportation: Air Courier, Member of S&P 500 ATLANTA GA www.ups.com
UPS is a global leader in logistics, offering a broad range of solutions including the transportation of packages and freight, the facilitation of international trade, and
the deployment of advanced technology to more efficiently manage the world of business.
Trading Data Consensus EPS Estimates Valuation
Price: $101.38 (as of 5/1/15) Month # of P/E FYE 12/31/14 31x
52-week range: $94.05–$114.40 Latest Ago Ests P/E FYE 12/31/15 20x
Market value: $91.5 billion This quarter $1.27 $1.27 24 P/E FYE 12/30/16 18x
Enterprise value: $99.0 billion Next quarter 1.38 1.38 24 P/E FYE 12/30/17 16x
Shares outstanding: 902.3 million FYE 12/31/15 5.18 5.16 29 EV/ LTM revenue 1.7x
Ownership Data FYE 12/30/16 5.77 5.77 28 EV/ LTM EBIT 19x
Notable holders: Management and insiders <1% FYE 12/30/17 6.36 6.36 11 P / tangible book n/m
Wellington 3% | MFS 3% | BlackRock 2%
LT growth 9.6% 9.3% 7 Greenblatt Criteria
FMR 2% | Northern Trust 1% | Columbia 1%
Cap Re 1% | T. Rowe 1% | BlackRock 1% EPS Surprise Actual Est. LTM EBIT yield 5%
Insider buys (last six months): 3 / sells: 1 4/28/15 $1.12 $1.09 LTM pre-tax ROC 27%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 51,486 45,297 49,545 53,105 54,127 55,438 58,232 58,430 13,779 13,977
Adjusted operating income 1,619 3,508 5,641 6,080 1,343 7,034 4,968 5,157 1,513 1,673
Adjusted pretax income 1,252 3,073 5,290 5,776 974 6,674 4,637 4,804 1,423 1,590
Adjusted net income 655 1,968 3,338 3,804 807 4,372 3,032 3,147 911 1,026
Adjusted diluted EPS 0.64 1.97 3.36 3.88 0.84 4.65 3.31 3.44 0.99 1.13
Dividend 1.80 1.80 1.88 2.08 2.28 2.48 2.01 2.74 0.67 0.73
Shares out (avg) 1,016 998 994 981 960 940 916 914 923 906
Cash from operations 8,426 5,285 3,835 7,073 7,216 7,304 5,726 n/a 2,267 n/a
Capex 2,636 1,602 1,389 2,005 2,153 2,065 2,328 n/a 322 n/a
Free cash flow 5,790 3,683 2,446 5,068 5,063 5,239 3,398 n/a 1,945 n/a
… % of revenue:
Adjusted operating income 3.1% 7.7% 11.4% 11.4% 2.5% 12.7% 8.5% 8.8% 11.0% 12.0%
Cash, investments 1,049 2,100 4,081 4,275 7,924 5,245 3,283 3,283 5,245 3,283
Receivables 6,194 5,922 5,627 6,246 6,111 6,502 6,661 6,661 6,502 6,661
PP&E, net 18,265 17,979 17,387 17,621 17,894 17,961 18,281 18,281 17,961 18,281
Intangible assets 2,497 2,685 2,680 2,686 2,776 2,965 3,031 3,031 2,965 3,031
Tangible assets 29,382 29,198 30,917 32,015 36,087 33,247 32,440 32,440 33,247 32,440
Payables 1,855 1,766 1,974 2,300 2,278 2,478 2,754 2,754 2,478 2,754
Short-term debt 2,074 853 355 33 1,781 48 923 923 48 923
Long-term debt 7,797 8,668 10,491 11,095 11,089 10,824 9,864 9,864 10,824 9,864
Total liabilities 25,099 24,253 25,618 27,666 34,210 29,738 33,330 33,330 29,738 33,330
Common equity 6,780 7,630 7,979 7,035 4,653 6,474 2,141 2,141 6,474 2,141
Tangible equity 4,283 4,945 5,299 4,349 1,877 3,509 -890 -890 3,509 -890
TBV / tangible assets 15% 17% 17% 14% 5% 11% -3% -3% 11% -3%
EBIT/capital employed 8% 18% 29% 32% 7% 37% 26% 27% 36% 40%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$140

$120

$100

$80

$60

$40

$20

$0
May 06 May 07 May 08 May 09 May 10 May 11 May 12 May 13 May 14 May 15

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Global logistics market leader, ahead of FedEx and DHL. UPS, Modest growth prospects. UPS has achieved such scale that future
founded in 1907 as a messenger and delivery service in Seattle, has growth may depend more on the state of the global economy than
become the largest package delivery company, a leader in the U.S. factors specific to UPS. Management’s targets for revenue growth
less-than-truckload industry and the top provider of global supply of 5-7% annually from 2016-2019 appear fairly decent, but they
chain solutions. UPS delivers packages each day for 1.6 million imply only slight growth in inflation-adjusted terms. While margin
shipping customers to 8.2 million receivers. In 2014, UPS delivered expansion should keep earnings growing at a faster rate in the short-
18 million pieces per day globally, or a total of 4.6 billion packages. to medium-term, margin expansion cannot continue indefinitely and
Sustainable competitive advantage, with industry-leading may reverse in a recessionary scenarios or due to competitive
margins. In the small package business, UPS has achieved margin factors. Such reversal would render UPS’s income growth stagnant
of 13.1% in 2014, compared to DHL at 10.1%, FedEx 9.3%, and or worse, likely prompting investors to reassess the earnings yield
TNT 3.5%. UPS boasts a global integrated network with superior they require to own the shares. The recent earnings and FCF yield
scale and efficiencies, erecting large barriers to entry. The brand is of 5-6% does not fully reflect the risks of industry cyclicality.
recognized and respected worldwide. No customer accounts for a Unionized workforce. UPS employed 435,000 people (excluding
material portion of revenue, enabling the company to raise prices at temporary seasonal employees) at yearend 2014, including 354,000
its discretion. The company has sought to grow market share by U.S. employees. Of the latter, 270,000 people are employed under
expanding global B2C solutions, industry-specific solutions, and by agreements with the Teamsters union. In 2014, the Teamsters
continuing to leverage technology efficiencies. 70% of drivers are ratified a new agreement with UPS that will expire in July 2018. In
expected to be on the proprietary ORION navigation system by the addition, 2,600 pilots are employed under an agreement with the
end of 2015, with $300-400 million in annual profit gains by 2017. Independent Pilots Association, which became amendable at the
UPS’s ability to collaborate with online retailers should aid growth. end of 2011. In February 2014, the parties received mediation by
In vertical markets such as healthcare, UPS’s ability to address the National Mediation Board for ongoing contract negotiations.
specific challenges, e.g., temperature sensitivity, drives business.
SELECTED OPERATING DATA
Large remaining international growth opportunity, especially in FYE December 31 2010 2011 2012 2013 2014
emerging markets. In 2015, management expects only 2-3% top- ∆ revenue 9% 7% 2% 2% 5%
line growth internationally, but margin expansion should continue, Employees (‘000) 401 398 399 395 435
with operating income growing 6-12% and operating margin Revenue ($bn) 49.5 53.1 54.1 55.4 58.2
reaching 15-16% (materially better than U.S. domestic operating …from the U.S. 74% 74% 75% 75% 75%
margin of ~13%). In 2016-2019, UPS expects international growth % of revenue by segment:
to outpace the company average, with revenue growth of 6-9%, U.S. domestic package 60% 60% 61% 61% 62%
EBIT growth of 9-12%, and operating margin of ~16%. UPS began International package 22% 23% 22% 22% 22%
expanding outside the U.S. in 1975 and now serves 220+ countries Supply chain and freight 17% 17% 17% 16% 16%
and territories with export products. Management is pursing new Operating margin by segment:
opportunities, e.g., Brazil package delivery network expansion. U.S. domestic package 11% 12% 1% 14% 8%
International package 16% 14% 7% 14% 13%
Targeting revenue growth of 5-7% and EPS growth of 9-13% Supply chain and freight 7% 7% 0% 8% 5%
from 2016-2019, with operating income growing 8-11% annually. Average daily package volume (‘000):
Management expects return on invested capital to average 25-30% U.S. domestic package 13,286 13,411 13,896 14,405 15,322
over the period. In 2015, UPS sees EPS of $5.05-5.30, up 6-12%. International package 2,288 2,386 2,399 2,533 2,694
The company expects revenue and operating income to grow 3-4% Average revenue per piece ($):
and 5-9%, respectively, this year, with growth in each of the three U.S. domestic package 8.85 9.31 9.38 9.39 9.25
major segments. U.S. domestic revenue should grow 4%, slightly International package 18.31 19.28 19.13 18.54 18.15
above the company average, while operating income growth will be Freight rev. / hundredweight ($) 19.18 21.17 21.73 22.05 22.64
Freight shipments per day (‘000) 39.5 40.5 40.1 41.5 42.5
driven primarily by continued margin expansion internationally.
Adjusted EBIT1 ($bn) 5.6 6.1 1.3 7.0 5.0
Headwinds include pension-related expenses and currency impacts. / Capital employed 19.5 19.2 19.1 19.0 19.1
History of strong cash generation and return of capital. UPS has = Return on capital employed 29% 32% 7% 37% 26%
generated adjusted FCF averaging $5+ billion over five years (range ∆ shares out (avg) 0% -1% -2% -2% -3%
of $4.6 billion to $5.4 billion from 2010-2014). The company has
bought back stock consistently, repurchasing $20+ billion over the RATINGS
past decade. UPS has spent modestly less on dividends, with the VALUE Intrinsic value higher than market quotation? 
recent annualized dividend of $2.92 per share implying a yield of SAFETY Low risk of permanent capital loss? 
~3.0%. Management expects to return 100% of excess CF in 2015. MOAT Able to sustain high returns on capital? 
From 2016-2019, UPS expects to spend $15+ billion on buybacks. MANAGEMENT Capable and properly incentivized team? 
Capex has trended down over the long term and is expected to be CAPITALIZATION Strong, deleveraged balance sheet? 
fairly modest at 4.5-5% of revenue, down from ~6% ten years ago, PERFORMANCE Business fundamentals improving? 
~8-10% twenty years ago, and ~10% or greater thirty years ago. MACRO Benefiting from economic and secular trends? 

THE BOTTOM LINE

UPS, along with FedEx and DHL, enjoys scale advantages in the logistics business, delivering billions of packages annually for business
and consumer customers worldwide. UPS’s moat appears sustainable not only due to scale but also the high efficiency and reliability of the
company’s technology-enabled global network. A lack of customer concentration allows UPS to use pricing as a tool for managing the
margin profile. Government-supported postal services generally have little impact on the competitive landscape in express delivery, and
many have partnered with one of the three major players. UPS employs ~$17 billion of capital and earns several billion dollars a year, an
attractive proposition. We like the business but note that it remains a cyclical, slow-growing business dependent on the state of the global
economy and the continued liberalization of trade. At an FCF yield of 5-6% (adjusted FCF of ~$5 billion), we find the shares fairly valued.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

UNITED PARCEL SERVICE – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS
Conservative Base Case Aggressive
Based on LTM revenue and average Based on LTM revenue and assumed Based on median consensus EPS
EBIT margin for past seven fiscal years normalized EBIT margin estimate for FYE December 30, 2016
▼ ▼ ▼
TTM net sales: $58 billion TTM net revenue: $58 billion Consensus FY16E EPS: $5.77 (§)
multiplied by multiplied by minus
Average 7-year EBIT margin: 8.2% Assumed operating margin: 12.0% Assumed upside/downside to
equals equals FY16 EPS estimate: 5% * $5.77
Estimated EBIT: $4.8 billion Est. operating income: $7.0 billion equals
multiplied by multiplied by Revised FY16 EPS estimate: $6.06
Assumed fair value multiple of EBIT: Assumed fair value multiple: multiplied by
12.0x 15.0x Corresponding industry P/E: 16.8x (*)
equals equals equals
Estimated fair enterprise value of Estimated fair enterprise value of Industry multiple-implied fair value:
UPS: $58 billion UPS: $105 billion $92 billion ($102 per share)
plus plus multiplied by
Cash, ST investments: $3.3 billion Cash, ST investments: $3.3 billion Assumed UPS multiple as a
minus minus percentage of the industry multiple:
Total debt: $11 billion Total debt: $11 billion 131%
equals equals (22.0x fair value P/E multiple)
Estimated fair value of UPS: Estimated fair value of UPS: equals
$50 billion, or $55 per share $98 billion, or $108 per share Estimated fair value of UPS:
(based on 900 million shares out) (based on 900 million shares out) $120 billion ($133 per share)
45% downside from recent price ($101) 7% upside to recent price ($101) (based on 900 million shares out)
(*) Represents Air Courier industry median multiple. 31% upside to recent price ($101)
(§) The FY16 consensus EPS estimate of $5.77 has remained roughly flat over the past three months. Source: Company filings, The Manual of Ideas analysis, assumptions and estimates.

UNITED PARCEL SERVICE – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
FedEx / FDX 171.73 -80% 7% 48,730 52,480 25% 2% 5% 5% 6% 90% 421 4% 4% 63% 9% 38%
Expeditors Int’l / EXPD 46.45 -49% 23% 8,876 7,909 21% 4% 4% 5% 5% 83% 447 8% 9% 30% 9% 65%
Forward Air Corp. / FWRD 51.40 -74% 12% 1,592 1,665 8% 3% 4% 5% 6% 49% 289 19% 20% 50% 11% 36%
UTi Worldwide / UTIW 8.92 -11% 173% 942 1,403 6% -10% neg. neg. 2% 298% 196 -6% -10% 35% 0% 4%
XPO Logistics / XPO 49.50 -95% 1% 3,943 3,935 9% -2% neg. neg. 1% 60% 236 236% 223% 28% -2% 23%
UPS / UPS 101.38 -63% 13% 91,472 98,976 n/m 0% 3% 5% 6% 59% 216 -39% 1% 82% 9% -3%
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

UNITED PARCEL SERVICE – MANAGEMENT’S LONG-TERM FINANCIAL TARGETS

UPS maintains
a reasonably
strong outlook
through 2019

*
Percentage increases based on growth compared to 2014 adjusted results. Source: Company presentation dated March 10, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

UNITED PARCEL SERVICE – MANAGEMENT’S GUIDANCE for GROWTH and OPERATING MARGIN

The U.S. remains the

driver of top-line
growth, while
international profitability
remains impressive

*
Percentage increases based on growth compared to 2014 adjusted results.

UNITED PARCEL SERVICE – DISTRIBUTIONS to OWNERS (as a percentage of net income)

Strong cash
conversion has
enabled UPS to
maintain return
of capital at a
very high level

UNITED PARCEL SERVICE – CALCULATION of FREE CASH FLOW ($ in millions)

1
Note: excludes the cash paid or received for business acquisitions or dispositions. *Adjusted.
2007 - $6.100 billion Central States multiemployer pension plan withdrawal payment; $1.100 billion tax benefit related to the withdrawal payment.
2008 - $1.228 billion tax benefit related to Central States multiemployer pension plan withdrawal payment.
2010 - Net cash from operations was impacted by $1.466 billion after tax discretionary pension contributions.
2014 - Net cash from operations was adjusted for the impact of $1.527 billion after tax payment for the Teamster healthcare charge and 2013 retro-wages paid in 2014.

UNITED PARCEL SERVICE – CALCULATION of ROIC ($ in millions)

*
2014 includes entire pension and postretirement benefit plan remeasurement (amounts inside and outside the 10% corridor). 2013 and 2012 reflect only amounts outside the 10% corridor.
Source for the above tables and charts: Company presentation dated March 10, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Verizon (VZ)
Services: Communications Services, Member of S&P 500 NEW YORK NY www.verizon.com
Verizon is an integrated telecommunications company that provides wireline voice and data services, wireless services, and Internet services.
Trading Data Consensus EPS Estimates Valuation
Price: $50.41 (as of 5/1/15) Month # of P/E FYE 12/31/14 21x
52-week range: $45.09–$53.66 Latest Ago Ests P/E FYE 12/31/15 13x
Market value: $205.6 billion This quarter $1.01 $0.95 24 P/E FYE 12/30/16 13x
Enterprise value: $314.1 billion Next quarter 1.00 0.95 24 P/E FYE 12/30/17 13x
Shares outstanding: 4,078.5 million FYE 12/31/15 3.84 3.67 27 EV/ LTM revenue 2.4x
Ownership Data FYE 12/30/16 3.98 3.89 32 EV/ LTM EBIT 15x
Notable holders: Management and insiders <1% FYE 12/30/17 4.01 3.93 16 P / tangible book n/m
Cap Re 4% | BlackRock 4% | Cap World 2% Greenblatt Criteria
LT growth 5.9% 8.5% 4
Wellington 2% | FMR 2% | Northern Trust 1%
Norges 1% | J.P. Morgan 1% | Mellon 1% EPS Surprise Actual Est. LTM EBIT yield 6%
Insider buys (last six months): 9 / sells: 10 4/21/15 $1.02 $0.95 LTM pre-tax ROC 25%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 97,354 107,808 106,565 110,875 115,846 120,550 127,079 128,245 30,818 31,984
Gross profit 58,844 64,905 64,557 65,000 69,611 75,663 77,148 77,407 19,629 19,888
D&A 14,610 16,217 16,303 16,496 16,460 16,606 16,533 16,385 4,137 3,989
Adjusted operating income 18,491 18,825 18,973 18,834 21,006 25,458 26,706 20,299 7,160 7,960
Adjusted pretax income 17,522 16,367 17,012 16,437 17,743 22,767 22,377 14,985 6,954 6,669
Adjusted net income 13,686 7,741 6,877 8,358 8,721 4,987 16,732 9,897 3,947 4,219
Adjusted diluted EPS 4.80 2.72 2.43 2.95 3.06 1.74 4.21 2.47 1.15 1.03
Dividend 1.78 1.87 1.93 1.98 2.02 2.08 2.14 2.18 0.53 0.55
Shares out (avg) 2,849 2,841 2,830 2,833 2,853 2,866 3,974 4,010 3,425 4,116
Cash from operations 27,452 31,390 33,363 29,780 31,486 38,818 30,631 33,661 7,139 10,169
Capex 17,133 16,872 16,458 16,244 20,110 17,184 17,545 26,402 4,363 13,220
Free cash flow 10,319 14,518 16,905 13,536 11,376 21,634 13,086 7,259 2,776 -3,051
… % of revenue:
Gross profit 60.4% 60.2% 60.6% 58.6% 60.1% 62.8% 60.7% 60.4% 63.7% 62.2%
Adjusted operating income 19.0% 17.5% 17.8% 17.0% 18.1% 21.1% 21.0% 15.8% 23.2% 24.9%
D&A 15.0% 15.0% 15.3% 14.9% 14.2% 13.8% 13.0% 12.8% 13.4% 12.5%
Capex 17.6% 15.7% 15.4% 14.7% 17.4% 14.3% 13.8% 20.6% 14.2% 41.3%
Cash, investments 10,291 2,499 7,213 13,954 3,563 54,129 11,153 4,933 3,544 4,933
Intangible assets 73,208 101,303 100,814 102,485 107,816 106,181 105,708 104,775 103,199 104,775
Tangible assets 129,144 125,604 119,191 127,976 117,406 167,917 127,000 131,015 118,363 131,015
Short-term debt 4,993 7,205 7,542 4,849 4,369 3,933 2,735 4,439 2,152 4,439
Long-term debt 46,959 55,051 45,252 50,303 47,618 89,658 110,536 108,949 107,617 108,949
Total liabilities 160,646 185,525 181,436 194,491 192,065 235,262 220,410 226,451 208,851 226,451
Tangible equity -31,502 -59,921 -62,245 -66,515 -74,659 -67,345 -93,410 -95,436 -90,488 -95,436
EBIT/capital employed 3% 19% 17% 16% 16% 38% 24% 25% 38% 49%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$60

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Among largest communications services providers in the world. Large capex requirements. In 2014, Verizon recorded D&A of
Verizon operates in two segments, wireless and wireline. The $16.5 billion and spent $17.5 billion on capital investments, with
wireless segment is the largest wireless service provider in the U.S., FCF of $13.1 billion. Due to the large amount of depreciation
as measured by subscribers and revenue. Verizon Wireless had 108 relative to net income, Verizon is forced to spend a large portion of
million retail connections at yearend 2014 and generated revenue of cash flow on capital investments that maintain the competitiveness
$88 billion in 2014, representing 69% of company revenue. The of the business. While investments in new technologies, such as 4G,
segment provides wireless services across one of the most extensive may appear to be “growth” capex, they may be more appropriately
wireless networks in the U.S. and has the largest 3G and 4G Long- considered maintenance capex as they are required merely to keep
Term Evolution (LTE) technology networks of any U.S. service Verizon competitive in the evolving wireless communications
provider.* Formerly known as Bell Atlantic, the company was services market. If technology alternatives or price competition
incorporated in 1983 and began doing business as Verizon in 2000 change Verizon’s profit model for the worse, management may feel
following the GTE merger. The company has ~177,000 employees. the need to keep spending heavily on capex, even if such capital
Complete ownership of wireless segment gives Verizon greater spending may not yield returns in excess of the cost of capital.
strategic flexibility and focus management squarely on growing the Negative tangible equity and large amount of debt. At March 31,
company’s most important business. Verizon Wireless (aka Cellco Verizon had total equity of $11 billion, goodwill of $23 billion,
Partnership) was formed as a JV in 2000 through the combination intangible assets of $6 billion, and wireless licenses of $86 billion,
of the U.S. wireless assets Verizon and Vodafone. In 2013, Verizon resulting in a large tangible equity deficit. The company had cash
agreed to acquire Vodafone’s 45% interest in Verizon Wireless for and investments of $5 billion, short-term debt of $4 billion, long-
$130 billion in stock and cash. Completion of the deal in February term debt of $109 billion, and pension liabilities of $33 billion on
2014 gave Verizon 100% ownership of Wireless. Verizon’s share the same date. While net debt to adjusted EBITDA amounts to a
count has grown to 4.2 billion, from 2.9 billion prior to the deal. manageable 2.5x, the fact is that shareholders rely on spectrum
Substantially completed deployment of 4G LTE network, with value realization (via FCF) in order to retain and grow the value of
capex now focused on adding capacity and density to the network. their investment. Given the competitive nature of the wireless
The company’s 4G LTE network is available to 98+% of the U.S. communications business and long-term technology-based threats,
population in 500+ markets with 300+ million people, including the absence of asset-based protection increases downside risks.
those in areas served by Verizon’s LTE in Rural America partners
SELECTED OPERATING DATA
(under this program, the company works with wireless carriers in FYE December 31 2010 2011 2012 2013 2014
rural areas to build and operate a 4G LTE network using each Employees (‘000) 194 194 183 177 177
carrier’s network assets and Verizon’s core 4G LTE equipment and Revenue ($bn) 106.6 110.9 115.8 120.6 127.1
700 MHz C Block and Advanced Wireless Services spectrum). In Wireless 61% 63% 66% 68% 70%
2014, Verizon deployed AWS spectrum in the 4G LTE network. Wireline 39% 37% 34% 32% 30%
This additional bandwidth, branded as XLTE, provides additional Operating margin – wireless 30% 26% 29% 32% 31%
network capacity and is currently available in 400+ markets. Nearly Operating margin – wireline 2% 2% 0% 1% 3%
all 4G LTE devices sold by Verizon are able to operate on XLTE. % of revenue by type:
Acquired additional spectrum in early 2015. Verizon has licenses Wireless – service 53% 53% 56% 58% 58%
to portions of the 800 MHz band (cellular spectrum), the 1800-1900 Wireless – equipment 7% 10% 11% 10% 12%
MHz band (PCS spectrum), portions of the 700 MHz upper C band, Wireline – mass markets 16% 15% 15% 15% 14%
Wireline – global enterprise 15% 14% 13% 12% 11%
and AWS spectrum in the 1700 and 2100 MHz bands, covering Wireline – global wholesale 8% 7% 6% 6% 5%
nearly all of the U.S. population. In January, the FCC auctioned off Operating statistics – retail postpaid wireless:
65 MHz of spectrum (AWS-3 band). Verizon was the high bidder Connections (mn) 83 87 93 97 102
on 181 licenses for a purchase price of $10.4 billion (paid in Q1). Net additions in period (mn) 2.5 4.3 5.0 4.1 5.5
At $2.71 per MHz per POP, the cost of this spectrum was materially Churn rate 1.0% 1.0% 0.9% 1.0% 1.0%
higher than spectrum acquired in 2006 and 2011. However, lower Revenue per account (avg) ($) 126 135 144 154 160
capex and opex per MB of capacity justifies the relatively higher Accounts (mn) 34 35 35 35 36
spectrum expense, according to management, which has stated that Connections per account 2.4 2.5 2.6 2.8 2.9
Verizon “achieved auction results in a disciplined manner.” While Return on capital employed 1 22% 24% 26% 31% 32%
1
Adjusted for unusual items of -$4.3 billion in 2010, -$6.0 billion in 2011, -$7.8 billion in
the company sees “no need” for further large spectrum acquisitions, 2012, $6.5 billion in 2013, and -$7.1 billion in 2014.
it is “open to additional primary and secondary opportunities.”
RATINGS
Strategic deals keep balance sheet intact despite $10+ billion VALUE Intrinsic value higher than market quotation? 
spectrum acquisition and $5 billion “accelerated share repurchase.” SAFETY Low risk of permanent capital loss? 
Verizon has monetized certain non-core assets, including a sale- MOAT Able to sustain high returns on capital? 
leaseback of tower assets of $5+ billion and a wireline property sale MANAGEMENT Capable and properly incentivized team? 
that delivers $10+ billion, with completion expected in H1 2016. CAPITALIZATION Strong, deleveraged balance sheet? 
*
Verizon’s primary network technologies are 4G LTE and 3G CDMA. 4G LTE PERFORMANCE Business fundamentals improving? 
provides higher data throughput at a lower cost compared to 3G technologies.
MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Following last year’s deal with Vodafone, Verizon owns 100% of Verizon Wireless, the largest mobile communications services provider
in the U.S., with 108 million retail connections and $88 billion in revenue. Wireless is Verizon’s “crown jewel,” driving profitability and
growth. A $10+ billion spectrum acquisition and continued capital spending on the network position Wireless for continued leadership.
While scale gives the company a competitive advantage, we do not view such advantage as reflective of an enduring competitive moat.
Verizon will need to keep capex fairly high in order to remain competitive. The leveraged trailing FCF yield of ~6% does not entice us to
seriously consider Verizon equity. FCF could grow if capex slows, but we do not view FCF growth as a high-confidence long-term bet.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

VERIZON – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on LTM revenue and average Based on LTM revenue and assumed Based on median consensus EPS
EBIT margin for past seven fiscal years normalized EBIT margin estimate for FYE December 31, 2015
▼ ▼ ▼
TTM net sales: $128 billion TTM net revenue: $128 billion Consensus FY15E EPS: $3.84 (‡)
multiplied by multiplied by minus
Average 7-year EBIT margin: 18.8% Assumed operating margin: 22.0% Assumed upside/downside to
equals equals FY15 EPS estimate: 5% * $3.84
Estimated EBIT: $24 billion Est. operating income: $28 billion equals
multiplied by multiplied by Revised FY15 EPS estimate: $4.03
Assumed fair value multiple of EBIT: Assumed fair value multiple: multiplied by
6.0x 12.0x Corresponding industry P/E: 16.8x (*)
equals equals equals
Estimated fair enterprise value of Estimated fair enterprise value of Industry multiple-implied fair value:
Verizon: $145 billion Verizon: $339 billion $276 billion ($68 per share)
plus plus multiplied by
Cash, ST investments: $4.9 billion Cash, ST investments: $4.9 billion Assumed VZ multiple as a
minus minus percentage of the industry multiple:
Total debt: $113 billion Total debt: $113 billion 110%
equals equals (17.5x fair value P/E multiple)
Estimated fair value of the common Estimated fair value of the common equals
equity of Verizon: equity of Verizon: Estimated fair value of the common
$36 billion, or $8.90 per share $230 billion, or $56 per share equity of Verizon:
(based on 4.1 billion shares out) (based on 4.1 billion shares out) $304 billion ($74 per share)
82% downside from the recent 12% upside to the recent (based on 4.1 billion shares out)
stock price ($50 per share) stock price ($50 per share) 48% upside to the recent
(*) Represents Communications Services industry median multiple. stock price ($50 per share)
(‡) The FY15 consensus EPS estimate of $3.84 has been revised upward by 5% from $3.66 three months ago. Source: Company filings, The Manual of Ideas.

VERIZON – ANALYSIS OF SELECTED COMPARABLE COMPANIES

Trading Data Public Market Valuation Operating Performance Tang.
(Click to visit Stock ∆ to Reach Tang. LTM EPS Yield LTM Rev./ ∆ Rev. % LTM Rev. Equity/
relevant websites) Price 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
AT&T / T 34.42 -39% 22% 178,646 270,655 n/m 6% 3% 7% 7% 49% 524 2% 0% 53% 11% -47%
BT Group / BT 70.00 -86% 2% 59,088 69,279 n/m 8% 5% 6% 6% 39% 310 -2% -3% n/m 23% -15%
Deutsche Telekom / DTEGY 18.50 -48% 25% 83,160 130,598 n/m 2% 4% 4% 4% 54% 308 7% 9% 38% 8% -34%
Orange / ORAN 16.48 -45% 134% 43,368 73,828 n/m -1% 3% 7% 7% 60% 283 -55% -8% 56% 17% -14%
Sprint / S 5.22 -27% 120% 20,660 49,413 n/m 2% neg. neg. neg. 71% 976 108% -2% 45% 10% -100%
T-Mobile U.S. / TMUS 33.85 -79% 5% 27,433 49,252 n/m -18% 1% 3% 5% 62% 677 14% 13% 48% 5% -36%
Telekom Indonesia / TLK 41.29 -60% 21% 20,378 20,608 25% 4% 6% 7% 7% 34% 274 8% 11% 70% 32% 47%
Vodafone / VOD 34.93 -55% 21% 93,594 124,226 39% -2% 2% 3% 2% 49% 653 -54% 12% 26% 27% 32%
Verizon / VZ 50.41 -57% 8% 205,597 314,052 n/m 4% 5% 8% 8% 41% 728 5% 4% 60% 16% -73%
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

VERIZON – CALCULATION of ADJUSTED EPS

Pension-related expenses
masked the underlying earning
power of the business in 2014

*
Results above are adjusted for non-operational items. Source: Company presentation dated January 22, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

VERIZON – REVENUE ($ in billions) VERIZON – ADJUSTED EPS

VERIZON – WIRELESS REVENUE ($ in billions) VERIZON – WIRELESS EBITDA ($ in billions)

Wireless growth
remains decent

VERIZON – RETAIL POSTPAID ARPA and EDGE BILLINGS VERIZON – MORE EVERYTHING ACCOUNTS

VERIZON – RETAIL CONNECTIONS (in millions) VERIZON – RETAIL NET ADDDS (in thousands)

VERIZON – WIRELINE REVENUE ($ in billions) VERIZON – WIRELINE EBITDA ($ in billions)

Source for the above charts: Company presentation dated January 22, 2015.

Wireline revenue and EBITDA have held up surprisingly well

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Wabco Holdings (WBC)

Consumer Cyclical: Auto & Truck Parts ROCHESTER HILLS MI www.wabco-auto.com
WABCO is a leading innovator and global supplier of technologies that improve the safety and efficiency of commercial vehicles.
Trading Data Consensus EPS Estimates Valuation
Price: $125.92 (as of 5/1/15) Month # of P/E FYE 12/31/14 26x
52-week range: $85.22–$133.31 Latest Ago Ests P/E FYE 12/31/15 21x
Market value: $7.4 billion This quarter $1.47 $1.56 15 P/E FYE 12/30/16 18x
Enterprise value: $7.3 billion Next quarter 1.49 1.57 14 P/E FYE 12/30/17 15x
Shares outstanding: 58.7 million FYE 12/31/15 5.90 6.16 15 EV/ LTM revenue 2.6x
Ownership Data FYE 12/30/16 7.08 7.29 15 EV/ LTM EBIT 22x
Notable holders: CEO Jacques Esculier <1% FYE 12/30/17 8.25 8.39 7 P / tangible book 22.0x
Other insiders <1% | Berkshire 7% Greenblatt Criteria
LT growth 20.0% 20.0% 1
T. Rowe 5% | Times Square 4% | FPR 4%
EdgePoint 3% | FMR 3% | Findlay Park 3% EPS Surprise Actual Est. LTM EBIT yield 5%
Insider buys (last six months): 10 / sells: 6 4/23/15 $1.41 $1.43 LTM pre-tax ROC 45%

Operating Performance and Financial Position

($ millions, except Fiscal Years Ended December 31, LTME FQE FQE
per share data) 2008 2009 2010 2011 2012 2013 2014 3/31/15 3/31/14 3/31/15
Revenue 2,588 1,492 2,176 2,794 2,477 2,721 2,851 2,774 730 652
Gross profit 694 328 615 808 740 814 883 868 218 214
Adjusted operating income 281 1 217 371 332 345 358 332 84 86
Adjusted pretax income 289 29 222 382 344 366 380 362 88 93
Adjusted net income 248 34 174 335 310 378 314 294 69 72
Adjusted diluted EPS 3.81 0.54 2.69 5.02 4.85 6.05 5.24 4.94 1.13 1.23
Shares out (avg) 65 64 65 67 64 62 60 59 61 58
Cash from operations 325 146 -190 332 358 666 314 355 46 87
Capex 84 66 74 105 101 122 136 129 23 16
Free cash flow 241 80 -264 227 258 544 179 226 23 71
… % of revenue:
Gross profit 26.8% 22.0% 28.3% 28.9% 29.9% 29.9% 31.0% 31.3% 29.9% 32.8%
R&D 3.6% 5.0% 3.9% 3.8% 4.2% 4.4% 5.1% 5.3% 5.0% 5.9%
Adjusted operating income 10.9% 0.0% 10.0% 13.3% 13.4% 12.7% 12.6% 12.0% 11.5% 13.1%
Cash, investments 393 350 67 102 175 528 412 425 397 425
Receivables 334 264 296 355 343 398 503 526 483 526
PP&E, net 316 368 350 357 389 423 425 394 423 394
Intangible assets 390 443 419 400 411 426 499 447 581 447
Tangible assets 1,386 1,273 1,106 1,224 1,336 1,967 1,933 1,934 1,947 1,934
Debt 250 156 114 78 76 87 315 364 146 364
Total liabilities 1,175 1,076 1,113 1,036 1,071 1,240 1,591 1,598 1,394 1,598
Tangible equity 211 197 -6 188 265 727 342 336 552 336
TBV / tangible assets 15% 15% -1% 15% 20% 37% 18% 17% 28% 17%
TBV per share 3.25 3.08 -0.10 2.81 4.15 11.64 5.71 5.76 9.02 5.76
EBIT/capital employed 47% -3% -39% 76% 53% 94% 46% 45% 55% 54%

Ten-Year Stock Price Performance and Trading Volume Dynamics

$140

$120

$100

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

INVESTMENT HIGHLIGHTS INVESTMENT RISKS & CONCERNS

Leading maker of commercial vehicle control systems, including Currency impact and volatile global truck and bus market
advanced braking, stability, suspension, transmission control and air weighing on near-term results. Reported sales declined 10.6%
compressing and processing systems, that improve performance and while constant-currency sales rose 3.8% in Q1. Reported and
safety and reduce vehicle operating costs. Wabco products are used adjusted EPS rose from $1.12 to $1.22 and $1.28 to $1.41,
in two-thirds of commercial vehicles with advanced control systems respectively, in Q1, reflecting good operating execution amid
as well as in sophisticated applications in cars and SUVs. Wabco currency headwinds and lower demand in South America. The
offers a broad, well-balanced product and systems portfolio, with no company expects truck and bus production to decline 10-20% in
category accounting for more than 15% of revenue. Core products China and 15-25% in Brazil this year amid 3-8% growth in Europe
include pneumatic anti-lock braking systems, transmission systems, (Western Europe starting to recover), 5-10% growth in the U.S., and
air disc brakes, air compressors, and air control valves for heavy 15-20% growth in India (accounts for improved GDP outlook).
and medium-sized trucks, trailers, and buses. Wabco provides Wabco’s investment in a manufacturing site in South Carolina and a
components and systems through the life of a vehicle, from OEM new vehicle development and testing facility in Michigan do not
design and development to the aftermarket (one-quarter of revenue). appear shrewd in the context of a strong dollar, but this “timing
Wabco operates 21 manufacturing locations on four continents and issue” hardly affects the long-term soundness of the decision.
has 11,400 employees, including 1,800+ engineers, in 38 countries. Demand dependent on commercial truck production, which
Benefiting from growing electronics content in commercial generally follows a multi-year cyclical pattern. In addition, rising
vehicle control systems. Wabco has grown sales of electronically fuel prices and other factors have made railroads more competitive
controlled products and systems, consistent with the market trend, versus trucking companies, presenting a long-term risk to truck
as OEMs look to improve safety and performance through advanced production. Any sustained decline in trucking would impact
functionality. Wabco also exploits a trend toward environmental demand, forcing Wabco to rely entirely on market share gains and
sustainability, as it innovates technology that increases fuel acquisitions for growth. In addition, Wabco is disproportionately
efficiency, reduces vehicle weight, and optimizes energy recovery. sensitive to European demand, as Europe accounts for ~58% of
Wabco has only one key competitor, Knorr, which has comparable revenue (Europe’s share of truck and bus production is only ~18%).
technical capabilities and commercial vehicle-related sales. Knorr is
strong in North America, while Wabco leads in emerging markets. SELECTED OPERATING DATA
FYE December 31 2010 2011 2012 2013 2014
Strong operating execution, with management relentlessly ∆ revenue 46% 28% -11% 10% 5%
pursuing efficiencies. Each quarter, the company comments on the ∆ gross profit 88% 31% -8% 10% 8%
period’s productivity gain ($17 million in Q1). We find this focus to Employees (end) 9,862 10,902 10,657 10,860 11,409
be a key differentiator because it enables Wabco to reinvest in Revenue ($mn) 2,176 2,794 2,477 2,721 2,851
product innovation and repurchase shares while staying competitive …from the U.S. 8% 9% 11% 11% 13%
on price. The company has gained share in the global commercial …from Europe 61% 62% 60% 61% 59%
vehicle market over the long term. From 2010-2014, Wabco grew OEM as % of revenue 74% 77% 75% 75% 74%
sales 16% while market growth averaged 8%. The differential Aftermarket as % of revenue 26% 23% 25% 25% 26%
resulted in a sales addition of ~$1 billion. CEO Jacques Esculier is % of sales by major end market:
highly regarded in the industry and the investment community. OEMs – truck and bus 63% 64% 62% 62% 60%
OEMs – trailer 7% 9% 9% 9% 10%
Guiding for adjusted EPS of $5.60-6.00 in 2015, down from prior OEMs – car 4% 4% 4% 4% 4%
guidance of $5.80-6.30, due largely to currency, pension, and Aftermarket 26% 23% 25% 25% 26%
interest headwinds. Constant-currency revenue should grow 5-10% EBIT margin (adjusted)1 10% 13% 13% 13% 13%
in 2015 (down from prior guidance of 6-11% growth), with adjusted D&A as % of revenue 4% 3% 3% 3% 4%
operating margin of 14.2-15.1% (in line with prior guidance). The Capex as % of revenue 3% 4% 4% 4% 5%
company has managed to mostly offset non-operating headwinds Adjusted EBIT1 ($mn) 217 371 332 345 358
due to productivity gains driven by the “Wabco operating system.” / Capital employed ($mn) 469 519 609 660 735
= Return on capital employed 46% 71% 55% 52% 49%
Cash-generative business, with FCF approximating adjusted ∆ shares out (avg) 1% 3% -4% -2% -4%
net income. Wabco generated adjusted FCF of $75 million in 1
Adjusted for unusual items of -$400 million in 2010, $23 million in 2011, -$7.7 million in
1Q15, representing 90% conversion of net income into FCF. For the 2012, $275 million in 2013, and -$23 million in 2014.
full year 2015, management estimates FCF conversation at 80-90% RATINGS
(excluding streamlining, separation, and acquisition items). Cash VALUE Intrinsic value higher than market quotation? 
flow should continue to benefit from NOLs until around 2018. SAFETY Low risk of permanent capital loss? 
Returning capital via share repurchases. The company bought MOAT Able to sustain high returns on capital? 
back $360 million of stock in 2014, ~5% of recent market value, MANAGEMENT Capable and properly incentivized team? 
following repurchases of $240 million in 2013 and $200 million in CAPITALIZATION Strong, deleveraged balance sheet? 
2012. Continuing this trend, Wabco repurchased $62 million of PERFORMANCE Business fundamentals improving? 
stock in 1Q15. Buybacks have approximated FCF from 2011-2014. MACRO Benefiting from economic and secular trends? 
THE BOTTOM LINE
Wabco has built a competitively advantaged business in the commercial vehicle market, primarily providing control systems to OEMs
(three-fourths of sales). Key customers are large, increasingly global, and relatively few in number due to industry consolidation. Still, the
two largest customers, Daimler and Volvo, accounted for 11% and 10% of revenue—not the level of customer concentration that would put
Wabco in a weak negotiating position. While the commercial vehicle market is slow-growing at best, Wabco has kept growing through
market share gains and global expansion. The company’s advanced control systems include braking systems, transmission systems, and
other mission-critical systems, making OEMs reluctant to compromise on quality. This supports Wabco’s attractive economics, with strong
returns on capital and FCF generation of 80-90% of adjusted net income. The recent strong stock price performance, despite slightly
lowered guidance for 2015, leaves us on the sidelines, as the shares offer a 5-6% forward EPS yield (FCF yield is modestly lower).

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

WABCO HOLDINGS – EQUITY FAIR VALUE UNDER SELECTED VALUATION SCENARIOS

Conservative Base Case Aggressive
Based on LTM revenue and average Based on LTM revenue and assumed Based on median consensus EPS
EBIT margin for past seven fiscal years normalized EBIT margin estimate for FYE December 31, 2015
▼ ▼ ▼
TTM net sales: $2.8 billion TTM net revenue: $2.8 billion Consensus FY15E EPS: $5.90 (‡)
multiplied by multiplied by minus
Average 7-year EBIT margin: 10.4% Assumed operating margin: 14.0% Assumed upside/downside to
equals equals FY15 EPS estimate: 5% * $5.90
Estimated EBIT: $288 million Est. operating income: $390 million equals
multiplied by multiplied by Revised FY15 EPS estimate: $6.19
Assumed fair value multiple of EBIT: Assumed fair value multiple: multiplied by
12.0x 18.0x Corresponding industry P/E: 16.6x (*)
equals equals equals
Estimated fair enterprise value of Estimated fair enterprise value of Industry multiple-implied fair value:
WABCO Holdings: $3.5 billion WABCO Holdings: $7.0 billion $6.0 billion ($103 per share)
plus plus multiplied by
Cash, ST investments: $430 million Cash, ST investments: $430 million Assumed WBC multiple as a
minus minus percentage of the industry multiple:
Total debt: $360 million Total debt: $360 million 146%
equals equals (20.0x fair value P/E multiple)
Estimated fair value of the common Estimated fair value of the common equals
equity of WABCO Holdings: equity of WABCO Holdings: Estimated fair value of the common
$3.5 billion, or $60 per share $7.1 billion, or $120 per share equity of WABCO Holdings:
(based on 59 million shares out) (based on 59 million shares out) $8.8 billion ($150 per share)
52% downside from the recent 5% downside from the recent (based on 59 million shares out)
stock price ($126 per share) stock price ($126 per share) 19% upside to the recent
(*) Represents Auto & Truck Parts industry median multiple. stock price ($126 per share)
(‡) The FY15 consensus EPS estimate of $5.90 has been revised down by 4% from $6.16 three months ago. Source: Company filings, The Manual of Ideas.

WABCO HOLDINGS – SELECTED CASH FLOW DATA ($ in millions)

Volatile but
strongly
positive FCF

WABCO HOLDINGS – MANAGEMENT GUIDANCE, FY2015 ($ in millions)

Source for the above tables and chart: Company presentation dated February 26, 2015.

© 2008-2015 by BeyondProxy LLC. All rights reserved. EPS

JOINgrowth
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 Value-oriented Equity Investment Ideas for Sophisticated Investors

WABCO – CONVERSION and CAPITAL ALLOCATION ($ in millions)

Wabco has one major competitor,

WABCO – COMPETITIVE OVERVIEW particularly in North America
WABCO KNORR

WABCO – MANAGEMENT’S FINANCIAL FRAMEWORK

Wabco maintains ambitious

financial targets
WABCO– ADJUSTED OPERATING MARGIN

Management sees
upside potential for
operating margin

Projections at 2014 constant FX. Source for the above charts: Company presentation dated February 26, 2015.

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Ten 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 WellCare WCG 77.88 -29% 22% 3,430 3,017 .2x 387% infinite 64% 2.8x <1% 12 / 14
2 Perion Network PERI 3.53 -12% 220% 244 168 .4x 341% infinite 18% 3.8x <1% -/-
3 Argan AGX 32.24 -19% 24% 472 138 .4x 46% infinite 32% 2.9x 3% 3/4
4 PDL BioPharma PDLI 6.87 -5% 49% 1,127 1,285 2.2x 43% 2407% 36% 5.6x <1% 6/-
5 Monster Worldwide MWW 5.74 -41% 22% 523 641 .8x 50% 1132% n/m n/m 6% 3/5
6 Callwave CALL 6.59 -2% 191% 118 44 .4x 31% infinite 72% >9.9x <1% -/-
7 Liquidity Services LQDT 9.26 -21% 94% 278 203 .4x 54% 632% n/m 2.2x <1% -/2
8 Steiner Leisure STNR 48.70 -26% 3% 636 704 .8x 37% 580% n/m n/m 9% 12 / 12
9 AOL AOL 40.60 -20% 23% 3,180 3,143 1.2x 53% 303% 37% 5.0x 2% 7/6
10 DepoMed DEPO 23.86 -59% 18% 1,425 1,109 2.8x 21% infinite 38% 4.9x <1% 4/4
11 Apollo Group APOL 16.84 -2% 105% 1,812 1,113 .4x 35% 304% 39% 2.5x <1% 1/7
12 CTC Media CTCM 3.35 -4% 244% 522 382 .5x 55% 217% 33% 2.2x <1% -/-
13 ITT Educational ESI 4.61 -21% 506% 109 124 .1x 165% 184% n/m .9x <1% -/9
14 Blucora BCOR 15.55 -19% 31% 636 566 1.0x 21% 645% n/m >9.9x 1% 9/6
15 Unisys UIS 21.86 -14% 40% 1,091 913 .3x 16% infinite 56% n/m 1% 19 / 12
16 Molina Healthcare MOH 59.55 -35% 14% 2,973 1,319 .1x 15% infinite 54% 4.6x 4% 16 / 18
17 Chicago Bridge CBI 49.87 -36% 68% 5,420 7,347 .6x 15% infinite 30% n/m 1% 12 / 10
18 Boulder Brands BDBD 9.47 -18% 65% 580 854 1.7x 23% 196% n/m n/m 3% 8/1
19 VAALCO Energy EGY 2.30 -8% 320% 134 80 .6x 178% 117% n/m .7x 2% 10 / 5
20 Keysight Tech KEYS 33.61 -19% 16% 5,662 5,874 2.0x 23% 170% 16% >9.9x <1% 13 / 8
21 GameStop GME 39.17 -19% 19% 4,221 3,967 .4x 16% 282% 35% 9.6x 2% 10 / 12
22 Landauer LDR 32.83 -15% 49% 314 439 2.8x 21% 156% n/m n/m 2% 14 / 1
23 Time Inc. TIME 22.48 -18% 15% 2,462 3,318 1.0x 15% 335% 29% n/m <1% 15 / 1
24 pSivida PSDV 3.97 -14% 24% 117 81 2.9x 13% infinite 1% 3.9x <1% -/-
25 H&R Block HRB 31.55 -14% 13% 8,684 8,093 2.4x 13% infinite 34% >9.9x <1% -/3
26 Leidos Holdings LDOS 41.89 -24% 13% 3,110 3,833 .8x 24% 134% n/m n/m 1% 12 / 8
27 Tessera Technologies TSRA 37.08 -46% 18% 1,957 1,522 5.5x 13% 2587% n/m 4.2x 2% 3/9
28 Black Box BBOX 19.99 -3% 27% 307 450 .5x 43% 99% n/m 4.9x <1% -/1
29 Navigant Consulting NCI 14.29 -13% 27% 689 866 1.0x 27% 116% n/m n/m <1% 6/4
30 Roundy’s RNDY 5.00 -44% 38% 246 831 .2x 39% 97% n/m n/m 6% 15 / 9
31 * Curtiss-Wright CW 72.61 -17% 7% 3,463 4,214 1.6x 28% 104% 7% >9.9x <1% 12 / 8
32 Weight Watchers WTW 8.55 -22% 249% 489 2,546 1.7x 12% infinite 37% n/m <1% 11 / 2
33 * Stryker SYK 93.40 -17% 5% 35,343 34,316 3.5x 15% 211% 56% >9.9x <1% 16 / 10
34 * Microsoft MSFT 48.66 -21% 3% 393,598 330,310 3.5x 12% 4391% 25% 6.4x 3% 8/7
35 * Capella Education CPLA 53.47 -1% 46% 653 520 1.2x 13% 406% 40% 3.6x <1% 4/5
36 Juniper Networks JNPR 26.91 -32% 0% 10,920 10,659 2.4x 13% 392% n/m 6.9x <1% 7/8
37 * Kaiser Aluminum KALU 81.68 -19% 1% 1,401 1,550 1.1x 42% 90% n/m 2.0x 2% 10 / 11
38 Terra Nitrogen TNH 139.73 -35% 14% 2,585 2,542 3.9x 15% 156% n/m 8.5x <1% 3/3
39 Hewlett-Packard HPQ 33.80 -8% 22% 61,434 67,576 .6x 16% 132% 23% n/m <1% 22 / 13
40 * Performant Financial PFMT 2.92 -1% 276% 144 176 .9x 16% 120% 45% n/m 3% 1/-
41 NetApp NTAP 36.69 -9% 19% 11,438 7,681 1.2x 11% infinite 20% 4.8x <1% 4/6
42 TiVo TIVO 11.07 -7% 29% 1,057 667 1.5x 11% infinite 42% 6.7x 3% 6/6
43 Symantec SYMC 25.14 -20% 9% 17,152 15,507 2.3x 11% infinite 26% n/m <1% 6/6
44 Neustar NSR 30.10 -32% 9% 1,667 2,109 2.1x 14% 141% 31% n/m 1% 6/6
45 Gold Resource GORO 3.46 -24% 84% 188 162 1.4x 20% 94% 48% 2.1x <1% 2/-
 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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

“Magic Formula,” Based on This Year’s 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 Virgin America VA 28.53 -7% 59% 1,232 952 .6x 15% infinite 2% 2.5x 32% 12 / 7
2 PDL BioPharma PDLI 6.87 -5% 49% 1,127 1,285 2.2x 32% 2407% 36% 5.6x <1% 6/-
3 Perion Network PERI 3.53 -12% 220% 244 168 .4x 14% infinite 18% 3.8x <1% -/-
4 Callwave CALL 6.59 -2% 191% 118 44 .4x 13% infinite 72% >9.9x <1% -/-
5 King Digital KING 15.90 -37% 34% 5,017 4,053 1.8x 12% infinite 25% 5.5x <1% -/-
6 POZEN POZN 8.01 -26% 21% 259 216 6.7x 10% infinite n/m 5.5x 3% 8/5
7 ITT Educational ESI 4.61 -21% 506% 109 124 .1x 30% 184% n/m .9x <1% -/9
8 Meritage Homes MTH 43.30 -27% 15% 1,715 2,531 1.1x 9% infinite 31% 1.5x 2% 13 / 6
9 CTC Media CTCM 3.35 -4% 244% 522 382 .5x 11% 217% 33% 2.2x <1% -/-
10 Gilead Sciences GILD 105.01 -27% 11% 155,736 158,012 6.3x 9% 484% 19% >9.9x <1% 11 / 8
11 GameStop GME 39.17 -19% 19% 4,221 3,967 .4x 10% 282% 35% 9.6x 2% 10 / 12
12 IDT Corp. IDT 17.04 -23% 36% 400 254 .2x 8% infinite 2% 3.1x 2% 10 / 6
13 TRI Pointe Homes TPH 14.41 -13% 21% 2,329 3,320 1.9x 8% infinite 34% 1.8x <1% 11 / 9
14 Blucora BCOR 15.55 -19% 31% 636 566 1.0x 8% 645% n/m >9.9x 1% 9/6
15 SuperCom SPCB 12.37 -43% 14% 170 165 5.6x 10% 123% 22% >9.9x <1% -/-
16 NetApp NTAP 36.69 -9% 19% 11,438 7,681 1.2x 8% infinite 20% 4.8x <1% 4/6
17 Cisco Systems CSCO 29.13 -23% 4% 148,701 116,201 2.4x 7% infinite 19% 4.9x <1% 18 / 16
18 Magic Software MGIC 6.56 -19% 28% 286 205 1.2x 9% 117% 12% 2.9x <1% -/-
19 Spirit Airlines SAVE 69.49 -24% 23% 5,072 4,655 2.3x 7% infinite 36% 4.7x <1% 15 / 10
20 Gold Resource GORO 3.46 -24% 84% 188 162 1.4x 10% 94% 48% 2.1x <1% 2/-
21 D.R. Horton DHI 25.79 -25% 14% 9,455 12,703 1.4x 7% infinite 35% 1.8x 8% 7/4
22 pSivida PSDV 3.97 -14% 24% 117 81 2.9x 7% infinite 1% 3.9x <1% -/-
23 Keysight Tech KEYS 33.61 -19% 16% 5,662 5,874 2.0x 8% 170% 16% >9.9x <1% 13 / 8
24 Pilgrim’s Pride PPC 25.44 -27% 28% 6,607 6,035 .7x 13% 77% 36% 3.0x <1% 2/2
25 EMC EMC 27.12 -8% 14% 53,612 52,657 2.1x 7% infinite 23% >9.9x <1% 14 / 14
26 Black Box BBOX 19.99 -3% 27% 307 450 .5x 8% 99% n/m 4.9x <1% -/1
27 Brocade Comms BRCD 11.65 -32% 11% 4,913 4,638 2.1x 8% 107% 31% 5.8x <1% 12 / 7
28 Apple AAPL 128.95 -36% 4% 742,885 753,660 3.6x 7% 11434% 26% 6.2x <1% 12 / 7
29 * Buckle BKE 45.63 -13% 17% 2,215 2,055 1.8x 8% 126% 37% 6.2x 2% 17 / 15
30 * Atento ATTO 13.07 -31% 7% 962 1,376 .6x 9% 85% n/m >9.9x <1% -/-
31 Triple-S Management GTS 19.17 -19% 33% 527 492 .2x 7% infinite 1% .6x 2% 11 / 1
32 Qualcomm QCOM 68.42 -9% 20% 111,495 97,036 3.5x 7% 450% 17% 3.6x <1% 19 / 14
33 * Vonage VG 4.71 -34% 10% 1,007 1,059 1.2x 7% infinite 53% >9.9x 7% 16 / 9
34 Taro Pharma TARO 141.41 -27% 22% 6,056 5,391 6.9x 8% 114% 15% 5.1x <1% -/-
35 * American Public Ed. APEI 27.66 -5% 37% 474 359 1.0x 8% 99% 38% 2.5x 3% 11 / 7
36 Fluor FLR 58.70 -12% 36% 8,604 7,526 .4x 8% 97% 30% 2.9x <1% 11 / 12
37 * Liquidity Services LQDT 9.26 -21% 94% 278 203 .4x 7% 632% n/m 2.2x <1% -/2
38 * Greenbrier GBX 62.33 -32% 26% 1,645 2,032 .9x 9% 66% 33% 3.5x 1% 7/9
39 Northern Tier Energy NTI 25.86 -24% 14% 2,401 2,676 .5x 14% 60% 3% 6.5x <1% 3/3
40 * Pulte Homes PHM 19.62 -16% 19% 7,154 8,027 1.4x 7% infinite 31% 1.5x <1% 8/6
41 * CSG Systems CSGS 29.30 -21% 6% 960 1,014 1.3x 8% 89% 40% >9.9x 3% 5/6
42 * Broadcom BRCM 45.04 -35% 4% 26,931 25,573 3.0x 7% 290% 3% 5.6x 1% 12 / 12
43 * Qlogic QLGC 14.38 -39% 7% 1,256 968 1.9x 8% 78% >99% 2.6x <1% 2/2
44 * Polycom PLCM 13.10 -21% 9% 1,769 1,382 1.0x 7% 113% 14% 4.0x <1% 10 / 6
45 * DeVry DV 30.04 0% 65% 1,914 1,508 .8x 8% 66% 13% 2.8x 2% 12 / 15
 Company website SEC Y! Price Charts Proxy Y!

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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

“Magic Formula,” Based on Next Year’s 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 Perion Network PERI 3.53 -12% 220% 244 168 .4x 18% infinite 18% 3.8x <1% -/-
2 Callwave CALL 6.59 -2% 191% 118 44 .4x 15% infinite 72% >9.9x <1% -/-
3 * Virgin America VA 28.53 -7% 59% 1,232 952 .6x 14% infinite 2% 2.5x 32% 12 / 7
4 King Digital KING 15.90 -37% 34% 5,017 4,053 1.8x 13% infinite 25% 5.5x <1% -/-
5 PDL BioPharma PDLI 6.87 -5% 49% 1,127 1,285 2.2x 11% 2407% 36% 5.6x <1% 6/-
6 ITT Educational ESI 4.61 -21% 506% 109 124 .1x 30% 184% n/m .9x <1% -/9
7 CTC Media CTCM 3.35 -4% 244% 522 382 .5x 14% 217% 33% 2.2x <1% -/-
8 Meritage Homes MTH 43.30 -27% 15% 1,715 2,531 1.1x 10% infinite 31% 1.5x 2% 13 / 6
9 TRI Pointe Homes TPH 14.41 -13% 21% 2,329 3,320 1.9x 10% infinite 34% 1.8x <1% 11 / 9
10 GameStop GME 39.17 -19% 19% 4,221 3,967 .4x 11% 282% 35% 9.6x 2% 10 / 12
11 POZEN POZN 8.01 -26% 21% 259 216 6.7x 9% infinite n/m 5.5x 3% 8/5
12 Gilead Sciences GILD 105.01 -27% 11% 155,736 158,012 6.3x 10% 484% 19% >9.9x <1% 11 / 8
13 Blucora BCOR 15.55 -19% 31% 636 566 1.0x 9% 645% n/m >9.9x 1% 9/6
14 * IDT Corp. IDT 17.04 -23% 36% 400 254 .2x 9% infinite 2% 3.1x 2% 10 / 6
15 Magic Software MGIC 6.56 -19% 28% 286 205 1.2x 11% 117% 12% 2.9x <1% -/-
16 SuperCom SPCB 12.37 -43% 14% 170 165 5.6x 11% 123% 22% >9.9x <1% -/-
17 Gold Resource GORO 3.46 -24% 84% 188 162 1.4x 17% 94% 48% 2.1x <1% 2/-
18 D.R. Horton DHI 25.79 -25% 14% 9,455 12,703 1.4x 9% infinite 35% 1.8x 8% 7/4
19 * VAALCO Energy EGY 2.30 -8% 320% 134 80 .6x 10% 117% n/m .7x 2% 10 / 5
20 Triple-S Management GTS 19.17 -19% 33% 527 492 .2x 8% infinite 1% .6x 2% 11 / 1
21 Black Box BBOX 19.99 -3% 27% 307 450 .5x 10% 99% n/m 4.9x <1% -/1
22 Spirit Airlines SAVE 69.49 -24% 23% 5,072 4,655 2.3x 8% infinite 36% 4.7x <1% 15 / 10
23 Taro Pharma TARO 141.41 -27% 22% 6,056 5,391 6.9x 9% 114% 15% 5.1x <1% -/-
24 * Atento ATTO 13.07 -31% 7% 962 1,376 .6x 10% 85% n/m >9.9x <1% -/-
25 NetApp NTAP 36.69 -9% 19% 11,438 7,681 1.2x 8% infinite 20% 4.8x <1% 4/6
26 * Pulte Homes PHM 19.62 -16% 19% 7,154 8,027 1.4x 8% infinite 31% 1.5x <1% 8/6
27 * Keysight Tech KEYS 33.61 -19% 16% 5,662 5,874 2.0x 8% 170% 16% >9.9x <1% 13 / 8
28 EMC EMC 27.12 -8% 14% 53,612 52,657 2.1x 8% infinite 23% >9.9x <1% 14 / 14
29 Brocade Comms BRCD 11.65 -32% 11% 4,913 4,638 2.1x 9% 107% 31% 5.8x <1% 12 / 7
30 Cisco Systems CSCO 29.13 -23% 4% 148,701 116,201 2.4x 8% infinite 19% 4.9x <1% 18 / 16
31 * Greenbrier GBX 62.33 -32% 26% 1,645 2,032 .9x 10% 66% 33% 3.5x 1% 7/9
32 CSG Systems CSGS 29.30 -21% 6% 960 1,014 1.3x 9% 89% 40% >9.9x 3% 5/6
33 Vonage VG 4.71 -34% 10% 1,007 1,059 1.2x 8% infinite 53% >9.9x 7% 16 / 9
34 Northern Tier Energy NTI 25.86 -24% 14% 2,401 2,676 .5x 12% 60% 3% 6.5x <1% 3/3
35 American Public Ed. APEI 27.66 -5% 37% 474 359 1.0x 8% 99% 38% 2.5x 3% 11 / 7
36 REX American REX 63.21 -18% 75% 499 362 .6x 14% 56% 32% 1.4x 2% -/1
37 * Argan AGX 32.24 -19% 24% 472 138 .4x 8% infinite 32% 2.9x 3% 3/4
38 * Autobytel ABTL 14.51 -46% 12% 129 126 1.2x 9% 72% 37% 2.9x 2% 10 / -
39 * Apple AAPL 128.95 -36% 4% 742,885 753,660 3.6x 7% 11434% 26% 6.2x <1% 12 / 7
40 * Synaptics SYNA 86.18 -35% 8% 3,171 3,078 2.0x 8% 110% 28% >9.9x <1% 9 / 10
41 * Qlogic QLGC 14.38 -39% 7% 1,256 968 1.9x 9% 78% >99% 2.6x <1% 2/2
42 Tucows TCX 17.98 -33% 10% 202 194 1.3x 7% infinite 33% >9.9x 1% 1/1
43 * Evolving Systems EVOL 9.45 -19% 21% 110 101 3.4x 8% 225% 33% 6.7x 3% 1/1
44 * Buckle BKE 45.63 -13% 17% 2,215 2,055 1.8x 8% 126% 37% 6.2x 2% 17 / 15
45 * Pilgrim’s Pride PPC 25.44 -27% 28% 6,607 6,035 .7x 9% 77% 36% 3.0x <1% 2/2
 Company website SEC Y! Price Charts Proxy Y!

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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Contrarian: Biggest YTD Losers (deleveraged & profitable)

Non-financial companies with no net debt, positive analyst estimates for next year’s 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) 2008 2013 2014 Change Revenue Book P/E Own. Sells
1 Sonus Networks SONS 7.89 390 307 0% -50% -60% -51% 1.1x 2.6x 24x 4% 15 / 7
2 Lumber Liquidators LL 27.11 734 690 157% -74% -59% -70% .7x 2.3x 16x <1% 10 / 8
3 Stratasys SSYS 36.71 1,869 1,469 241% -73% -56% -63% 2.0x 3.1x 19x <1% -/-
4 Apollo Group APOL 16.84 1,812 1,113 -78% -38% -51% -42% .4x 2.5x 15x <1% 1/7
5 VAALCO Energy EGY 2.30 134 80 -69% -67% -50% -74% .6x .7x 10x 2% 10 / 5
6 Zulily ZU 12.15 1,499 1,126 n/m -71% -48% -73% .9x 5.4x 29x <1% 6/3
7 Bio-Path BPTH 1.45 130 116 163% -64% -46% -40% >99x 9.5x 29x <1% -/-
8 Ardelyx ARDX 11.01 205 98 n/m n/m -42% 0% 3.1x 3.4x 8x 16% 10 / 14
9 * IGI Laboratories IG 5.22 276 224 988% 71% -41% 10% 6.0x 5.9x 113x 3% -/1
10 Career Education CECO 4.20 284 77 -77% -26% -40% -40% .1x 1.5x 47x <1% 8/7
11 Control4 CTRL 9.56 233 152 n/m -46% -38% -47% 1.0x 2.0x 12x <1% 2/3
12 * Caesars Acquisition CACQ 6.44 878 870 n/m -47% -38% -49% >99x .9x 4x <1% -/-
13 * A. H. Belo AHC 6.53 142 61 310% 20% -37% -20% .2x 1.8x 54x 2% 7/7
14 OraSure Technologies OSUR 6.38 364 267 73% 1% -37% -2% 2.5x 3.0x 50x 3% 8/8
15 DeVry DV 30.04 1,914 1,508 -48% -15% -37% -33% .8x 2.8x 12x 2% 12 / 15
16 * FARO Technologies FARO 40.51 704 543 140% -31% -35% -7% 1.6x 2.4x 22x <1% 1/5
17 Tuesday Morning TUES 14.24 627 573 774% -11% -34% 3% .6x 2.8x 20x <1% 12 / 3
18 Virgin America VA 28.53 1,232 952 n/m n/m -34% 0% .6x 2.5x 7x 32% 12 / 7
19 Gulf Island GIFI 12.82 186 150 -11% -45% -34% -34% .3x .7x 128x 1% 3/1
20 LivePerson LPSN 9.42 532 483 418% -36% -33% -5% 2.3x 8.0x 26x 9% 3/2
21 Centrue Financial TRUE 15.47 1,261 1,120 n/m n/m -32% 0% 5.4x 7.5x 38x 4% 14 / 11
22 Powell Industries POWL 33.18 400 346 14% -50% -32% -47% .6x 1.1x 18x 7% 10 / 1
23 * SCM Microsystems INVE 9.41 101 79 -58% 63% -32% 8% 1.0x 3.3x 60x 4% 6/1
24 * Strayer Education STRA 50.40 553 510 -76% 46% -32% 18% 1.1x 6.4x 13x 1% 1/5
25 * Xenon Pharma XENE 13.42 191 107 n/m n/m -32% 0% 3.8x 2.6x 26x 4% 9/2
26 Rentrak RENT 49.71 756 671 322% 31% -32% -13% 7.0x 8.1x 1657x 6% 8/4
27 * CTC Media CTCM 3.35 522 382 -30% -76% -31% -60% .5x 2.2x 7x <1% -/-
28 Enanta Pharma ENTA 35.11 656 552 n/m 29% -31% -6% 4.4x 3.4x 12x 5% 4/2
29 Silicon Graphics SGI 7.89 272 194 100% -41% -31% -21% .4x 5.2x 17x 1% 11 / 5
30 * Cytosorbents CTSO 6.91 171 165 246% 121% -31% 22% 40.2x 50.1x 43x 2% 8/1
31 * Capella Education CPLA 53.47 653 520 -9% -20% -31% -7% 1.2x 3.6x 15x <1% 4/5
32 * Vera Bradley VRA 14.21 566 454 n/m -41% -30% -50% .9x 2.0x 14x 10% 18 / 9
33 Coupons.com COUP 12.42 1,028 834 n/m n/m -30% -31% 3.8x 4.4x 24x 5% 7/7
34 Borderfree BRDR 6.42 206 79 n/m n/m -28% -57% .6x 1.8x 87x 3% 2/1
35 * Extreme Networks EXTR 2.54 252 232 9% -64% -28% -54% .4x n/m 27x 2% 11 / 6
36 * American Science ASEI 37.38 276 171 -49% -48% -28% -45% 1.1x 1.6x 39x <1% 6/1
37 * Cnova CNV 5.70 2,511 2,003 n/m n/m -28% 0% .9x n/m 68x <1% -/-
38 * Agilysys AGYS 9.08 207 133 112% -35% -28% -26% 1.3x 2.9x 61x 2% 5/2
39 Planar Systems PLNR 6.05 136 121 892% 138% -28% 185% .6x 2.8x 10x 6% 7/2
40 * Yelp YELP 39.76 2,968 2,636 n/m -42% -27% -38% 6.3x 6.7x 86x <1% 6/6
41 * Calix CALX 7.29 378 280 n/m -24% -27% -16% .7x 3.0x 17x 8% 4/3
42 * Acorda Therapeutics ACOR 29.77 1,274 1,265 45% 2% -27% -17% 3.0x n/m 30x 2% 11 / 9
43 * Carbonite CARB 10.41 284 219 n/m -12% -27% 2% 1.7x n/m 78x 7% 9/5
44 * Turkcell TKC 11.09 9,844 7,536 -24% -17% -27% -25% 1.4x 1.4x 10x <1% -/-
45 Polo Ralph Lauren RL 136.12 11,885 11,154 200% -23% -26% -11% 1.5x 4.1x 19x 1% 11 / 9
 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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

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 ITT Educational ESI 4.61 -21% 506% 109 124 .1x 3x 3x 154% 186% - <1% -1 / -1
2 * Progress Energy PGN 1.73 -39% 912% 148 2,252 1.1x 3x n/m 297% 182% 29% <1% 7/1
3 McClatchy MNI 1.37 -3% 333% 119 906 .8x - - 101% 71% - <1% 1/-
4 Cloud Peak Energy CLD 6.52 -14% 215% 398 792 .6x n/m n/m 20% 55% - 2% 9/8
5 Lee Enterprises LEE 3.28 -17% 44% 179 947 1.4x 8x 8x 45% 52% - 5% -/9
6 Partner Comms PTNR 2.50 -4% 258% 395 1,061 .9x - - 41% 47% - <1% -1 / -1
7 Weight Watchers WTW 8.55 -22% 249% 489 2,546 1.7x 14x 17x 37% 41% - <1% -1 / -1
8 Cumulus Media CMLS 2.07 -8% 229% 483 2,946 2.4x 16x 8x 19% 39% - 3% -/-
9 Cellcom Israel CEL 4.60 -1% 197% 462 1,217 1.0x 12x 10x 66% 38% - <1% -1 / -1
10 Smart Technologies SMT 1.15 -4% 275% 144 238 .5x n/m >99x 26% 36% - <1% 8/6
11 Callwave CALL 6.59 -2% 191% 118 44 .4x 8x 7x 19% 24% - <1% 6/-
12 Alliance Imaging AIQ 21.86 -13% 48% 235 709 1.6x - - 29% 24% - 2% -1 / -1
13 Rayonier Materials RYAM 19.12 -25% 131% 819 1,698 1.8x 14x 15x 13% 23% 1% <1% -1 / -1
14 * Dawson Geophysical DWSN 5.71 -26% 28% 123 125 1.1x - - 19% 22% - <1% 3/3
15 USMD Holdings USMD 10.03 -35% 116% 103 124 .4x - - 19% 20% - 2% -1 / -1
16 NCI NCIT 10.08 -21% 29% 131 106 .3x 14x 13x 19% 20% - <1% -1 / -1
17 Performant Financial PFMT 2.92 -1% 276% 144 176 .9x 75x 12x 12% 18% - 3% -/-
18 * Tribune Publishing TPUB 17.36 -14% 55% 445 755 .4x 10x 7x 24% 17% 4% <1% 7/3
19 Higher One ONE 2.90 -26% 124% 139 201 .9x 7x 7x 16% 16% - 24% -1 / -1
20 OCI Resources OCIR 23.85 -13% 13% 476 594 1.3x 10x 10x 15% 16% 9% <1% -1 / -1
21 Demand Media DMD 6.44 -37% 88% 128 80 .5x n/m n/m 16% 16% - 1% 6/6
22 Radio One ROIAK 3.80 -64% 33% 191 971 2.2x - - 27% 16% - <1% -1 / -1
23 hhgregg HGG 5.71 -20% 98% 158 131 .1x n/m n/m 32% 15% - <1% 6/-
24 Harbinger Group HRG 12.73 -17% 12% 2,565 6,920 1.2x - - 16% 15% - 2% -1 / -1
25 VOXX International VOXX 8.97 -27% 33% 216 307 .4x 16x 14x 18% 15% - <1% 1/5
26 Salem Comms SALM 5.01 -5% 120% 127 405 1.5x 14x 11x 20% 14% 5% 14% 4/4
27 Domtar UFS 43.24 -24% 12% 2,774 3,960 .7x 14x 12x 11% 14% 4% <1% -1 / -1
28 Entercom ETM 12.16 -35% 10% 482 930 2.4x 18x 13x 12% 14% - 12% -1 / -1
29 Engility Holdings EGL 27.84 -2% 76% 1,022 1,308 1.0x 15x 11x 19% 12% - <1% -1 / -1
30 * Argan AGX 32.24 -19% 24% 472 138 .4x 16x 13x 17% 12% - 3% 8/6
31 Barrett Business BBSI 43.87 -58% 45% 313 327 .5x 13x 11x 19% 12% 2% 2% -1 / -1
32 PDL BioPharma PDLI 6.87 -5% 49% 1,127 1,285 2.2x 3x 9x 16% 11% 9% <1% -1 / -1
33 Molina Healthcare MOH 59.55 -35% 14% 2,973 1,319 .1x 24x 17x 33% 11% - 4% -1 / -1
34 Outerwall OUTR 68.20 -25% 14% 1,258 1,979 .9x 10x 9x 17% 11% 2% <1% 16 / 18
35 Community Health CYH 52.64 -31% 10% 6,212 22,619 1.2x 14x 12x 12% 11% - 2% 1/-
36 * Ultra Clean UCTT 6.17 -15% 67% 195 204 .4x 17x 12x 13% 11% - 4% 11 / 2
37 * Boyd Gaming BYD 13.54 -35% 11% 1,491 4,807 1.8x 53x 31x 12% 10% - 2% -1 / -1
38 Neustar NSR 30.10 -32% 9% 1,667 2,109 2.1x 7x 9x 15% 10% - 1% 13 / 1
39 * Strayer Education STRA 50.40 -17% 58% 553 510 1.1x 15x 13x 13% 10% - 1% -/-
40
41
42
No other companies meet the stated screening criteria.
43
44
45
 Company website SEC Y! Price Charts Proxy Y!

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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

Value with Catalyst: Cheap Repurchasers of Stock

Companies that may be creating value by reducing their shares outstanding at relatively cheap prices
▼
Q-Q Average Annual EV / Next Price to Net Cash Insiders
Price MV EV Change Change in Shares TTM FY Tangible as % of % Buys/
Company Ticker ($) ($mn) ($mn) in Shares 3 Yrs 5 Yrs 7 Yrs Revenue P/E Book MV Own. Sells
1 Advanced Semi ASX 7.24 11,172 12,613 -7.8% 1% -1% 0% 1.5x 11x 2.5x -13% <1% -/-
2 * Juniper Pharma JNP 7.32 79 66 -7.4% 1% 10% 9% 2.0x 6x 2.8x 17% <1% 1/-
3 Blue Earth BBLU 0.90 84 81 -6.8% 72% 48% 38% 4.4x 45x 1.1x 3% 4% 8/-
4 * Banco Macro BMA 54.43 4,405 n/m -6.7% -1% 0% -2% n/m 9x 3.5x n/m <1% -/-
5 SunOpta STKL 10.07 683 804 -6.6% 1% 1% 1% .6x 17x 2.5x -18% 2% 8/4
6 * Magyar Bancorp MGYR 8.84 51 n/m -5.6% 0% 0% 0% n/m - 1.1x n/m <1% -/-
7 National West. Life NWLI 238.00 865 n/m -5.4% n/m 0% 0% n/m - .6x n/m <1% 4/4
8 Quanex Building NX 18.96 642 579 -5.2% 0% 0% 0% 1.0x 27x 2.6x 10% <1% 5/2
9 Ellomay Capital ELLO 8.40 90 115 -5.2% 15% 9% 10% 7.3x - .9x -28% <1% -/-
10 Constellium CSTM 18.31 1,919 2,149 -4.7% 5% n/m n/m .5x 10x n/m -12% <1% -/-
11 Anworth Mortgage ANH 5.14 541 563 -4.6% -1% 4% 18% 3.6x 12x .8x -4% 2% 4/-
12 NTT DoCoMo DCM 17.75 72,086 65,262 -4.6% 0% 0% -1% 1.8x 19x 1.9x 9% <1% -/-
13 Crocs CROX 12.93 996 764 -4.5% -1% n/m 1% .6x 23x 2.8x 23% 3% 8/3
14 NASB Financial NASB 26.50 197 n/m -4.5% 0% n/m 0% n/m - 1.0x n/m <1% -/-
15 Assured Guaranty AGO 25.89 3,998 n/m -4.5% -2% 8% 16% n/m 11x .7x n/m 2% 13 / 10
16 Aspen Insurance AHL 46.97 2,899 n/m -4.5% -3% -5% -4% n/m 11x .9x n/m 1% 24 / 13
17 * Fresh Del Monte FDP 36.92 1,935 2,248 -4.2% -2% -3% -1% .6x 15x 1.4x -16% 27% 19 / 16
18 Cooper Tire & Rubber CTB 36.91 2,143 1,957 -4.1% 0% 1% 0% .6x 11x 3.1x 9% 1% 9/5
19 * Fluor FLR 58.70 8,604 7,526 -4.0% -3% -3% -1% .4x 13x 2.9x 13% <1% 11 / 12
20 Cree CREE 31.12 3,396 2,764 -4.0% 4% 7% 6% 1.6x 24x 1.9x 19% <1% 3/1
21 UBS UBS 20.12 75,077 n/m -3.8% -1% 0% 9% n/m 12x 1.6x n/m <1% -/-
22 * NewBridge Bancorp NBBC 7.90 283 n/m -3.8% 34% 20% 20% n/m 11x 1.3x n/m 2% 18 / 7
23 Montpelier Re MRH 38.14 1,671 n/m -3.5% -10% -12% -10% n/m 13x 1.1x n/m 2% 9/3
24 KLX KLXI 41.71 2,200 2,929 -3.4% 0% 0% n/m 1.7x 14x 2.6x -33% 1% 8/2
25 * China Yuchai CYD 19.89 760 728 -3.2% n/m n/m n/m .3x 7x .7x 4% <1% -/-
26 RenaissanceRe RNR 103.09 4,745 n/m -3.1% -8% -8% -8% n/m 11x 1.4x n/m 2% 20 / 11
27 * PRGX Global PRGX 4.32 111 87 -3.0% 5% 5% 15% .5x 42x 2.6x 21% 3% 8/-
28 STMicroelectronics STM 7.94 7,215 6,669 -2.9% 0% 0% 0% .9x 12x 1.5x 8% <1% -/-
29 * Ultratech UTEK 20.39 563 296 -2.9% 3% 4% 3% 1.8x 23x 1.6x 47% 4% 3/2
30 * Rudolph Tech RTEC 13.06 417 314 -2.9% 1% 1% 2% 1.6x 17x 1.8x 25% 5% 15 / 13
31 * Dillard’s DDS 133.38 5,494 5,912 -2.8% -7% -10% -8% .9x 14x 2.7x -8% 11% 17 / 4
32 XL Group XL 36.99 9,496 n/m -2.8% -5% -5% 7% n/m 10x 1.0x n/m <1% 16 / 12
33 First Financial Banc FFBC 16.78 1,035 n/m -2.5% 1% 6% 7% n/m 13x 1.6x n/m 2% 25 / 17
34 Hess HES 75.78 21,781 25,324 -2.5% -3% -1% 0% 2.4x n/m 1.1x -16% <1% 21 / 7
35 * Fox Chase Bancorp FXCB 16.52 194 n/m -2.5% -5% -4% -3% n/m 21x 1.1x n/m 4% 13 / 2
36 * Axis Capital AXS 52.33 5,277 n/m -2.4% -5% -5% -5% n/m 11x 1.0x n/m 1% 14 / 8
37 * SuperCom SPCB 12.37 170 165 -2.3% 97% 70% 54% 5.6x 9x 11.3x 3% <1% -/-
38 * Magna International MGA 51.23 21,038 20,813 -2.3% -4% -1% -1% .6x 9x 2.9x 1% <1% -/-
39 * Cheviot Financial CHEV 15.31 103 n/m -2.2% -9% -2% -2% n/m - 1.1x n/m 4% 9/5
40 * Am. River Bank AMRB 9.65 74 n/m -2.2% -6% 9% 6% n/m 17x 1.0x n/m 3% 5/-
41 * EnerNOC ENOC 12.86 391 275 -2.1% 3% 6% 12% .6x n/m 2.7x 30% 11% 8/5
42 * First Community FCCO 12.02 80 n/m -2.1% 26% 16% 11% n/m 12x 1.2x n/m 8% 18 / 2
43 * Beneficial Mutual BNCL 11.62 961 n/m -2.1% -2% -1% 3% n/m 55x 1.0x n/m 2% 15 / 14
44 * Hyster-Yale Materials HY 73.26 1,195 1,115 -2.0% 0% n/m n/m .4x 13x 2.7x 7% 3% 52 / 23
45 * Hancock Holding HBHC 28.82 2,345 n/m -2.0% 9% 23% 17% n/m 12x 1.4x n/m 1% 25 / 8
 Company website SEC Y! Proxy Y!

* New additions are highlighted. Criteria: ► MV < 3 * TBV ► Next FY P/E < 12 ► Debt/equity < 0.4 ► MV > $50mn ► Q-Q  shares < 0

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

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 Armour Residential ARR 3.06 -3% 46% 1,078 605 32% 16% 8x 7x .7x <1% 11 / 1
2 Orchid Island ORC 13.79 -10% 9% 253 166 16% 16% 6x 6x 1.1x <1% 6/2
3 Ellington Residential EARN 16.41 -4% 11% 150 105 13% 13% 6x 6x .9x <1% -/-
4 Ellington Financial EFC 20.10 -3% 27% 672 559 15% 13% 8x 8x .9x 2% 1/-
5 AG Mortgage MITT 19.28 -9% 4% 547 684 12% 12% 8x 8x 1.0x <1% 5/-
6 Dynex Capital DX 8.02 -3% 11% 440 517 12% 12% 9x 10x .9x 4% 5/5
7 Annaly Capital NLY 10.12 -1% 18% 9,591 10,015 12% 12% 9x 9x .8x <1% 1/-
8 Am. Capital Agency AGNC 20.75 -2% 16% 7,320 6,673 12% 12% 8x 9x .8x <1% 8/4
9 Am. Capital Mortgage MTGE 17.62 -1% 17% 902 751 15% 11% 8x 8x .8x 1% 9/4
10 Hatteras Financial HTS 18.13 -3% 13% 1,755 1,405 11% 11% 16x 10x .8x <1% 6/-
11 Capstead Mortgage CMO 11.73 -2% 14% 1,124 1,100 12% 11% 10x 10x .9x 1% 1/4
12 Transocean Partners RIGP 15.39 -25% 91% 1,061 975 1% 9% 8x 7x 1.0x <1% 3/-
13 * FS Investment FSIC 10.48 -13% 3% 2,533 n/m 6% 8% 11x 10x 1.1x <1% 15 / -
14 Solar Capital SLRC 19.75 -13% 12% 839 n/m 8% 8% 12x 11x .9x <1% 2/2
15 Electro Rent ELRC 10.82 -7% 61% 261 253 7% 7% 16x 15x 1.2x 1% 6/1
16 Blue Capital Re BCRH 17.76 -10% 9% 155 n/m 5% 7% 10x 9x .9x <1% -/-
17 World Point WPT 18.04 -12% 27% 629 605 7% 7% 17x 15x 3.7x <1% 2/1
18 Manning & Napier MN 10.40 -2% 80% 154 n/m 6% 6% 9x 9x .9x 3% 7/1
19 Itau Unibanco ITUB 12.89 -21% 43% 68,408 n/m 3% 6% 10x 9x 2.2x <1% -/-
20 China Yuchai CYD 19.89 -17% 13% 760 728 12% 6% 8x 7x .7x <1% -/-
21 Nat’l Australia Bank NABZY 14.45 -12% 15% 70,379 n/m 5% 6% 13x 13x 2.2x <1% -/-
22 Australia and NZ ANZBY 26.81 -8% 21% 74,594 n/m 5% 6% 13x 12x 2.4x <1% -/-
23 Telecom Argentina TEO 21.01 -13% 26% 2,709 2,659 25% 6% 10x 10x 2.7x <1% -/-
24 Qiwi QIWI 27.21 -32% 76% 1,479 n/m 6% 6% 20x 17x >9.9x <1% -/-
25 * Artisan Partners APAM 45.34 -3% 29% 3,331 n/m 9% 5% 15x 13x >9.9x <1% 6/1
26 Citizens & Northern CZNC 19.71 -9% 9% 240 n/m 5% 5% 14x 14x 1.4x 2% 20 / 3
27 * Subsea 7 SUBCY 11.08 -26% 90% 3,695 3,403 5% 5% 8x 10x .9x <1% -/-
28 * Community Bank Sys. CBU 34.58 -5% 13% 1,408 n/m 3% 5% 16x 15x 2.2x 1% 8/7
29 * STMicroelectronics STM 7.94 -21% 26% 7,215 6,669 5% 5% 20x 12x 1.5x <1% -/-
30 Delek Logistics DKL 43.00 -30% 5% 1,063 0 4% 5% 12x 12x n/m 1% 3/4
31 Calamos Asset Mgmt CLMS 12.20 -9% 18% 251 n/m 5% 5% 24x 21x 1.3x 3% 7/2
32 Guess? GES 18.48 -10% 56% 1,578 1,102 5% 5% 21x 18x 1.5x <1% 9/7
33 Safety Insurance SAFT 57.99 -16% 14% 875 n/m 4% 5% 19x 14x 1.2x 4% 11 / 9
34 * Old Republic ORI 15.33 -12% 13% 4,002 n/m 5% 5% 14x 14x 1.0x <1% 3/2
35 * Wal-mart de Mexico WMMVY 23.54 -19% 16% 41,330 40,909 22% 5% 24x 22x 5.8x <1% -/-
36 CVR Energy CVI 41.67 -21% 22% 3,618 3,540 7% 5% 21x 20x 3.8x <1% 4/4
37 NTT DoCoMo DCM 17.75 -19% 8% 72,086 65,262 3% 5% 21x 19x 1.9x <1% -/-
38 Acacia Research ACTG 10.63 -9% 87% 543 n/m 5% 5% 25x 11x 3.2x 2% 8/5
39 Oritani Financial ORIT 14.92 -10% 8% 657 n/m 4% 5% 16x 16x 1.3x 2% 1/1
40 Computer Programs CPSI 54.62 -13% 23% 618 584 4% 5% 21x 18x 7.6x 7% 14 / 2
41 Evolving Systems EVOL 9.45 -19% 21% 110 101 4% 5% 16x 13x 6.7x 3% 1/1
42 Magic Software MGIC 6.56 -19% 28% 286 205 5% 5% 12x 9x 2.9x <1% -/-
43 Greenhill & Co. GHL 39.70 -13% 33% 1,131 n/m 5% 5% 21x 17x >9.9x 2% 8/4
44 * Meridian Bioscience VIVO 17.69 -12% 21% 738 688 5% 5% 20x 19x 5.6x 2% 12 / 9
45 Sasol SSL 40.15 -23% 51% 26,302 25,597 5% 4% 16x 14x 1.8x <1% -/-
 Company website SEC Y! Price Charts Proxy Y!

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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

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 58.50 -11% 22% 2,144 1,967 .07x 12x 11x - 1.4x 2% 9 / 12
2 World Fuel Services INT 52.11 -33% 12% 3,762 4,149 .10x 15x 14x .5% 4.3x 2% 6/7
3 Ingram Micro IM 25.65 -13% 19% 4,008 4,728 .10x 9x 8x - 1.2x <1% 9/1
4 Global Partners GLP 40.72 -25% 12% 1,262 1,860 .11x 19x 17x 6.7% 3.3x 10% 5/6
5 Kelly Services KELYA 16.69 -12% 28% 634 643 .12x 18x 13x 1.2% .9x 11% 9 / 11
6 Core-Mark CORE 53.50 -30% 34% 1,238 1,321 .13x 23x 19x 1.0% 3.0x 3% 15 / 11
7 TravelCenters TA 17.18 -58% 5% 659 1,029 .13x 14x 13x - 1.4x 7% 7/5
8 Molina Healthcare MOH 59.55 -35% 14% 2,973 1,319 .14x 24x 17x - 4.6x 4% 16 / 18
9 PBF Energy PBF 28.59 -26% 21% 2,715 3,577 .18x 7x 8x 4.2% 2.4x <1% -/1
10 Murphy USA MUSA 66.26 -36% 12% 3,017 3,182 .18x 19x 18x - 3.5x <1% 6/7
11 Insight Enterprises NSIT 28.07 -23% 14% 1,095 994 .19x 13x 11x - 1.6x 1% 9 / 11
12 AmerisourceBergen ABC 114.61 -44% 5% 25,169 24,866 .20x 25x 22x 1.0% n/m <1% 19 / 15
13 Aegean Marine Petrol ANW 15.02 -53% 5% 725 1,336 .20x 13x 11x .5% 1.5x <1% -/-
14 Triple-S Management GTS 19.17 -19% 33% 527 492 .21x 15x 12x - .6x 2% 11 / 1
15 Barnes & Noble BKS 22.70 -32% 16% 1,450 1,319 .21x >99x 35x - 7.1x 2% 3 / 13
16 Spartan Stores SPTN 30.82 -38% 6% 1,166 1,730 .22x 16x 15x 1.8% 2.7x 3% 19 / 15
17 Veritiv VRTV 39.37 -31% 38% 630 1,664 .22x 9x 8x - 1.5x <1% 13 / -
18 Alon USA Energy ALJ 16.85 -39% 3% 1,181 1,530 .23x 17x 33x 2.4% 2.2x 51% 3/5
19 WellCare WCG 77.88 -29% 22% 3,430 3,017 .23x 23x 16x - 2.8x <1% 12 / 14
20 PC Connection PCCC 24.67 -22% 20% 650 589 .24x 15x 13x - 2.2x 4% 7/3
21 Celestica CLS 12.44 -26% 5% 1,959 1,390 .25x 12x 11x - 1.5x <1% -/-
22 Best Buy BBY 35.18 -31% 18% 12,395 10,128 .25x 14x 12x 2.6% 2.7x <1% 10 / 10
23 Sears Holdings SHLD 40.52 -45% 19% 4,318 7,868 .25x n/m n/m - n/m <1% 3/2
24 Overstock.com OSTK 21.34 -35% 28% 518 394 .25x 27x - - 4.1x 6% 14 / 14
25 Dean Foods DF 16.31 -23% 21% 1,539 2,440 .26x 21x 16x 1.7% 5.2x 1% 14 / 9
26 Avnet AVT 44.02 -19% 7% 5,979 7,251 .26x 10x 9x 1.5% 1.9x <1% 7/8
27 Sprague Resources SRLP 24.65 -23% 17% 519 1,338 .26x 9x 10x 7.7% >9.9x 1% 10 / 9
28 Owens & Minor OMI 33.73 -6% 8% 2,128 2,544 .27x 18x 16x 3.0% 4.8x 1% 12 / 11
29 SYNNEX SNX 77.58 -24% 3% 3,065 3,728 .27x 12x 11x .6% 2.7x 2% 12 / 6
30 Flextronics FLEX 11.89 -29% 8% 6,803 7,186 .27x 11x 10x - 3.5x <1% 5/6
31 China Yuchai CYD 19.89 -17% 13% 760 728 .27x 8x 7x 6.0% .7x <1% -/-
32 Unisys UIS 21.86 -14% 40% 1,091 913 .28x >99x 19x - n/m 1% 19 / 12
33 * Supervalu SVU 8.84 -22% 36% 2,314 4,928 .28x 11x 11x - n/m <1% -/2
34 Delek US Holdings DK 37.80 -34% 9% 2,167 2,313 .28x 13x 13x 1.6% 2.4x 1% 2/5
35 Valero Energy VLO 58.90 -28% 9% 30,276 32,973 .28x 9x 9x 2.7% 1.5x <1% 5/8
36 * Sanmina-SCI SANM 21.11 -22% 24% 1,744 1,807 .28x 10x 9x - 1.4x 2% 15 / 8
37 Fiat Chrysler FCAU 14.65 -42% 17% 18,824 30,760 .29x 15x 9x - n/m <1% -/-
38 Bunge BG 88.78 -17% 5% 12,750 16,504 .29x 14x 12x 1.5% 1.8x <1% 17 / 5
39 KBR KBR 17.38 -19% 54% 2,507 1,818 .29x 15x 14x 1.8% 4.9x <1% 22 / 10
40 Phillips 66 PSX 81.61 -30% 8% 44,259 47,736 .30x 13x 12x 2.5% 2.5x <1% 8/1
41 Par Petroleum PARR 24.11 -48% 6% 895 944 .30x 11x 11x - 3.4x 2% 13 / 4
42 CrossAmerica CAPL 32.11 -20% 27% 544 819 .31x 86x 62x 6.8% 7.5x 2% 5/3
43 Jabil Circuit JBL 22.96 -25% 5% 4,449 5,157 .31x 11x 10x 1.4% 2.7x 2% 4 / 12
44 * Cardinal Health CAH 85.55 -26% 7% 28,243 29,338 .31x 20x 17x 1.6% >9.9x <1% 13 / 7
45 Benchmark Electron. BHE 23.95 -15% 9% 1,258 884 .32x 15x 13x - 1.1x <1% 5/4
 Company website SEC Y! Price Charts Proxy Y!

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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

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 Career Education CECO 4.20 -2% 76% 284 77 .1x .2x n/m n/m 47x 1.5x <1% 8/7
2 Five Star Quality FVE 4.29 -25% 24% 210 252 .2x .2x n/m n/m >99x 1.0x 2% 4/-
3 Stewart Information STC 36.85 -27% 14% 884 796 .4x .4x 14.6x 15x 11x 2.2x 1% 2/7
4 Oppenheimer OPY 24.14 -21% 7% 329 456 .5x .5x 10.5x 15x 9x 1.0x 3% 11 / -
5 Systemax SYX 10.62 -4% 57% 391 230 .1x .5x n/m 15x 8x 1.1x <1% -/2
6 Perion Network PERI 3.53 -12% 220% 244 168 .4x .5x .6x 7x 6x 3.8x <1% -/-
7 Bridgepoint Edu. BPI 8.78 -7% 85% 399 180 .3x .6x 12.6x 32x 24x 1.2x <1% 17 / 12
8 Abercrombie & Fitch ANF 22.51 -14% 102% 1,566 1,389 .4x .6x 8.2x 24x 19x 1.1x <1% 9/4
9 Nature’s Sunshine NATR 13.00 -9% 28% 243 181 .5x .7x 9.5x 18x 14x 1.9x 2% 8/6
10 Aeropostale ARO 3.08 -31% 65% 244 231 .1x .7x n/m n/m n/m 3.4x 2% 16 / 5
11 Barnes & Noble BKS 22.70 -32% 16% 1,450 1,319 .2x .7x 12.6x >99x 35x 7.1x 2% 3 / 13
12 Kelly Services KELYA 16.69 -12% 28% 634 643 .1x .7x 19.0x 18x 13x .9x 11% 9 / 11
13 Liquidity Services LQDT 9.26 -21% 94% 278 203 .4x .7x 6.5x 15x 17x 2.2x <1% -/2
14 Apollo Group APOL 16.84 -2% 105% 1,812 1,113 .4x .7x 4.0x 15x 15x 2.5x <1% 1/7
15 Con-way CNW 42.39 -5% 26% 2,443 2,748 .5x .7x 9.6x 16x 13x 3.0x 1% 9/9
16 Extreme Networks EXTR 2.54 -8% 120% 252 232 .4x .8x n/m n/m 27x n/m 2% 11 / 6
17 TravelCenters TA 17.18 -58% 5% 659 1,029 .1x .8x 9.1x 14x 13x 1.4x 7% 7/5
18 Roundy’s RNDY 5.00 -44% 38% 246 831 .2x .8x 19.5x n/m 72x n/m 6% 15 / 9
19 First American FAF 34.95 -25% 9% 3,789 3,496 .7x .8x 8.7x 14x 13x 2.4x 2% 14 / 6
20 * Tribune Publishing TPUB 17.36 -14% 55% 445 755 .4x .8x 6.1x 10x 7x n/m <1% 8/6
21 Triple-S Management GTS 19.17 -19% 33% 527 492 .2x .9x 6.5x 15x 12x .6x 2% 11 / 1
22 * Health Net HNT 53.00 -37% 16% 4,077 1,916 .1x .9x 6.0x 16x 13x 3.6x 3% 16 / 14
23 PennyMac Financial PFSI 18.36 -25% 3% 398 468 .9x .9x 2.1x 9x 7x n/m <1% 4/2
24 Telecom Argentina TEO 21.01 -13% 26% 2,709 2,659 .7x .9x 4.3x 10x 10x 2.7x <1% -/-
25 Assurant AIZ 61.92 -4% 13% 4,244 4,096 .4x .9x 1.8x 12x 9x 1.1x 1% 8 / 11
26 IDT Corp. IDT 17.04 -23% 36% 400 254 .2x .9x 10.6x 12x 11x 3.1x 2% 10 / 6
27 Ascena Retail ASNA 15.23 -31% 20% 2,478 2,403 .5x .9x 11.6x 21x 17x 3.1x <1% 2/3
28 Bravo Brio BBRG 14.99 -23% 9% 227 283 .7x .9x 18.3x 23x 20x 4.2x 2% 1/3
29 * eHealth EHTH 12.15 -27% 225% 218 178 .9x 1.0x n/m n/m 69x 4.5x 10% 6/7
30 * UTi Worldwide UTIW 8.92 -2% 65% 942 1,403 .3x 1.0x n/m n/m 61x >9.9x <1% 6/5
31 Village Super Market VLGEA 32.66 -41% 6% 459 410 .3x 1.0x 10.7x - - 2.0x 23% 1/8
32 Kindred Healthcare KND 24.18 -30% 11% 2,019 4,632 .9x 1.0x 24.7x 19x 14x >9.9x 3% 24 / 13
33 SkyWest SKYW 16.12 -57% 0% 832 2,030 .6x 1.0x 20.4x 18x 13x .6x 3% 15 / 6
34 Avon Products AVP 8.16 -13% 85% 3,546 5,165 .6x 1.0x 10.2x 15x 12x n/m <1% 5/4
35 * United Online UNTD 15.44 -39% 18% 225 146 .7x 1.0x n/m 16x 16x 7.7x 4% 12 / 6
36 GAIN Capital GCAP 10.26 -43% 7% 445 (385) n/m n/m n/m 8x 8x 2.6x 4% 7/6
37 INTL FCStone INTL 31.77 -48% 6% 599 (232) n/m n/m n/m 14x 13x 2.0x 9% 16 / 7
38
39
40
41
No other companies meet the stated screening criteria.
42
43
44
45
 Company website SEC Y! Price Charts Proxy Y!

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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

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 LeapFrog LF 2.26 -7% 247% 159 65 .6x 59% 135% .2x n/m 2% 8/5
2 Richardson Electron. RELL 8.87 -3% 25% 121 19 .8x 84% 113% .1x - <1% -/-
3 EMCORE Corp. EMKR 5.43 -36% 11% 174 27 1.0x 85% 88% .2x 78x 2% 11 / 6
4 West Marine WMAR 10.03 -17% 37% 246 201 .8x 19% 83% .3x 20x <1% -/3
5 Electro Scientific ESIO 5.70 -1% 51% 173 94 .9x 46% 82% .6x n/m 3% 9/3
6 QLT QLTI 3.68 -9% 82% 189 33 1.2x 82% 81% n/m - <1% 3/-
7 Benchmark Electron. BHE 23.95 -15% 9% 1,258 884 1.1x 30% 80% .3x 13x <1% 5/4
8 Manning & Napier MN 10.40 -2% 80% 154 2 .9x 99% 76% .0x 9x 3% 7/1
9 Geospace Tech GEOS 21.17 -29% 180% 278 228 .9x 18% 76% 1.5x n/m 2% 6/-
10 CSS Industries CSS 28.43 -20% 16% 266 178 1.1x 33% 75% .6x - 1% 5/3
11 Systemax SYX 10.62 -4% 57% 391 230 1.1x 41% 75% .1x 8x <1% -/2
12 Alpha & Omega Semi AOSL 8.19 -15% 37% 218 106 .8x 51% 71% .3x 47x 18% 8/5
13 Tremor Video TRMR 2.49 -19% 100% 128 50 1.4x 61% 69% .3x n/m 1% 6/5
14 Audience ADNC 4.82 -34% 172% 113 58 1.2x 49% 68% .5x n/m 11% 11 / 6
15 ModusLink MLNK 3.46 -17% 25% 181 62 1.1x 66% 67% .1x - <1% 7/1
16 Hurco HURC 32.52 -23% 23% 213 156 1.3x 27% 66% .7x - 3% 11 / 4
17 Tech Data TECD 58.50 -11% 22% 2,144 1,967 1.4x 8% 65% .1x 11x 2% 9 / 12
18 * Akebia Therapeutics AKBA 7.85 -6% 295% 161 52 1.5x 68% 64% n/m n/m 1% 7/2
19 CDI CDI 13.78 -6% 40% 271 236 1.3x 13% 63% .2x 24x 6% 3/2
20 * Achaogen AKAO 5.61 -2% 209% 101 38 1.6x 63% 63% 1.9x n/m <1% 4/-
21 Oclaro OCLR 1.92 -32% 64% 209 141 1.2x 33% 61% .4x n/m 2% 7/5
22 Calamos Asset Mgmt CLMS 12.20 -9% 18% 251 (223) 1.3x 189% 60% n/m 21x 3% 7/2
23 Lakes Entertainment LACO 8.74 -31% 21% 117 45 1.1x 61% 59% .8x - 14% 6/-
24 PCTEL PCTI 7.93 -13% 13% 148 89 1.3x 40% 59% .8x 13x 4% 10 / 10
25 GSI Technology GSIT 5.36 -16% 24% 125 60 1.2x 53% 58% 1.1x n/m <1% 1/1
26 ScanSource SCSC 39.43 -21% 8% 1,130 1,014 1.5x 10% 58% .3x 13x <1% 9/5
27 RealNetworks RNWK 6.40 -6% 31% 231 70 1.4x 70% 58% .4x n/m <1% 7/1
28 Sizmek SZMK 6.62 -27% 54% 196 105 1.3x 46% 58% .6x n/m 13% 5/3
29 Spartan Motors SPAR 4.65 -8% 23% 158 135 1.1x 15% 58% .3x 16x 4% 12 / 4
30 Ultratech UTEK 20.39 -24% 36% 563 296 1.6x 47% 57% 1.8x 23x 4% 3/2
31 Kulicke and Soffa KLIC 15.61 -22% 6% 1,198 583 1.6x 51% 57% 1.0x 13x <1% 7/8
32 * Catalina Lighting CALA 9.82 -34% 241% 176 74 1.8x 58% 56% n/m n/m <1% 1/-
33 Loxo Oncology LOXO 11.35 -13% 45% 189 83 1.7x 56% 56% n/m n/m <1% 1/-
34 * American Science ASEI 37.38 -1% 95% 276 171 1.6x 38% 55% 1.1x 39x <1% 6/1
35 * Movado MOV 28.84 -21% 56% 696 496 1.4x 29% 55% .8x 12x 4% 13 / 6
36 * Intevac IVAC 4.98 -4% 77% 114 63 1.2x 45% 55% 1.0x n/m <1% 2/2
37 * Pendrell PCO 1.04 -5% 84% 277 108 1.8x 61% 54% 2.6x - 2% 7/2
38 * Digi International DGII 9.91 -30% 9% 241 157 1.5x 35% 54% .8x 36x 2% 13 / 4
39 Frequency Electronics FEIM 12.70 -21% 17% 110 100 1.2x 9% 53% 1.3x 16x <1% 5/6
40 NOW DNOW 24.64 -19% 53% 2,694 2,499 1.7x 7% 53% .6x 48x 1% 5/5
41 Fabrinet FN 18.30 -26% 22% 648 408 1.4x 37% 52% .6x 11x 3% 5/4
42 YuMe YUME 5.16 -19% 34% 172 108 1.7x 37% 52% .6x n/m 2% 6/4
43 Tesco Corporation TESO 12.69 -25% 77% 494 418 1.0x 16% 51% .8x >99x 1% 12 / 4
44 Borderfree BRDR 6.42 -11% 177% 206 79 1.8x 62% 50% .6x 87x 3% 2/1
45 No other companies meet the stated screening criteria.
 Company website SEC Y! Price Charts Proxy Y!

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

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 Value-oriented Equity Investment Ideas for Sophisticated Investors

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